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Omnicare, Inc. (OCR)

Q2 2011 Earnings Call

July 26, 2011 9:00 am ET


Patrick Lee – VP, IR

John Figueroa – CEO

John Workman – President and CFO


Frank Morgan – RBC Capital Markets

Lisa Gill – JPMorgan

Robert Jones – Goldman Sachs

Brendan Strong – Barclays

Jason Gurda – Leerink Swann

Robert Willoughby – Banc of America

A.J. Rice – Susquehanna Financial

Adam Feinstein – Barclays

Steven Valiquette – UBS

Glen Santangelo – Credit Suisse



Good morning. My name is Maryann and I will be your conference operator today. At this time, I would like to welcome everyone to Omnicare’s Second Quarter 2011 Earnings Conference Call. All lines have been placed on mute to prevent any background noise. After the speakers’ remarks, there will be a question-and-answer session. (Operator instructions) 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, Maryann. Good morning, ladies and gentlemen, and thank you for joining us today. With me on the call today 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 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 sake and the 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 Web site. Also on our Web site, we have posted supplemental slides, which are intended to accompany our remarks this morning.

Before turning the call over to John, I would like to remind analysts to limit themselves to one question and one follow-up during our question-and-answer session so others may ask their questions. With that, it is my pleasure to turn the call over to John Figueroa.

John Figueroa

Thanks Patrick, and good morning to all of you who joined us on the call today. I'd like to begin this call by providing my thoughts on our second quarter performance and the key highlights driving the business, John will then discuss the second quarter financial results in greater detail and also provide an update to our 2011 guidance that includes our more favorable cash flow expectations, following our remarks, we’ll be happy to answer your questions.

I’m pleased to report that during the second quarter, we continue to progress toward our objective of becoming a stronger operations driven company. We generated' adjusted EPS of $0.50, once again exceeding the street consensus estimate, although slightly lower sequentially reflecting the seasonably softer period in terms of utilization levels. Of course, this was in line with our prior comments about the quarter.

The highlight for the quarter was again our cash flow generation. We demonstrated sound financial discipline yielding strong cash flows, while adhering to a very diligent capital allocation program entered on optimizing returns.

For the quarter, we generated approximately $137 million in cash flows from operations, which brings our year-to-date total to $281 million, marking the strongest cash flow performance in the first six months of any year in our 30-year history. I believe our strong cash flow continues to be the most compelling yet undervalued aspect of the Omnicare story, because it enables us to create significant value for our shareholders.

Turning now to our operating performance, few items stand out. The lower utilization levels within our long term care business that we had anticipated, pharmaceutical market dynamics and additional progress made towards enhancing the overall customer experience evidenced by improved retention.

First, with respect to utilization. As you may recall, we began the year with script volumes benefiting from the new RUG-IV reimbursement rules, which were intended to lower healthcare cost by transitioning certain clinically complexed patients from a high cost treatment center to a lower cost alternative.

While I believe acuity levels continue to benefit from this dynamic in the second quarter, overall utilization was weaker sequentially as expected due to reduced occurrences of the flu and other circumstances in the elderly population generally common in colder months.

We also saw a continuation of many of the pharmaceutical factors that have been impacting results for the past several quarters, namely, a further increase in generic drug utilization. Our team continued to be very effective at converting residents to newly launched generics with our generic dispensing rate, expanding another 60 basis points to 78%.

I believe we have the highest generic conversion rates in the long-term care industry, largely because our sophisticated direct sourcing program provides us with more attractive opportunity and the added incentive to drive penetration of generic drugs. And because of this unique opportunity, I believe it incents Omnicare and we are aligned with our customers as well. Where we benefit from generics, our payers, customers and patients do as well.

Regarding customer retention and growth, we made additional progress during the quarter especially with respect to customer retention. We have been very candid with our employees, customers and shareholders that our focus has been on enhancing service in an effort to create customers for life. And I am very pleased at how well our organization is being this objective.

Our redefined organizational structure continues to have a favorable impact on our long-term care group, providing greater consistency in service delivery, while enabling our most effective operators to have a greater impact on the business. I also believe we are beginning to bridge the communication gap between what new and existing customers know about the services we provide.

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