Seeking Alpha
We cover over 5K calls/quarter
Profile| Send Message|
( followers)  

PharMerica Corporation (NYSE:PMC)

Q1 2008 Earnings Call

May 9, 2008 10 a.m.

Executives

Gregory S. Weishar – Chief Executive Officer and President

Michael J. Culotta – Chief Financial Officer and Executive Vice President

Berard E. Tomassetti – Senior Vice President and Chief Accounting Officer

Tim Jolley – Vice President of Planning and Analysis

Terry Hartlage – Vice President of Finance

Analysts

Adam Feinstein – Lehman Brothers

Eric Gommel – Stifel, Nicolaus & Company, Inc.

Melissa Jaffee – Merrill Lynch

Robert Willoughby – Banc of America Securities LLC

Operator

Good day, ladies and gentlemen, and welcome to the First Quarter 2008 PharMerica Corporation Earnings Conference Call. My name is Lacey, and I’ll be your coordinator for today. (Operator Instructions) As a reminder, this call is being recorded for replay purposes. I would now like to turn the call over to your host, Ms. Terry Hartlage [ph], Vice President of Finance. Please proceed

Terry Hartlage

Good morning and thank you for joining us for the First Quarter Conference Call for PharMerica Corporation. On the call with me today are Greg Weishar, Chief Executive Officer; Mike Culotta, Executive Vice President and Chief Financial Officer; Berard Tomassetti, Senior Vice President and Chief Accounting Officer; and Tim Jolley [ph], Vice President of Planning and Analysis.

Before beginning our remarks regarding the first quarter results, I would like to make a cautionary statement. During the call today, we will make forward-looking statements about our business prospects and financial expectations. We want to remind you that there are many risks and uncertainties that could cause our actual results to differ materially from our current expectations.

In addition to the risks and uncertainties discussed in yesterday’s press release and in the comments made during this conference call, more detailed information about additional risks and uncertainties may be found in our SEC filings, including our most recent annual report on Form 10-K, the quarterly report on Form 10-Q.

Copies of these documents may be obtained from the SEC or by visiting the Investor Relations section of our website. PharMerica assumes no obligation to update these matters discussed on this call. We have made available to you our press release and our 10-Q filed with the SEC. In addition this webcast will be on our website along with the transcript from this call.

I would now like to turn the presentation over to Greg.

Gregory S. Weishar

Thanks, Terry. Welcome, everyone. As always, we are pleased to have the opportunity to discuss our company’s results with you today. Let’s remember this is only the second full quarter of operating results for the combined businesses of KPS and PharMerica LTC.

As you recall, the combined businesses of KPS and PharMerica LTC were merged on July 31, 2007, and what this means is that the quarter-over-quarter comparisons are not meaningful. The financial results of the first quarter of 2007 only represent the results of operations and cash flows of KPS. Mike will go into the financial details later, but I will give you the highlights.

Yesterday we released our first quarter and we filed our 10-Q. Our diluted earnings per share was $0.11 for the quarter. The integration, merger-related costs and other charges represented $4.1 million or $0.08 diluted loss per share. Excluding the integration, merger-related costs and other charges, diluted earnings per share totaled $0.19.

Total revenues were $495.1 million, and on a sequential quarter basis, this was an increase of 59 basis points or $2.9 million increase. We dispensed over 10.2 million prescriptions compared to 10.1 million in the fourth quarter of 2007.

Our adjusted EBITDA was $21.1 million, giving us a 4.3 adjusted EBITDA margin. Adjusted EBITDA for the first quarter compared to the fourth quarter was negatively impacted by $2.5 million for employer taxes and employee benefits. Most of this is not recurring in the remaining quarters, as most employees will have exceeded their maximum by the end of this quarter.

We continue to see strong cash flow, generating over $11.2 million in the first quarter of 2008, and we continue to reduce debt as we pay down $10 million of long-term debt in this quarter.

Talking to analysts and shareholders they all ask us about generics. Here are some key points. Profits on generics are attractive for the first couple of years. After that, profitability falls to roughly an average margin, gross profit margin, as increased manufacturer availability permits payers to lower reimbursement. We have about a two-year window of generous profits here.

I think the way to look at our business model is if there is a lot of brands coming into the pipeline, that’s good for our business. Likewise, if there’s a lot of generics coming into the pipeline, that’s also good for our business. And it’s also good for our customers because generics are a lower-cost alternative. Think of it this way. New brands drive rebates and revenue whereas new generics drive improved gross margins and pressure revenue. Historically, we’ve had brand growth or generic growth, never both growing at the same time. So right now it’s the sweet spot for generic drugs. Given that we do a great job of moving generics, we have an industry-leading generic dispensing rate of over 68%. We have the opportunity to recoup the rebates we lose when the brand drug goes off patent. We replace that margin stream with the attractive margins on the generics.

Staying on generics for a minute, as you know, we have somewhat different population than, say, the retail pharmacy industry. Our drug mix is more heavily weighted on seizure drugs and also mental health as opposed to, say, cardiovascular drugs, which drive the ambulatory patient.

Some examples of the top brand drugs prescribed by geriatric physicians are Risperdal, Depakote, Topamax and Keppra. Six of our top drugs will go generic by 2010, and in total about 12,000—excuse me—12% of drugs then will go generic by 2010. Of the drugs going generic in 2008, Risperdal has received the most discussion. We originally estimated the Risperdal would generate an improvement in 2008 margin of about $500,000. We remain comfortable with this estimate.

I would like to now turn to update you on our company’s five key initiatives. Recall these initiatives are the key operational focus of our company and our key to long-term sustainable growth. Overall, they are designed to drive operating and financial improvement across our whole organization. They are: improving client service, improving billing and collections; capturing operational and overhead synergies; development and implementation of e-prescribing platforms; and developing key operational and financial metrics. Let me give you an update on our progress.

Number one, improving client retention. As I have repeatedly mentioned, we believe we can meaningfully improve client satisfaction and retention over the next 12 months. Customers are our number one asset, and we’re not different here than any other business. It’s essential that we do not lose focus on client satisfaction and retention, and we haven’t done that. And so what we’re doing is we have completely overhauled our client service organization and philosophy, moving client service out of the pharmacy and into the field. And we have essentially finished the reorganization of our account management into client segments and have most, if not all, positions filled. We’re also finalizing plans for a National Client Service Center scheduled to open towards the end of this year. We are confident these efforts will bear fruit in 2009 and beyond.

Number two, improved billing and collections. We have strengthened our resources in this area, and we will continue to prudently commit resources to improve the billing and collection infrastructure to better meet the challenges of Medicare Part D. We have seen early signs of improvement over the past several months. For example, bad debt was 1.1% this quarter, a 42 basis point improvement over last quarter, excluding the favorable impact of the $1.7 million fourth quarter recovery. Next in line is improving private pay billing and receivables. We expect to see improvement here in 2009. We’re also seeing improvements in cash collections. For example, cash collections as a percent of revenue exceeded 100% for the quarter.

Number three, capturing operational and overhead synergies. We have completed over 30% of our pharmacy consolidations, as measured by customer-licensed beds. We expect to complete over 90% of our consolidations by the end of this year. Our margins this quarter are being negatively impacted by the increased volume of consolidations versus 2007. Once a consolidation is complete, usually about three months after we close the consolidated pharmacy, we begin to realize the synergies and scale efficiencies. However, during the period of consolidation, we are impacted by higher operating costs as we scale down in one pharmacy and beef up in other pharmacies. We continue to be very confident that we will exceed the $30 million in synergies and operational efficiencies we have committed. The financial impact will be more evident in 2009, as you will see the positive impact on margins from these consolidations.

Number four, development and implementation of e-prescribing platforms. I think about—if you think about order entry costs, there’s not only the cost of keying the data, but there’s also the cost of interpreting the data. Most of you have seen a prescription form at one time or another. They are not at all easy to read even for pharmacy professionals. I believe this technology is one of the most promising areas for improving patient care, certainly as it applies to medication management. The Institute of Medicine and CMS have embraced and endorsed e-prescribing for this reason. And from a labor standpoint, when we’re paying pharmacists over $100,000 a year and when pharmacists and pharmacy techs are in short supply, our ability to participate in this technology not only improves care but reduces our operating costs. And we are increasingly confident that Medicare will mandate e-prescribing for Part D coverage, and when that time comes, we’ll be ready to deliver. However, this may be two to five years away.

Number five, development of key performance indicators. I think most of you have noticed in this 10-K and recent 10-K that we have started the process of including key operational information. And we look at our business as a script business, and we want the financial market to evaluate our performance on that basis. Going forward, we will use key prescript operating measures to determine our core profitability, productivity and progress. We now manage every aspect of our business using key performance indicators. For example, all employee bonus goals are linked to key profit measures. And obviously, our goal to is to drive accountability and operating performance and to get alignment from the corporate office to field, pharmacy and account management operations. We’re very pleased to have the bulk of this initiative complete and behind us. However, we will continue to improve our key metrics as we move forward.

Now I’d like to talk about our growth prospects. Recall in August that we laid out acquisitions as a key opportunity for growth. We are presently building an acquisition pipeline. Mike and his team have looked at a number of properties. The earnings look good, but cash flow falls short of the valuation sellers are seeking. We’re continuing to explore a number of opportunities with the goal of making selective acquisitions. We will continue to be very disciplined in how we approach acquisitions. We’re not going to overpay. We believe there needs to be a reset of expectations in the market today. We think the market is a bit overvalued relative to cash flow.

Secondly, in terms of our growth opportunities our industry continues to grow at a steady pace. We certainly are not seeing the top line growth of 6% to 8% that we experienced historically, predominantly due to generic revenue pressures. But with improving margins due to generics and improved scale efficiencies, we are comfortable that we can grow double-digit rates for the next several years.

Finally, we anticipate the aging of America will provide us plenty of room over the next decade. Demand for long-term care pharmacy services is rising, and we see a vibrant market for our services for years to come.

We still have a lot of work ahead of us as we build a platform for the future. Our operating strategy in 2008 continues to be one of execution. This year is important for us to achieve our integration and business stabilization goals and to demonstrate to our shareholders that we can successfully integrate and consolidate our pharmacies, improve our processes for billing and collections and on a sustainable basis retain and grow our client base.

We continue to see significant progress in 2008 as demonstrated by our financial results. We continue, we believe, the groundwork that we are laying in 2008 will yield significant value for 2009 and beyond. And I’ll now turn it over to Mike to discuss the details of the quarter results.

Michael J. Culotta

Thank you, Greg, and good morning. Let’s spend a few minutes on the results of our operations. As Greg mentioned earlier, this is only our second quarter that both KPS and LTC have been included in the results of operations for the full quarter.

As you noted in our 10-Q, there are two sections in the MD&A. The first section is based on the first quarter 2008 compared to the historical first quarter of 2007. Remember, as Greg mentioned, the first quarter of 2007 only includes the results of operations and cash flows for KPS since it was the predecessor.

The other section of MD&A is a comparison of the fourth quarter 2007 to the first quarter 2008, a sequential quarter comparison. We believe this is very useful to you, the investors and analysts.

As you recall, we also furnished an 8-K on November 8, 2007, with the combined operations of KPS and PharMerica LTC. Included in that 8-K was also statistical data. Throughout these discussions we have obtained information from this source in our previous earnings calls.

Let’s now discuss our revenue trends and metrics. Our first quarter revenues were $495.1 million. This is an increase of $2.9 million over the sequential fourth quarter and an $8 million increase over the combined operations over the first quarter of 2007.

Our prescriptions dispensed were 10,212,000 this quarter compared to 10,061,000 in the fourth quarter of 2007 and 10,232,000 in the first quarter of 2007 on a combined basis. We do note that our business is cyclical and with that of the skilled nursing facilities. Customer-licensed beds under contract were 334,226 this quarter or a decline of 2,817 from the fourth quarter of 2007 and a decline of 6,505 from the first quarter of 2007 on a combined basis.

Our institutional revenues per script were $47.08 this quarter compared to $47.33 for the fourth quarter of 2007 and $46.26 for the first quarter of 2007 on a combined basis. Our increase in scripts and revenues from the fourth quarter was due to higher senses caused by seasonality.

We saw an increase in patients although customer-licensed beds were down. As it relates to our $2.2 million increase in institutional revenues over the sequential quarter, $4.7 million related to the volume while there was a $2.5 million decrease in revenue rate for prescription as we continue to see the shifting of brand to generics.

As it relates to the first quarter comparison in the institutional pharmacy segment, the increase of $6.9 million was driven primarily by rate increase. Our revenues increased sequentially in the hospital pharmacy management segment by $700,000 as two new hospitals were brought on. The increase of $1.4 million compared to the first quarter of 2007 was attributable to five new contracts signed.

Let’s now turn to the cost of goods sold and gross margin, particularly as it relates to the institutional pharmacy segment. Our gross profit of $69.7 million for this quarter or $6.83 per prescription dispensed compared to $72 million in the fourth quarter of 2007 or $7.13.

The declining gross profit and gross profit per prescription dispensed was attributable to the employer taxes and benefits that are reset every January 1st and inefficiencies and duplicative costs caused by the number of consolidations we had in progress. These items were reduced by decreases in cost of drugs as we continue to see brand-to-generic changes, our synergies, reduction in overall delivery costs and scaling of certain pharmacies for which the consolidations had been completed.

On a combined basis for the first quarter of 2007 gross profit was $64.2 million or $6.28 per prescription dispensed. The increase over comparative quarters was due to the staffing changes as a result of efforts to appropriately staff pharmacy levels to production. Gross profit margin improved 80 basis points from first quarter 2007 on a combined basis to the first quarter of 2008.

Rebates were $12.7 million in the first quarter of 2008 compared to $12.4 million in the fourth quarter of 2007 and on a combined basis $13.2 million in the first quarter of 2007. The largest difference was on Risperdal as we saw the rebate decline significantly in the third quarter of 2007.

Selling, general and administrative expenses, SG&A, includes functions such as pharmacy, regional and operation management, IT, billing and collections functions, legal, HR, finance and others. It also includes certain costs, such as provision for doubtful accounts. SG&A costs were $57.3 million or 11.7% of revenues for the first quarter of 2008 compared to $60.2 million or 12.2% of revenues for the fourth quarter of 2007.

Largest declines were in rent, depreciation and labor-related costs. Even though labor-related costs declined, employee benefits increased due to the reasons stated earlier. SG&A expenses on a combined basis were $57.5 million in the first quarter of 2007. SG&A increased due to the cost of being a public company but decreased as a result of staff downsizing.

On a combined basis our provision for doubtful accounts were as follows: 5.2 million or 1.05% in the revenues in the first quarter 2008 and 5.5 million or 1.12% of revenues in the fourth quarter of 2007. Remember that the fourth quarter in 2007 had a 1.7 million recovery on the receivables that were reserved prior to the merger. On a combined basis the provision for doubtful accounts was $5 million in the first quarter 2007. We continue to be concentrating on cash collection efforts and in some cases, as previously discussed removing ourselves from nonpaying, nonprofitable customers.

The company’s combined adjusted EBITDA for the first quarter 2008 was 21.1 million compared to 22.1 million in the fourth quarter 2007. On a combined basis the adjusted EBITDA was 16.4 million in the first quarter 2007. Again, remember, from our fourth quarter call we did have a 1.7 million pickup on very old accounts that were reserved prior to the merger.

Thus for comparative purposes the consolidated EBITDA in the fourth quarter adjusting for the 1.7 million would have been $20.4 million. The adjusted EBITDA $21.1 million for the first quarter of 2008 was negatively impacted $2.5 million related to employer taxes and employee benefits. Our employee benefits increased in the first quarter of 2008 from the fourth quarter of 2007 as the FICA, FUDA [ph], SUDA [ph] and 401K match were reset effective January 1st. A sizeable portion of our workforce makes in excess of $90,000 a year; thus, the first quarter has historically higher employee benefits.

We continue to focus on operational efficiencies and customers collections. Our adjusted EBITDA margins were 4.3% in the first quarter of 2008 compared to 4.5% in the fourth quarter of 2007 and 3.4% on a combined basis for the first quarter 2007. Which of course this is exclusive of integration, merger related costs, and other charges.

Turning to the balance sheet and cash flows. Our DSOs dropped 39.7 days. We continual evaluate the net realizable value of our receivables and client payment patterns. Our total debt outstanding is detailed in our 10-Q as are the covenant calculations. Our cash flows from operations for the quarter were 11.2 million and paid down 10 million of term loaned debt. Our cash flows on a sequential quarter basis declined by $12 million.

This decline was a result of $4.7 million in incentives and vacation paid out in the first quarter that was previously accrued, $1 million in additional lease payments also previously accrued. Additional cost in inventory of 2.4 million as a result of inventory increases at the receiving pharmacy as we are consolidating and 6.9 million lower cash collections on receivables in the first quarter due to timing of certain collections and obviously, the 1.7 million receivable recovery we mentioned earlier.

These outflow flows of cash were offset by the collection of rebates of approximately 3.4 million. Our increase in purchase of equipment and leasehold improvements was due to the systems equipment to support the technology infrastructure as we consolidate our operations. We continue to believe our guidance is appropriate at this time and we will not be adjusting it. Let us remember we have a number of consolidations in process and others starting soon which initially impact us negatively. Thanks very much, Greg.

Gregory S. Weishar

Thank you Mike. So as I stated before we continue to see great opportunities and are very pleased with the progress we have made to date. We view our industry as essential to providing the medication needs to frail and elderly, a need that will only grow as the population ages.

We are confident that we will be able to overcome the Medicare Part D pains that all of us in the pharmacy industry have experienced over the past couple of years. And we have our eyes open to the challenges before and believe that we are on track to achieve our targets and continue to see solid growth in 2008. And basically reaping majority of the rewards of our management team’s hard work today and 2009. Once again I thank you for your interest in our company. And I will not turn it over to the operator to begin our Q&A.

Question-and-Answer Session

Operator

Ladies and gentlemen (Operator Instructions). And our first question will come from the line of Adam Feinstein with Lehman Brothers. Please proceed.

Adam Feinstein – Lehman Brothers

Thank you. Good morning everyone. Very strong quarter here. Just wanted to ask a few questions here. Maybe just to start. With respect to the gross margin relative to the SG&A, clearly in the fourth quarter you had a lot more leverage on G&A line and then this – excuse me. You had more leverage at the end of the first quarter and in the fourth quarter it was the gross margin. I know you had talked a little bit about employee benefit costs and such. But just curious, as we think about gross margins throughout the year can you help us think about the seasonality there and do you think we will see the current quarter run rate as indicative on the full year?

Michael J. Culotta

Adam, what we are hoping very much for is there would be improvements in that. But let us remember – let us talk a little bit about some of the inefficiencies that we had from fourth quarter to first quarter. First, from the standpoint of the gross margin line, roughly of about that $2.5 million, 1.8 of that 2.5 million was in the cost of goods sold which was the increase in cost per employee benefit. Roughly in the fourth quarter we estimated about $250,000 worth of inefficiencies that we had on consolidation. There was about 1.1 million this quarter and the majority of that is in the cost of goods sold line. Really to answer your question, we hope to see more improvement throughout the quarter as we see brand to generics as we continue to consolidate more but we will be seeing some offsets as we have more and more to consolidate. So we are hoping very much for continuation of up kicks.

Adam Feinstein – Lehman Brothers

Okay, great. And this just with that with respect to the integration with the 30 million in synergies that you have outlined could you just help us think about what percentage you have achieved thus far and then just, you guys were talking about middle of 2009 terms of getting there but then on the last call you said it would probably be a little bit earlier based on your tone it sounds like that is the case also. Just wanted you to go back and maybe talk about the synergies and integration opportunity.

Gregory S. Weishar

Adam, this is Greg. How are you?

Adam Feinstein – Lehman Brothers

Hey Greg.

Gregory S. Weishar

We probably, our best estimates indicate we are generating roughly half of the 30 million in synergies on a go-forward basis this year. That is not to say half are in the business right now. But we think for ’08 we are going to generate about $15 million in synergies. And then, of course, we are getting the tailwinds of the fourth quarter and the last half of the third quarter in terms of the consolidations that we are doing. And we would expect to pick up at least another 15 on a go forward basis by the end of the first quarter of ’09. Again, just to recall we do not get to see the synergies, the flow through, on the operations until about three months after the consolidated pharmacy closes. And that is because of the inefficiencies that Mike talked about.

Adam Feinstein – Lehman Brothers

Okay. All right, good. And then just wanted to get your thoughts in terms of rebate pressures in the industry. Just wanted to, looking at the combined company last year and looking at the rebates this quarter was down slightly but on relative to the fourth quarter it was flat. But just curious if you have seen any change out there. I know with Risperdal there was some changes but other than that, just curious if you have seen any change in terms of rebates.

Gregory S. Weishar

We have two things going on. The number of drugs rebatable are going down. Risperdal is an example oft hat. But at the same token we are able to generate better returns for individual drugs. So are estimates this year are relatively flat, up a couple million maybe over last year but all in all probably you will want to look at these no upside no downside on rebates as a total amount of margin for this year. So that is where we are.

As we drive generics, I think this time last year our generic dispensing rate was. I am not sure quite but at 60 or below 60%. And I think it was like 57 to 59 somewhere in that number. So if you look at it from that standpoint 10% of the total scripts that are being dispensed are not brands whereas they were last year. That is the pressures that we are seeing from just the quantity of brands available for dispensing; however, we have done a pretty good job, I think, of offsetting that loss with better negotiations on the remaining brands that we do dispense.

Adam Feinstein – Lehman Brothers

Okay. And then just a final question and I will get back into the queue here. Just with on a guidance. I just wanted to get your thoughts there. I guess still a pretty wide range and understand with the company still being somewhat new why you would have a wide range but just with the strength in the last couple of quarters it seems like you guys are doing a great job. Just curious in terms of what are the swing factors as you think about the wide range Mike.

Michael J. Culotta

And I am probably going to go through this with you in detail sort of a little bit line item by line item. But really back, in terms of the guidance that we gave back on February 18th, when you take a look at our last trailing four quarters and you add the revenue on a combined basis. We ran, combining those, 1.95 billion. Basically our range was 1.935 to 1.955 and let us remember, we're continue throughout the year, you will see the brand to generic changes. So right now, we are running about on the upper end of that range but again you have got the brand to generic that will take place.

When you take a look at the EBITDA and you take a look at this quarter and you take a look at last quarter. We are probably in the mid to upper end of that range. We still fall between that range at this point and time. And let us remember right now we are roughly at about 25, 30% complete. We are going to be at the end of the second quarter, by the end of year 90% but the next quarters, second and third quarter we really start building up more and more of the consolidations. And as you saw we had about 1.1 million of inefficiencies that took place there. So we are sort of still comfortable with that at this point.

That is not to say we will adjust this depending upon how we do at the end of the second quarter. The depreciation, amortization expense, we are at 7.5 million. You multiply that times four. You are roughly at 30 million. So we are a little below what we gave in terms of the 32 to 33 million range; however, one of our purchases we had in terms of fixed assets during the first quarter was a large computer. Most of asset additions are usually a three to five year life. So you will have of what we acquired in the first quarter you are probably going to have close to a million in depreciation expense over the remaining of the years. So you will see that tweak up.

Interest expense. We did a little bit better there. Mainly from the standpoint of interest income, so when you take out the interest income you would probably be at the 16 million dollar range. However, we were at 3.7 so maybe we are a little conservative on the interest expense.

Our tax rate you saw come in at 43.5. Hopefully as the year progresses we will get closer to the 42.5. So our tax rate is a little bit higher than we thought. And the net income is roughly right there in line. When you take out the merger, integration and related costs and also the EPS we are probably in the mid to upper end of that range. So, still in all at this point and time with all the consolidations going on we just feel like let us keep this thing right now at what we believe. It may be a little conservative but let us hold it right now until we get through another quarter.

Adam Feinstein – Lehman Brothers

Okay. Thank you very much.

Operator

And our next question will come from the line of Eric Gommel with Stifel Nicolaus. Please proceed.

Eric Gommel – Stifel, Nicolaus & Company, Inc.

Good morning. Just a couple questions. I think you talked about your decline in beds related to nursing home providers taking in operations or bringing them in house. Is this is a trend that you see growing? Or is this something is maybe fading over time?

Gregory S. Weishar

We addressed this same question, I think Eric, last quarter. From our standpoint given the fact we have talked to a lot of people that there is kind of a sign wave that occurs. Over time this, there will be an up tick in this behavior over two or three years. And then there will be a downtick in terms of people who look to sell and move out of the pharmacy, in house pharmacy model. It is hard for us to assess whether that is more or less what is going on right now. But I can tell you we continue to see a number of folks who have gotten into the pharmacy business, who are kind of looking at it saying this may be a little more than we bargained for. And the business is a little tougher than what it was three years ago, four years ago. And we remain confident while we are seeing people go in house today. We are confident over the next three to five years that that will not be as predominant in the industry as it is today.

Eric Gommel – Stifel, Nicolaus & Company, Inc.

And the fact that you are kind of moving to metrics that are more first script metric. Is that, are you trying to maybe refocus investors’ attention on the fact that it may not so much be tied to beds as much as the number of scripts? Meaning acuity, the fact that you could do more patient days perhaps with less beds, is that sort of –

Gregory S. Weishar

I think there are two dimensions there. Yes, there is two dimensions. One of the dimensions is that we look at beds as being a less stable statistic as opposed to patients. And particularly when we start look at assisted living facilities you might get a facility that has a 150 beds or 150 residents but you only get 30% of them. So that statistic ceases to have meaning so we are trying to focus our energies on patients as opposed to beds for that reason.

In addition on the prescript piece. We are also trying to focus the fact that are key profitability and our key ability to grow is around patients and their use of prescription medications. And also we are trying to focus our attention on cost per script as opposed to cost as a percent of revenue. And all of the percent as revenue metrics that have historically been used for this business because revenue today does not really mean what it meant two or three years ago. So really we are trying to benchmark. We think the strongest benchmark is patients as well as scripts.

Eric Gommel – Stifel, Nicolaus & Company, Inc.

And then my last question and I will jump out. You talked about sort of the near term opportunities in generics and you are clearly a margin expansion story. What is, now that you have had some time to look at the industry, evaluate it closely, what do you think is a real sort of steady state in margin for this business? If you were to look at optimizing your operations, how do you think about that?

Gregory S. Weishar

Well I think we are still in kind of the five to seven range. And I think a big wild card here is what is the long-term posture that we are going to have in the PDP arena in terms of our negotiations with Part D plans. And that is the issue that would swing this thing one way or another. But I think a five to seven number we are comfortable in that range. And I think if you look at our other players and different pharmacy segments, 4 to 5%, 4%, 3% are the kind of mode that we operate in. I think five to seven is a number that we are comfortable in terms of that range with the wild card being one of the long-term behaviors of the Part D plans.

Eric Gommel – Stifel, Nicolaus & Company, Inc.

Okay. Thank you.

Operator

And our next question will come from the line of Melissa Jaffee with Merrill Lynch. Please proceed.

Melissa Jaffee – Merrill Lynch

Hi guys. Good morning. Have you given operation cash flow guidance for the year? And then how much you expect sort of nonrecurring or working capital needs related to the integration and consolidation for inventory build that sort of thing?

Michael J. Culotta

Yes, Melissa we gave roughly three cash flow about $20 to $30 million.

Melissa Jaffee – Merrill Lynch

Okay.

Michael J. Culotta

Free operating cash flow.

Melissa Jaffee – Merrill Lynch

Okay and then–.

Michael J. Culotta

And then what we mentioned was we were probably going to have about 30 to 34 million in CapEx. And the main we reason, as we talked about, was due to the consolidations that are all taking place this year.

Melissa Jaffee – Merrill Lynch

Okay. And on the inventory levels?

Michael J. Culotta

The inventory levels you did see a little spike. Those should be as we go throughout the year; you are probably going to see little bits and pieces of spike ups in that. Because as you consolidate one pharmacy you have to build up that inventory and you cannot totally take the other pharmacy and put it down to zero. So you will see a little bit of spiking going on probably continuation in the second and third quarters and then we should start seeing that to decline as they consolidate.

Melissa Jaffee – Merrill Lynch

Okay. And then just following up on your comments about the PDPs. Other than just higher reimbursement what kinds of adjustments in your ideal world could you make to those contracts?

Gregory S. Weishar

That could take a long time to talk about that one. I think there are key operational dynamics as well as pricing dynamics that we are focusing our discussions around on the PDPs. As you know this institutional market segment is quite a bit different than the retail pharmacy segment. Fundamentally what is different is that the retail segment assumes that the patient can actually go to the pharmacy pick up the script and it also assumes that the patient has money to pay co-pays. And so the whole structure around private authorizations and drugs not covered presents a special burden to the institutional segment. And so those are the key elements from an operational dimension that we are looking at. Formulary management initiatives, cost containment initiatives and how those impact are operations.

Melissa Jaffee – Merrill Lynch

Okay. Are you generally getting higher dispensing fees on the generic side?

Gregory S. Weishar

Higher than?

Melissa Jaffee – Merrill Lynch

Versus brand.

Gregory S. Weishar

Oh on the generics. No typically our dispensing fees are the same.

Melissa Jaffee – Merrill Lynch

Okay. All right. Thanks.

Operator

(Operator Instructions) And our next question will come from the line of Robert Willoughby with Banc of America Securities. Please proceed.

Robert Willoughby – Banc of America Securities, LLC

Greg or Mike you did mention acquisitions obviously part of the strategy here. Are you at that point in the consolidation now that this quarter, next quarter we could see some transactions or are we still thinking a little bit further down the line?

Gregory S. Weishar

I think we are at the point now where if we found the right opportunity Bob, we would pounce it. And not be so hesitant in terms of the integration challenge as we were maybe six months ago when we talked about this. And I think right now it is more about finding the right opportunity and finding opportunities that we think that when we wake up in two or three years there is still going to be business there. So I think the answer to that is if there was something that came across our desk tomorrow that we thought was a good acquisition opportunity we would buy it.

Robert Willoughby – Banc of America Securities, LLC

And do start-up efforts make any sense at all or is just vastly easier to buy the book of business?

Gregory S. Weishar

I am not sure I understand your question Bob.

Robert Willoughby – Banc of America Securities, LLC

I mean would you ever open up a pharmacy in a new region where you had no operations prior to that or do you really need to buy your way into the markets?

Gregory S. Weishar

We would not preclude that but clearly we would want to do that with a partner or not just go in without any business. So the answer is again if there were some opportunity for us to aggregate some business in a certain area where we are not and start a pharmacy we would do that. But that opportunity has not presented itself yet.

Robert Willoughby – Banc of America Securities, LLC

And you spoke to kind of a 5 to 7% margin opportunity ultimately in the business. At what point and time do you have the clarity to determine whether you are kind of the near the high end of that or the lower end of that? Is there some action dates here that would give you some view on that?

Michael J. Culotta

Yes I would say Bob probably in the end of the third, fourth quarter timeframe. By that time we will have 70% plus of our consolidations done. Lot more of integration that has taken place and we will see where we are. But the nice thing about this is we are starting to see consistency from our month to month in our EBITDA line, which was a very key thing, that we had been looking at. So that is really good news for us. And we continue to find opportunities. The best way to describe it every time we look at something we continue to find more and more opportunities with these two companies.

Robert Willoughby – Banc of America Securities, LLC

Okay. And just lastly. I do not honestly have the terms of your credit facilities debt in front of me. Are there opportunities that you anticipate refinancing that to bring rates down or is it just to tough at this point?

Michael J. Culotta

I would say we have got a pretty good deal right now with what we have. So I would not see any changes there.

Robert Willoughby – Banc of America Securities, LLC

Okay. Thank you.

Operator

And at this time we have no questions in queue. I would now like to the presentation back over to Greg for closing remarks.

Gregory S. Weishar

Thank you Lacey. Again thank you for your interest in our company. I do not have anything more to say other than the fact that I think you can tell from our results and from our comments today that we remain extremely optimistic about the long-term prospects of our company. And we also appreciate all of your interest in our company and look forward to our next call. Thank you.

Operator

Thank you for your participation in today’s conference. This concludes your presentation. You may now disconnect. Good day.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: transcripts@seekingalpha.com. Thank you!

Source: PharMerica Corporation Q1 2008 Earnings Call Transcript
This Transcript
All Transcripts