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PSS World Medical Inc. (NASDAQ:PSSI)

F4Q09 (Qtr End 3/27/09) Earnings

May 07, 2009 08:30 AM ET

Executives

Robert C. Weiner - Vice President, Investor Relations

David A. Smith - Chairman and Chief Executive Officer

David M. Bronson - Executive Vice President and Chief Financial Officer

Gary A. Corless - Executive Vice President, Chief Operating Officer

John Kreger - William Blair & Company

Kevin P. English - Senior Vice President, Supplier Operations

Analysts

Alex Beckler - Goldman Sachs

Richard Close - Jefferies & Co.

Robert M. Willoughby - Banc of America Securities LLC

John Ransom - Raymond James & Associates, Inc.

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the PSS World Medical Year-End 2009 Conference Call. During the presentation, all participants will be in a listen-only mode. Afterwards we will conduct a question-and-answer question. (Operator Instructions). As a reminder, this conference is being recorded Thursday, May 7, 2009.

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

Robert C. Weiner

Thank you operator. Good morning everyone. Thank you for joining our fiscal year 2009 fourth quarter and year end conference call.

Today on the call, our speakers as usual from last quarter are David Smith, Chairman and CEO; Gary A. Corless, Chief Operating Officer and David Bronson, Executive Vice President and CFO.

We issued our fiscal year 2009 press release last evening. If you need a copy please contact us. The release and our Financial Workbook for the fiscal year 2009 are available on our website on also at www.pssworldmedical.com. The Financial Workbook contains GAAP and non-GAAP financial measures that provide much greater detail into our businesses.

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 risks and uncertainties that could cause actual results to differ materially from what is expressed or forecasted today. 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 website 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 their 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.

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 SEC rules. You will find reconciliation charts at the end of our Financial Workbook and in our Form 8-K submitted to the SEC. Thank you.

Let me take a moment now to alert our listeners to upcoming investor events where our management team will be meeting with investors and making formal presentations. On Tuesday May 19, we'll be hosting our Annual Investor Day at NASDAQ's MarketSite facility located in Times Square in New York. Please contact us here if you are interesting in attending this event.

Additionally we plan on attending the Goldman Sachs 30th Annual Global Healthcare Conference in New York and the William Blair 29th Annual Growth Stock Conference in Chicago on June 9th and June 10th respectively.

We also plan presenting at the Jefferies Conference the Annual Healthcare Conference in New York on June 17th.

For our call today, we will follow our formal remarks by Q&A session, as prompted by the operator.

I'm now pleased to turn the call over to David Smith, PSS World Medical's Chairman of the Board and CEO.

David A. Smith

Good morning. Thank you for joining our year-end call. And we look forward to seeing you again on May 19th in New York for Investor Day.

I am compelled to start this call with a thank you and congratulations to our officer, leadership teams, field leadership teams, sales, operations and shared service teams. You performed masterfully, serving our customers, each other and shareholders. Thank you.

We're proud to have accomplished our fiscal year 2009 goals, when so many others have not, but more importantly to have done so, investing in the future, improving customer satisfaction, creating exciting new programs, improving the trust and culture of the company while not sacrificing any of our principles and commitments.

John F Kennedy once told his cabinet, the Chinese worker crisis has two characters. The first represents danger, and the second opportunity. This crisis was economic. However the danger was more than any of us needed to see or experience in a lifetime.

But for the company, if the crisis had to happened, it occurred at a very good time. We already believe the economy was in trouble and customers would be under intense pressure. Our original strategic plan contemplated economic hardships and was built on strategies to improve our customer's health, create innovative solutions and drive efficiencies and increased productivity.

The strongest headwinds were evident in times accidentally, but perfectly with our strategic planning process. We had the time to recalibrate for the economy, identify and invest in new solutions, plus engineer new and improved efficiencies and cost savings. All this while our competitors have fired thousands of employees, lost focus and deteriorated the morale, trust and confidence of their people or reduced and offerings for their customers. We have been moving forward.

We will aggressively attack now, attack our customers and their customer's biggest problems with new solution at the time when competitors are less able to respond. It took us time. But we now see, feel and believe confidently in this new opportunity and more importantly in our execution of the plan to win. And win in a way that strengthens the trust, culture and performance of this company for our customers, each other and shareholders.

The net result is that we beat year one. We are reconfirming year two, of our three year business plan. And year two goals for EPS are a $1.13 to a $1.17 or about 20% growth in earnings.

Today Gary Corless will share some examples of what is working and David Bronson will review our financial results after I make a few comments here on the year.

We finished 2009 with $0.96 of EPS, driven by stronger then play in momentum and traction in margins and balance sheet discipline producing record cash flows. The Physician business experienced some headwinds with a decline of same day sales of 2% in the quarter and growth for the year of about 4%. With out two items the business would have seen about 2% growth.

First, about 8 million of flu test kits less were sold this year than last. There was little to no flu this last season. Second, there was 11 million of equipment sales that were delayed or cancelled until customers could get a better feel for the economy.

Now for April, the Physician business turned back to growth. This April grew compared to last April and last April was part of a very good growth quarter. For the month of May, which for us began on April 27th, we expect the H1N1 flu bout to have a short but positive impact on revenues. We have seen a flurry of sales in masks, gloves and hand sanitizers and flu test kits.

We have pandemic inventory stockpiled and have been able to fill all customers' orders, But turned down non-traditional orders from Mexico, that would have depleted traditional customer needs. So regardless, with or without H1NI the Physician business has turned to growth.

For the year the Physician business had a record 15,000 customer signups for our e-commerce platforms, bringing the total to 38,000 e-commerce physician customer accounts. 40% of the Physician revenue came from e-commerce in the quarter.

This progress gives me personally great confidence in the availability of customer facing time and bandwidth that our sales force had to provide solutions to our customers and attack our competition.

If there were economic headwinds, the Elder care business slides through them like a hot knife through butter. They had 10% same day sales in the quarter and 8% for the year. Homecare now represents 35% of revenues and is growing the fastest 22% same day sales growth in the quarter, and 15% for the year. Elder Care selective specialty brand sales grew 31% in the quarter with heavy growth in new products like the Quintek blood glucose monitor.

We launched this product in September and already 80% of sales force is successfully selling the product and most of these sales are new sales and not conversions. For both businesses, our brand's at a high water mark and totaled 15% of revenue.

We have many new products again for this New Year, including higher margin and more complex product launches. For Elder Care, we are confident in the alignment of our solutions and programs to the needs of this market, including expected potential changes in reimbursement.

Now before I blab along too long let me turn the call over to Gary Corless.

C: Gary A. Corless: Executive Vice President and Chief Operating Officer:} Thank you David. Although the economy is causing challenges for many of our healthcare providers, they are not entirely new challenges. They are in fact in effect another layer problem, they and we are very familiar with.

As we've told anyone and everyone, that will listen for the past three or four year doctors, and particularly primary care providers have been facing real challenges to their businesses. They have increasing needs for solutions that will help them improve their care and their financial position.

Our offering will help them do that by expanding their ancillary services, controlling their costs and increasing their efficiencies. That is why this environment positions us well to help our customers and those customers currently with competitors that do not have the necessary solutions to get them through these challenging times.

Here are few real examples of what I am talking about. Last week I was making customers calls with one of our sales reps, Jennifer Avonde (ph) in South Florida. I found that the best way to see how things really work or don't is through unsolicited direct customers feedback.

Over and over I witnessed the continued shift in customers willingness to try any and all of our brand, select, consult et cetera. In fact, when customer doctor Hoise Tumarov's (ph) urine chemistry analyzer went down, our rep, Jennifer unplugged it, replaced it with our PSS brand instrument and serviced it and walked out. No questions asked. The quality rightfully assumed.

Another example is in Texas where customer, Sandy Pierson from Complete Healthcare recently agreed to a trial of our few of our own brand products and was so pleased scheduled now writes, send whatever you can to Select products at the bottom of her orders.

The reality is that physician offices are busier than ever doing with less therefore depending on our reps and our brands even more. These examples help to explain the 14% growth in our brands in Q4.

Ancillary services continue to be an important area of opportunity for our Physicians. A good example is the single doctor oncologist from Central Florida care center who's been working harder and harder for years trying to stay ahead, but to no avail. Our rep Brain Cox (ph) was able to help them improve patient care and the practices' financial position through new ancillary services, that enabled him to in-source testing he had been outsourcing. chemistry, hematology, immunoassay, in essence a full lab.

As for the importance important of running an efficient healthcare practice, I am going to use, the customer, Cynthia Stein, registered nurse and Clinical Director of Carolina Asthma and Allergy, who thanks us for making the orders and supplies (ph) for her eight offices manageable.

She claims that our e-commerce solutions, MyPSS has made them more effective and more efficient. Similar experiences have led to over 40% of our revenues coming into e-commerce in the month of March.

Lastly, Doctor Warsaw (ph) at Salt Lake City is a strong example the necessity to have real HIT solutions built for the small private practitioner. Dr. Warsaw was using a local billing company. It took him up to five months to get paid and he got very poor information in reporting.

After consulting with his PSS rep and adopting our athenahealth solution he stated thank you for bringing the athenahealth. It's the best business decision I have made in ten years. He, along with another 165 physicians adopted our athenahealth solutions in Q4.

Let's talk about Gulf South. Gulf South's current double-digit growth is due to the past several years of our organization's commitment to building a comprehensive and differentiated offering for regional independent nursing homes as well as homecare.

This includes proprietary products, programs, technology and services. Our people and our customers enthusiasm for our offerings shows in the results. A strong contributor to Gulf South's overall Q4 growth was a 22% growth in homecare.

This in turn was driven by 28% growth in home health agencies and 20% in hospitals. A good example of how we achieved this growth is a decision made by new customers at Central Wisconsin. Community Care decided to purchase from Gulf South once sales rep Steve Warty (ph) presented our core home care program to help them achieve improve clinical and financial outcomes.

Another is Melissa Smith, Gulf South worker, who picked up Craven County (ph) home health after showing them the value of our patient home delivery program, our Gulf South online technology and our Axis program that awards them for achieving efficiency. Gulf South rep, Brian Stegall Automoly Home Care (ph) and the value of our patient of home delivery and our technology to secure this new business for Gulf South. This account had been a long standing and loyal account of a strong regional distributor.

As discussed some of them are reactively positively to our offering as well. As evidenced by new customer, Crofwell Harpers (ph) decision to switch to Gulf South. Our sales rep Mike Sherry (ph) showed them the value of our hospice formulary, our owned brand of products Select Nightingale, et cetera and delivery service we have on track.

Our skilled nursing facility business growth of 10% has been strengthened by our focus on the breadth and the quality of our owned brand. This the reason that after recent evaluation period, one of our largest skilled nursing surgery customers Care One chose our Guard Irrigation kits and Respiratory Plastic over national manufactured brands. They are now converting 67 homes to these brands. Example like these drove over 31% growth of our brands in Q4.

Lastly, it would amiss not to show the defensive power of our offering. As others try and reach our customers, they bump up against the years of our commitment to strengthen them. Sales rep Paul Bernaski (ph) recently utilized our momentum program to defend his account, Nottingham Village from a price attack by a competitor.

The strength of the program changed the customers' focus to the value of our complete offering. But the Gulf South or PSS, our PSS World medical offering is becoming increasingly more increasing more of a necessity for healthcare providers. And therefore increasingly valuable to our people and those that put their confidence in us.

Thank you. Let me turn the call over to David Bronson.

David M. Bronson

Thank you Gary and good morning everyone. This morning, I'll make a few comments on our results for Q4 and will spend the rest of the time recapping our full year performance. First though, let me assay the sentiments you've already heard from Dave and Gary. We've just completed our business planning process for fiscal years 10 to 12 and we're looking forward to sharing the details of those plans at your Investor Day.

But I can't think of a time in my tenure here at PSS when we've been better positioned from having the right business strategies, plenty of capital to execute those strategies and a highly focused and motivated team of people, with a well developed culture of execution.

I think all of these are reflected and validated in the highlights for the quarter and the full year. For Q4, consolidated revenues of 470 million were down just under 5% from prior year with four fewer billing days. On a per day basis, revenues grew by 1.5% with a decline of 2% in the Physician business, offset by an increase of 10.3% in per day revenues in Elder Care. The bright spots for the quarters, as you've already heard, was growth of our Select, our private label brands of 14% in the Physician business and 31% in Elder Care.

Our continued success in driving this strategy in our markets, along with very good execution of buyer side and vendor relations programs drove over 30% -- 30 basis point improvement in gross margin from prior year.

Fourth quarter per day growth in nursing home business was 10%, with 22% for home care revenues. On the downside, the traditional flu season was very light; sales of diagnostic flu kits were below prior year. Also equipment sales in the quarter were down, due to a combination of less demand for cosmetic lasers, and a slowdown of replacement of laboratory diagnostic equipment, both areas that are heavily influenced by the economy.

Operationally as we said in the press release, we are very pleased with the momentum of our business simplification and lean strategies, which drove historically low cost to deliver results in both businesses this quarter. The number and the quality of the ideas the initiatives and the enthusiasm related to these efforts is I think a reflection of the strength of our culture and of our field and shared services leadership teams.

This momentum resulted in improved operating margin for both divisions, and gives us added confidence in achieving the future goals that we have outlined. During the quarter, holders of the 2004 convertible notes put back essentially the entire issue to us as expected. The outlay of about $150 million of cash to redeem that debt was offset to a degree with much better than expected operational cash flow in the quarter of over 44 million, leaving us with the strong cash position going into the New Year. We also repurchased 1.2 million shares during the quarter, using about $17 million to do that.

There really were no other unusual items effecting, either the earning statement or the balance sheet for the quarter. Net income and earnings per share comparisons to prior year are however impacted by last year's sale in the fourth quarter of a portion of our stake in athenahealth. The after tax again on that transaction was about $2.8 or $0.04 share.

Now let me summarize what I think are some important takeaways for fiscal year 2009. And I'll do this in the context of the key business strategies, we've been pursuing for some time now. The strategies to drive revenue growth, operating margin expansion and cash flows and return on committed capital.

Gary has talked already about a lot of the successes we're seeing in our go-to-market strategies. I'll just recap some full year performance metrics in this area. Overall revenue growth for the year was 5.2% with Physician growing 3.7% and Elder Care growing 8.7%.

Despite a slowdown in the overall market growth due to the current economic environment, we continued to grow revenues and to leverage that growth. On a little under a $100 million of new revenues, we grew operating income by almost 9 million or about 9% dropped through it and that's a very good performance in the first year of a three year plan, which is the year that we make our investments and long-term initiatives.

We continue to see opportunity to leverage both our distribution infrastructure as well as our shared services platforms. Sourcing is another leg of our margin expansion strategy. For the year, growth in sales of Select products were just over 20% and now represents over 15% of total revenues.

Select sales grew by 15.2% in Physician and 28% for Elder Care. New products continued to be added, customer acceptance continues to gain momentum as you heard Gary say and I can tell you that the overall profit contribution from our global sourcing efforts exceeded our internal plans for the year.

We also made significantly strides with improving efficiencies with branded manufacturers this year. We tracked performance in this area with a number of metrics such as freight cost, purchasing efficiencies, inventory adjustments, all of which improved over prior year.

One of the most important metrics is in the area of rebates and contracts. This is a complicated set of processes. It can result in significant profit leakage if not executed well. This year, we saw 65% reduction in loss rebates, or rebates denied. This is the result of investments we've made in leadership training and technology. These improvements remove a potentially big area of friction between us and our suppliers, allowing us to spend our time together with them in much more productive conversations about taking their product successfully to market.

I've already talked about the momentum in our business simplification or lean strategy as represented by historically low cost to delivery results in both divisions. There is not time today to go into a lot of detail about all of the specific programs that are moving forward in this area and we will do a lot more about that at our Investor Day.

The net results is that the Physician business improved operating margin by almost a 4 percentage point over the prior year and Elder Care operating margin improved by almost 0.5 point. Consolidated operating margin improved by 19 basis points to 5.2%.

Operating cash flow for fiscal 2009 came in at just under 90 million, far exceeding our goal of 73 to 77 million. I'm particularly pleased with our performance here which reflects very good management of working capital in fast changing market conditions.

In markets where the overall credit worthiness of customers is increasingly challenged, we improved overall DSOs by more than one full day, while continuing to grow revenues faster than our competitors, reflecting the value our customers see in our overall product and service offerings.

Bad debt write-offs were favorable to plan and to prior year and our ageing metrics improved as well. This is some really impressive execution by both divisions in this area. Capital spending for FY09 came in at just under 27 million in line with our goal for the year. And about two-thirds of this went towards IT projects that will expand or improve our distribution technology platform, continuing to drive our business simplification initiatives.

Share repurchases for FY09 totaled 3.4 million shares, including 1.2 million shares in Q4. The Q4 activity completed the existing share repurchase authorization and the Board has now authorized another 5% repurchase program going forward.

In closing, it has been a year that none of us is likely to forget with unprecedented upheaval in the financial markets and the overall economy. Headwinds continue but this management team to a person believes more than ever that our core strategies are exactly what our customers need and that we will continue to perform and achieve our goals.

Thank you, and now I'll turn the time over to Rob for Q&A.

Robert C. Weiner

Operator if you could queue people up for questions, and we'll take them as they get.

Question-and-Answer Session

Operator

Certainly (Operator Instructions). Our first question comes from the line of Randall Stanicky from Goldman Sachs. Please proceed with your question.

Alex Beckler - Goldman Sachs

Good morning it's Alex Beckler for Randall actually. A couple of clarifications, first on the expenses. It seems like the full year '09 it seems like the corporate expense line item is up 50% for the year with segment margins meaningfully up in both segments. So I am just curious if there were any expenses in '09 that were moved from the segment to the corporate line?

David Bronson

We didn't have any reclassification I will remind you Randall that, Alex sorry that last year we had a fairly large favorable item, in terms of a bonus decrease in our bonus accruals for last year, which was the third year of our three plan and also this year is the first year of our new three year plan, a year that we historically make investments in some of new initiatives that drive returns in the out year. So I think its combination of both of those things. I'll tell you that expenses came in above favorable to our internal expectations and also that our overall operating margin improved.

Alex Beckler - Goldman Sachs

Got it. So the 10 million corporate expense in the quarter should we expect that to trend down over the course of 2010?

David Bronson

It's a little bit impacted by the number of days in the quarter, but I think it's a decent run rate, yes.

Alex Beckler - Goldman Sachs

Okay. And final clarification, should we assume that your fiscal 2011 guidance will remain intact, or should we waiting for the Investor Day for clarification, here?

David Smith

We are addressing is this next fiscal year. Clearly the management has the same three year business plan in mind. But we feel like going out one year. So the only thing credible that we could do right now and we'll flush out a lot of that kind of stuff at the May 19, Investor Day.

Alex Beckler - Goldman Sachs

Fair enough. Thank you.

Operator

Our next question comes from the line of Lisa Gill from JPMorgan. Please proceed with your question.

Unidentified Analyst

Hi, thanks. It's Arthur Freeman (ph) for Lisa. Dave you've mentioned that you've seen an uptick in the Physician business starting April. Could you provide any color on where that's coming from? Would it be the equipment sales, which that I think grew 11 million or so. And so if that was delayed or cancelled. Do you see an uptick in that or was it more related to the flu issues or something else?

David Bronson

Okay. Just to reiterate April ended on the actually the 24 and we began May on the 27. The flu H1N1 really started at the end of April and the beginning of May. So any impact from H1N1 in May and not April. And, but I said in April that we turned to growth and what I'm telling you is we are seeing across the board things just activity.

We are seeing positive reaction to our programs, we are seeing sales force positively react to our programs, people here really like what we are doing and it's all focused on solving problems for the customer and as far as getting into any granularity. We go through a process here that flushed out all of our numbers and we haven't been through that process.

So, I don't feel comfortable trying to articulate a particular area of growth. But what I feel comfortable with telling you is that it's very important for me to see the turn. I didn't know what it would happen. It happened. And our people are very fired up by our programs and we are making progress.

Unidentified Analyst

Okay. And then on the guidance that you have provided for fiscal '10, just to clarify how does convertible accounting play into that? Is that factored into guidance given the fact that a vast majority of the '04 convertibles got back to you?

David Bronson

I'll just reiterate what I said I think on the last call which was, first of all to specifically answer your question, that 113 to 117 does not contemplate the new convertible accounting. Well, we will implement that with our first quarter results. That's the timing for us to implement and adopt that accounting. And what we've said in the past is that convertible accounting would have about $0.08 impact in FY'10 and our FY '09 would be restated and it would have about $0.11 impact in FY '09.

David Smith

So, its strange as it is the accounting will actually speed up the appearance of our growth and we'll guide people to the real growth that we're experiencing which we believe will be about 20% for this year this upcoming here.

Unidentified Analyst

Okay, thanks. And finally just to clarify any impact from on flu, I am sorry from the fuel expenses going down, you usually talk about that, but there's no mention this quarter?

David Bronson

It was not a material impact. As you recall when the fuel prices change, one of the things that changes is our surcharges as well. And so, and surcharges have come down and gone way with the fuel on coming down and also it didn't have material impact on relative to our targets for the year.

Unidentified Analyst

Okay, thank you very much.

Operator

And our next question comes from the line of Richard Close from Jefferies Please proceed with your question.

Richard Close - Jefferies & Co.

Yes, on the rebate step that you gave I was just curious in terms of the 65% reduction in loss rebate. How much more can you go on that, what are your thoughts on 2010 with respect to that area?

David Bronson

We're at historical low level now for loss rebates. It's a pretty small number, if we didn't lose any pace it wouldn't have super material impact on us going forward. I think the more important thing is that this now very much facilitates better conversations and better interaction in relationships with our vendors and we made a fairly significant investment in training and in technology and people to get to where we're at.

We'll be rolling out some new technology this year, which will automate some of those processes. But, and it also significantly improves our sales rep productivity in being able to have the right task and the right pricing according to the most recent contract with those customers. So it's good in the lot of ways and essentially, we've gotten rid of a problem.

Richard Close - Jefferies & Co.

Okay and then, with respect to the Select, nice performance through the year. Where do you see Select going in fiscal -- the new fiscal year? Obviously it's a great environment to have that offering and just was curious whether you see the growth that you achieved, I guess in the fourth quarter continuing throughout 2010.

David Smith

Actually it's a really good question. I want you to ask me on May 19th, because I will lay it out for you. But suffice it to say, we expected to continue to grow. We've got a lot of new products and we've got some launches and some pretty interesting products this next year. The ones that we launched this last year like the Quintet blood glucose is doing very well. So we've got some new. more complex, more margin related products as well as some basic standard products that will help our customer.

So I'd say come in on the 19, we'll lay it out for you but I would expect it to continue to grow.

Richard Close - Jefferies & Co.

Okay. And then final question here would be one home health. Obviously doing really well there. There are some questions in terms of reimbursement with the budget coming out here soon and being debated. Are you hearing any feedback from your customers in that area, in terms of overly concerned? And how that's going to impact them and I guess trying to gauge what the potential impact is to you guys if there's major changes on the reimbursement front?

Gary Corless

This is Gary Corless. I want to answer your question and talking with the customers, I can tell you that we have had a number of those conversation, not of a product but we have that conversation and not to turn anything into a positive but obviously you walked us into the very solutions that we had for Florida and so our core formulary. So the things that we have there really would help them in any environment but I think I even I want them. If they foresee a change in their reim. So certainly you have to stop them buying as you can tell from their results, I think it plays our strategy well.

Richard Close - Jefferies & Co.

Okay. Thank you very much.

Operator

And our next question from the line of John Kreger from William Blair. Please proceed with your question.

John Kreger

Hi, thanks very much. Couple of questions on the Physician business. David, could you just give us a bit more clarity about what your customers saw in recent months? When did the slowdown really seem to kick in and did that show up in the form of fewer patient visits or perhaps some other sort of trade down and just again to be clear. So the rebound, did you really see that in the month of April?

David Smith

Okay. We've all participated in the losses about $5 trillion between our mortgages, I mean our value of our homes, our 401 Ks and stock accounts and all that. So we all have been cutting back, whether it's going to different restaurants, not buying dessert, going to different places for vacation et cetera and that translated in the physician office to elective procedures were down, plastic surgeries were down. Even preventive maintenance was down.

So, patients looked at every way they could to try save for a period of time until they figure it out what was going on in the economy and the world. So you can almost look at the savings rate going from negative 2% a couple of years ago to 6 or 7% today. Less affected by unemployment than the savings rate, because unemployment has a way of activating some of our utilization rather then declining it.

So what I would say is in November, we saw a big slowdown. We were doing fine in October and then all of a sudden in November, you could just see everything falling off. So, we didn't lose share. Our customers lost utilization and they've bought less. They've bought less across the board and then I would tell you, in pediatrician accounts, they just as busy as ever were because everybody takes their kids. In parts of Florida and other places where it's all Medicare, it just as busy as ever was, because nothing has changed.

It's for us in the middle that we're breadwinners of our families trying to save money and not take care of ourselves, while we figured out what the economy held and trying to save some money.

So in April, I understand that, we go through a process here to really dig through our numbers before we put them out. So I'm a little bit hesitant to give any granularity. But, what I would tell you is that we saw a utilization increase. At the same time, we rolled out all of our new programs and our sales people are pretty fired up.

Our operating teams are fired up. People are doing very well here and feel good about the direction of the business. So some of it is the attitude they carry with them. Some of it is the utilization of the customer and some of it is new programs that we've launched. But we did see the turn in April. I didn't know what month it would happen in, but we went from negative to positive.

John Kreger

Great thanks. Second unrelated question; what's your thinking about acquisitions in this environment? I am guessing asset values and prices have come down a bit.

David Smith

John, we continue to just have a pretty full pipeline that the valuation expectations have not comedown, as fast as you might think. But they are slowly coming down, I think that you'll see us get some transactions done in the next two months. And certainly the interest is there.

We -- a lot of our smaller competitors are feeling a lot of pressure. And, they are looking for exit strategies and we're trying to pick the best ones.

John Kreger

Great. And then lastly, Dave any changes to your bad debt or assumptions in the quarter?

David Bronson

You mean going forward?

John Kreger

No, your allowance in the March quarter, in the methodology?

David Bronson

No, no, no changes in the methodology. As I said our ageing buckets look sort of better than ever. Our bad debt write-ups are way down. We continue to monitor the creditworthiness of our customers very carefully, both on the physician side and on the Elder Care side. But we don't have any justification or rationale to change any of our accounting methodologies right now.

John Kreger

Great, thanks.

Operator

And our next question is from the line of Robert Willoughby from Banc of America-Merrill Lynch. Please proceed with your question.

Robert Willoughby - Banc of America Securities LLC

Thank you. David any plans that you have mentioned for the short-term debt on the balance sheet, 50 million or so? Will there be any effort to pay that out or is that something we will just see you term out?

And then secondarily just looking at the share gains in the homecare business, quite impressive here, where so you see share coming from? Are you doing business with any of the larger chains at this point and when do you realistically expect to see some sort of competitive response there?

David Bronson

I answer debt question and I'll let Dave answer the home care question. On the debt that was a swap that we did to lock in some interest rate it was about two years ago I think there is six months left on that. It's with our bank group and so it will get -- when it expires it will go away.

Robert Willoughby - Banc of America Securities LLC

Okay.

David Smith

Gary why don't answer where the shares is coming from?

Gary Corless

I would say there is really a mix. I mean certainly some from some of our larger competitors, but we're also seeing a willingness for people to look in solution that wasn't them there before so as I mentioned one of the examples coming from a very loyal long standing customer of very string regional competitor in the Northeast. Opened to switch Gulf South because of the program. So we do, we have mix customers from small to relatively large and some of the larger customers are growing themselves.

So it's really a pretty broad base mix of growth and we like that and then also it actually reduces the threat of a competitive response. So it's growing the way we like it.

David Smith

Bob does that hit it?

Robert Willoughby - Banc of America Securities LLC

Yeah, to some extend, I guess you are seeing more greens rolling up some of the smaller infusion therapy providers, I mean do they emerge as a competitor for you or in any way shape of form?

David Smith

We're kind of in the not so sexy area of business. We actually sell gauze and those kinds of products and what I would tell you is if you had to plot out on a graph what the sexiest the most highly reimbursed or what the biggest growth reimbursement potential service provider area was you wouldn't pick our area.

So, we are grinding it out in the least sexiest part of the market but the most uncentralized, unconsolidated with the customers needs the most logistical and systems and formulary and just everything else.

And I don't see the customers going away. I see regionals and nationals do grow and consolidate. I see a lot of run way here for the next 5 to 10 years because of the government forcing patients into this field and the need of the provider. So you can't look at respiratory or infusion or those kind of consolidation plays in similarly there too our strategy in our customer and what we do for our customers, it just doesn't it doesn't quite bear.

Robert Willoughby - Banc of America Securities LLC

And I would think then given the opportunity Dave I mean is this the cost of the acquisition focus, it would seem to me you in an open field here then?

David Smith

Yeah. If we're going to grow 20% or something like that, I kind of have hard time buying it. Unless we see a company that's just really solid from a quality the ramp of quality of service or something that we don't have, but right now our solutions are pretty innovative and our people are pretty excited by, so if we need sales people should we go out and buy them? If we need a service should we go out and buy it and those are the kind of decisions in the home care area that we're looking at, and we're taking share from a whole bunch of people not just one.

So it's pretty wide open, and I would say the deal is got to be the right deal from a brand, from a service, from a value, from extending our strategic plans after that we could get there and the kind of people that we want to bring on the company.

Robert Willoughby - Banc of America Securities LLC

That's great. Thank you.

Operator

(Operator Instructions). And our next question comes from the line of John Ransom from Raymond James & Associates. Please proceed with your question.

John Ransom - Raymond James & Associates, Inc.

Hi, good morning. I saw your Select was 15%. What is the long-term ceiling on Select as a percent of your total mix?

David Smith

What we've talked about in the past is 25%, is what we think we will accomplish. And that's based on the complexity of other products that we sell. The strategic relationships we have with our vendor partners and the R&D effort in the product, the brand recognition, those kind of things.

So, we went through a filter, we went through a look at our strategic relationships we have and the complexity of products. And we identified about 25% of our COGS that would eventually be interim brand or specialty brands. And, so we're just constantly making progress towards that goal.

If we update that, it will be on the 19th as to what that overall goal is, but I think that's a pretty solid objective right now.

John Ransom - Raymond James & Associates, Inc.

Okay. And, second question was, just given the whole change in Asia from inflation to deflation and from it's a lot of manufacturing overcapacity. Have you seen anything change on the cost curve there?

David Smith

Well, I think one of the biggest changes is the container cost. Kevin, what's that gone from?

Kevin English

We've seen about 40% reduction in bunker fuel. And that's a pretty significant portion of that overall cost.

David Smith

That is something like 4000 or 3000 containers?

Kevin English

Yeah that's about right.

David Smith

Yeah, so container costs have come down, raw material costs like plastic resin and things like that have comedown. We are always six months to nine months behind from the standpoint of where prices go up.

John Ransom - Raymond James & Associates, Inc.

Okay.

David Smith

We've got six to nine months of orders in the system, production going on, containers on the water, inventory in our RDC, inventory in our branches, kind of thing. And then with the prices go down, we're the same amount of time behind from standpoint of when that starts flowing in. So we're just now starting to see this work through inventories that the new inventory coming in is cheaper than the one that we were selling. So it just it's a cycle. And we're seeing now reduction in pricing.

John Ransom - Raymond James & Associates, Inc.

Is that material then, I mean we should see some margin, some tangible margin gains over the next couple of quarters?

David Smith

May 19th, is when will walk you through it and

John Ransom - Raymond James & Associates, Inc.

You're really trying to people to the meeting. Aren't you. I mean --

David Smith

Absolutely.

John Ransom - Raymond James & Associates, Inc.

Pretty good.

David Smith

We want you to hear the whole story before you make decisions.

John Ransom - Raymond James & Associates, Inc.

And I guess my last question. This is a softer question, but as you have worked through your revenue cycle, joint venture is there anything you know now about how to position that and sell it that you didn't know 18 months ago? And do you think is there a potential as you, as Tom is on that that might be a step function change or should we just look at that to read more linear, more of a linear progress?

David Smith

Okay. We're going through that step process right now. Momentum's really picking up. We're both organizations have been learning from each other. We clearly have a few things that we need. We need decision makers in the field with our people in order to make the next kind of leap. But I think we've made great progress to this point. I think the product is a very good product. I don't think we'll get to the next step without a person in the field, that's capable of making a decision. But I think that progress has been made.

John Ransom - Raymond James & Associates, Inc.

I mean I guess the question is, I mean, it's really hard to get in front of doctors. I mean you see this poor detailers sitting in their lobby. And they might five minutes of a doctor a year and they get screamed by the nurses. How do you break through, given where you are on the food chain? How do you break through to that level? And how do you have credibility with that sales? And then you do anything different to try to engineer your way in front of the decision makers, that's different than just kind of feet on the street and just keep slogging away?

David Smith

Well, fortunately, we get to walk by that person that's sitting and dinging on well and waiting to get in the back. We come in the backdoor or just walk through the front door as we say hello to the nurse or the office attendant at the front, because we service that whole camp. We've been taking care of that account for 10 years or 15 years or 2 years and everything they want or need, we take care of them in a no hassle service oriented way and we've been building through disease aid management tools solutions that the doctor has never seen before. And so, they want to hear what we have to say.

It's not just that we're taking care of their needs; they actually are interested what we have new or what we have to say today. So, for us to bring up the topic of you're not making as much money as you should, we have to actually step back because they talk to us for 30 minutes and we have listen for a while, before we start talking to them about potential solutions.

So our problem is getting them to see that this product is better than that product at a time where the rules aren't even written for the new EMR reimbursement. So, it more about confusion from the government and new product, which product to pick than it is from the topic and our ability to get in front of the decision maker and have a good conversation.

John Ransom - Raymond James & Associates, Inc.

The product that you sell them, they kind of notice had a (ph) headline out there. They are going to offer the off scripts, electronic circuit? It's not on this morning.

David Smith

Yeah. It was so.

John Ransom - Raymond James & Associates, Inc.

Okay, all right. Thank you.

Gary Corless

This is Gary. I would say that in order to enter this conversation, it certainly helps if you had a history of this higher-end conversations with the physician, prior to bringing up something like in the HR system. So, the fact that we've talked to him about the laboratory immunoassay and chemistry and all those different areas that they practice and use our (ph) services. Set this up well for them to have any conversation they let's talk about how you doing in this areas of the business. If you purely been selling gauge or doing the tonnage business of supply, it certainly would make it more challenging in the walking and have the creditability of type of conversation.

John Ransom - Raymond James & Associates, Inc.

Thank you.

Operator

Mr. Smith, it appears to be no further questions at this time. I will turn the call back to you. Please continue with your presentation or closing remarks.

David Smith

Thank you. I'd just like to end the call with request from all of our vender homes. Put not your trust in money, but your money in trust. We believe we've earned and we'll continue to earn the trust of our customers, each other and our shareholders. We look forward to executing our plans and reporting these results. Thank you for today.

Operator

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

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Source: PSS World Medical F4Q09 (Qtr End 3/27/09) Earnings Call Transcript
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