Good morning, ladies and gentlemen, and welcome to the Owens & Minor First Quarter 2012 Earnings Conference Call. My name is Ben, and I will be your operator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to turn the presentation over to your host for today's call, Mr. Craig Smith, President and Chief Executive Officer of Owens & Minor. Please proceed, sir.

Thank you, Ben, and good morning, everyone. I want to welcome you to the Owens & Minor First Quarter 2012 Earnings Conference Call. We'll review our results and take your questions in a moment. But first, let me introduce my colleagues on the call today: Jim Bierman, our Chief Operating Officer; Drew Edwards, our Interim Chief Financial Officer; and Grace Den Hartog, our General Counsel. Now before we begin, Trudi Allcott from our Investor Relations team will read a Safe Harbor statement. Trudi?

Thank you, Craig. Our comments today will be focused on financial results for the first quarter 2012, which are included in our press release. The press release, as well as the supplemental slide presentation, can be found on our website at owens-minor.com, where we will also archive the webcast of today's call. In the course of our discussion today, we may make forward-looking statements. These statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected. Please see our press release and our SEC filings for a full discussion of these risk factors. As for our investor calendar, upcoming events are outlined in our press release, and we look forward to seeing you on the road in the weeks to come. Thank you. Craig?

Thank you, Trudi. I'd like to call on Drew Edwards, our Interim Chief Financial Officer, to review the numbers with us. Then I'm going to ask Jim to provide an operational overview. So let's start with Drew.

Thank you, Craig, and good morning, everyone. I'm pleased to have this opportunity to provide you with some insight into our quarterly financial results. Net revenues increased 4.4% for the first quarter of 2012 when compared to the same quarter last year. Net revenue growth resulted from an increase in sales to existing customers of approximately $56 million, contributing 2.6% of the total increase, and increase in sales to net new customers of approximately $33 million or a 1.6% contribution to the total increase in revenues. And finally, fee-for-service revenues added about $5 million or 0.2% to the increase in revenues. Gross margin dollars increased 1.7% primarily as a result of increased fee-for-service revenues. As a percentage of revenues, gross margin was 9.66%, representing a decline of 26 basis points when compared to the first quarter of 2011. The decline in gross margin percentage in the first quarter this year compared to the first quarter of last year resulted from changes in customer mix, including lower margin on new contracts with large, integrated healthcare networks, as we have discussed previously, and continued competitive pressures. On a sequential basis, versus the fourth quarter of 2011, gross margin percentage declined by 9 basis points due to lower revenues from our consulting services that tend to fluctuate from quarter-to-quarter. LIFO provision declined by $6 million compared to the first quarter of last year. It seemingly benefited the current quarter gross margin. There are numerous components to gross margin and inventory valuation, which change from quarter-to-quarter, and the impact of changes in these other components offset the impact of the decline in LIFO for the quarter. I'd like to now turn to SG&A expenses, which improved by 10 basis points to 7.01% versus the same period last year. On a dollar basis for this…

Thank you, Drew, and good morning, everyone. I'd like to take this opportunity to provide a bit of an operational overview, especially in areas where we are seeing the impact of larger trends. Analysis of our revenue results shows that sales to existing customers continued on a strong pace, while sales to new customers, including the large new IDNs, were positively impactful in the first quarter. You will recall that Craig has challenged the team to grow revenues by more than 100 basis points over market growth. We are pleased to note a 160 basis point growth in net new business for the quarter. In addition, revenue growth attributed to existing customers also grew in excess of the market due in large part to our customers' expansion of their systems by acquisition. Gross margin as a percentage of revenue for our traditional distribution business decreased 42 basis points from the prior year, related primarily to changes in customer mix. Partially offsetting this decrease was a 20 basis point contribution from our fee-for-service businesses in the first quarter. For some time, we have been talking about the impact of the large new enterprise customers in the market. Last year, we signed a significant amount of this business, and we have commented on the leverage that these customers have in the marketplace. However, we see these large health systems and provider groups as the winners in healthcare, and we consider ourselves very fortunate to be aligned with them. Looking at SG&A results for the quarter. We see the increase in expenses relating to the OM Healthcare Logistics new business. In comparing this year's first quarter to last year's, you may recall that we onboarded OM Healthcare Logistics' largest customer in the second quarter of last year. We continue to see improvement in…

Thank you, Jim. I'm going to make a couple of observations this morning, and then we'll open it up for questions. We are often asked about the current healthcare environment, and at this point, we will hesitate, really, to point any significant change in utilization over the last few months. Trends among our mix of customers are in line with what we have previously seen. Now as you know, I'm out on the road a lot and I have been out on the road quite a bit the last 3 months, and I'd like to share some observations with you, observations that I really have been seeing for a period now. The large enterprise customers that we have identified really continue as significant players in the market. And these large systems are working to create efficiencies and drive costs out of the supply chain as they anticipate a lower reimbursement environment in the future. And I get told that all the time, really almost every week. In turn, these large enterprise customers are also the most active and consolidating acquiring customers and building new services for their patients. And in fact, both of the 2 systems we brought on last year have either acquired or affiliated with new hospitals since joining us. Now just a few weeks ago, and I'd like to give you some examples of when I'm out of the road and when I'm talking to -- with our larger customers and noncustomers, one of our customers told me that they had just added 4 affiliates to the group and asked if we can move these hospitals under their platform. And like many of our customers, this IDN wants to help with data collection, data cleansing, analysis, logistics, supply chain services and integration of the new facilities. Now…

[Operator Instructions] And our first question today comes from the line of Greg (sic) [Glen] Santangelo from Credit Suisse.

I just want to follow up with you, Craig and Jim, on the margin issue. I'm getting a lot of questions on that. And if I look at your kind of gross margins in the first quarter, you put up 9.66%. And Jim, you obviously talked about the impact from the IDNs and the repricings and the customer mix, and so I'm kind of curious, was that in line with your expectations, a little bit better, a little bit worse?

Sure, Glen. The -- when we talked at our Investor Day and we chatted about what the target range for gross margin on an annualized basis may look like, we talked in terms of a range of 10% to 10.25%. Obviously, the 9.66% is below that. We've also commented in the past and as late as the last conference call for the last quarter that the major variable associated with that is the fee-for-service performance. So as we think about the first quarter that we've just completed, we came in with less fee-for-service business than we were originally targeting. Now that, as Drew said, ties primarily to the consultancy business and work that we do, and that does tend to fluctuate over time and with the timing of individual contracts. But for the quarter, it was a bit less than what we had originally targeted.

And so Jim, maybe if I can just kind of follow up on that, on the logistics issue, it's kind of encouraging that you believe the business can be breakeven this year. But I'm guessing it was not breakeven in 1Q, and I guess implied in that statement that you expect it to be breakeven for the full year. Do you need to win additional revenues? Or can you kind of get there with what you have currently?

Yes. And just not to parse words, but to just restate that I think at Investor Day and what we've said on numerous occasions since then, is that we would reach a breakeven run rate in 2012. But that being said, we have seen improvements to date in the financial performance of OM Healthcare Logistics. The improvements to date have primarily been in the area of expense reduction and greater efficiencies that have been brought to the front by Brian Shotto and his team and their expertise in managing the third-party logistics business. So that's been very positive. We do have capacity to do what we would characterize as tuck-in additions to our customer base without increasing the infrastructure. And as you well know, in that kind of a situation, that incremental revenue would have a very significant impact on bottom line performance. The sales efforts are underway in that under -- for that initiative. And we're pleased with how things are progressing. And we are very pleased with the market receptivity that we've seen with the management team that we have in place.

Hey, Craig, maybe if I can ask you just one last question, and I promise I'll jump off. Your revenue growth continues to be very strong and up almost 3% with existing customers. Is that coming more from price increases? Or are you seeing anything in terms of volumes? Or has it kind of been status quo in that regard?

Well, I think, Glen, I'd refer back to the last 2 or 3 quarters that we've been talking about this large IDNs, is that the growth, really, is coming from the larger systems that are either adding services or combining with other hospital systems. And that trend continues. If you heard my comments, just as I go across the country, these systems are just consolidating. And really, the one example I gave you was for new customers -- for an existing customer we have that we'll start to move over. So I think we're going to continue to see that for some period of time.

Our next question comes from the line of Larry Marsh of Barclays.

Craig, Jim, Drew and the team, just a couple of questions. First, if I go back to February, Craig, then you announced the promotion of Jim to Chief Operating Officer, I think, highlighting the need to drive margins in your business with all this incremental volume with key customers. So I guess around that, maybe for Jim, are there any initial takeaways you have being in the role now for 7 weeks that's sort of different in what you've already talked about? And then just a clarification, you mentioned your biggest variable here is fee-for-service performance. Are you referring that both to 3PL and consulting? And when you say 20 basis points of contribution, how does that compare to last year? And where do you think that can go?

Yes. Larry, you have a bunch of questions there. I'll do my best to pick them off. I'm thinking, in terms of the more philosophical broader question you posed on directionally what's the focus of operations initially, I think it'd be silly for me not to acknowledge my technical training and background from a financial perspective and not bring that to the forefront of these new responsibilities. So I alluded to earlier in the comments that there is an increased focus on looking at the profitability of different subsets of the organization. And that profitability could be on a customer basis, a provider-customer basis. It could be looking at the profitability of our supplier relationships, on a specific supplier basis. It can be as much on a category or a line of products. And it most certainly, as you saw in the fourth quarter, focuses on our geographical alignment and where we have resources allocated throughout the United States. So I think we are looking at empirical data to validate positions and tactics that we'll take in all those given areas going forward. Enough on the philosophy, and I can drive into more of the details of the question you raised. The 20 basis points on fee-for-service business was, for this quarter, primarily driven by OM Healthcare Logistics. But keep in mind, as I know you well know, that we had a very low comp in the first quarter of last year in that business. And we have the CareFusion business running through, though by definition, it was expected that we would get a benefit in that area. The piece that came in below the prior year and below the -- what we were targeting or thinking about had more to do with our OMSolutions consultancy work and some one-off work that the core distribution business does on a fee-for-service basis for selected customers. So that's really the variance that we saw for the quarter.

Got it. Okay. And it seems like the message you're sending, Craig, Jim, is, hey, with the changes, these gross margins are not really acceptable. In fact, I don't think I've ever seen it quite as low, and I've covered you guys for a number of years. So I think that's what you're communicating. I just want to say that. So the second question, and I'll keep maybe asking every quarter, is really on the JV for to private label. It seems like that's a great opportunity for you guys to help offset some of the issues associated with bigger customers asking to do more. Craig, you said you're pleased with where that sits. I think I'm assuming that's going to be several cents accretive to your business this year. I'd still love to get you to reflect on sort of where you feel like you are and then where you think you can get to in terms of percentage of business in terms of capacity and how quickly we can get there as we think about the next 2 years.

Well, let me -- we've been at this for about 5 years, Larry. And again, you followed us for a long time. And I feel much more confident and comfortable. And again, I think we all have a tendency to straight back to the private label piece, and there's really a bigger picture to this. And I think, Jim, in answering your question about his first 7 weeks here, and I'm next door to him, so he's a busy guy, he's got them lined outside the door seeing him. But I think you have to look at the whole sourcing strategy in total. I'm very pleased I got to go to Shanghai. We've got some great people there. The challenge I always saw us having is, do we have one person in China running around, talking to manufacturers? And I think we have the appropriate infrastructure now to address in a product category when we want to do private label. We can either choose to go through China or a branded manufacturer can still approach us and private label for us. We also have, we believe, an opportunity with some of our larger suppliers to work with these large IDNs, and this would be a whole hour discussion. But we're benchmarking all of our manufacturers. We're now starting to share that operationally with some of these larger IDNs who want us to be as successful as they are. So when we talk about -- I'm feeling much better in total about our supplier strategy. And clearly, private label will be a fairly big component to that. I almost feel like we're just starting again. But we're starting with the right people in place, in the right direction, and some focus and disciplined that Jim has brought through sourcing is now starting to pay off. And I think we publicly said that we would like roughly 10% of our business to be private label over a period of years. So we're going to continue to stay at that. But we also have opportunity with our branded manufacturers to improve profitability, to improve efficiency and improve productivity, and that's what a lot of these larger IDNs are looking for.

Right. So it sounds like -- and I'll jump off. It sounds like, Craig, you're saying you're as comfortable that this is going to be a good contributor this year and next year regardless of sort of how it comes in, and you don't feel like there's any concern that as we think about a year from now, you're going to come to us and say you're a bit behind plan on sort of the overall sourcing initiatives?

As of this date right now, I'm feeling very comfortable -- no. I mean, a lot of things can happen in 9 months, Larry. You know that probably as well as anybody in the market. But as to date, everything that I've seen, everything that I've experienced, everybody, everything that I've talked to and everybody I've talked to in the organization and talking with customers, I feel that this was a right investment and the right strategy, is to really work on our supplier portfolio and make sure that we have the appropriate suppliers that our customers want. And I think it's a win-win for us, the suppliers and the providers.

Our next question comes from the line of Robert Willoughby from Bank of America Merrill Lynch.

Craig or Jim, it looked cash flow was the eye-opener for us. Maybe a 3-part question here. Can the inventories come down more in the future? Or are we at a steady-state level needed to support the current revenue trends? And then maybe if you can comment on the M&A prospects that you may see, does your cash balance suggest you might be more open to transactions possibly in the future? And then lastly, just remind us when the last time you raised your dividend was.

Sure, Robert. Let's address the last one first. We raised the dividend as of the last quarter, February. So it was effective as of the last earnings call. And so as we consider M&A activity, as we've said for some period of time, where -- we have grown historically by being an acquisitive company. We have looked at opportunities over the last several years and then disappointed in the pricing that was in the marketplace. But we are constantly on the lookout for significant opportunities that align with our strategic initiatives. And we've talked in the past that we would look in areas such as regional distributors where a great exit strategy for these family-run businesses is. We would look in areas potentially to expand our third-party logistics capabilities. We would look for partnering opportunities with large IDNs, so -- and a handful of technology-based, really enabling technologies for the services we provide. Those are kind of the 4 major areas that we would consider. As you look at the cash that we generated from operations for the quarter of about $100 million, I would tend to say, and this is just my own editorial comment, that is, one thinks is about the performance in day sales outstanding, and therefore, our receivables position, that there, we pretty much have achieved about as good as it's going to get, at 19.9 days, and that there would be some of ebb and flow around that number in an ideal situation. In the inventory area, and believe me, getting from 10.0 last quarter to 10.5 this quarter was no small accomplishment. But we believe that there is still some opportunity that exists there. Craig has challenged the team to do more and do better. I will point out one thing, though, that is maybe more nuance than more detail than the investor community really needs. But as these this large IDNs systems, as Craig referred to, grow through either affiliation or acquisition, there is, at times that they're adding the new hospitals to their system and conversion to us as a distributor, the need to build up inventory to support those conversions. So even though it's not a new business coming in to us, a new contract coming in to us, it is a bolus of this new business that we need to service. So we may find times when we have these spikes in increase in inventory that are aligned with serving the growth of these new large systems. But with that as a caveat, yes, I think there's an opportunity to continue to improve on the inventory side.

Just quickly on the valuation expectations, you said they had been high. Are they more reasonable now that we're more likely to see something over the next 12 months?

Yes. We never want to handicap, but we're in the market all the time. And we're looking aggressively at opportunities that we think can generate a return to our shareholders and that are consistent with our strategic initiatives.

Our next question comes from the line of Lisa Gill from JPMorgan.

I just have a couple of follow-up questions. Craig, you talked about these IDN relationships, and I was just curious. As you think about the optimal margins on these new larger contracts over time, do you anticipate that overall, the operating margin will be better than your core book of business? Or I think you characterized the fact that they had a lot of purchasing power that maybe will be worse. How should we think about that over the next several years? And then secondly, I know, Drew, you said it's still early on, but are you still comfortable with that target range of 10% to 10.25% on the gross margin side for this year?

Let me take the first part of the question, Lisa, and I think that actually is an excellent question because you can look at these relationships short term or you can look at them long term. And I think the -- you move from a vendor-customer relationship to a partner-customer relationship, and you have different discussions around logistics. You have -- in one instance, we took one of these systems out of 3 warehouses. And so it's not necessarily always about price. And obviously, they're big, and so they're expecting to be competitive in the marketplace. And -- but that is only really a small component of that. So I would say, over a period of time, the goal really is -- and one of the questions that was not asked today is, we believe we are aligned in our larger systems how we sell. So we don't have 20 people running around talking to 100 customers. We have a team with a senior leader executive with 3 or 4 resources, working corporately, corporate to corporate, to come up with goals and objectives to help them drive their cost down. So in the old days, historically, it would almost be like a medical device company where you have a lot of people out selling. This is really more of a centralized sell. So it might take a little bit longer than ordinarily 20 people running around and getting some hit and miss success among 100 hospitals. And so we might -- back to Jim's point, 12 to 18 months. It's -- you're talking about, for instance, that you're very familiar with PANDAC, wound suture inventory management. You're talking about doing all 100 hospitals or a region of 100 hospitals versus trying to go out and individually sell to 100 hospitals. So we believe, long term, that this will enhance profitability. Also, they're more than willing to talk about which suppliers are most efficient and most productive for us. Now there are existing contracts with suppliers that they have, and in some instances, we're going to have to let those contracts play out and expire. And then as opportunities come up, we're going to be sitting down with these customers and trying to determine any product category, what is the best supplier for both the provider and for us. So we made a conscious decision on these larger IDNs to make an investment up front. Jim talked about the inventory. I think that's a tremendous example of how the inventory is coming down, the operations are stabilizing. And now we're going to work on margin and profitability.

And Lisa, this is Drew. As Jim mentioned earlier, I think the key to achieving our 10% to 10.25% gross margin goal, one is meeting our goals for fee-for-service business. And then two, the other thing is, as Jim touched on in his script, is optimizing our business with our large enterprise customers. So those are really the 2 key areas to us achieving that goal for the year.

Okay. Great. And then if I could just sneak one last one in, I know you talked about the new Novation relationship. Is there any major changes to that relationship that we should be aware about?

No. I would -- I don't think, as we think about it, that there's anything particularly unique or different as we said at this point in time.

Our next question comes from the line of Eric Coldwell from Robert W Baird.

Just a quick follow-up on the last one from Lisa on the Novation deal. Jim, you said you didn't think there was anything dramatically unique about the renewal. At the same time, my impression was that the last time OMI renewed with Novation, Novation wound up using many more distributors than had been originally expected, which was a disappointment. I'm curious if you are able to convince them to narrow their distribution list and perhaps provide more volume to OMI.

Yes. Unfortunately, Eric, I'm not privy to that information. Maybe someone within our organization is, but I'm not aware of that. I think that's probably a question better directed to the folks at Novation.

Okay. Let me shift gears. We talked about the asset management, the DSO and inventory turns. Another component is days payable, which has declined, I think, for the third consecutive quarter and was down 2 days sequentially, which is a historic low on the DPOs. Is there something about your manufacturer relationships that's changing? Is this possibly a timing issue? And where do you see days payable going in the near term and then longer term?

This is Drew. Most of that change in that decrease is due to timing. We would expect that as inventories move up and down, you would see the payables move up and down in tandem over a period of time. But most of that change is due to timing.

Okay. And then on supplier incentives and rebates and really just your focus on key suppliers, last year, despite the strong revenue growth, you had lower profitability on that side of the equation. I'm curious, what's the status with supplier renewals this year and relationships? And do you see similar, lower or higher opportunities on the rebates and incentives as you move forward?

Yes. I think going back to the earlier comment I made, Eric. We're looking at the financial contribution of all major components of our business. And so therefore, we certainly look at the provider side and the financial contribution that we receive from providers. But just as equally, we look at the financial contribution received from suppliers. And as you would expect in instances when we are not achieving what we feel is a fair return, then we begin to have conversations on both -- with the supplier, obviously, the manufacturer, but with our hospital customers to let them know why we are engaging in this kind of conversations with the manufacturers.

Okay. My last question is related to the 3PL business. The major customer, CareFusion, that came on in a big way in April of last year is now annualizing. It does not appear from what we can model is the revenue stream there has increased dramatically. In fact, your fee-for-service revenues have declined sequentially since the second -- the third quarter of last year. I'm curious, are there additional tranches with that big customer to bring onboard at this point? Or is that status quo business, and therefore, 3PL revenue, for that to increase, you need to onboard new accounts? Or are there additional opportunities with the existing anchor client?

Sure, Eric. I think, and we've been pretty candid about this, Craig, going back to the middle of last year, is that, look, CareFusion is an important client to us. It's the largest of the third-party logistics clients that we have. And we need to get the service model right for it. And so we've been focused on that. Sure, there is more opportunity with CareFusion in that we don't have their entire book of business. And we are always keen and interested in expanding the strategic relationship that we have with important customers in CareFusion, and certainly, an important customer. But I think more importantly is the fact that we need to get what we're doing right first, and we're feeling really good about how we're progressing along those lines.

Our next question comes from the line of Robert Jones from Goldman Sachs.

I recall last quarter, I think in response to the changes you're seeing amongst your customers, you did discuss adjusting the sales force a bit. I was just wondering, Jim, if maybe you could give us an update of where you are in that process and if there's any sustained benefit we should expect from any of the changes there?

Sure, Robert. Yes, so I think the changes we made in the fourth quarter have the benefits, have definitely been recognized as we move in to the first quarter of this year, and we would expect to continue on during the course of the entire year. As Craig said, the model's changing. And the service model, the selling model is changing. And we -- you never want to say never as to what the future may hold, but I think in the normal course of things, there is fine tuning that needs to occur. And we'll do that over time as need -- as it's needed. But we have seen the expected benefit as we look at the first quarter.

Great. That's helpful. And Craig, I know you mentioned this larger IDN is actually approaching you more now as it relates to servicing some of the non-hospital or non-acute care sites.

Right.

I guess is there any sense you can give as of what percent of sales today maybe come from the non-hospital or the ambulatory setting? And then maybe how does that compare to, say, a year ago? And where do you think that number can go to?

Well, what I would like to try to do, Robert, is guide us back. Again, I'm not trying to dodge your question here. Clearly, the physician piece is going to play more important role for us in the integrated delivery networks. And if you remember, a lot of the Ambulatory Surgery Centers today are either owned or managed by the provider systems. So we have that broken out. It -- we are in the physician business. We're in the ambulatory surgery center business. What we're trying to do is do a different model than what we've done currently in the past. But I would guide you back to the fact that most of these hospitals are moving from an acute care setting to a non-acute care setting, whether it's rehab services or clinics or surgery centers. And so how we capture that is we still look at the integrated delivery network in total in terms of ship 2 points that they have within that organization. So we're clearly focused on not going out and doing the 1 and 2 doctors on the corner, but more around the 100 or the 200 doctors that are owned or managed or affiliated with the hospital system. Those numbers we see probably will improve this year only from the standpoint that we have been, I would say, doing some beta testing and really looking at that market. And I think we're starting to execute with some of our larger IDNs, and I'll probably have a little better picture for you at the end of the year as we start to ramp up with some of these systems.

Got it. That's helpful. Just one last one. I wanted to circle back on the GPOs. Good news on Novation. I'm just wondering if I can ask maybe the same question a different way. Is there any sense you can give us around repricing there? And then I believe you have 2 of your other large GPO contracts coming up for renewal over the next year. I was just wondering how impactful the repricing of those contracts should be, anything out of the ordinary? Or should this be similar to historical renewals that we've seen?

Well, let me take that. I was fairly involved in the Novation re-signing. And actually, we have one more coming up, which is Premier, late in -- late of this year. And I think what we did is, in Investor Day, try to, in our guidance, take any impact that Novation, and obviously, Premier would have little or no impact on us all this year because it's so late in the year. And I believe Novation starts September 1, so there's probably a little bit of impact in the fourth quarter. But we've actually really put that into our guidance for the year. And we feel we're right where we need to be with Novation, and we're now working on the Premier contract.

Our next question comes from the line of David Larsen from Leerink Swann.

Have you guys sized the total revenue contribution from these large IDN contracts at all? Or can you give us a sense for their total size, if possible?

Yes, I don't think we've shared that previously. I think the -- what I will point you to, David, is that Craig has spoken in the past that over the last 18 months or so, there was several billion dollars of business that was either signed or re-signed in conjunction with all of this. So it's a substantial portion of our revenue base. But I'm not sure at this point -- I don't have the numbers in front of me, and I'm not sure at this point we would look to share those specifics.

Okay. So in terms of the new sort of contracts that are in place with these IDNs where there appears to be a performance piece to them that you'll probably realize in 12 to 18 months, I mean, is it correct to think about sort of that whole kind of portion that you mentioned subject to those new contract terms? Or just part of it -- part of them?

I think it's fair to think in terms of a relatively large component of our book of business has these, I guess as you put it, contract terms associated with them. These are large, complex customers where we believe the opportunity lies in changing the model, adapting the model to a different service level, and therefore, improving, truly, SG&A performance in order to achieve targeted operating earnings performance. I think that's a better way of saying that.

Okay. That's great. And this is my last question. In terms of the technology infrastructure sort of overall that you're implementing, can you just sort of give us a sense as to sort of how far along you are in that and like what percentage of your distribution centers is being converted to the new platform? And if so, what percent have been converted so far and has access to live?

Yes. Remember, we went through what was called lift and shift about 2 years ago, which was with Microsoft, where we basically took all of the operating pieces of the business off the mainframe. So that allows us the flexibility to pick and choose best of class, whether it's around financials or sales reporting or something like that. So really, the platform has been in place for a while. And we're now making enhancements to the systems, primarily around making it more flexible and easier for our customer to do business with us, improving the interaction with the customer, making it easier for our customer service to be more proactive versus reactive. And so there's a number of initiatives that we've invested in or are investing in that are not necessarily going to go through a whole transformation or ERP system upgrade like you would do with SAP or somebody like that. So we're about 3 months into it, 4 months into it. It's going very well so far, very smoothly. We think there's an opportunity around reporting structure and how we report internally in the organization. I'm actually very excited about that. And -- but I would say we are on track, and I assume that we will be on track through the 3 years. We've got a great team working on that, and we've got a lot of operational people working with the IP folks to make this a world-class system and an upgrade for us.

Our final question today comes from the line of Steven Valiquette from UBS.

So just looking for a bit more color here on what did drive the lower LIFO charge in the quarter. I guess just to confirm, was there a notable step-up in rebates and discounts from manufacturers in the quarter? Or did you maybe just dip into some older LIFO layers with this big step-down in inventory that you had in the quarter? Just trying to get more color around all that.

Steven, I mean, the reduction in the LIFO charge was due to lower list price increases in the first quarter this year compared to the first quarter of last year. It's that simple, really.

So what do you think really is driving lower price inflation in the industry right now?

Well, I think we've been pretty open about the fact that it's a pretty competitive market out there right now. I think the customers -- it's a buyer's market. And actually, we've been seeing this for a period of time. But I would just say the competitiveness in the marketplace going back to this taking 30% out of operating cost, everybody is working very hard across the board to take pricing -- not pricing, but really to take cost out of the system. I think you're also seeing that the provider is looking at more and more the market as a commoditization of the market and opportunities to perhaps look at products that are more commoditized. And I think you're seeing probably categories that were once before seen as maybe not necessarily high in clinical but semi-clinical or there's also pricing pressure on that on the manufacturers.

Okay. Let me add just a quick follow-up here quickly on the operating cash flow. It does bounce around like for any distributor with the changes in working capital. But just kind of curious if you have a rule of thumb for just your normal relationship between your adjusted net income and operating cash flow. I mean, some years it's lower, some years it's higher. But I think if you average it all out over the past 5 years or so, it's roughly a 1:1 ratio. Would you -- should we just assume it's something along those lines going forward? Or could that improve further on the cash flow versus net income? Just any sort of broad picture color on that relationship would be helpful.

Yes. This is Drew, Steven. I think longer term, your metric there of operating cash flow net income plus depreciation and amortization is probably a good metric for normalized operating cash flow. And if you want to get to what I'll call free cash flow before dividends, you would subtract out level of capital expenditure from that number.

Okay. So pretty status quo then on all those inner workings. Okay. Got it. Okay.

And with no further questions, I will now turn the call back over to Mr. Smith for his closing remarks.

Thank you, everyone, for listening in to the call. And as Trudi said, we're going to be very active out in the marketplace over the next quarter. So we look forward to seeing you in one of many conferences and look forward to seeing you soon. Thank you.

Thank you for your participation in today's conference. This concludes the call. You may now disconnect. Good day.