Feb 5, 2008
Executives
Craig Smith - President and CEO Trudi Allcott - Director of Investor and Media Relations Jim Bierman - CFO Charlie Colpo - SVP of Operations Dick Bozard - VP and Treasurer
Analysts
Joel Ray - Davenport & Company Eric Coldwell - Robert W. Baird Glen Santangelo - Credit Suisse Steven Postal - Lehman Brothers Atif Rahim - JP Morgan Robert Willoughby - Banc of America Securities
Operator
Good morning, ladies and gentlemen, and welcome to the Owens & Minor fourth quarter and yearend 2007 conference call. My name is Lisa, and I will be your coordinator for today.
At this time, all participants are in a listen-only mode. We will be facilitating a question-and-answer session towards the end of this conference.
(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.
Craig Smith
Good morning, everyone. Welcome to the Owens & Minor fourth quarter 2007 conference call.
We'll review our results and take your questions in a moment. First, let me introduce my colleagues on the call today: Jim Bierman, our Chief Financial Officer; Charlie Colpo, our Senior Vice President of Operations; Dick Bozard, Vice President and Treasurer; and Grace den Hartog, our Senior Vice President and General Counsel.
Now, before we begin, Trudi Allcott, our Director of Investor and Media Relations, will read a Safe Harbor Statement. Trudi?
Trudi Allcott
Thank you, Craig. Our comments today will be focused on the company's results for the 2007 fourth quarter and year-to-date.
These results are included in our press release. The press release as well as a few supporting slides can be found on our website under the Investor Relation section.
In the course of our call today, we will 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 in our SEC filings for a full discussion of these risk factors. And finally, this conference call will be available on our website for the next three weeks.
Thank you. Craig?
Craig Smith
Thank you, Trudi. Let me call on Jim to brief us on financial results.
Jim?
Jim Bierman
Thank you, Craig, and good morning, everyone. We are pleased with the progress we made in the fourth quarter as we continue our efforts to position the company to achieve profitable, sustainable growth.
I will begin my remarks with an overview of the fourth quarter results. Fourth quarter 2007 revenues were $62 million greater than revenues reported in third quarter 2007.
In the fourth quarter, we began realizing the financial impact of the significant new business wins, net of losses which occurred in the second half of 2007. While we clearly anticipated these additional revenues in providing our 2008 guidance, we did not anticipate the increase occurring at the pace that it did in the fourth quarter.
Fourth quarter 2007 gross margin was $6.9 million greater than the gross margin in the third quarter 2007 and better than we had expected. As a percent of revenues, gross margin improved 2 basis points from 10.57% as of the third quarter to 10.59% as of the fourth quarter 2007.
Gross margin dollars improved as a result of the combined effect of the increasing revenues and an increase in volume purchase allowances. Seasonal fluctuations in volume purchase incentives are not unusual as suppliers typically measure growth in quality, financial incentive programs at the calendar yearend.
Fourth quarter 2007 SG&A expense increased $6.3 million from third quarter 2007 and was generally in line with the levels we anticipated for the quarter. As a percent of revenues, the fourth quarter SG&A expense increased to 8 basis points from the third quarter to 7.87%.
As we discussed in greater detail during our Investor Day presentation, our portion of the increasing dollars is due to the variable costs related to our increasing revenues. Increases due to distribution center relocation expenses and additions to bad debt expense explain the remainder of the variance when compared to third quarter 2007.
First quarter 2008 SG&A expenses are targeted to slightly increase in dollars when compared to fourth quarter 2007 due to seasonality. For example, the first quarter will contain payroll related tax and unemployment insurance costs, which take effect at the beginning of the calendar year as well expenses related to teammate incentive and equity compensation awards.
Fourth quarter 2007 operating earnings were $40.8 million compared to $40.9 million in the third quarter. Interest expense, a component of net income but not operating earnings decreased $1.6 million in the fourth quarter of 2007 when compared to third quarter as a result of the reduction in the average principle debt outstanding during the period.
Net income for the quarter was $22.5 million compared to $21.2 million in the third quarter 2007. For the fourth quarter, diluted earnings per share were $0.55 improved sequentially from $0.52 for the third quarter.
Operating cash flow was a positive $17.8 million for the quarter. However, debt increased $52.7 million as payments were made to vendors and suppliers.
When compared to third quarter 2007, receivables decreased $46.4 million and inventory remained essentially unchanged as of December 31, 2007. Now, let me turn to a brief overview of the year.
When comparing 2007 to 2006, you must keep in mind that 2007 reflects the full-year impact of the McKesson transaction that was completed effective September 30, 2006 and our new contracts with our GPO partners Novation and Broadlane. 2007 revenues were $1.27 billion greater than revenues reported in 2006.
McKesson related revenues were approximately $1 billion in 2007 and $282 million in 2006. Organic growth was driven by our success in attracting several large hospital accounts.
Craig will comment later on the market and the evolving value proposition for our services. 2007 gross margin dollars were $118 million greater than 2006, but as a percentage of revenues, the rate decreased from 10.78% in 2006 to 10.51% in 2007.
The increase in gross margin dollars is directly related to the increase in revenues. The decrease in gross margin as a percentage of revenues is due to two factors.
First, margin was negatively affected by the new GPO contracts and second, at transitions the McKesson margin was lower than Owens & Minors. We saw this begin to improve over the course of the year as pricing files were raised to our standards.
2007 SG&A expenses were $73 million greater than in 2006, but as a percentage of revenues, the rate improved 51 basis points in 2007 to 8.02%. The transition payments to McKesson included an SG&A expense were $6.7 million in 2007 and $19.3 million in 2006.
2007 operating earnings and net income were greater than in 2006 by $40 million and $24 million respectively. Several factors affected the comparisons to 2006 earnings, net interest expense increased by $9.7 million due in large part to the company financing the McKesson transaction with short-term debt.
2006 net income reflects a pre-tax loss on bound refinancing of $11.4 million and finally, our income tax rate for 2006 was 37.6% compared to 39.5% for 2007. Consequently, year-to-date diluted earnings per share were $1.79 compared to $1.20 last year an increase of 49%.
Before we move on, I'd like to comment on our direct-to-consumer business. Our direct-to-consumer business reported revenues of $106 million for 2007 compared to revenues of $92.5 million for 2006, a 14.5% increase.
EBITDA a non-GAAP measure for 2007 was $12.5 million or 11.8% of revenues compared to $600,000 for the prior year. Operating earnings for 2007 were a positive $1.5 million compared to a loss of $9.6 million for 2006.
It was a year of challenge for our DTC business and our teammates were successful in their efforts to stabilize operations. Now turning to asset liability management.
As of December 31, 2007 receivable, DSOs were 26.3 days, a four day improvement when compared to the fourth quarter last year. Inventory management was also improved for the quarter.
Inventory turns were 10.6 in the fourth quarter comparing favorably to 9.2 turns for the fourth quarter last year. Improving inventory management has been a focus for us all year and our teams really did a great job.
Cash provided by operations was $220 million for 2007 compared to a use of cash of $74 million in 2006. During 2007, the company used $30 million for capital expenditures, $28 million for dividends payments and repaid $153 million of the debt outstanding on our revolving credit facility.
Now, turning to our guidance for 2008, as Craig said in our press release, we believe we will achieve 2008 revenue growth in the 5% to 7% range outpacing industry growth rates and we are targeting 2008 earnings per share in a range of $2.20 per share to $2.30 per share representing a 23% to 28% increase for the year. Other assumptions built into our guidance for 2008, which we discussed in our Investor Day are outlined in our press release and in the presentation posted on our website.
Now, I will turn it over to Craig for his remarks.
Craig Smith
Thank you, Jim. Before I add my comments to Jim's I would like to recognize the passing of a member of the Owens & Minor family and those of you, who have followed us for a while will remember these gentlemen.
Philip Minor, the uncle of our Chairman Gil Minor recently passed away. He began his Owens & Minor career like many of us in the stock room and served in many roles in the company and ultimately served as Acting Chairman for a decade.
Now, Philip was very instrumental in the growth of our company. And I echo what Gil has said about his uncle, he personified everything that is good about Owens & Minor and we will greatly miss him as the company moves forward.
Now, turning to the subject in hand, since Jim has given you a good look at the quarter and the progress we've made in 2007, I would like to give you a view from about 10,000 feet. In 2007, we had strong revenue growth and 9.5% of that was organic growth.
We reported operating cash flow of 2020 millions and we reduced long-term debt by approximately $150 million and we continued to bring on new accounts that are larger and more complex. During the fourth quarter, we did exactly what we said we would do.
We completed the accelerated moves and consolidation of facilities. We finished brining on new customers signed in the second half of 2006, and we continued making necessary changes to our cost structure.
Since late last year, I've been on the road meeting with several customers and what I hear from them validates our strategy in the marketplace. We continue to win customers with our value analysis approach, offering them strategies and techniques to produce supply chain savings.
For example, we are working with customers to create distribution solutions such as storeroom and warehouse layouts. We are also working with them to build benchmarks and metrics to help them achieve savings and efficiency improvements and we are providing better transparency into the supply chain for customers and suppliers alike.
For example, one of the customers that I met with early in January actually told me, they were able to reduce their supply chain costs by approximately $12 million annually. Our teammates are working together in the field to provide the basic services our customers require, but also to bring in the more sophisticated services.
We know what they want and need, including information management, clinical supply chain management, third-party logistics, and even cross-docking solutions. As a team, we are very focused on a year ahead and the opportunities to sell this comprehensive coordinated offering.
As a result, we are signing customers to more complex supply chain solutions agreements. These hospital customers see us as an integrated partner rather than as a vendor.
And as we move forward, we will continue to invest in our company and in the infrastructure and systems that will enable us to offer integrated solutions to our customers. This year, for example, we anticipate ongoing investment in our previously launched mainframe migration.
We have a project to upgrade our warehouse management systems as well as improvements to certain back office functions, which will support us as we pursue our long-term strategic goal of maintaining operational excellence. With every decision we make, we aim to do what's right for our customers, to provide value with every service and to improve what we do every year.
Everyday with our teammates, we strive to provide a workplace that supports them as they serve customers and encourages them to cross-train and developed their skills. I will clearly say our teammates went way above and beyond their normal duties in a year that was complex and challenging for the company.
On behalf of myself and the management team, I want to convey my gratitude and pride for their efforts. And what I believe was a very good year for the company.
Long-term we are focusing on achieving consistent progress in our financial results, growing our company and expanding our reach in the growing healthcare market. Thank you and we would be happy to take your questions.
Operator
(Operator Instructions) Our first question comes from Joel Ray from Davenport. Please proceed.
Joel Ray - Davenport & Company
Good morning and congratulation on a very good quarter.
Craig Smith
Thank you, Joel. Good morning
Jim Bierman
Thank you, Joe.
Joel Ray - Davenport & Company
I was wondering Jim, if you could a little bit on the balance sheet, specifically I note that your interest expense came down on a net basis in the quarter, yet our debt was up roughly $45 million, $50 million in the quarter. I am sure this is timing of when monies were borrowed that was paid down etcetera.
I was hoping you might be able to elaborate a little bit on that? And give us some of your thoughts about sustainability of the current levels?
Jim Bierman
Yeah. We're extremely pleased and to be candid a little surprised that we weren’t as successful as we were in our asset, liability management for the quarter and you are absolutely right.
During the course of the quarter our average debt outstanding was less than certainly in the third quarter and what we anticipated consequently the interest expense was less. If you look at the actual balance sheet accounts impacted by this what caused a bit of the phenomena at the end of the quarter of increasing the debt.
It was the timing of payables that we had and you see a significant reduction in the accounts payable accrued expenses that exist over the period. So, at year end, we had borrowed, as I said in my remarks just over about $50 million additional debt.
As we go into the first quarter we are feeling good about the cash flow opportunities that exists for the company, but I would point out that some of the levels we achieved in the fourth quarter, both in inventory turn and day sales outstanding were at near record lows for the company and we would expect there to be some move towards normalized results as we move forward to the first half of next year.
Joel Ray - Davenport & Company
Okay. So the point is we probably shouldn't be looking for these types of lower net interest expense to be sustained, quite this sharply?
Of course you will be generating some strong cash flow during the overall year. So, I know one of the uses will be to potential de-lever your balance sheet as well as look at the acquisitions?
Jim Bierman
Exactly, so as we move forward during the course of the year and with the excess cash that we anticipate generating, we would anticipate de-lever the short-term debt that we have. Again, as it makes sense relative to other capital expenditures or merger and acquisition opportunities.
Joel Ray - Davenport & Company
Very good. Thanks very much for your time and congratulation again on a very good quarter and year.
Jim Bierman
Thank you, Joel.
Operator
Our next question comes from Eric Coldwell from Robert W. Baird.
Please proceed.
Eric Coldwell - Robert W. Baird
Thanks. Good morning.
Good Job. Jim just following on Joel's, can you just give us a quick sense or update on how the debt is allocated currently, what portion is fixed versus floating and the average effective interest rate?
Jim Bierman
I may have to call upon my good friend Dick Bozard for the average effective interest rate, fundamentally…
Eric Coldwell - Robert W. Baird
I think you'd be able to pull Dick into conference.
Jim Bierman
Fundamentally, the notes payable, half are fixed and half are floating. Is that not the case?
Dick Bozard
That's right. So we have $100 million that is floating currently.
Eric Coldwell - Robert W. Baird
Yeah.
Dick Bozard
And when you look at our credit agreement the charge is based on some of the ratios that we hit. And when you look at our effective rate today, we're paying probably around 5.5 to 6 is probably what we'll see in the first quarter.
Eric Coldwell - Robert W. Baird
Okay. Great.
Thanks, Dick. Second question is on the acute versus direct-to-consumer business.
Based on the detail provided on the call, it looks like acute did a little better, hospital distribution did a little better, direct-to-consumer maybe a little bit below my model. If I did the math right, it looks like 4Q DTC sales were down about 11% to 12% year-over-year and EBIT was maybe down about a $1 million or a loss of a $1 million, is that accurate, did I do the math right?
Jim Bierman
Yeah. I think you're pretty close.
I think just to give some color to it, as we've done in each of the quarters -- last three quarters, at the very least, we continue to look at the accounting policies the methodology and estimates that we use at that business and fine-tune them as we get more historical perspective. There were some adjustments to the bad debt reserve within lines with what we would anticipate for the year.
But there were some adjustments that were reflected in the fourth quarter. In addition, we look to the amortization of the capitalized advertising asset and made some adjustments there in speeding up some of the amortization.
So the end result was that in the range that you were speaking of.
Eric Coldwell - Robert W. Baird
Okay. And so when we look at directionality in 2008, I realize this is a fairly small and relatively immaterial segment to the total mix but what's the direction in '08?
Are you looking for revenue growth in '08, is it more of a focus on getting the operating margin up for the full year? And could you add any color on trends and either gross margin or SG&A expense, again, normalizing for the fine-tuning on the accounting adjustments?
Craig Smith
Why don't you take any of the accounting fine-tuning and then I'll talk a little bit more directional on where we're going.
Jim Bierman
Yeah. I think we're pleased with where we are coming at the end of this year in terms of the positioning in the company.
SG&A expenses were up a bit in the fourth quarter in part due to the beginning of putting together some direct sales force that Craig is going to come on to in a minute. So SG&A was a bit higher without the corresponding revenues.
I mean quite candidly over the course of the year, the emphasis has been on getting the business right. And we are pleased that if you look at the DTC customers that we have at the end of the year, it's about a 187,000, it's about the same as what existed in the third quarter and we are up year-over-year, but we did not buy any companies in the space during the course of the year nor did we did we buy any patient list or anything.
So, I think we are feeling good that things have stabilized and we're ready to move forward in this next year. Craig?
Craig Smith
Eric, I would just say we did bring on a new sales leader late last year, who has a lot of experience in this space and what I would call the sales model is changing for us in that specific market. We had little more clean-up really to do in the fourth quarter in terms of directionally how we were going to move forward from a sales standpoint.
But I am feeling comfortable with this new sales leader and the reports that I am getting on the changes she is making down there in the direction. She is taking and also, we just were about ready to ramp-up and finalize our five-year plan.
So its how direct-to-consumer fits in our five years strategy and we haven't completely finished that yet, but obviously the non acute-care market, is a market that's growing. Hospitals are looking to move into that market.
And so, what I would say is directionally the company is looking at non acute-care services and -- but I think more importantly the sales model has changed down there and I feel very comfortable with the sales leader down there.
Eric Coldwell - Robert W. Baird
Great. And then final question and I'll let others jump in.
At the Investor Day in December, there was some talk about, OMI really focusing more on balanced growth margin expansion opportunities and really enhancing your currently book of business as opposed to aggressively going after share in 2008. Part of that conversation related to how you look at pricing and supplier mix et cetera.
Craig Smith
Right.
Eric Coldwell - Robert W. Baird
I am curious what update can you give us on pricing? Have you been able to affect any price increases in your portfolio, and if so, what kind of responses are you seeing from suppliers and customers?
Jim Bierman
Well, we're really actually doing that. I think what I had talked about at Investor Day was product category management.
So, really what we're doing is looking at particular product categories that the company is involved with to decide whether those particular product categories are profitable or not profitable. And I can tell you right off the top of my head, specifically, we did take price in three areas and I think we were fairly successful overall in taking the price up.
And I think that's gets back to the 5% to 7% you hit there; right on the head is we're really looking at the whole supply chain. We're not just looking at the customer base margin.
We're also looking at the profitability of some of these lines that we carried. So, to your point, we are looking at profitability -- we're always looking at profitability, but we've had really phenomenal sales growth for the last five years.
5% to 7% really is still above what we consider to be the industry average. We do a lot of validation on the numbers on that.
But to your point, we are actually looking at suppliers and the customer base and there has been some loss of sales. But I think, overall, from a profitability standpoint, warehouse space, shipping -- we look at all of that before we take a pricing increase and the business we've lost, I would say, was business that overall will make us more profitable.
Eric Coldwell - Robert W. Baird
Good. Thanks, guys.
Operator
Our next question comes from Glen Santangelo from Credit Suisse. Please proceed.
Glen Santangelo - Credit Suisse
Yeah. Thanks, Craig.
I just wanted to talk to you about sort of your progress on a couple of different fronts. In the last 18 months, you obviously renegotiated some big GPO contracts in Novation and Broadlane.
And we talked in the fall about selling some value-added services through to those customers and improving the margin and continuing to improve your private label business. Could you just give us an update on both those fronts so that will help us think about how the margins may progress in 2008?
Craig Smith
Sure. Thank you, Glen.
I think we've made good progress in 2007 and if you remember we had stated that we really had three challenges, which was bringing on McKesson business at a margin we thought was higher than what it came in at. And I'm pleased to say, we do have the margins almost to the percent or the hundredth percent exactly to where we felt that business was going to be.
So it took us somewhere roughly four to six months to get that back up. The other challenge was Broadlane, which is a sole-source agreement, which I'm pleased to say they have worked very closely with us to get our margins back to where they need to be.
We have actually had some, to your other point, we've actually introduced MediChoice at Broadlane and we're going to continue to focus on that. So, they've worked very closely with us to get that margin back to where it should be.
And again back to the other question, we're also working on supplier profitability. So we're attacking this from several different angles.
The challenge is, is that margin does not come back as quickly as, say, reduction in SG&A. So I am pleased with the progress.
I'd like to see us doing better than where we are. It's still a very high focus, especially, when you have 5% to 7% sales growth.
The area that we're really working on this year is margin and SG&A reduction. So, we're making nice progress.
We're not where we need to be on the Novation accounts yet, but that's a very high focus for the company.
Glen Santangelo - Credit Suisse
And Craig, as you think about 2008 kind of the low-end to your guidance versus the high-end to your guidance, is kind of gross margin going to be that swing factor that puts you up one end to the other?
Craig Smith
Well, I think, Glen, really probably SG&A will be the opportunity for us in how we execute with the slower sales growth, we should be able to actually impact our SG&A. That was really, if you look at 2007 with eight physical moves, the 600 people we had to bring on at one point and we're working on that down.
I think really the opportunity continues to be SG&A. I think margin, we're going to continue to work on that.
We're going to continue to hold as best as possibly we can. But as I said last year and as I will say again this year, although our costs are becoming more fixed I still think that that's our opportunity now.
I know Jim had made some comments about first quarter with incentives and benefits, but clearly, SG&A is very high on the radar screen for us.
Glen Santangelo - Credit Suisse
And maybe I can just follow-up with Jim and just kind of maybe get a little bit more detailed thoughts on what he's talking about Q1, and could you give us a rough sense of the magnitude of the uptick we should see, how big are the benefits?
Jim Bierman
Yeah. I am not sure, we're comfortable going much further than what we've said, Glen.
I guess, let me see if I can try to make it a little clearer. I think the fourth quarter had some discreet items associated with it, such as the distribution centre relocation expenses that we foreshadowed in the third quarter conference call.
I think our thinking behind our comments for the first quarter were relative to the fact that there is some seasonality in SG&A. And we wanted to illustrate the fact that the first quarter does get hit with a couple of items that are somewhat unique to the first quarter.
Glen Santangelo - Credit Suisse
So, to put it in another way, you're just sort of suggesting first quarter we should see a little bit of a tick-up and then we should make progress from there.
Craig Smith
That's exactly what we're anticipating. We remain comfortable with the guidance that we've given that over the course of the year, SG&A as a percentage of revenue should continue to improve mid-single digit basis point improvement when compared to the second half of 2007.
Glen Santangelo - Credit Suisse
Okay. That's perfect.
Thank you so much for the comments.
Jim Bierman
Thank you, Glen.
Operator
Our next question comes from Steven Postal from Lehman Brothers. Please proceed.
Steven Postal - Lehman Brothers
Thanks a lot and good morning.
Craig Smith
Good morning.
Steven Postal - Lehman Brothers
Craig, I think at the Investor Day, you all were talking about two GPO relationships that were also going to renew this year. Can you update us on that?
Craig Smith
Yeah. Actually, we would see probably those being finalized sometime late in 2008.
I think we did name both of those groups at Investor Day, which is HPG and Premier. We are moving along normal course of business.
I think ordinarily, we don't signal to the market, but we thought -- and from a duo diligence standpoint, we should let people know that both of those are for bid. I think we feel fairly comfortable about both.
Again, it gets down to profitability and price and we're comfortable in those negotiations to do, but those are still on track to be finalized probably sometime late in 2008.
Steven Postal - Lehman Brothers
Okay. So from a financial impact, those were new rolls.
It sounds to me, you wouldn't expect that to impact '08 financials?
Craig Smith
Well, I think at this point, there is no change in their status that would impact a change in our thinking towards 2008 that we've talked about.
Steven Postal - Lehman Brothers
Okay. And then, typically, you all have use of cash because of the seasonal inventory build.
You didn't have that this quarter and last quarter you indicated that you continue to expect that. I am just wondering in the context and how we should about operating cash flow in the first half of the year in Q1 and inventory -- how should we think about that?
I know, Jim, you said that inventory turns hit a peak in Q4, should we expect that that could reverse in Q1?
Craig Smith
I think what we'll see -- we made surprising accomplishment in the fourth quarter. I think the [even] flow of the balance sheet management, it would not be surprising to see inventory turns not as successful -- in the first quarter not as successful as in the fourth quarter and potentially day sales outstanding a little less than what we was in the fourth quarter.
I mean those were pretty amazing results and so I think those numbers should, could and may change a bit in the first quarter. It doesn't mean that we're not focused on that and aren't looking for every opportunity to continue to improve the cash flow from operations.
But I think it is the reality that to make a couple of steps forward you take little half step back, you make a couple forward steps forward.
Steven Postal - Lehman Brothers
Okay. And then, just a final question.
It looks like bad debt expense increased significantly, sequentially, was that in the DTC business or there was something else going on there?
Craig Smith
Yeah. I think sequentially bad debt expense increased just over $8 million.
I want to point out that if you look at bad debt on year-to-year basis, it was about $23 million last year and about the same this year 22.6 this year. But specifically, as it relates to the $8 million in the fourth quarter only a portion on it certainly had to do with some, the clean up that I mentioned earlier on the DTC business.
And there was also adjustments made at the distribution business also. I think we're definitely in tune with the issues associated with the economy and exposures that exists and I think as it's normal and customary and very prudent.
We evaluated exposure and made the corresponding adjustments to our reserves as we moved into the end of the year. So, we're comfortable with where we're positioned and we think the decisions were prudent.
Steven Postal - Lehman Brothers
Are you suggesting that with some of the changes in the macro environment that there has been a change at your customers from a credit perspective?
Craig Smith
Well, I think you always have -- our customers aren't totally insulated from the realities of the economy and we have a national dispersion of customers. And there are geographic areas of the country, where public and private hospitals are facing more challenges than others.
I think we're being prudent, we're being careful as we evaluate some of those exposures.
Steven Postal - Lehman Brothers
Okay. Thanks a lot.
Operator
Our next question comes from Lisa Gill of JP Morgan. Please proceed.
Atif Rahim - JP Morgan
Hi, it's Atif Rahim in for Lisa. Most of the financial questions have been answered, but just a couple of housekeeping questions.
I don't know if you've disclosed the number of DTC lives that that you have right now and also how MediChoice is trending in terms of the number of news skews that you've introduced lately and revenues if possible.
Craig Smith
I'll take the DTC and if you would take -- Charlie is going to talk about the other question. I think I had mentioned earlier that we had about 187,000 patients or customers at the DTC business at the end of the fourth quarter which is totally in line with the amount that existed at the end of the third quarter.
Charlie?
Charlie Colpo
And for MediChoice, we are seeing some strong growth. We saw some strong growth in 2007 and that's continuing in the first month of 2008.
We are up to about 1,500 stock keeping units today.
Atif Rahim - JP Morgan
Okay. That's great.
Thank you.
Craig Smith
Thank you.
Operator
Our next question comes from Robert Willoughby from Banc of America Securities. Please proceed.
Robert Willoughby - Banc of America Securities
Hi, good morning. I'm not sure where the consensus for the first quarter is actually going to fall out.
I guess there is a board range out there currently, but your annual guidance does allow. I know you mentioned higher SG&A from the fourth quarter, but are there other factors that would cause the near-term numbers to be materially lower than the fourth quarter or is it just the SG&A line item to pay attention to?
Jim Bierman
I did mention that there was -- that there tends to be and this is of a longer horizon than just this next quarter. But there does tend to be some seasonality in the supplier volume purchase and incentives that exists.
And that's because many of them are predicated of a calendar year basis and whether or not, you achieve that performance becomes clear as you get to the end of the year or the last two quarters. So I think there is an element of seasonality in that particular number, otherwise I'm not really aware of any that I can think of.
Robert Willoughby - Banc of America Securities
Well, I guess there was a kind of a dime rate split between the low-end and the high-end of the consensus range, which seems a bit extreme for your business which I generally have some pretty good visibility. Is there not an effort to rein in that range a bit or?
Jim Bierman
You have me a bit of disadvantage and best I can do is share where we stand in our look and then, hopefully, the message is clear to the analyst to follow us. Craig?
Craig Smith
I think actually, Robert, we've been fairly consistent in last two or three years to widen a range, primarily around adding the Direct-to-Consumer business, the OM solutions component. Years ago, we had what would be considered a very tight range -- over the last two or three years, we basically have widened that range and I think it's fairly consistent with where we've been over the last, at least since 2005 with the -- bringing on the axis business.
Robert Willoughby - Banc of America Securities
Okay. That makes sense.
I also -- I don't know if I heard you actually provide cash flow guidance for the year. I wonder working capital benefits in '07 from the McKesson deal, such that cash flow might be down, even on higher EPS might be down year-over-year or is it still realistic to assume that should be up?
Craig Smith
Yeah. We haven't given that guidance at this point.
And I think it's -- right now we are not -- we're probably not comfortable doing that. Let us consider that and look to our 10-K filings to address liquidity and working capital needs going forward.
Robert Willoughby - Banc of America Securities
Okay. That's it from me.
Thank you.
Craig Smith
Thank you. Operator, we have time for one more question.
Hi, we may have lost the operator. Operator?
Operator
(Operator Instructions) At this time there are no further questions. I would now like to turn the call back over to Mr.
Smith, for closing remarks. Please proceed.
Craig Smith
Thank you very much for joining us today, and we look forward to a very strong 2008. Thank you.
Operator
Thank you for participating in today's conference. This concludes the presentation.
You may now disconnect. Have a great day.
Thank you.