PSS World Medical, Inc. F2Q09 (Qtr End 09/30/08) Earnings Call Transcript

Oct.23.08 | About: PSS World (PSSI)

PSS World Medical, Inc. (NASDAQ:PSSI)

Q2 2009 Earnings Call

October 23, 2008 8:30 am ET

Executives

Robert Weiner - Vice President, Investor Relations

David Smith - Chairman and Chief Executive Officer

David Bronson - Executive Vice President and Chief Financial Officer

Analysts

Lisa Gill - JP Morgan

Robert Willoughby - Bank of America Securities

Larry Marsh - Barclays Capital

John Kreger - Robert W. Baird

Randall Stanicky - Goldman Sachs

John Ransom - Raymond James

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the PSS World Medical Second Quarter Fiscal Year 2009 Conference Call. During the presentation all participants will be in a listen-only mode. [Operator instructions]. As a reminder, this conference is being recorded Thursday, October 23, 2008.

I would like now to turn the conference over to Rob Weiner, Vice President, Investor Relations. Please go ahead, sir.

Robert Weiner - Vice President, Investor Relations

Thanks, John. Good morning everyone. Thank you for joining our fiscal year 2009 second quarter call. Today on the call, our speakers are David Smith, Chairman and CEO; and David Bronson, Executive Vice President and CFO.

We issued our second quarter press release last evening. The release and our accompanying financial workbook for fiscal year 2009 second quarter call are available on our website at www.pssworldmedical.com. The financial workbook contains GAAP and non-GAAP financial measures that provide greater detail into our businesses. Please also pay attention sales day schedule in the workbook particularly as it relates our third and fourth quarters of this year.

Now, I’ll read the forward-looking statement. During this call, we may make a number of forward-looking statements regarding revenue, gross margin, operating expenses, operating margins, earnings per share, and other matters that are not historical facts. These statements involve a number of risk and uncertainties that could cause actual results to differ materially from what is expressed or forecasted. For a list and description of certain of these risks and uncertainties, we refer you to the forward-looking statement disclosures in today’s press release, and to the other information provided in our most recent Form 10-K and other SEC filings, copies of which are available from the SEC from the Investor Relations section of our Web site or from us in Investor Relations.

The company wishes to caution listeners of this call and its replay not to place undue reliance on any such forward-looking statements, which statements are made pursuant to the Private Securities Litigation Reform Act of 1995, and as such speak only as of the date made. The company also wishes to caution listeners that it undertakes no duty or is under no obligation to update or revise any forward-looking statements.

Let me also remind you that we may reference certain non-GAAP financial measures in an effort to provide additional information to investors. All non-GAAP measures have been reconciled to the related GAAP measures in accordance with the SEC rules. You will find the reconciliation charts at the end of our financial workbook and in Form 8-K submitted to the SEC.

Our management team will be on the road next week, meeting with investors on Monday, Tuesday, and Wednesday in New York and Boston. On November 10 and 11, we will be in Denver, and on the November 12, we will be at the Credit Suisse Healthcare conference in Phoenix. One last trip of the year in Denver, we will be in the Midwest -- I mean in December, sorry -- we will be in the Midwest and Baltimore December 1 through to 4.

For our call today, we will follow our formal remarks by a Q&A session, prompted by the operator. We will limit the call to no more than an hour in duration. I am now pleased to turn the call over to David Smith, PSS World Medical’s Chairman of the Board and Chief Executive Officer.

David Smith - Chairman and Chief Executive Officer

Good morning and thank you for joining us. I want start with a familiar Chinese proverb. This proverb is both a curse and a blessing. It reads “May you live in interesting times.” Everyone has witnessed the curse of interesting times in the last few months. On the other hand, the blessing I believe is connected to the fate, or hard work, or both, to accumulate benefit from changes in interesting times. The reason I mentioned the proverb is that I believe we are blessed by both, fate in our industry and customer position, and the right amount of sweat equity and investment in strategies that drive customer solutions and operational efficiencies.

Yes, we anticipated tougher economic conditions. Even while we are paying very close attention to the world around us, the bottom line is I’ve never felt better about our business, our people, our programs and our future.

During our Investor Day, we laid out the strategies and programs for our current three-year plan. We believe our customer would continue to face economic stress, so we focused our revenue strategies on unique customer solutions, increasing sales force bandwidth and expanding our Select brand product lines. This quarter continues to verify the plan and our program’s connection to the customers’ needs.

I will start with the Physician Business revenue highlights. The Physician Business continues to grow at two times market and exceed their profit plan. The only negative news was the loss of revenue and profit for the Gulf Coast hurricanes. The Physician Business sales force and management team also took a week in September for their national sales meeting to launch our newest innovative customer solutions. It was a fantastic meeting, and it was a first for us, which was unusual, where each strategy and program was launched by a customer to our people.

For the year, one of the most critical and foundational strategies for the Physician Business was to create new solutions selling time bandwidth, a strategy that only increased in importance in the new economic environment. The Physician team achieved their fiscal 2009 annual goal that we made public for e-commerce with 35% e-commerce revenue in Q2. We had about 5,000 customer sign-ups for myPSS.com and Smartscan in the quarter, which means more sales force time available to solve customer issues and create program revenues.

A few examples of how the Physician sales force is utilizing this new bandwidth is an equipment growth quarter of 6.2%, and a Lab diagnostic growth quarter of 12.7%. Regardless of the economic climate, both of these equipment and Lab diagnostic growth metrics are the result of our people’s solution selling time, our customers’ desire to listen, and more importantly, willingness to spend cash or credit capital on our timely and quality solutions. Our HIT sales were up 56% in the quarter. We have about 220 closes so far, with a goal of 1000 for the year. We are seeing tremendous interest by our customers in our HIT offering. Again, the timing and quality of our offering is outstanding.

Now for Elder Care revenue strategy highlights, in the Elder Care business, we rolled out our new skilled nursing facility or SNF, marketing program, called Momentum. In the quarter, SNF revenue growth was 8%, with 61% of our sales reps signing up Momentum customers. We actually had more Momentum agreement sign-ups in the quarter than we had in the first total year of our previous and successful Answers program.

Home Care in the quarter grew about 12%. Since Q4 we have about 500 new Home Care customers, with homecare deliveries up 50% as our agency customers fully utilize our supply chain programs.

Now for both businesses, Physician and Elder Care, our family of Select brand products are now about 14% of total revenue, up 21% for the year. We launched both strep and pregnancy diagnostic tests for Select last year with great success. This quarter, we will be launching the Quintet line of glucose testing products, they are state of the art but very durable, easy to read with an extended range of 300 tests. The Quintet family of products is a great fit for all of our markets.

During Investor Day, we also laid out our operating growth strategies, operating profit growth strategies, including sourcing and supply-chain programs, plus one major new initiative, operational simplicity, which drives efficiency through process improvement and technology investments. While growing revenue at twice the market growth rate in Q2, the operating profit growth performance was better. Our sourcing team produced valuable gross margin improvement, while our operating team continued to deliver improving metrics. The early implementation activity of operational simplicity has proven to be a fertile ground for the creation of new efficiency ideas and projects. The net result is a 120 basis point improvement in Physician operating margin at 7.7% of revenues, and a 50 basis point improvement in Elder Care operating margin at 5.6% of revenues.

More importantly for me, these results are matched by improving visibility and increasing runway of future operating margin growth potential. David Bronson will talk about the balance sheet and cash flow, but I want to congratulate the operating and finance teams for reducing DSOs by 1.5 days in the last 12 months, and congratulations for a $39 million cash flow quarter.

Before I turn the call over to David, we are on track, and I will reiterate, we are on track to achieve or exceed our goal of $0.94 to $0.96 for the fiscal year. I feel very good about our position in the future, not because it will be easy but because we believe we have successfully anticipated the economic conditions and continue to adapt and be flexible in our execution. We have a significant amount of sweat equity in creating the industry’s best portfolio of customer solutions and programs. We have great morale and team focus and commitment, matched by the solid strategies and visibility into their runway of future potential. Regardless of who is elected, we see their policies favoring our customer base and the low-cost provider position of the alternate site market.

Now, I will turn over to David.

David Bronson – Executive Vice President and Chief Financial Officer

Good morning everyone. Our second quarter showed good progress in each of our business strategies, as Dave talked about. We continue to grow revenues at twice the market growth rate in both of our businesses, despite some impact from tropical storms and hurricanes in Texas and Louisiana. Operating margins expanded in both businesses as well, as our strategies of leveraging revenue growth while at the same time lowering operating costs continue to gain traction.

Our overall financial position was strengthened by a successful offering of convertible bonds and by strong operating cash flow for the quarter. Let me add some color by sharing with you a few details.

The Physician Business reported revenues of $342 million, a growth rate of 6.7% over prior year. We estimate that we lost around $3 million of revenue in the quarter as a result of hurricanes Ike and Gustav, with many of our Physician customers in those areas shut down or otherwise impacted. Without that impact, revenue growth would have been just shy of 8% for the quarter. We did record a benefit in the quarter of a little over $1 million, pretax, from the sale and delivery of flu vaccine.

In terms of operating costs, programs designed to leverage fixed costs and increase operational efficiency, along with continued efforts to aggressively manage our net fuel costs resulted in a 30 basis point improvement in cost to deliver this quarter for the Physician Business.

Accuracy and order picking and delivery is one of the key drivers of costs in our operations. Getting it right the first time is an important performance metric for our warehouse staff. We are already at a very high little here, around 99% first time accurate, but continued focus and the introduction and use of automation tools can continue to drive not only cost improvement but will also stretch our lead in overall customer satisfaction. We have launched a focus program to be lean in all of our operational activities. This means redesigning our organizational structures and processes to take out nonproductive activities and costs. This initiative is being led by our Senior VP of Operations, Brad Hilton, and is part of the business simplification component of our margin expansion strategy that we shared with you at our Investor Day.

All of our operations leaders have been through initial training and workshops and the lean process, and we will be talking more about this in future communications, but we are already seeing some benefits. Just by way of example, this past quarter, the Physician Business grew by over $350,000 per day in revenues, yet our warehouse cost per day in dollars was flat to prior year, despite some of the inflationary pressures we’ve seen from energy and materials costs.

This helped the Physician Business grow its operating income by 25% in Q2, an improvement of 120 basis points as a percent of sales, as Dave shared with you. In the Elder Care business, overall revenue growth accelerated to 8.5% over prior year with our private-label Select brand growing by over 26%. Nursing home revenues grew by 8% in the quarter, and Home Care revenues grew by 12%. Elder Care grew operating income by 21% in the quarter and expanded margins by 50 basis points as a result of improved selling margins with Select and home health growth, and continued focus on operational excellence in our warehouse operations. The Elder Care business is working on the same operational efficiency and lean programs I talked about just now for the physician business.

On the consolidated basis operating in a consolidated business, operating income for Q2 was $24.5 million. As we pointed out in our press release last night, the prior-year quarter benefited from a favorable adjustment to long-term management incentive compensation accruals of about $0.04 a share, or a little over $4 million. Adjusting for that item, operating margin this quarter would have shown about a 50% or 50 basis point improvement over prior year. During the quarter and concurrent with our convertible debt offering, we repurchased about 2 million shares with part of the proceeds from the offering. That bond offering $230 million at 308% coupon will increase our quarterly interest expense, but that increase will largely be offset by the returns we are getting on the invested proceeds. That in addition to the reduction in share count for the shares purchased at the time of offering will mean that the financing is expected to be non-dilutive to our EPS goals this year.

The recent significant tightening of the business and consumer credit markets has caused us to remain very focused on our receivables and credit management. We have continued to invest in training of all of our people in this area, and in weekly and monthly reviews of any and all past-due amounts or large account balances. We know you share this concern, and we are aware that some of our peers have reported problems in this area.

Our receivables metrics have never been better. We saw an overall reduction in DSOs in the quarter, along with marked. Improvements in our aging and collections. We even saw some recoveries of previously written-off balances, the result of our efforts in this area. This will continue to be something we watch very carefully. Our overall lack of any significant customer concentration, though, does reduce our total credit risk. We believe our performance in managing credit in this environment, along with our operational execution, are the main reasons that S&P two weeks ago revised its outlook on us from stable to positive.

As a result of the convertible offering, as well as good cash generation in the quarter, we reported over $226 million of cash on the balance sheet at the end of the quarter. This cash is invested through the largest and best-capitalized banks, across a portfolio of highly liquid, AAA-rated money market and municipal bond accounts. We monitor and manage these investments to balance risk and return with a bias towards minimizing any market risk. We believe that it is prudent to be in a capital conservation mode in this environment. Until we see the credit markets and financial institution return to normalcy, we will continue in that mode. We also feel that our strong balance sheet and cash serves, along with the resonance that our marketing programs and strategies have with our customers, position us well to selectively take advantage of market opportunities that present themselves. Whether its tuck-in acquisitions, strategic acquisitions, or new product and market extensions, we are in position to selectively choose where to invest capital for the highest return.

With the first half successfully behind us, with the traction that we see in our key programs and initiatives for this yea and with a strong balance sheet with plenty of liquidity, we are reiterating our EPS goal of $0.94 to $0.96 for the full year with operating cash flow of $73 million to $77 million.

Finally, we again encourage you to refer to our chart of selling days per quarter as you look out to Q3 and Q4. Our fiscal Q3 will have four will have four more selling days than prior year. Q4 will have four less.

I will now turn the time back over to Rob for Q&A

Robert Weiner - Vice President, Investor Relations

Shaun, if you could begin the queue for questions, I would appreciate it.

Question-and-Answer Session

Operator

[Operator Instructions]. And our first question comes from the line of Lisa Gill with JP Morgan. Please proceed with question.

Lisa Gill

Thanks very much and good morning. In July, the National Association of Insurance Commissioners did a study, and they found that 22% of people said they are going to go to the doctor less going forward because of the concerns around the economy. I’m just wondering. What you hearing from your doctors? Clearly, you had a nice quarter this quarter and sales were really good on the Physician side, but what kind of impact could that have? Then secondly, as we look to China and look at sourcing in China, clearly they are having a lot of issues there right now, slowing down even more so than the US. Is this giving you an opportunity to really use your purchasing power and your relationships to get even better pricing than what you had anticipated in some of your sourcing relationships? Thanks.

David Bronson

Good morning, Lisa. Two great questions, it’s something that we’ve been very carefully watching, and talking to our customers and monitoring. I believe there’s two basic trends that you’ll see. One is where people with discretionary income will not have procedures done. Whether that’s plastic surgery procedures or voluntary procedures, people will cut back on those kind of things, and we’ve seen that in the market. The other thing you’ll see is that, when people are depressed or not feeling good about the world around them, they do go see their doctor for the aches and pains that they’ve been not paying attention to, because of a couple of things. One, they might be afraid they’re going to lose their benefits. Two, if they’re going to be laid off, they have 18 months to use their benefits. So, there are some competing trends in the market. There are some competing things that go on in a downturn in the economy. I think, short-term, the general practitioner is in a very good position and does very well in these economic conditions. I think the more specialized you are and more dependent on voluntary procedures, the more you will see an impact. At the same time, if it goes on for an extended period of time, 24 or 36 months, I believe you start to see an impact, even on the general practitioner. So --

Lisa Gill

That would be because you expect that people will lose their insurance coverage, or just that, as things go on, people are rationing what they buy?

David Bronson

Correct on insurance coverage

Lisa Gill

Okay. Then I’m just trying to think about it from a PSS World Medical perspective, this is a leverage based business. What could you do to scale down and how quickly could do it and how quickly you get information so that you would have the information to be able to do that? So, if you start to see things slow, do you have the ability to be able to lay off the salespeople, close distribution centers, should it have to come to that?

David Bronson

the way I look at it, I see this as an opportunity to leverage the relationship with the customer and help them to deal with the issue, either changing the procedures they are doing in office to drive more business and revenue into their practice, and an opportunity to change a variety of things that they might not be doing in their office or doing a different way in their office, and help them to mitigate or offset some of the decline. So, I don’t see a decline in our business. I don’t see what you are referring to as kind of a decline that would cause a reversal. At the same time, a lot of our costs are variable. You mentioned a sales rep. The last thing I would probably do is relieve a sales rep. They are on straight commission. So, they are motivated to not let their revenues go down; they are motivated to not let their livelihood go down. And since, they are completely variable with if their sales go down their commissions go down, they are the last person I would look at. But, our business is very leverageable on the upside; it’s very variable on the downside. But, I just don’t see that. I see an opportunity to really solve problems for the customer. I see an opportunity where there’s a crisis where you can get customers to do things they may not have ever done in the past automate their practices, look at different ways of doing their procedures and their processes in the practice, and I just don’t see the world that way. I think it’s a trick question to answer.

Lisa Gill

Right

David Bronson

Not that you intended it that way, but it just is a trick question, the way I see the world. Now in China.

Lisa Gill

Okay.

David Bronson

Definitely there is some major, major change underfoot in China. Just as fast as it built up, it may be coming back down. There are a lot of plants and a lot of factories that are looking for something to make. So, while it’s a little early for me to answer your question, I do anticipate that we will have an opportunity to be very competitive in our product costs, in our product acquisition costs. The only trend going against that, of course, is oil and energy, but that has come down dramatically. So, I think we will have an opportunity to make products that maybe we were competing with other factories on trying to get time and attention for, for the R&D effort. I think we will have competitive pricing on our existing factories, and I think it warrants a trip right now just first just talking about it this morning with John Sasen, that it is time for us to go back over, reintroduce ourselves and the medical opportunity that’s in the US, and get some new factories in the mix. So, I think it’s just a little early. I think you’ve got the right question. It’s the same one I have, and the same one I’m seeing, but I don’t have an answer as to what it means yet.

Lisa Gill

Okay great I will appreciate the comment.

Operator

And our next question comes from the line of Robert Willoughby of Bank of America Securities. Please proceed with your question.

Robert Willoughby

Jumped on late here did you comment how sales under the Novartis relationship went on the flu vaccines was there any early successes there or changes to what you hope to generate from that relationship?

David Smith

Bob, what I said was that we saw $1 million, a little over $1 million this quarter of pretax benefit from the sale and delivery of flu vaccine.

Robert Willoughby

Okay and that’s in line with kind of your expectation then?

David Smith

Yes.

Robert Willoughby

Just what can we do, the cash has been built up. I guess you will be retiring the convert here shortly. But how big an acquisition can you hope to accomplish in the current environment, or would you be willing to do, given your balance sheet?

David Smith

Bob, we’ve kind of laid out that we think, with the industry economics, that we think that, in both markets, about 50% is in the hands of regional and independent, smaller players, and I think there will be an opportunity to have really good conversations with those folks and help them with this dilemma and leverage our infrastructure, and pick the right players that have the right culture and the right brand and the right reputation to fold into our business. So, I think there’s a lot of that out there. I’ve never talked about buying something big, so that would have to be very strategic and very well thought through. In this environment, I don’t know that being extended in debt is the right thing to do, or reopening bank agreements or any of those kind of things. So, we’ve talked about fold-ins and I think that’s what we’re comfortable talking about. I’m not going to hypothetically talk about something that we’re not doing.

Robert Willoughby

Okay. Just lastly, David, I know you don’t like the quarterly guidance thing, but can you help us on the diluted share base here with the converts coming on and off and the share repurchase? Any idea how that is trending over the course of the year?

David Bronson

Our weighted shares outstanding for this quarter were impacted by the repurchase of 2 million shares We got about a half, two thirds of a quarter of that impact, so you can probably factor that in going forward. I also said that -- or we haven’t done any other share repurchases at this time, because as I said we are conserving capital right now

Robert Willoughby

The other convert, though, comes off in the March quarter, correct?

David Bronson

The March quarter, March 15 is the one day date that the investors can put that back to us yes.

Robert Willoughby

And we would expect, then, the diluted base to gap down then, now?

David Bronson

Well, right now that convert -- at our current share price is not the monies, so its not diluted right now.

Robert Willoughby

Okay, okay that’s great, thank you.

David Bronson

Thanks, bob.

Operator

Our next question comes from on the line of Larry Marsh with Barclays Capital. Please proceed at your question.

Larry Marsh

Okay, thanks and good morning.

David Bronson

Good morning, Larry.

Larry Marsh

Good morning to you. Let me start my question with Mr. Bronson and I will come back to you Dave. Just a couple of clarifications, you had mentioned the recover of previously reserved balance, I guess in your Elder Care segment in the quarter. Can you give us the size of that.

David Bronson

Yeah, it was a couple of hundred thousand dollars some previously recorded bad debt. We are very conservative when we put a customer in collection or if they stand pass their terms, we are pretty reserve that, it doesn’t mean that we give up on it, so we keep working with the customer and we’ve had some nice recoveries of two accounts in particular in the quarter.

David Smith

Hay Larry it wasn’t material but we were just trying to give color that we have a pretty good process.

Larry Marsh

Yes. Just on that, obviously I am one of the worrywarts. Sometimes a receivable is good until it’s not. So, how are you feeling good about being able to look into the financial health of some of your customers, given what happened to the hole market, the last time we had such credit conditions, especially in the nursing home side. It was just a combination of customer dependence, or is there some other way you can never really look in and sort of figure out if they are too financially levered?

David Smith

We have conversations with CFOs of those customer accounts. Our sales reps are going in there; they give us feedback and we tell them what to look for. Our collections people are in constant contact with them. We are looking at their filings and their financials. You know, this is a pretty robust process that we go through with a lot of people involved.

David Bronson

Larry, I would just add to that. When three trillion has been lost, I assume everybody has lost it, and so I assume everybody is in a worse position than they were. So I don’t think we will get caught by surprise, but I think, by reducing our DSOs and limiting our exposure and having 100,000 plus customers, we are in decent shape here. Our sales people really are in there all the time, and they will notice things if they are different.

Larry Marsh

Okay. Just, any clarification you say about $1 million pretax benefit from flu, and I think you are just booking that as fee. Do you have any is that right? Is it just a fee? And what is your expectation of anything ballpark, what do you think you’re going to see in the December quarter?

David Smith

You know, it is a fee, so we book our income on a net basis. We said all along that this would be $0.1ore $0.2 this year, and we are out there trying to get as much of this done as we can. We booked a little over $1 million in this quarter.

David Bronson

If you remember, Larry, this contract was late in the season, so we didn’t expect much. So the $0.1 or $0.2 we are right in line with where we thought we would be

Larry Marsh

Okay, so it sounds like, if I just sort of put another $0.10 in this quarter on top of the you’ve got this quarter, it sounds like it would be in the same ballpark, in the right ballpark?

David Bronson

Well, $0.1or less then, I don’t know.

Larry Marsh

Okay (multi speakers). Yes, complex. Well, David, let me just get you to elaborate, because it really is an interesting question about the economy, and you definitely get due credit on the flu call for this past year. It sounds like you may have had the right call on the economy. I guess we should all talk to you more. But to that point --

David Smith

I went into all cash a long time ago for my stock.

Larry Marsh

I definitely should have talked to you more! You know, I guess the question is, when you sort of say you are well prepared for that, from an operating standpoint, what does that mean? If you just pull back the reins and then I know, in the press release, I guess Mr. Bronson is quoting taking advantage of opportunities. I assume that just means tuck in acquisitions and such but may be a little bit of elaboration of why you feel like you’re in such a good position given the economy?

David Smith

It’s a really good question, and I really am not being boastful at all. It’s just, last November, we realized things had potential for a major correction because of oil, not because of the mortgage situation. We already knew our customer was under financial pressure. So we, in our strategic planning process, started pulling way back and creating strategies that would be very helpful in a time where the customer had more problems, they were in crisis, they were willing to listen. So part of it was freeing up your sales force so that they could have time to deliver solutions. Part of it was innovating new solutions that you wouldn’t normally try but in a crisis, people might be willing to listen to, everything from automating the practice to going and giving away their books to someone like Athena to do the revenues, to just a whole bunch of a variety of automation tools that make us more profitable. At the same time, in the business on the operational side, going to a simplicity program, where one of your biggest projects is asking people how to get lean. It’s asking which technology solutions will deliver the best efficiency, assuming that the oil prices go up or that the economy shuts down. So, when you start that process a year ago, we are way into it. We are -- I’m in second-generation/third-generation ideas. We are very non-panicked. We are very focused on how we’re going to drive better than our goals for this year, not how are we going to survive our goals or how are we going to come close to our goals? So I don’t know, David, how would you add to that?

David Bronson

Larry, I would just add to that we did factor on economic challenge into all of our plans. And so those contingency plans were already in place. And so, things are like where as been really stingy about headcount increases going into the New Year other than what we have added for strategic reasons. Just spending around activities and programs just all kind of things that you would normally do my boss was right ahead of curve and he is put us on the track ahead of time.

David Smith

And just a (multi speakers).

David Bronson

I got remind by one other thing, Kevin English is sitting here you said in your – you reminded me but a major initiatives with our vendors, they wanted to rise prices at the beginning of this year, we told them it was a horrible thing to do it. So, how could we reinvest the supply chain between the two of us so that we got to save money and not to have to rise prices roughly did. The two of us we’ve raised prices less than and still share for everyone else. So, we ended this year with all the strategies, we are not trying to figure them out right now. I guess that’s what I’m trying to come from Larry.

Larry Marsh

And just and also the but, based on that then, what would you say the biggest mistake a company in you could make in this kind of environment what might be the leisure of the actions so much have that would be the wrong move do you think?

David Bronson

Well, that we’ve seen it. We’ve seen a couple of people just rising prices indiscriminately; and we are just ripping the business away. So, we are coming at it completely and differently, we are telling the customer there, the governments in their pockets, insurance companies in their pocket so, the vendors are in their pockets, anybody is in their pockets, how can we help you doing this currently in our financial stressful environmentally tough time. Your patience are going to be less willing to do voluntary or discretionary procedures how are you going to survive this. So, having this conversation the customer slams the door behind us lock us to the chair and starts going through our whole menu and whole litany of ideas. And we leave there with an order. We leave there with to do list of things that to bring back to them whether its people to see or products to understand or reimbursement understand or what ever, and we’ve really busy right now. Our people winning on the street, our people see as differentiated from the rest of our competition, our competition will do this eventually but we’re ahead. And our people like it. So, I don’t know one area of our business where I’m not having people tell me that they have got more run rate, they’ve got more opportunity, they’ve seen victory on the street, they are seeing “holy cow! We are in the right place at the right time. So, it’s not one place, it’s a whole bunch of places, it’s hard to put your stamp of the approval on one product that you can get a metric on the say. This is how you are going to win, but, my competition has not done what we did. I’m thankful for that.

Larry Marsh

Okay, thank you. It’s very good. Very good, thanks so much.

Operator

And our next question comes from the line of John Kreger with Robert W. Baird. Please proceed with your question.

John Kreger

Thanks actually from William Blair but we get confused all the time. A follow up question to Larry on the environment, for your physician business David could you just refresh our memory your typical business with a physician office customer, how much of that would you considered to be consumable and really just high to their underlying volumes versus discretionary capital equipment type of purchases?

David Smith

Yeah, it’s a great question. First, John good recovery on the and I apologize for being called the wrong thing. Only as a 12 or 14% of our business is equipment? 14%? 11%? 11% of the Physician Business is equipment. A very little amount of the Elder Care business is equipment, 1 or 2%? So, I would consider everything else kind of disposable repeat business, but even part of that is associated with discretionary spend. So, it depends on the practice. If you are a plastic surgeon, well, notably half of your business is that way. If you are a pediatrician, none of your business is that way. So, we’ve focused historically on the general practitioners. We’ve started moving into the surgery center. So, I really don’t -- I really won’t know if the business is down because I’m just now starting to get some of it.

The general practitioner, we are seeing not much of a change in what’s happening out there. And, our equipment was up 6% in the quarter because our people are out there really communicating with the customer on how to overcome some of these difficulties. So, very little is tied to discretionary because we’re not in the surgery center market. We are just entering that market. Most of our general practitioners have normal everyday customers, even though some of it may be affected by a change in the economy. It’s hard for me to be able to give you a percentage on that. I would say pediatricians, none; I would say, internal medicine, maybe 10 or 20%. So, it just depends on the type of customer.

John Kreger

Great, great. Thank you. And, then just one other question -- if you think about the potential for perhaps a continuing strengthening dollar and declining gas prices, are those opportunities for further margin improvements for you as you look out through the rest of this year and maybe next, or are those cost drivers hedged by you, and therefore if they even move in the right direction for you, they don’t necessarily help your P&L?

David Smith

I’m just going to first say we are the worst company at hedging anything! I’ve never seen us successfully do it; I don’t think we are ever going to get it right. Maybe we are just not smart enough. So, if the oil goes down, we make money. If oil goes up, we have to have efficiency programs to offset the costs. So, that’s a positive. The dollar, all of our contracts in China were in dollars in Thailand, Malaysia, etcetera. And we were able to, with volume and with having the right organization over there, helping them with efficiencies, deal with it and not have our prices go up very much. With the strengthening dollar, that will take all of the pressure off of that. Actually, what’s going on over there with the factory capacity will probably be enough opportunity to get very competitive, because people are trying to survive over there, and we may have some unique competitive situations on factories. So, David, any thoughts?

David Bronson

Well, on the fuel, John. The fuel surcharge that we do and we don’t charge all the customers a fuel surcharge, but to the extent that we do, that is tied to national prices of gas. So that, as prices come down, that surcharge will also come down. So, it’s not as much of an opportunity as you might think it would be.

John Kreger

Right, thanks very much.

Operator

And our next question comes from the line of [Randall Stanicky] with Goldman Sachs. Please proceed with your question.

Alex Beckler

It’s actually Alex Beckler for Randall, good morning.

David Bronson

Good morning, Alex.

Alex Beckler

I just want to, just a couple of quick questions. I just want to follow-up on David Bronson’s comments regarding sort of being more in the capital conservation mode. Does this refer to M&A, share buyback outlook, or is there anything else? Also, how long do you expect to stay in that mode?

David Bronson

Well, like I said in the press release, until we see some normalcy return to the credit markets and people’s access to credit, especially our customers but we are conserving cash. We want to be cash-heavy right now. That’s --- we got $226 million of cash, we are watching it very closely. What it means, Alex, is that we are just going to be very selective. Our three-year goal, we don’t have to buy any companies to hit that goal. There are going to be companies and opportunities that present themselves, and we can be very selective. So, where our posture is conservative, it means that we are only going to pick the very best opportunities with the highest returns. It doesn’t mean that we are going to not do things; it just means that we are going to be very careful.

David Smith

And that includes where we invest our cash. We are probably not getting as much a return as we could. We are being very careful. Yes, it means that maybe we may have bought a hold-in that wasn’t as pretty, and now we are only talking to the best.

Alex Beckler

Thank you very much.

Operator

[Operator Instructions]. And our next question comes from the line of John Ransom with Raymond James. Please proceed with your question

John Ransom

Hi good morning

David Bronson

Hi John.

John Ransom

Good morning I just wanted to go back to the year sourcing question. Obviously, when you gave your guidance in May, commodity prices were kind of at their peak. I know you said you’re going to go back over there. But how should we think about the longer-term opportunity on your private-label sourcing opportunity if in fact, we continue to see this commodity and kind of emerging market meltdown? How should we think about that maybe two, three, quarters out?

David Bronson

Okay, well, first, our goal is, as we saw it, it was the greatest potential for our private label, which I would prefer not to call private label because, from the quality standpoint it’s a Select band. We saw potential 35% revenue, so we are at 40% right now. So, we continue to expect that to grow. We gave guidance for the year I think of 20%, I think of 20% guidance.

David Smith

For growth, and that’s the right growth goal for this year. And You know, the commodity prices and the oil are things that we dealt with as a result of the economy, but we are still growing at that 20% -- so 25% cost of goods sold, not revenue, sorry. We continue to see the opportunity to grow regardless of the commodity situation, so I’m not sure that changes the outlook. What I think changes the outlook is maybe further out than two quarters, we will have more opportunity to get some more SKUs than we had before because there will be more factory capacity looking for a capacity looking for a place to go. But that’s a couple of quarters out; it’s not now. That’s today’s work based on the changes that will probably benefit us three or four quarters from now.

John Ransom

I guess what -- maybe I didn’t ask this very well, but let’s say you were say you were able to buy a SKU for $100 when you thought about your numbers in May, as the cost -- could that cost be $95 or $90, two quarters out, if we continue to see things going like they have? Not so much the fuel costs but just the actual procurement costs, no other assumptions being changed?

David Bronson

I think I answered that earlier when I said it’s just a little early. I understand you guys work in nanoseconds, but for me, we’ve got to let the capacity hit, we’ve got to let the realize station of the capacity hit. We’ve got to negotiate some of those contracts. Some of those contracts are intentionally not short term. We have six months or nine months or a year’s worth of inventory being made for us right now. But, just like they negotiate with us in the middle of it, we can negotiate with them in the middle of it. So it’s just a little early for me to give you an indication, but this is all very positive for our sourcing effort. I just need a little more time to be able to bake in not just your reality but my reality with the factories and all of our SKU production. So, it’s just a little soon.

John Ransom

Well, I understand, I understand. The other question I know you are in cash conservation mode, but at what you can maybe step out of just cash conservation mode? Is there a goal there?

David Smith

I don’t know if it’s something that I would quantify, when people cannot get financing, our customers can’t get refinanced, or can’t get credit to run their businesses. Remember, these are all small businesses with small balance sheets. It is really hard to kind of quantify when that changes. I guess I don’t have a good answer for you, John, on that.

John Ransom

Okay, thank you.

Operator

There are no further questions at this time. I will now turn the call back to you. Please continue with your presentation or closing remarks

David Smith

Okay. Again, thank you for being on the call. It was a good quarter but a good indication and verification that we are going in the right direction. And I look forward to Q3 and Q4, and we reiterate guidance of $0.94 to $0.96. Thank you very much.

Operator

Ladies and gentlemen, that does conclude today’s conference call. We thank you for your participation and ask that you please disconnect your lines.

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