Omnicare's CEO Discusses Q1 2012 Results - Earnings Call Transcript

Omnicare (OCR)

Q1 2012 Earnings Call

April 26, 2012 9:00 am ET

Executives

Patrick Lee -

John G. Figueroa - Chief Executive Officer and Director

John L. Workman - President and Chief Financial Officer

Nitin Sahney - Executive Vice President and President of Specialty Care Group

Jeffrey M. Stamps - Executive Vice President and President of Long-Term Care Operations

Analysts

Lisa C. Gill - JP Morgan Chase & Co, Research Division

Charles Rhyee - Cowen and Company, LLC, Research Division

Glen J. Santangelo - Crédit Suisse AG, Research Division

Frank G. Morgan - RBC Capital Markets, LLC, Research Division

Robert M. Willoughby - BofA Merrill Lynch, Research Division

Robert P. Jones - Goldman Sachs Group Inc., Research Division

Brendan Strong - Barclays Capital, Research Division

Steven Valiquette - UBS Investment Bank, Research Division

Presentation

Operator

Good morning. My name is Theresa, and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare's First Quarter 2012 Earnings Call. [Operator Instructions] Thank you. I would now like to turn the call over to Patrick Lee, Omnicare's Vice President of Investor Relations. Mr. Lee, you may begin your conference.

Patrick Lee

Thanks, Theresa. Good morning, ladies and gentlemen, and thank you for joining us today. With me on the call are John Figueroa, Chief Executive Officer; and John Workman, President and Chief Financial Officer.

Before we begin, let me remind you that during this call, we will make remarks that constitute forward-looking statements. Actual results may differ as a result of a variety of factors, including those identified in our earnings release and in our various filings with the SEC. You are also cautioned that any forward-looking statements reflect management's current views only, and that the company undertakes no obligation to revise or update such statements in the future. For simplicity's sake and to focus on what we believe are the best indicators of our operating performance, we will discuss results from continuing operations, and we'll also exclude special items for all periods in our discussion today.

A reconciliation of this non-GAAP information has been attached to our earnings release and is also available on our newly redesigned website. Also on our website, you will find first quarter supplemental slides and the historical data behind our adjusted cash-based EPS reporting methodology, which we'll follow during our discussion today.

[Operator Instructions] With that, it is my pleasure to turn the call over to John Figueroa.

John G. Figueroa

Thanks, Patrick. Good morning, everyone, and thank you for joining us. During today's call, I'd like to share with you some of the drivers behind our first quarter performance, as well as provide an update on the status of our core operating initiatives. John will then review our first quarter financial results and current outlook for the year. Following our remarks, we'll be happy to answer your questions.

We are pleased with our solid first quarter financial results, which reflect the continuation of our recently established earnings momentum. Our focus on becoming more operationally driven and customer focused has enabled us to become more efficient as an organization, while concurrently benefiting from the pharmaceutical market trends. I believe we have begun a successful 2012 by elevating Omnicare's growth profile and positioning our shareholders for value enhancement.

For the quarter, we generated adjusted cash EPS of $0.81, which represents a 17% increase over the first quarter of 2011. This robust earnings growth was driven largely by our ability to leverage a sales increase. With sales 4% higher on a year-over-year basis, we increased our gross profit by 10%, as we benefited from the introduction of new low-cost generic drug alternatives, while also driving more operational efficiency.

As a result, we expanded our gross margin by 115 basis points to 23.1% and we created further leverage at the operating income line as gross profit dollar growth outpaced the year-over-year increase in SG&A dollars, driving adjusted operating profit 19% higher. With SG&A expense remaining relatively even sequentially, we expanded our adjusted operating margin by 40 basis points to 9%.

We also continued to generate solid cash flow with first quarter cash flow from continuing operations of $100 million or nearly 84% of our adjusted income before income taxes. And while John will discuss how that cash was allocated during the quarter, I believe we've been consistent in returning at least 25% of our cash flows to shareholders, while also looking at ways to improve our capital structure and generate attractive returns through acquisitions. We believe this disciplined approach to capital allocation, coupled with a robust cash flow characteristics of our company, provides for a compelling opportunity for our shareholders.

Turning now to our operating performance. A few items stand out. We continue to benefit from certain pharmaceutical market dynamics: further improvements in efficiency and standardization; a decline for the quarter in the number of beds served, as we had expected; and a robust growth within our specialty care group.

With respect to the pharmaceutical market dynamics, we have seen a number of high volume branded products convert to generic form during the past 6 months, and we have been effective in driving rapid conversion to these low-cost alternatives. In fact, our generic dispensing rate expanded 80 basis points during the quarter to 80.1%. And because we believe there are still a number of significant generic drugs yet to be introduced into the market and other exclusive generic drugs are soon to become multi- sourced, there is still opportunity for Omnicare, our customers and payers to capture additional savings.

I believe Omnicare's generic drug efficiencies, coupled with our unique clinical programs, enable us to generate savings that provided tremendous amount of value for our customers. In fact, we recently met with a new regional customer and evaluated their savings attributed to our therapeutic interchange programs and a brand to generic efficiency program, and this new customer was pleased to see we saved them over $250,000 in the fourth quarter alone. When we benefit from our clinical expertise and generic drug efficiencies, our customers do, too. And that is why we believe Omnicare and our customers are uniquely positioned to benefit from this generic wave we are currently writing.

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