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  RehabCare Group, Inc. (RHB)Q3 2007 Earnings CallOctober 31, 2007 10:00 am ETExecutivesGordon McCoun - Investor RelationsJohn Short - Chief Executive OfficerJay Shreiner - Chief Financial Officer Peter Doerner - Senior Vice PresidentAlan Sauber - Senior Vice President of Government andRegulatory Affairs AnalystsRobert Hawkins - Stifel NicolausDerrick Dagnan - Avondale PartnersBalaji Gandhi - OppenheimerRobert Mains - Morgan KeeganPresentationOperatorGood morning, ladies and gentlemen. And welcome to theRehabCare Third Quarter Earnings Call. At this time, all participants are in alisten-only mode. Later, we will conduct a question and answer session. Pleasenote that this conference is being recorded.I will now turn the call over to Mr. Gordon McCoun. Mr.McCoun, you may begin.Gordon McCounThank you and good morning everybody. Welcome to theconference call to discuss RehabCare's third quarter 2007 earnings. With ustoday from management are John Short, chief executive officer of RehabCareGroup and other members of the senior management team.Before we begin, I?d like to remind you that this conferencecall contains forward-looking statements that are made pursuant to the SafeHarbor provisions of the Private Securities Litigation Reform Act of 1995. Thisconference call contains forward-looking statements that are made pursue in theSafe Harbor provisions of the Private Securities Litigation Reform Act of '95.Forward-looking statements involve known and unknown risksand uncertainties that may cause our actual results in future periods to differmaterially from forecasted results. These risks and uncertainties may includebut are not limited to our ability to consummate acquisitions and other partneringrelationships at reasonable evaluations.Our ability to integrate acquisitions in partneringrelationships within the expected time frames and to achieve the revenue costsavings and earnings level from such acquisitions and relationships at or abovethe levels projected. Our ability to comply with the terms of our borrowingagreements changes in governmental reimbursement rates and other regulations orpolicies affecting reimbursement rates or policies provided by clients to otherpatients.The operational, administrative and financial effect of ourcompliance with other governmental regulations and applicable licensing andcertification requirements. Our ability to attract client relationships or toretain and grow existing client relationships through expansion of our serviceofferings and the development of alternative product offerings.The future financial results of any unconsolidatedaffiliates, our ability to attract and the additional cost of attracting andmaintaining administrative, operational and professional employees. Shortagesof qualified therapists and other healthcare personnel, significant increasesin health, worker's compensation and professional and general liabilityinsurance.Litigation risks of our past and future business includingour ability to predict the ultimate costs and liabilities or the disruption toour operations. Competitive and regulatory effects on pricing and margins, ourability to effectively respond to fluctuations in our census levels and numberof patient visits.The adequacy and effectiveness of our information systems,natural disasters and other unaccepted events, which could severely damage orinterrupt our systems and operations. Changes in federal and state income taxlaws and regulations, the effectiveness of our tax planning strategies and thesustainability of our tax positions.In general and economic conditions including efforts bygovernmental reimbursement programs, insurers, healthcare providers and othersto contain healthcare costs. With these introductory comments out of the way, Iwould like to turn the call over to Dr. Short. Please go ahead.John ShortThank you, Gordon. Good morning and thank you for joining ustoday and Happy Halloween. I'm John Short, president and CEO of the company.I'm joined my by executive management team and Jay Shreiner our CFO. All of uswill be available during the question and answer period following our formalremarks.On balance, we are pleased with the development of ourbusiness on the third quarter. We saw yet another period of sequentialimprovement in our contract therapy operating margins, which began in thelatter part of the first quarter and has been sustained in the second and thirdquarters.Within HRS, we also saw improvement in both our inpatientand outpatient operating margins despite continued declines in the number ofunits and declines in the 75% rule impact discharges. In our freestandinghospital segment, we experienced growing pains during the quarter asperformance was impacted by start-up costs, increases in estimated contractualadjustments at one facility and a shift in pair mix at another.Overall, we achieved operating earnings of $8.2 million forthe quarter or $0.22 per diluted share. These are the highest operatingearnings in EPS totals in the last eight quarters. I'll give you somehighlights of the quarter as they pertain to our operating results. Beginningwith contract therapy.We're extremely proud of the progress that our contracttherapy business has made in the past 15 months. Integrating and acquiredbusiness that significantly expanded our number of clinicians, operatingrevenues and facilities. Operating earnings improved $2.1 million sequentiallyto $3.2 million.The cumulative improvement in quarterly operating earningsfor the past six months was nearly $5.4 million. The divisions operating marginfor the third quarter stands at 3.2%, which reflects significant progresstowards our goal of 4.5% to 5.5% operating margins during 2008.While we remain focused on improving our CT margins, we areturning our attention to stabilizing and growing our number of CT locations andexpect to return to net additions in our contract therapy portfolio beginningin 2008.Moving on to hospital rehabilitation services, we continueto successfully manage our staff utilization and operating expenses, whichenabled us to achieve the 270 basis points sequential improvement in thedivision's operating margin, as operating earnings increased $5.4 million to$6.3 million in the third quarter, despite lower revenue quarter to quarter.For outpatient business saw continued improvement in operations to supportthese results.In the third quarter, our same store 75% rule qualifyingadmissions increased by 1.1% compare to the second quarter of 2007 while totalsame store admissions declined by 1% sequentially. Same store admissionsyear-to-date ending third quarter versus the same time period of 2006 include a13.1% increase in non-Medicare volume.On average, our units are currently operating at a 64.9%compliance level with 41 units having entered their 65% compliance level onJuly 1st. We expect to be fully compliant in all of our areas by the end oftheir special 65% compliance periods. We have increased our focus to supportthe hospital rehabilitation services business to a number of initiatives.First, at the beginning of the second quarter, we rolled outa new initiative in collaboration with Gallup hoping to improve the process forselection and training of new field managers in HRS. To date, it is resulted inhiring of 15 new program managers. Operating results from the units managed byGallup's selected candidates have showed significant improvement in revenue andcontribution over the prior six-month performance.Secondly, early testing of new products is underway. Ourfirst short stay rehab unit has met our performance expectations and offers analternative for patients that are negatively impacted by the 75% rule incertain markets. In addition, we're also testing a more comprehensive serviceoffering that includes nursing, case management, coding, denials and LTACHmanagement.Thirdly, in late September, we signed a new three-yearagreement with Premier Inc. Premier is the largest healthcare provider alliancein the country with over 1,700 hospitals plus thousands (inaudible) otherhealthcare providers.In addition, we renewed our relationship with VHA, whichrepresents over 1,200 hospitals for an additional three years. Both of theserelationships will give us a new or expanded Chanel to introduce our currentand future product offerings. Our freestanding hospital division saw operatingrevenue and earnings decline sequentially for the third quarter compared to thesecond quarter of 2007.Several adjustments in both quarters significantly maskednormalized operating performance. However, in addition to these adjustments,the division experienced lower revenues in earnings due to case managementchallenges and isolated pair mix issues as well as start-up costs at itsAustin, Texas joint venture in the amount of $700,000.Last quarter, I discussed steps that we had taken to turnaround one of our hospitals, which is underperformed in the second quarter. Wetook aggressive action by changing management, rebuilding referralrelationships, right sizing the staff and more closely monitoring expectedreimbursement.This hospital has responded very well to these actions andhas significantly improved its operations during the third quarter. Rehabhospitals within the division, which the company managed through an average 75%rule compliance level of 63.7% during the quarter are expected to be fullycompliant at the end of their respective compliance.As our prestanding hospital division continues to grow, weare accelerated our investment and leadership process standardization andinformation systems across the division in order to build a solidinfrastructure for more consistent operating performance in this division.The division continues active development of five choiceventure projects. We announced one additional joint venture during the thirdquarter with which an agreement with landmark health systems Inc. of RhodeIsland to jointly operate the rehab hospital of Rhode Island and to develop along-term acute care hospital subject to certificate of need approval. Theacquisition of the rehab hospital subject to review by the state department ofhealth and attorney general. We expect to begin operations facilities duringthe second quarter of 2008.The first phase of our 20-bed rehabilitation hospital jointventure with the Seton family of hospitals in Austin, Texas opened August 21stof this year. We're still awaiting state survey necessary to receive theMedicare provider network. This process may take longer than we haveexperienced in the past.Second phase of this project will include a development of along-term acute care hospital and expansion of the rehabilitation hospital. OurLTACH in north Kansas City and the joint venture with St. Luke's hospital inSt. Louis are proceeding as scheduled. North Kansas City is currently underconstruction and will open during the first quarter of 2008. Groundbreakingceremonies for the St. Luke's joint venture occurred on October 24th with aplanned opening for late 2008.Our planned 50-bed LTACH joint venture with Memphis MedicalCenter in Peoria, Illinois, which received certificate of approval, is subjectto the completion of definitive agreements. Construction will begin in thefirst quarter of 2008 with an expected opening date of the first quarter of2009.Our last project is planned development of an LTACH with ourexisting rehabilitation hospital partner in Kokomo, Indiana, which should openin the second half of 2008. We have several letters of intent and additional opportunitiesunder review. Some of which involve acquisitions of existing facilities.Turning to the legislative and regulatory update, while theMedicare provisions of the children's health and Medicare protection act of2007, the champ act were removed from a stand alone states children's healthinsurance program or chip bill that remains to be seen what action the senatewill take on these provisions by the end of the year.These provisions include a freeze of 75% rule at 60%.Extension of the Part B Therapy Cap Exception Process, refinement of LTACHpayments and an increase in physician fee schedule. Rehabcare is activelyworking with congressional offices, trade groups and industry peers toencourage the senate to finish work on Medicare issues by December 3 1, 2007.RehabCare Group and others in our industry have assertedthat the rules imposed on Inpatient Rehabilitation Facilities or IRFs arearbitrary and not based on achieving the best patient outcome at the lowestpossible cause. To begin building a body of knowledge around the best treatmentlocations for certain patients, we recently completed a study documenting theimpact of 75% rule for IRFs.The study compared the Medicare expenditures and outcomes ofpatients in the 25% category treated in our IRFs compared to those treated inour skilled nursing facility therapy programs. Study group consisted of 124,000patients treated in our programs from January 2006 through August of 2007.Some of the study highlights include 81% of IRF patients weredischarged to a home environment compared to 37% of sniff patient. Average oneswho stay was 10.4 days in an IRF and 34.9 days in a skilled nursing facility.Based on average months of stay, the average sniff payment was approximately$13,855 per stay while the average payment per IRF discharge was $12,981 or6.7% less, and 52% of the sniff patients went on to other Medicare-fundedsettings upon discharge compared to 17% of the IRF patients.This report is being circulated among members of Congressand healthcare associations in an effort to win support for legislative freezeon implementation of the 75% rule. The complete study document is available onour web site at www.rehabcare.com/75% study.Moving on to part B therapy caps without further interventionby Congress, the current Part B therapy cap auto perception procedure isscheduled to lapse on December 31, 2007. As a response to the potential therapycap location, we have completed a review of our data and identified theconditions most frequently treated and reimbursed under Medicare part B.Using this information, a care mapping process that will tietreatment plan to cost of care and development and will be completed byDecember 1. These care maps will allow clinician to plan treatment and managecosts within the financial constraints of the cap dollars, ensuring thepatients will not exhaust their limited benefits on one treatment episode earlyin the year.Moving on to the physician fee schedule. Use of the chargebasis for Medicare part B therapy services, the physician fee schedule faces a9.9% scheduled reduction beginning January 2008 without intervention byCongress. CMS by regulation has proposed similar though smaller decreases inthe physician fee schedule over the last several years. Congress has passedlegislation each year to reverse the decreases.The market basket increase became effective October 1, 2007when payment rates increasing 3.2% and 3.3% in patient rehab in skilled nursingfacilities respectively. Over the last two years, we have seen an increase inthe number of denying claims within our acute rehab units and hospitals as aresult of medical necessity determinations by both fiscal intermediaries andmore recently by recovery audit contractors or RACs.In addition to local coverage determination, in regards tolocal coverage determination, a recent AHA and FHA study shows that nationallyover 63% of all denying claims are overturned and repaid to providers. Rehabcare continues to exceed the national average with a 90.5% overturn rate.In regard to the RACs, CMS has issued a pause in the auditsin the state of California until the end of October while a review ofPRG-Schultz is conducted. In addition, as a result of issues, which arose inthe California RACs, the rollout of the RACs in Massachusetts, South Carolinaand Arizona will exclude the 27% downing for denied claims.CMS has issued a request for proposal for contractors toimplement a RAC program in all 50 states beginning in March 2008. In order toplace rehab care in a preferred position for recruiting therapists, we haveinitiated two programs with academic institutions in markets that we believewill elevate our visibility with graduating students, and enhance our abilityto attract the best talent.We're pleased to announce this quarter the RehabCare inconjunction with the University of Missouri is supporting the development ofphysical therapists assistant and occupational therapy assistant programs atcommunity colleges in rural locations throughout the State of Missouri. We'realso partnering with the university of Kansas to provide it out professorship.The RehabCare professor will work to provide a geriatriccurriculum that supports appropriately trained therapist for rehab careprograms. The professor will also serve as a conduit for research betweenRehabCare and the university as well as provide significant disability forRehabCare for students and the national academic community.The launch of these two initiatives will influence theavailability of therapists throughout the region. This is the largestcommitment to date by RehabCare to partner and support the academic community.I'll now turn the call over to Jay Shreiner who will review our financialresults for the quarter. Jay?Jay ShreinerThank you, John. Consolidated net revenues for the thirdquarter of 2007 of $172.9 million declined 4.5% compared to $181.1 million inthe second quarter of 2007. Consolidated net earnings in the third quarter morethan doubled sequentially to $3.9 million or $0.22 per share on a fully dilutedbasis compared to $0.09 in the previous quarter. In the third quarter lastyear, revenues were $183.2 million and net earnings were $2.3 million or $0.13per fully diluted share.As John said earlier, this is the best performance that wehave generated in the past two years, and demonstrates the success of theactions we have been taking. Consolidated net earnings for the second quarterincluded a $4.9 million pretax impairment charge or $0.17 per fully diluted shareafter tax to write down the value of an intangible asset related to theLouisiana Specialty Hospitals statutory exemption from the 25% rule for LTACH.Net revenues for the contract therapy division were $98.3million, a decrease from the second quarter of $2 million or 2%. This declinewas driven by a 2.3% reduction in the average number of locations operatedduring the quarter partially offset by increased revenue per location.The divisions operating earnings of $3.2 million in thethird quarter of 2007 compared to $1.1 million sequentially, and to a loss of$2.2 million in the first quarter of this year. This $2.1 million sequentialimprovement in earnings resulted from the operating efficiency and thereductions in expenses as previously discussed.During the third quarter, 55 programs closed. Of thoseclosures, 27 were the result of self-operation or external competition with theremaining 28 primarily the result of low profitability or nonpayment. 30 newclient sites were open in the third quarter.Backlog in the division was up to 20 compared to 15 in theprior quarter. Third quarter, HRS revenues were $40.3 million, a decline of3.6% on a sequential basis. Primarily resulting from fewer net operating unitsbut partially offset by higher in patient revenue per location and perdischarge.Operating earnings for the division were $6.3 million, anincrease of $900,000 or 16.6% from the $5.4 million of operating earnings inthe second quarter. Primarily resulting from reduced division general and administrativeexpenses and improved operating performance over outpatient business.The division finished the quarter with 154 programs, as aresult of three openings and ten closures. ARUs at quarter end totaled 108 downfrom 110, as three ARUs open and five ARUs closed. The five remaining closureswere two subacute units and three outpatient units.One of the closures was for nonpayment and nine chose toself-operate. The majority of those that chose to self-operate wereunderperforming units. The division's backlog was four at the end of thequarter all of which are ARUs. One is scheduled to open in December 2007 andthree in 2008.Operating revenues in the freestanding hospital divisiondeclined 9.6% sequentially or $2.6 million to $24.4 million in the thirdquarter from $27 million in the second quarter as a result of several items.During the third quarter, the division recorded a $1.4 million of additionalcontractual allowances principally at one of its facilities.In the prior quarter, the division recognized a net $900,000reduction in contractual allowances, primarily related to prior year costreport reserves these adjustments, which totaled $2.3 million account for thevast majority of the $2.6 million sequential revenue combined.The division reported an operating loss of $1.6 million inthe third quarter compared to operating earnings of $1.8 million in the priorquarter, excluding a $4.9 million pretax impairment charge on a LouisianaSpecialty Hospital intangible asset recognized in the second quarter.In addition to the swing and operating revenues, resultingfrom contractual adjustments, which I previously mentioned, the division wasimpacted by case management challenges, isolated pay or mix issues and $700,000in start-up costs at its Austin, Texas, venture. Joint venture.For the nine months ended September 30, 2007, we generatedcash from operations of $30.9 million and paid down $20 million in long-termdebt. We spent approximately $6.5 million for capital expenditures including$4.2 million in the company's freestanding hospitals division.Primarily on developing our Seton joint venture in Austin,Texas and adding a high observation unit in one of our LTACH. The remaining$2.3 million of capital expenditures were principally related to informationsystems, day sales outstanding were $78.4 as of September 30 compared to $74.9at June 30, 2007, and $77.9 at December 31, 2006.At September 30, we had approximately $14.2 million in cashand cash equivalents compared to $9.4 million as of December 31, 2006. We had$94.6 million in outstanding debt under our revolving credit facility with aweighted average interest rate of approximately 7%. Total debt outstanding atSeptember 30, 2007, was $100.6 million compared to $120.6 million at December31, 2006.We anticipate our interest rate spread on our revolvingcredit facility will decline to 150 basis points above LIBOR during the fourthquarter.Now, I'll turn the call back over to John.John ShortThank you, Jay. As you can see from our results, we arepleased with the direction of the company in particular by the progress in ourcontract therapy operations, in the operating expense management in our HRSdivision.We obviously have some work to do in our freestandinghospital division to improve its business processes and technology and prepareit for further growth. We're confident that the fundamentals of this businessremain sound and support our continued investment in the future.With the disruption of our symphony acquisition behind us,we move forward with a continued focus on improving margins developing ourfreestanding operations, reducing our debt and dealing with the numerousreimbursement challenges that we face.I want to take this opportunity to thank Tom Davis for histen years of important service to the company, first in the hospitalrehabilitation division and more recently in business development andfreestanding hospital division.His leadership in contacts and the healthcare industryprovided that the catalyst for the development of our newest division, adivision, which forms the foundation of our future growth. We wish Tom all thebest as he embarks upon a new career direction, we will definitely miss him.As we celebrate our 25th year of operation, let me thankeveryone who has helped us reach this important milestone, especially our morethan 16,000 colleagues who continue to focus on our most important missionproviding quality care to help people regain their lives.Thank you for your continued support and we look forward tosharing our future successes with you. With that, I would like our operator toopen the call for questions. Operator?Question-and-Answer SessionOperator(Operator Instructions) Our first question comes from RobHawkins from Stifel Nicolaus. Please state your question.Robert Hawkins - Stifel NicolausGood morning. Nice quarter, guys. Looks like everything iskind of stabilizing and turning up. Can we go into one thing that I thought was-- that I would like to understand a little better is the contractualreimbursement issue, the $1.4 million number at the hospital. John ShortSure. Jay?Jay ShreinerYes, good morning. What we're doing within our freestandinghospitals is standardizing and strengthening our processes surroundingdetermining of contractual allowances. And we believe that this will reduce therisks of variability of calculating these estimates.We have a new lead in that division. Kurt Schultz joined usas Vice President of Finance as of about two months ago. He has career prior tocoming here was with kindred and brings tremendous knowledge and expertise intherapy so we made and are making significant progress in this area.RobertHawkins - Stifel NicolausWell, I mean, is it a one-time item, the $1.4 million in theone hospital or is this something that -- first of all, was it an LTACH orrehab? And then, is this something that, I think his name is Kurt, is going tohave to roll through, each of the hospitals and you might find a few everyquarter? How is this going to kind of play out?Jay ShreinerNow, we've gone through all hospitals in the third quarter,the quarter we just reported so the net of everything that, using the morestandardized processes came out into $1.4 million, which we just reported. Thatadjustment was in an LTACH but I mean, we've looked at all of our hospitals andfeel that, you know, that -- the changes that we've made have strengthened ourability to estimate these closer to what the actual cash will be.Robert Hawkins - Stifel NicolausOkay. And then one area I'm kind of curious about are theGPO contracts, you've had VHA for a while, I mean how should we b thinkingabout what this impact might mean for you going forward with premiere, andre-signing VHA?John ShortRob, let me have Peter Doerner, the point guy on that, forboth relationships, address that issue. Peter?Peter DoernerRob, good morning. You're correct. We've had therelationship with VHA for nine years. We've just recently renewed it in thequarter as we reported. That's provided very good growth within the hospitalsthey represent.The new relationship with premiere, we're as excited about,the premiere represents a larger bulk of hospitals between those twoorganizations, you know; they are the 600-pound gorilla in the nonprofit sectorof hospitals. So, what this allows us to do is give us a new and expandedaccess channel to these hospitals as we've reported, we have some new productsthat are testing and developing. Both of these access channels are greatopportunities for us to introduce these products to these hospitals and getsome traction.So, we expect that the positive traction we've had with VHAwill be synonymous as we roll out the premiere, they have a very similar typestructure in terms of how they work with their hospitals. So, we're prettyexcited about these relationships. Obviously we're just getting started withthem. So, it's going to take us a little bit of time to roll out our message.But once we do, we expect some pretty good traction from these organizations.Robert Hawkins - Stifel NicolausCovering VHA, deals do we have?Peter DoernerWe have 53 hospitals that are part of the VHA alliance.Currently, we serve 23 hospitals under premiere and about 125 give or takenursing homes that are premiere members as well. So that's where we're startingfrom and our objective is to build on the good success and performance we'vedelivered with those premiere VHA members and expand from there out.Robert Hawkins - Stifel NicolausPremiere is about two or three times the size of VHA, isthat correct?Peter DoernerPremiere represents, they have around 1700 hospitals andthen I don't know the exact number but it is north of 6,000 nursing homes. VHAis around 1200 hospital members, all in the nonprofit sector.Robert Hawkins - Stifel NicolausGreat. And then one final question. I was pretty excited tohear about the IRS study that you guys did. How do you guys plan to use it? Imean, you've got a timely situation coming up here with the Medicare bill inthe next 30 days. Maybe 45 days. How will this kind of play into that process?Peter DoernerWell we're making the study available to all of thecongressional leadership in both the house and the senate and theirprofessional staffs. We're also meeting CMS. We provided them a copy of thestudy as well and we're going to attempt to get the study published in avariety of both trade and professional journals. It may take a little longer.But we're aggressively getting the word out especially in DC.Robert Hawkins - Stifel NicolausOkay and did you use an independent group to, I guess gatheror interpret the data or did you guys do it all yourself?Peter DoernerWe did it internally but we did hire a third party editorto, you know, who is backed in a mission to go through it and you know makesure we were not overreaching the methodology was sound. So, we benefited fromthat kind of a second opinion.Robert Hawkins - Stifel NicolausGreat. Thanks. Again, great quarter. I'll jump back in thequeue. Thank you.OperatorOur next question comes from Derrick Dagnan from AvondalePartners. Please state your question.Derrick Dagnan - Avondale PartnersGood morning and congratulations on a nice quarter. I wantedto ask kind of a bigger picture question, John. If I think back over the lastthree years, you guys have generally been when you look at these 75% rulecompliance thresholds, you have generally been ahead of them. At this point,you're kind of behind the 65% threshold.And I guess is that, is that the company being a little morecognizant of when each individual hospital rolls into the threshold or is itmore of a market phenomenon, kind of the difficulty of finding compliant cases?John ShortWell, I think it's absolutely true. We're working tighter towhatever compliance period our managed hospitals or owned hospitals are in. So,as we've gotten more experienced and improved both our clinical processes aswell as our monitoring processes, we've been able to run them tighter to theexisting compliance criteria.It is also clearly true that, you know, the industry haslost 100,000 discharges over that time period. So, we continually have to bebrighter, faster, smarter than the competition to try and keep flat. You know,the good news that we've reported is we've seen significant growth in ournon-Medicare business as a result of our marketing efforts in that segment. Todeal with, you know, the ever-tightening 75% roll issue.Derrick Dagnan - Avondale PartnersOkay. And in -- in the press release, I think it says thecompliant case growth in the freestanding business was 22% on the same storebasis. And I guess, when you reconcile that with kind of the overall same storerevenue growth, are we just looking at the difference in kind of the declineand the noncompliant cases? Or did I read something wrong?John ShortWell, you've got us all scrambling.Derrick Dagnan - Avondale PartnersLast sentence before your balance sheet commentary on thepress release. John ShortClearly, you know, we've been focusing on generating morecompliant cases. And you're correlating that with what Derrick Dagnan - Avondale PartnersThat's a major increase in compliant volumes it looks like.But the overall same store revenue growth in the freestanding hospital businesswas, you know, about .6%. I was just trying to understand the dynamics behindthat?Jay ShreinerWell, again, over the course of the year, the industry losta lot of discharges as we went from 50 to 60 and now 65%. So, yes, we had to dothis in order to stay flat.Derrick Dagnan - Avondale PartnersOkay. And I guess, I'll ask one more question then get backin the queue. With respect to your helpful hints on the CT business, 4.5% to5.5% margin, is that kind of the average margin for all of 2008. Is that kindof what you're targeting there?John ShortTo date, we've been willing to say we're going to hit thatin 2008.Derrick Dagnan - Avondale PartnersSo, it could be fourth quarter or?John ShortWell, clearly, we're very encouraged by the fact that in thethird quarter of 2007 we're already at 3.2%.Derrick Dagnan - Avondale PartnersOkay.John ShortBut we're not willing to trap ourselves yet. Let's see whatthe fourth quarter brings and then we'll, you know, no doubt update the helpfulhint based on the fourth quarter.Derrick Dagnan - Avondale PartnersOkay. And then the same question for the 17% to 19% margintarget for the mature freestanding business. I guess the same answer?John ShortThat's correct.Derrick Dagnan - Avondale PartnersOkay. Thanks a lot. I'll jump back in the queue.John ShortThanks.OperatorOur next question comes from Balaji Gandhi from Oppenheimer.Please state your question.Balaji Gandhi - OppenheimerGood morning.John ShortGood morning.Balaji Gandhi - OppenheimerA couple of things. One, I just want to get back into thequestion we had about the contractual adjustments. I wanted to make sure whatI'm trying to figure out is the $24 million in revenue for the freestandingsegment, is that a good number that we can build off of in terms of, you know,just kind of organic growth, you know, excluding any new projects you do or asthe previous question was, you know, I think implying is could we see any kindof further adjustments to contracts.Jay ShreinerYeah, I think a normalized, more normalized revenue numberwould be $25.8 million. So, we believe, again, through the process that Kurthas, his expertise that he's brought and the standardization that we'veintroduced here in estimating the contractuals, that the adjustments that wereported this quarter are now behind us.Balaji Gandhi - OppenheimerSo, going from 24 to $25.8, does that mean that you benefitfrom some of these adjustments as well?Jay ShreinerThis quarter was the $1.4 million was a negative to thisquarter's revenue.Balaji Gandhi - OppenheimerCorrect.Jay ShreinerSo, what I'm saying is on more normalized revenue for thisquarter would be the $25.8 million. Balaji Gandhi - OppenheimerSo, you should start -- Jay Shreinerbuild off for that going forward.Balaji Gandhi - OppenheimerGot it, got it. Ok. Okay. Then, is there any kind ofaccounting rule change or anything? Because I only bring that up because it isdue the second company of come across in the LTACH area that has had to do thisor is it just kind of cleaning up?Jay ShreinerNow, there's no accounting rule change that was associatedwith this.Balaji Gandhi - OppenheimerOkay. Okay, great. And then where was that facility, the onefacility with the $1.4 million?Jay ShreinerIt is one of our LTACH. We haven't disclosed anythingfurther than that.Balaji Gandhi - OppenheimerOkay. And then the other question I had was about the -- howshould we think about the Part B therapy cap, you know, last year, you werefortunate enough to get the legislation passed without really, you know, verycomprehensive Medicare bill and so, you know, is there anymore likelihood thatthat piece can pass without some of the other Medicare provisions? Jay ShreinerAlan Sauber here who is our regulatory guy.Balaji Gandhi - OppenheimerYeah.Alan SauberBalaji, I think what you'll find is this is very wellentrenched into the discussions from the senate for any type of Medicarepackage. So, it is probably going to go with a host of other Medicareprovisions and we're hopeful that it gets done by the end of December. Balaji Gandhi - OppenheimerOkay. Alan SauberPart B therapy cap has probably more support to get fixedthan any of the other provisions we're interested in. Balaji Gandhi - OppenheimerRight. That was the same kind of similar case last year,right?Alan SauberRight. Correct. However, we're tired of this annual beingheld hostage so we're actually going to start engineering clinically tosignificantly reduce the potential negative impact of the therapy cap should itever be promulgated.Balaji Gandhi - OppenheimerOkay. If I also remember correctly, you kind of had sometype of, you know, I guess fail safe plan to implement at some point inDecember. You know, if you do have to go back under, you know, into a capworld. Alan SauberYeah, I wouldn't call it fail safe. I would call it amitigation strategy.Balaji Gandhi - OppenheimerOkay. Okay. And is it the same situation where at some pointin December, you'll have to decide to adopt that?Alan SauberWe're taking steps now to implement our new care -- our caremapping process and we're going to implement that regardless of what happens tothe part B therapy cap issue.Balaji Gandhi - OppenheimerOkay. I mean just, you know, is there any way we could tryto think about -- I know 4.5 to 5 is, you know, best case scenario maybe or areasonable case scenario. Can the business be run profitably if we do have acap in 2008?Alan SauberOh, yeah.Balaji Gandhi - OppenheimerOkay. So any kind of -- Alan SauberAt least based on what we see now, we think we can engineermostly around it. Now, there are going to be some start-up interruptions forthe first quarter or two. But again, we're going to -- we're going to startputting the processes in place during the fourth quarter to deal with thatissue. So, we're not going to just wait and hope that Congress does the rightthing by December 31st of this year.Balaji Gandhi - OppenheimerOkay. Great. That's helpful. Thanks.Operator(Operator Instructions) Our next question comes from RobMains from Morgan Keegan. Please state your question.Robert Mains - Morgan KeeganGood morning. John, in your commentary, you mentioned thatyou have a short stay rehab unit that's being tested. Could you describe that alittle bit? I don't know if I'm familiar with it.John ShortYeah, what we've -- as you're well aware, Rob, the 75% ruleapplies to all patients regardless of pair so there are a ton of non-Medicarepatients out there that also give precluded from accessing Medicare certifiedIRFs because of the 75% rule.So, in a couple of markets, we have put together withhospital clients a smaller short stay non-Medicare certified unit and that'swhere we're running hip and knee patients that are covered by non-Medicarepayers. And the early -- the early results are very encouraging. It requires anentirely different marketing focus and an entirely different clinical approach becausethese really are short stay patients.So, it is a volume play. You need big enough Geographic(inaudible) area in order to run sufficient volume through it to keep, youknow, a ten-bed unit profitable. But so far, so good and if we've got what, twoor three others benefit (ph), at some stage of development. Robert Mains - Morgan KeeganNow, kind of looping back to the study that you did,obviously to do something like this, you need payer buy-in. You've got it inthose markets. They're not seeking to put the patients in a sniff because theythink they can save money?John ShortCorrect. They recognize that, you know, they have alreadydone the study that CMS either should do or has done and won't tell anybodyabout which is to link all of the costs for an episode, a patient episodetogether and based on how successful they are, managing the care through theentire process judging the cost from that perspective.So, payers have already done that analysis and you know, weare a better bargain for patients that can tolerate three hours or more ofcare. Just what we found in our paper as well as in our short-stay units is ifyou can tolerate three or more hours of care, we can get you back to homefaster and cheaper than any other alternative. Robert Mains - Morgan KeeganUm, on this all-private pay option, do you have this goingon with any of your competitors in the markets? John ShortNo and I hope they're not listening.Robert Mains - Morgan KeeganOkay. I hope I don't wave a red flag by adding one morequestion. Would the model for this, or don't you know yet be ARU or IRF? Interms of would it be unit or freestanding? John ShortIt would be ARU.Robert Mains - Morgan KeeganBecause it is so small?John ShortCorrect.Robert Mains - Morgan KeeganOkay. Okay, then just to belabor the freestanding hospitalissue, if I add back the contractual adjustment, add back the start-up loss, itstill is a down quarter on a profitability basis. You mentioned some of theother things that you're doing in terms of -- does it sound like, kind of like,infrastructure builds? Are these additions to your cost base that are going tobe with you and you got to grow out of or are they kind of one-time? How shouldwe look at that? John ShortThe specific issues in the third quarter at first to do withsome uneven care management processes between our units. That we're in theprocess of standardizing and secondly, a payer mix change in one of our unitsthat was a result of a lapse in our marketing focus.So, we view both issues as eminently fixable. We're workingdiligently just like we are in improving the contractual adjustment process toimprove our care management and our pair mix management processes. So, you'llsee significant improvement in the fourth and subsequent quarters. Robert Mains - Morgan KeeganPayer mix change, I assume that means too much governmentbecause you weren't marketing to private?John ShortNo, actually, it meant that our Medicare mix went down. Wegot too much managed care business.Robert Mains - Morgan KeeganOh, and this is in an IRF?John ShortCorrect.Robert Mains - Morgan KeeganOkay. And then the care management processes, could you kindof elaborate on what that would be? John ShortWell, historically, we've let the individual facilities dealwith the admission process and care management process while they're in ourfacilities and the discharge disposition process. And we found too muchvariability in how that set of activity is being done.So, we're better integrating our admissions coordinatorswith our case management nurses with our discharge planners. So that we'reusing the same approach in its monitor to be monitored centrally, so thatthey're not missing the right questions at the right time with the rightcoding.Robert Mains - Morgan KeeganYou had some hospitals that weren't admitting the rightpatients, weren't keeping the right amount?John ShortNot enough of them. That's correct.Robert Mains - Morgan KeeganOkay. And then last question, Jay, you mentioned DSOs beingup. Any reason behind that?Jay ShreinerNo. The quality of our receivables hasn't changed. As younotice, we had a pretty big cash balance. What we did see this quarter is a lotof cash come in on the last day and the beginning of the next quarter, which isthe beginning of October. So, I would attribute it more to timing.Robert Mains - Morgan KeeganSo, kind of noise rather than a trend.Jay ShreinerRight.Robert Mains - Morgan KeeganOkay, that's all I had. Thank you.John ShortThanks.Operator(Operator Instructions) Our next question comes from DerrickDagnan from Avondale Partners. Please state your question.Derrick Dagnan - Avondale PartnersThanks. I wanted to ask one follow-up. This year, you've hada number of net declines in the number of contract therapy units that you haveand some of those, you know, are self-operated and some of them are yourdecision. So, I guess two questions.One, on the ones where it's your decision to stop operating,if it is in a market where you have some reasonable density, can you use thoseemployees and other businesses and does that help you with your, you know, wageproblems or wage shortages?John ShortAbsolutely.Derrick Dagnan - Avondale PartnersOkay. And I guess the second question on the contracttherapy business, if we're looking at a potential Medicare package and if we goback to the champ bill, there were various areas of post-acute care where themarket baskets would be eliminated. If the skilled nursing market basket waseliminated, would that hurt you in your contract therapy business were yourpricing is tied to Medicare skilled nursing pricing?John ShortYes. The increase that we got in the fourth quarter would belargely rescinded in 2008.Derrick Dagnan - Avondale PartnersOkay. Well, that's all I had. Thank you very much.John ShortThank you.OperatorAt this time, I am showing no further questions.John ShortOkay. As a reminder, this conference call is being webcastlive on our website at www.rehabcare.com and will be available for replaybeginning at 1:00 pm eastern time today. Thanks, everybody, for joining us andhave a great Halloween. We're all in costume here.OperatorThank you ladies and gentlemen. This concludes today'sconference. Thank you for participating, you may now disconnect.Copyright policy:All transcripts on thissite are copyright Seeking Alpha. However, we view them as an importantresource for bloggers and journalists, and are excited to contribute to thedemocratization of financial information on the Internet. (Until now investorshave had to pay thousands of dollars in subscription fees for transcripts.) Soour reproduction policy is as follows: You may quote up to 400 wordsof any transcript on the condition that you attribute the transcript to SeekingAlpha and either link to the original transcript or towww.SeekingAlpha.com.All other use is prohibited.THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATIONOF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHERAUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATETRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THEREPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKINGALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADEBASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT.USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELFAND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHERDECISIONS.Complete Story »

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  United Microelectronics Corp. (UMC)Q3 2007 Earnings CallOctober 31, 2007 8:00 am ETExecutivesChitung Liu - Chief Financial OfficerJackson Hu - Chairmanand Chief Executive OfficerBowen Huang - Senior Investor Relations ManagerAnalystsRandy Abrams - Credit SuisseWilliam Dong - UBSShailesh Jaitly - NomuraPranab Sarmah - Daiwa SecuritiesTse-yong Yao - HSBCMehdi Hosseini - FBRPresentationOperatorThis is Shekuana and I will be facilitating the conferencecall today. I would like to welcome everyone to UMC's Third Quarter 2007Earnings Conference Call. All lines have been placed on mute to prevent anybackground noise.After the presentation, there will be a question-and-answerperiod. Please follow the instructions given at that time if you would like toask a question. For your information, this conference call is being broadcastlive over the Internet. A replay of the call will be available at www.umc.comunder the ?Investor Relations?, ?Investor Events?section through Tuesday,January 1st, 2008.Also, a telephone replay of the call will be available from10 am New York time and will run until midnight on November 1st, 2007. Toaccess the replay, please call 888-286-8010 or 617-801-6888 if you are callingfrom outside the U.S. To access, the access code will be 403-01-749 throughoutthis period.I would like to introduce Mr. Chitung Liu, CFO of UMC. Mr.Liu, you may begin.Chitung LiuThank you, operator. Hello, everyone. This is Chitung. Weare happy that you could join us for our conference call today. With me hereare Dr. Jackson Hu, Chairman and CEO of UMC and Mr. Bowen Huang, Senior IRManager.Before we begin, please bear with me for a moment. I need togo over the standard Safe Harbor policy. Certain statements made during thecourse of our discussion today may constitute forward-looking statements thatare based on management's current expectations and beliefs and are subject to anumber of risks and uncertainties that could cause actual results to differmaterially, including risks that may be beyond the Company's control. For theserisks, please refer to UMC's filings with the securities authorities in theU.S. and in the ROC.First, let's start with our performance for the thirdquarter of 2007. For this period, our revenue was NT$31.03 billion, which is anincrease of 23.6% compared to $25.1 billion last quarter. Year-over-yearrevenue decreased by 11.4% from NT$27.85 billion in third quarter 2006.Gross profit for this quarter was NT$8.22 billion or 26.5%of revenue compared to NT$4.96 billion or 19.8% of revenue from second quarterof 2007. Operating profit was NT$4.24 billion or 13.6% of revenue compared toNT$1.23 billion or 4.9% of second-quarter 2007 revenue.Net income was NT$9.23 billion in third quarter 2007compared to a net income of NT$4.91 billion in 2Q '07. EPS for the quarter wasNT$0.57 and earnings per ADS were US$0.088. The bulk out of numbers highlightof UMC's financial performance for the last quarter. You can view more detailson our quarterly report, which has been posted on our website.Now let me turn the call to Dr. Jackson Hu to provide acloser look for our business update and guidance for the next quarter. Jackson,please.Jackson HuWelcome to our quarterly conference call today. It is niceto meet everyone again on the air and we always appreciate your participationand your interest in UMC.First of all, we had an excellent quarter for Q3 2007. Ouroverall performance exceeded our guidance including revenue, gross margin,operating margins, wafer shipment, loading, and other key indicators. It isworthwhile to note that overall wafer shipment exceeded a1 million 8-inchequivalent for the quarter.This was a UMC record high. Certainly the strong seasonaldemand in Q3 was a main contributor. The facts that both 12-inch fabs had anaverage loading of 95% clearly indicated that for the product mix and thecustomer mix were ideal to take full advantage of the strong demand.In the meantime, we must also point out that althoughrevenue was impressive, it did not reach historical highs due to price pressurein both material 8-inch and advanced 12-inch properties. This is a clearindication there is now too much competition within our industry.In Q3, we completed Taiwan's largest ever-capital reductionplan by canceling 30% of UMC's outstanding shares while returning NT$57.3billion to shareholders. Our cash position after the capital reduction remainsvery healthy.On the other hand, UMC continues to reconstruct its balancesheet to improve capital utilization and ROE or return on equity.Also worthwhile to mention, in Q3, we signed a technologycross license and joint development agreement with Elpida. This is asignificant development that gives us access to their DRAM technology, which wecan offer as part of our SOC solutions for memory intensive applications.Furthermore, we will jointly develop with Elpida an emergingPRAM technology or phased change memory for future SOC design. As the process ofscaling (ph) continues, multiple systems can be integrated in the future. Theability to integrate various system memories will become very important in thefuture.Another topic, which the industry should be interested in isour CapEx for 2008, which will be significantly reduced relative to 2007 forthe following reasons; first, we have found a way of enhancing productivity forcertain critical and capital intensive equipment, such as the scanner.Second, our capacity expansion is mainly focused on convertingcapacity from older generations to more advanced processes, for example; from0.13 micron to 65-nanometer.Third, the CapEx will be able to support higher revenuegrowth, if 2008 is a strong demand year.From now on, increasing profitability will be UMC's numberone business objective. However, I must remind you that this goal will nothappen overnight. A solid beginning will be the implementation of a disciplinedCapEx strategy.Now, let me provide you with the guidance for the fourthquarter 2007. Wafer shipments are expected to decrease by approximately 9%.Wafer ASP in U.S. dollars is expected to decrease by approximately 1%.By the way, these are normal seasonal adjusted in ouropinion. And also, for the factors that are not under our control, for examplethe exchange rate is not considered here.The capacity utilization rate will be approximately 85%. Asfor profitability, gross profit margins will be approximately 25%. Thepercentage of revenue from 90-nanometer and a below will be approximately 25%.The consumer segment is expected to be the strongest,followed by communications segment and the computer segment. Our 2007 CapExbudget will be approximately US$1 billion.That's all for my comments. Thank you again for attendingtoday's teleconference. Now let's see about questions, you have about UMC.Operator?Question-and-Answer SessionOperator(Operator Instructions) Your first question comes from theline of Randy Abrams with Credit Suisse. Please proceed.Randy Abrams - Credit SuisseYes, good evening. I wonder, if you can give us an update onyour expectation for the 65-nanometer ramp over the next few quarters.Jackson HuWe have many 65-nanometer products at various stage of UREintroduction and others are prototyping in other stages. So they will go intoproduction as time goes by. And the highest volume, high volume will occurafter Q2 next year.Randy Abrams - Credit SuisseOkay. Maybe quantify it in terms of percent of revenue, howquick and maybe metrics on getting to 5% or getting to 10% of revenue from 65?Jackson HuIn the fourth quarter, you will be around 4%.Randy Abrams - Credit SuisseOkay. Thank you. On your CapEx, your utilization reached 95%you were mentioning last quarter. Do you worry about leaving some business onthe table next year? You mentioned a strong growth year. Just want to see ifCapEx is down significantly, how much can you grow your capacity next year?Jackson HuAs I mentioned earlier, the main objective for next year isto convert the capacity mix so that we can satisfy customer?s needs. An exampleis converting a large chunk of 0.13-micron capacity into 65 nanometer, whichwill have higher ASP.So, we will be able to support a very high growth rate nextyear, even close to or about 35% if 2008 turns out to be a strong year.Randy Abrams - Credit SuisseOkay. And one last question. Could you maybe talk aboutwhat's driving -- you had a strong third quarter so it might be a higher base,but what's driving a bit more of a sequential decline in fourth quarterrelative to some of your peers?And how does that set up for first quarter if you have alower base in fourth quarter? Do you still see a seasonal decline -- say highsingle digits first quarter -- maybe a range for that?Jackson HuIt's too early to talk about Q1 next year, but for Q4, wesee a normal adjustment probably across the Board in the computer,communication and consumer segment.Randy Abrams - Credit SuisseThanks a lot, guys.OperatorOur next question comes from the line of William Dong withUBS. Please proceed.William Dong - UBSGood evening. Quick question on the CapEx side. I understandthat there's a plan to significantly cut CapEx for next year. But I think interms of strategic planning for the future technology development, I just wantto get your sense of what is to plan on 45 and how do we progress from here?Jackson HuGood question. 45 nanometer, we are producing the firstproduct for our customer. It is in 12A, our 12-inch fab in Tainan. And, we haveseveral other customers that are doing prototype preparation in the test chipas well.William Dong - UBSSo, will the sort of slowdown in CapEx affect your ramp oris it actually not -- it will not affect your ramp?Jackson HuProbably not, it will not affect the ramp. We estimate thevolume for 45 nanometer next year will be limited.William Dong - UBSOkay. Thank you very much.OperatorOur next question comes from line of Shailesh Jaitly withNomura, Singapore. Please proceed.Shailesh Jaitly - NomuraYeah. Hi, this is Shailesh. Firstly, if you could helpexplain the utilization difference between say your 12-inch fab versus your8-inch capacity?Jackson HuIn which quarter?Shailesh Jaitly - NomuraIn the just past quarter, 3Q.Jackson HuIn the past quarter, 3Q?Shailesh Jaitly - NomuraYes.Jackson HuThe 12-inch actually is slightly better. Was slightly betterthan 8-inch.Shailesh Jaitly - NomuraYes, that's what I was trying to understand because when Ilook at your revenue by process geometry, I noticed that your growth in thehighland processors is a lot faster as compared to the matured processors,whereas when I look at pretty much all your competitors, it is the reverse ofthat which has occurred. So could you help reconcile this major difference asto what product segments are really driving your higher end of the products?Jackson HuOkay. In Q3, actually, applications demand for advancedprocess technology is -- was strong across the board, including communicationsand computers, graphics, chips and consumers. So, a referenced speaker is thatyou can find in our published report, that 90 nanometer and below accounted for25% of our revenue and 0.13 accounted for 23%. So, totaling those three, 0.13micron below accounted for about 48% of our overall revenue.Shailesh Jaitly - NomuraI understand. Also, could you help provide some estimates ofthe development costs, which are going to be required for your 45 nanometer ascompared to same like-to-like costs for 65?Jackson HuWe don't have that number on top of our head. And actually,the more expensive equipment needed for 45 nanometer is a merchant scanner. Andbeyond that, I could not think of any special equipment that are much moreexpensive than 55 nanometer generation.Shailesh Jaitly - NomuraYes, taking a different aside, would it be fair to assumethat your 45 nanometer development costs, the process development costs, is alot higher because when I speak to the industry participants, the numbers thatcome across are as high as $800 million.So, just trying to understand that massive reduction inCapEx versus the need to migrate to 45 nanometer, how would you reconcile thesetwo differing needs?Jackson HuFor your information, the development of our 45-nanometertechnology is progressing very, very well, and we have old R&D equipmentneeded. So, I don't think it has anything to do with the -- or it has not muchto do with the CapEx, yes. Everything has been factored in including theR&D equipment.Shailesh Jaitly - NomuraI understand. One last question if I may. You mentionedabout the capacity conversions, which you are targeting, 0.13 micron to 65nano. If you could help provide some CapEx estimates, talk emerging say astandard have a 30,000 wafers per month, how much CapEx would be required andhow much time would be required to convert say 0.13 micron to 65 nano?Jackson HuIt has been progressing for a while and I think within twoquarters, most of the conversions will start to become effective. So that wecan take advantage of a strong demand in Q3.Shailesh Jaitly - NomuraAnd how much will it cost you two quarters free to migrateand how much will it cost you?Jackson HuWe will have to discuss that information in the next quarterlyconference when we provide more detail to CapEx information.Shailesh Jaitly - NomuraUnderstand that. I appreciate for your answers. Thanks alot.OperatorYour next question comes from the line of Pranab Sarmah withDaiwa Securities. Please proceed.Pranab Sarmah - Daiwa SecuritiesThank you for taking my questions. First I have questions onsome financial numbers. Can you give us your non-operating guidance for fourthquarter? And also the depreciation expenses for fourth quarter?Chitung LiuFor the third quarter, there was NT$2 billion cash dividendincome, which we will not see that again in Q4. And also, just on the assetdisposal, the share sales in fourth quarter, they will also be lower than thatin third quarter.So, overall it will be actually much lower in Q4 versus Q3in terms of net non-operating income. And as for depreciation, we will see aminor increase in Q4 over Q3, low single digits.Pranab Sarmah - Daiwa SecuritiesLow single digits. Okay. Then, Jackson, you have mentionedabout some of the critical equipment can be a bit here high productivityannouncement under some of the critical equipment. Could you identify what arethe critical equipment you are talking about here?Jackson HuThe one example I can mention or one equipment I can mentionis the scanners, which is very expensive, as you know, the basis. Advancedscanners can cost $50 million per piece.Pranab Sarmah - Daiwa SecuritiesSo, now you will be using your old scanners to migrate to a65 nanometer from 0.13-micron. That's what you were trying to say, right?Jackson HuWhat we are trying to say is the existing scanners arecapable of doing 65 nanometers.Pranab Sarmah - Daiwa SecuritiesThe 65 nanometer. Yes. But when you start 45 nanometerprobably, from 2009, your capital intensity will again increase probablybecause you do not have any more scanners for 45 nanometer?Jackson HuThat's a good guess. And we'll have to talk about that nextyear.Pranab Sarmah - Daiwa SecuritiesOkay. And one question on the 65 nanometer, how manypercentage of our revenue came in third quarter?Jackson HuIn third quarter is about 1%.Pranab Sarmah - Daiwa Securities1%. And in 45 nanometer risk productions is going to startfrom when? How for general technology, that is why I think low volt technologysorry low power technology for general technology, when you are going to startrisk production?Jackson HuOkay. For 45 nanometer and low power products, we aremanufacturing the first product in the fab right now. So, I expect them to gointo production probably second quarter next year. The latest is third quarter.And then the prototypes for the high performance products will be secondquarter to have a takeout in the second quarter next year.Pranab Sarmah - Daiwa SecuritiesThank you.OperatorYour next question comes from the line of Tse-yong Yao withHSBC. Please proceed.Tse-yong Yao - HSBCHi, Thanks for taking my call. First, real quick, I justwanted to confirm the gross margin guidance for Q4. I thought I heard 25%, butthe press release says 20%.Jackson Hu25% was correct.Chitung LiuNo, no, 20%.Jackson HuNo, 20%.Chitung LiuBecause in Q3 it was 26.5%, so it will be about 20%.Tse-yong Yao - HSBCOkay thanks. Second, just trying to get a better feel forthe weakness in Q4. I know you talked about strengthen in consumer and maybe alittle bit weaker in comms (ph) and computer, but could you talk about maybehow broad-based it is? Is it one or two customers or is it across the entirespectrum? And then regionally, which areas are growing? Which ones are maybe laggingsbehind?Jackson HuSorry. Would you repeat your question again?Tse-yong Yao - HSBCRegarding Q4 revenue guidance, you had talked about consumerseeing some strengthen in consumer and followed by communications and computermaybe being a little bit weaker.Just trying to get an idea, first of all regionally, isthere specific regions that are growing faster than others? And then, thesecond part is kind of how broad based it is. Is it caused by a handful ofcustomers or is it caused by a more broad based industry?Jackson HuI understand. As a matter of fact, I think that we needed tocollaborate on this area. Actually, the percentage of applications in Q4 willbe not too much different than Q3 maybe a variation of 1%, 2% for each segment.So, consumer segment is expected to be the strongest, is arelative statement, as you know in Asia, that's what is stronger. Andcommunications segment, probably is weaker in the United States. And computersegment is lower mainly probably due to LCD drivers. Hopefully that is helpful.Tse-yong Yao - HSBCOkay, thanks. I guess, then next question is, so talkingabout the capital, the greater capital discipline, lower capital spending for2008, have you begun to see any signs of perhaps spillover in the sense thatcustomers not being able to get capacity at say TSMC or some of the othercompetitors and then coming to UMC as an alternative?Jackson HuYou mean, when? When?Tse-yong Yao - HSBCI guess?Jackson HuOr in general?Tse-yong Yao - HSBCIn Q4, just generally speaking do you start to see any typeof customers coming to you looking for capacity because perhaps they can't findit somewhere else?Jackson HuGood question. Maybe there are a couple of them.Tse-yong Yao - HSBCOkay. And the next question for me is; you are talking aboutconverting a lot of your existing capacity for example the 130 nanometer to 65nanometer. I assume that this is limited to your 300 mm or your 12 inchinstalled base.Jackson HuThat's correct.Tse-yong Yao - HSBCSo do you have any plans to improve -- what are your -- Iguess a better way to ask is what are your plans to improve productivity if yousqueeze additional capacity out of your mature technology lines, your 8 inches?Jackson HuOkay, that is a good question. The answer is yes. As amatter of fact that we see higher demand on certain mature 8-inch technology,for example like a 0.18 micron generation. We do see a strong demand and nextyear, we will spend more in dollars, in absolute dollar amount for increasingthe 8-inch capacity.Tse-yong Yao - HSBCOkay. Thanks a lot. That's all for me.OperatorYour next question comes from the line of Mehdi Hosseini,with FBR. Please proceed.Mehdi Hosseini - FBRThanks for taking my question. I apologize if I'm repeatinga prior question. I joined in late. Could you -- I'm not asking you forguidance, but based on what you are seeing out there in terms of forecasts orvolatility in the forecasts, how would you describe Q1? Would you say isseasonal, below seasonal, above seasonal?And then going back to the prior question you said strengthfrom certain areas for mature technologies; can you be more specific? I'm notasking for a specific customer name, but in terms of end market or application,what are those applications that you are actually seeing on expected strengthfor these mature technologies?Jackson HuOkay. First of all, for Q1, and we do not make forecaststhat far out, and we don't see any signs one-way or the other. It's still alittle early.And secondly, on 8-inch technology, for example,high-voltage process, which is UMC -- one of UMC's strengths for LCD driversfor both large panel and small panel, that segment has the strong demand.Mehdi Hosseini - FBROkay, I thought you said LCD driver was weak or did Imisunderstood you earlier on?Jackson HuI'm talking about over a broader timeframe.Mehdi Hosseini - FBROkay. I understand. And then in terms of the rather high-endapplications, especially with some of the graphics using flip chip packagingtechnology, are you seeing any shortages of bumping at the back end houses?Jackson HuNot really. We see strong demand and tight supply, but notshortage yet.Mehdi Hosseini - FBROkay. Thank you.Operator(Operator Instructions) At this time there are no furtherquestions. I would now like to turn the call back over to Mr. Liu.Chitung LiuThank you, operator. That concludes our call today. Thanksagain for your participation. If you still have any additional questions,please do not hesitate to contact us directly. Operator, back to you.OperatorThank you. Our link to the replay of this call will beavailable until the end of Tuesday, January 1st, 2008 in the "InvestorRelations" section of UMC's website. A dial-in version of the replay canbe accessed by calling 888-286-8010.If you are in the U.S., or 617-801-6888 for internationalcalls. The dial-in replay will be available until midnight or on November 1st,2007 New York time. The access code is 403-01-749. If you have any additionalquestions, please feel free to contact us directly. Thank you all again andhave a good day.Copyright policy:All transcripts on thissite are copyright Seeking Alpha. However, we view them as an importantresource for bloggers and journalists, and are excited to contribute to thedemocratization of financial information on the Internet. (Until now investorshave had to pay thousands of dollars in subscription fees for transcripts.) Soour reproduction policy is as follows: You may quote up to 400 wordsof any transcript on the condition that you attribute the transcript to SeekingAlpha and either link to the original transcript or towww.SeekingAlpha.com.All other use is prohibited.THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATIONOF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHERAUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATETRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THEREPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKINGALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADEBASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT.USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELFAND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHERDECISIONS.Complete Story »

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  Weyerhaeuser Co. (WY)Q3 2007 Earnings CallOctober 31, 2007 10:00 am ETExecutivesKathy McAuley - Vice President of Investor RelationsSteve Rogel - Chairman, President, and Chief ExecutiveOfficerRich Hanson - Executive Vice President and Chief OperatingOfficerPatty Bedient, Executive Vice President and Chief FinancialOfficerDan Fulton - President of Weyerhaeuser Real Estate CompanyAnalystsGeorge Staphos - Banc of America SecuritiesMark Connelly - Credit SuisseRichard Skidmore - Goldman SachsGail Glazerman - UBSPeter Ruschmeier - Lehman BrothersMark Wilde - Deutsche BankMark Weintraub - Buckingham Research GroupChip Dillon - CitigroupDon Roberts - CIBC World MarketsRoss Gilardi - Merrill LynchSteve Chercover - D.A. DavidsonMark Connelly - Credit SuissePaul Latta - McAdams Wright RagenMark Wilde - Deutsche BankGeorge Staphos - Bank of America SecuritiesPresentationOperatorGood morning, ladies and gentlemen, and thank you forstanding by. Welcome to the Weyerhaeuser 2007 Third Quarter Earnings ConferenceCall. During today's presentation, all parties will be in a listen-only mode.Following the presentation, the conference will be open forquestions (Operator Instructions). This conference is being recorded Wednesday,October 31st, 2007.I would now like to turn the call over to Kathy McAuley,Vice President of Investor Relations. Please go ahead, ma'am.Kathy McAuleyGood morning, and welcome to Weyerhaeuser's third quarter2007 earnings conference call. I'm Kathy McAuley, Vice President of InvestorRelations. Joining me today are Steve Rogel, Chairman, President, and CEO, RichHanson, Executive Vice President and Chief Operating Officer; Patty Bedient,Executive Vice President and Chief Financial Officer; and Dan Fulton, Presidentof Weyerhaeuser Real Estate Company. This call is being webcast atwww.weyerhaeuser.com.The earnings release and material for this call can be foundat the website or by contacting April Meier at 253-924-2937. Please review thewarning statement in our press release and on the presentation slidesconcerning the risks associated with forward-looking statements.Forward-looking statements will be made during this conference call.I will now turn the call over to Steve Rogel. Steve? Steve RogelThanks, Kathy, and to all of our callers for joining ustoday. A little later on this call, you'll hear from Kathy, Dan Fulton, RichHanson, and Patty Bedient. They will provide more detail on the operatingresults we announced this morning and our outlook for the fourth quarter. Butbefore they do, I'd like to give you a brief overview.Third quarter results were obviously affected by thecontinuing weakness of the housing market. As we noted in our earnings releasetoday, this downturn deepened during the quarter and affected many of ourbusinesses.The regions in which WRECO operates have certainly felt theimpact of the slowdown, as Dan will discuss. Our real estate companies areperforming better than many of their peers. This is due in large part to themarkets we're in, the niches we serve, and the steps we've taken to prepare fora downturn.Looking ahead, we remain bullish on the housing market. Aswe've discussed before, the long-term demographic trends support not only arebound from today's levels but a strong housing market for the long-term.In addition to managing through the current market, our jobis to position ourselves to take full advantage of stronger markets whenconditions improve. We've done just that in both WRECO and iLevel. It is alsoour belief that over the long-term, the markets in which our real estatebusiness operates will be among the strongest in the country, and that WRECO iswell positioned to benefit from this.In wood products, the weakness in the housing markets islikely to affect our businesses for sometime. Rich will outline the steps we'vetaken to balance supply with demand through closures, curtailments, restrictedoperating postures at the company's wood products facilities.Our iLevel approach, which gives us great line of sight toour customers' ultimate needs, helped us develop these responses to marketconditions. We're also better able to anticipate what our customers want fromus in the future.This allows us to begin product development today fortomorrow, and it positions Weyerhaeuser to be the leading supplier. Ourtimberlands business was affected by softening in the log markets this quarter.But long-term we see opportunities to maximize revenue from our 6 million acresof fee owned timberlands.In addition to our ongoing timber management, exciting newrevenue opportunities include our biofuel alliance with Chevron, carboncredits, and oil, gas, and mineral extraction.We are committed to ensuring that our shareholders receivethe full benefits from these valuable holdings. To that end, our work onstructural alternatives continues, and we are actively supporting theindustry's ongoing tax reform efforts.Bipartisan support for the Tree Act of 2007 is growing.Passage of this legislation would provide immediate value to shareholders andis compatible with many different business strategies. Our strategic decisionto focus on specialty pulp also is paying dividends.Today absorbent and specialty fibers account for virtuallyour entire pulp portfolio, allowing us to leverage our research and developmentexpertise. Strong market conditions resulted in higher prices in the thirdquarter. But more importantly, the outstanding operating performance of ourcellulose fibers mills positioned us to capitalize on this improvement. Richwill provide further details in his report.Finally, our containerboard packaging and recycling businessis successfully implementing its new business model while we continue ourstrategic review of the business. As previously discussed, these alternativesrange from continuing to hold and operate the business to a possible sale,disposition, or combination.The process is ongoing. But due to confidentialityrequirements, I can't say more at this time. We are confident, however, that weare taking the right steps to create the greatest value for our shareholders.I'd now like to turn the call over to Kathy McAuley, whowill provide some additional details on the results we reported this morning.Kathy?Kathy McAuleyThank you, Steve. This morning Weyerhaeuser reported thirdquarter earnings of $101 million or $0.47 per diluted share, on net sales of$4.1 billion. The third quarter includes the following after tax items. Acharge of $17 million or $0.08 per diluted share for closures, restructuringand asset impairments in our wood product segment.A charge of $17 million or $0.08 per diluted share relatedto the restructuring of administrative function, including a regional Canadianoffice and one-time cost associated with the transition to a new IT servicesprovider.A charge of $16 million or $0.07 per diluted share for theimpairment of real estate assets. A net gain of $26 million or $0.12 perdiluted share related to legal settlements. A net gain of $7 million or $0.03per diluted share on the sale of operation and previously closed plant sites.Excluding these items, the company earned $118 million or$0.55 per share. A GAAP reconciliation of special items is available at ourwebsite in the earnings information package.In that package, please turn to chart 12, which is areconciliation of the key changes in earnings per share before special itemsbetween Q2 2007 and Q3 2007. Second quarter 2007 earnings before special itemswere $0.48 per share.Lower volumes reduced earnings $0.12 per share. The largestvolume decline were in wood products. Price and mix were a negative $0.12 pershare. This decline was due to lower log and wood products prices and a lessfavorable seasonal mix of businesses in containerboard.High cellulose fiber prices partially offset this result.Manufacturing cost contributed $0.19 per share, driven by productivityimprovement and lower energy cost in containerboard packaging and recycling andproductivity increases coupled with less maintenance downtime in cellulosefibers.Real estate related assets contributed $0.03 per share.Other contributed $0.09 per share partially due to SG&A reduction. Thirdquarter 2007 earnings before special items were $0.55 per share.I will now turn the call over to Dan Fulton to discussWeyerhaeuser Real Estate Company results.Dan FultonGood morning. Trends in earnings and other key operatingmetrics for real estate in the third quarter and year-to-date 2007 reflect thevery difficulty business conditions that we were encountering. Negativemomentum in the national housing markets discussed in last conference callscontinued in the third quarter and conditions seem poised to deterioratefurther over the balance of the year.Excess inventories of both new and existing homes, declininghome prices, and tightened credit standards have rocked most local markets.Consumers are understandably cautious in this environment. And many havewithdrawn from an active search pending stabilization in prices and easieraccess to the mortgage market.As stated in this morning's press release, real estateearned $60 million in the third quarter compared to $64 million last quarterand $135 million in the same quarter one year ago. Earnings in the currentquarter included a $30 million gain on land sales and last quarter's earningsincluded a $42 million gain on sale of an apartment project.Considering the very difficult market conditions across theindustry, we're pleased with the relative performance of our operations. Thirdquarter earnings included $23 million in impairment charges for lots impactedby unfavorable market conditions. Earnings for the second quarter of the yearand for the third quarter a year ago also included impairment charges of $12million and $14 million respectively.Single-family operations generated 88% of revenue in thethird quarter. And on a year-to-date basis, single-family operations havegenerated 91% of revenue this year compared to 93% last year. A 10% decline inaverage sale price in the third quarter compared to the same quarter a year agoreflects the intensely competitive pricing environment for new homes, changesin sales mix to lower priced product, and a slight shift in our geographic mixto the relatively healthier, but lower priced Houston and Puget Sound markets.With the burden of excess inventory, builders across thecountry continue to aggressively discount standing units, effectively rewardingbuyers who withdraw from the market to wait for price stabilization. Thesemarket forces are driving expectations for lower pricing in order to clearexcess inventory in a period of slack demand.For these reasons, we believe virtually all of the marketsin which we operate have additional downside price risk in the near term. PugetSound region has been our strongest market this year with year-to-date salessignificantly higher than during 2006. However, traffic and sales were weak inthe third quarter, both trending below the pace set in the prior year andinventories have increased.Houston has been steady in 2007, although moderated from thevery active levels of a year ago. Market remains reasonably healthy,particularly in our targeted market segment of move-up buyers. The suburban Washington,D.C. market started the year stronger than expected but weakened in response tothe record level of existing home inventories.Our own sales have increased year-over-year in 2007, due inpart to increased lot availability in our communities. Las Vegas, Phoenix,Sacramento, and the Inland Empire of Southern California represent our mostchallenging markets, each of which is characterized by significant inventoryoverhang, deep sales price discounting, and high contract cancellation rates.These markets remain negative despite strong underlyingfundamentals, including continued job growth. The markets in Los Angeles andSan Diego have moderated compared to a year ago, but competitively pricedproduct and good locations will attract buyers. Housing affordability remains along-term structural issue in these markets.We're fortunate that the recent wave of fires in SouthernCalifornia did not affect our existing communities, though we have sufferedsome wind damage in our inland empire communities. Although there may beshort-term spike in regional demand, especially for standing inventory, weexpect that our operations will likely experience diminishability ofsubcontractors and local regulatory staff as priorities appropriately shift toremediation efforts.Across the industry, single-family gross margins are underpressure from deep discounting in the market, particularly on standing units.At WRECO, third quarter single-family gross margins were 17.9%, an increasefrom 16.7% in the second quarter due to a shift in mix, but down compared to26.1% in the same quarter a year ago.On a year-to-date basis, single-family gross margins were18.7% this year compared to 27.5% last year. With the continuing overhang ofinventory in many local markets, we expect our margins to deteriorate furthernext quarter.We control land representing about seven years of sales, ofwhich approximately 55% is owned. Declining new home prices have increased thelikelihood that land controlled in recent years may have valuation issues,particularly if controlled during periods when land markets were hyperactive in2005 and later.We monitor our land positions on a quarterly basis. Usingconsistent practices, we recognized impairment charges in the third quarter of$23 million as compared to $12 million last quarter and $14 million in thethird quarter of last year. Additionally, we recognized charges of $1.3 millionfor abandoned deposits and pre-acquisition costs in the third quarter comparedto $800,000 last quarter and $5.5 million in the third quarter of last year.The bulk of our land acquisitions in 2005, 2006, and 2007have been lot takedowns in existing communities with the exception of ouracquisition of Maracay Homes in Phoenix in February 2006. On an overall basis,a high percentage of our land position today was controlled via acquisition oroption in 2004 and prior. We're not isolated from the actions of otherhomebuilders, including the public companies, virtually all of which havereported major impairment charges in each successive quarter over the past twoyears.These charges effectively reduce the cost basis of futurehome deliveries for our competitors and increase the pressure on us incompeting communities. If a competitors' impairment charge results in asignificant disparity in value compared to our community, we may choose to takea compensating sales price reduction. We're focused on controlling thecontrollable and we have taken the following management actions in order toremain as efficient with our capital as possible.We reduced the number of housing starts in the third quarterby 41% compared to the prior quarter. Our current completed and unsoldinventory position of 451 units represents approximately 33 days sales.Approximately 50% of our completed and unsold inventory today is in Las Vegas.Virtually all land acquisition obligations under purchase and option agreementshave been renegotiated. In some circumstances, we canceled our option andwritten off deposits and pre-acquisition costs.Many sellers, however, have recognized the current marketenvironment and our negotiations have resulted in reductions in price, changesin terms, or both. This is an ongoing process, and we'll have more work to doif the market slowdown continues.Our vendors and subcontractors are also supporting ourefforts to remain competitive by reducing costs in order to help mitigate someof the impact of price discounting. Lastly, we've reduced generaladministrative expense by nearly 12% in the third quarter compared to the samequarter last year. Additionally, we selectively reduced field staff as wecontinue to balance supply with demand. And now I'll turn the call over toRich.Rich HansonThank you, Dan. I will continue by providing an operationaloverview of our other business segments. As expected, the weak housing marketalso had a significant impact on the results of our wood products andtimberlands businesses in the third quarter.Wood products obviously was most affected, but we alsostarted seeing some negative effect on log prices during the quarter. I knowthat everyone understands that the plummeting national housing starts arehaving an effect on our wood products markets. But for perspective, on aseasonally adjusted basis, housing starts for the third quarter were down 24%from a same period a year ago and down 11% since the second quarter.In addition, we are experiencing significant weakness in therepair and remodel market. Because of lower sales volumes in our wood productsbusinesses during the quarter, we have aggressively worked to balance oursupply with customer demand. We are continuing that effort, as demonstrated byour recent announcements that by year-end we will indefinitely curtailproduction at two oriented strand board mills and a timber strand mill.Taking into account the recently announced mill closures, wewill be operating our oriented strand board and timber strand system at lessthan 60% of capacity. We expect to take further action in the fourth quarter asnecessary to match our production to demand. The wood products businesscontinues to proactively reduce working capital consistent with this reduceddemand in the business restructuring.Weestimate by year-end, working capital will beapproximately 30% lower than yearend last year. As reported by Random Lengths,the average oriented strand board prices for the third quarter are at theirlowest level since late 2002 and the quarterly average price for lumber is atits lowest since 2000.Regarding timberlands, last quarter I mentioned that logprices had remained sticky and hadn't necessarily tracked the housing marketslowdown. That changed in the third quarter, especially in the west, whereprices declined for both domestic and export log sales. Industry log usage declinedas mills in the west began taking downtime to adjust production levels to thedeclining demand.Although southern mills are also adjusting to lower demand,log volume and prices were stronger in that region due to an increased demandfor chips and restricted log and stumping supply.Meanwhile, a weak Japanese housing market affected our logexport business. I just returned from Japan where I met with Chugoku Mokuzai,our largest log export customer. I learned that construction delays caused aportion of this weakening building market as new building regulations wererecently implemented.The strength of the Japanese market, however, remainsuncertain as we move into a seasonally slow period. Sales of non-strategictimberlands, as you can see during the quarter, offset some of the downwardeffect on earnings from lower log sales.In containerboard, the industry containerboard millscontinue at high operating rates, and inventories are low. In addition,inefficient box plant capacity has been coming out of this industry supplysystem. We've closed 12 plants since January '06.We've had a smooth implementation of our $40 a toncontainerboard price increase and we anticipate that a majority of that priceincrease will be recovered in box price this year. The lag in the full recoveryis because some of our businesses in long-term agreements that we will berenegotiating during 2008, and that will give us better pricing flexibility.But what is more important is our focus on company margins here.We continue to implement a demand driven business model incontainerboard packaging. We will achieve our projected $100 million in savingsin 2007 as part of the two-year goal of $230 million and we are continuing tomove aggressively with plant rationalizations and customer selection aligningto our capabilities to improve margins.And finally, in cellulose fibers, this segment benefitedfrom higher third quarter prices due to strong market conditions. During thequarter, third party realizations for absorbent pulp increased $26 a ton andthis is an $85 a ton increase since third quarter of last year.More important, due to the significant improvements in theoperating performance in this segment, we are positioned to capture the maximumrevenue and bring this price improvement to the bottom line. Production fromcellulose fiber mills increased by 26,000 tons in the third quarter, in part toone less annual maintenance outage in the quarter compared to the secondquarter. But four of the cellulose fiber mills set quarterly productionrecords.I'd now like to turn the call over to Patty Bedient, whowill outline our fourth quarter expectations.Patty BedientThanks, Rich. And good morning. Our outlook for the fourthquarter anticipates continued challenging market conditions for all of ourhousing driven businesses. As a result, we expect difficult underlyingfundamentals in timberlands, wood products and home building.On a positive note, economic drivers for our cellulosefibers and containerboard packaging segments should result in favorableoperating earnings in the fourth quarter compared to the third. I'll start theoutlook with our timberland segment.The continued weakness in the housing market is expected toresults in lower domestic and export log prices. We estimate the harvest in thewest will decrease while southern harvest will be flat with the third quarter.Sales of non-strategic timberland are anticipated to be lower in the fourthquarter compared to the greater than normal levels in the third.Overall, timberland segment earnings are expected todecrease in the fourth quarter compared to the third quarter. In wood products,the traditional seasonal slowdown of the fourth quarter will be furthercompounded by the anemic housing market.Sales realizations are expected to continue to deterioratein the fourth quarter over most of our product line. Shipment volumes are alsoestimated to decline. The restricted operating postures that Rich outlinedearlier will continue, and we will take further action as necessary to matchproduction with demand and manage working capital.Despite these efforts, we expect that fourth quarteroperating losses will deepen as compared to the third quarter levels.Containerboard shipments are expected to increase due to thestrong demand in export markets. Rights realization should also improve as theboard price increases announced during the last quarter are in place for thefull quarter.Box shipments are estimated to decline seasonally in thefourth quarter compared to the third. Prices should move up as increases fromthe third quarter announcements are realized more fully in the fourth quarter.The effect of price increases will be moderated somewhat due to seasonalchanges in mix.OCC prices are expected to moderate somewhat over the thirdquarter level and will likely remain high given the Asian demand. We anticipateincreased energy cost based on greater seasonal usage and higher natural gasprices.The non-fiber mill manufacturing cost should increase due tomore scheduled maintenance downtime in the fourth quarter than in the third.Packaging manufacturing costs are also expected to increase, mainly due toseasonally lower volume.Overall, we expect fourth quarter earnings in ourcontainerboard-packaging segment to be comparable to the third quarter.We believe markets for cellulose fibrous products willremain favorable throughout the fourth quarter. Shipments are anticipated toincrease slightly and sales realization should remain strong. The mills arerunning well, and with less scheduled maintenance downtime in the fourthquarter, manufacturing costs are expected to decrease compared to the thirdquarter.As a result, we anticipate higher cellulose fiber segmentearnings in the fourth quarter as compared to the third. We expect businessconditions for our real estate segment to deteriorate further in the fourthquarter. Volume, price, and margins in our single-family home building activitywill be impacted by intensely competitive market conditions.Homebuilders are aggressively positioning in an environmentwith fewer buyers and higher inventories of new and resale homes. We expect toclose approximately 1,200 single-family homes in the fourth quarter and we areevaluating the prospects of selling certain non-strategic land parcels.However, the likelihood and timing of closing thesetransactions cannot be estimated. Exclusive of such land sales, we expectoverall segment earnings to decline in the fourth quarter compared to thethird.Capital expenditures for Weyerhaeuser Company were $454million through September 30. Expenditures for the full year should be closerto $725 million as compared to our earlier budgeted amount of $800 million. Wehave now completed our share repurchase authorization, and in the third quarterwe purchased nearly 7 million shares for about $440 million, these purchasescontributed to our increased debt level at the end of the quarter.During the fourth quarter we will continue our focus onmanaging capital spending, working capital, and cash flow management in orderto reduce our debt levels.With that overview, I'll turn the call back to Kathy tobegin our question-and-answer session. Kathy?Kathy McAuleyPatty. Eric, could we open the floor for questions, please?Question-and-Answer SessionOperator(Operator Instructions) Our first question comes from GeorgeStaphos with Banc of America. Please go ahead.George Staphos - Banc of AmericaSecuritiesThanks. Hi, everyone. Good morning. First question aroundcontainerboard and packaging, Rich, I was wondering if you could give us a bitmore color on the things that are going well for you with the business -- thenew business plan, new business model, and things that you're still finding achallenge with.It would appear that it's still somewhat difficult movingthe pricing ball towards the goal line because of the lag effect that you havewith some of these contracts. If you could add a little color there, that wouldbe great, and then I have a couple of follow ons?Rich HansonOkay, George. Well, your description is really prettyaccurate. I think what's going well is the rationalization and the transitionof business to the remaining plants in a more efficient system. It's going welland on schedule.As I said as we are tracking our own cost and marginimprovements in those initiatives, we are well on schedule against the $230million permanent margin improvement. But as you say, as we go through and wehave some major national contracts that we need to renegotiate to get relief onfactor cost increases and board cost increases, that's where we still have somechallenge in front of us.We've been very pleased with the price increases that wehave gotten on those contracts that are open, and the percentage of businesswe've been able to transition.George Staphos - Banc of AmericaSecuritiesWas there a mix factor at all in the third quarter versusthe second quarter in terms of why we didn't see a bit more of a price lift inboxes?Rich HansonAbsolutely. The E. coli scare in green vegetables had animpact in the lower volume in the produce segment. As we said in the past,that's an attractive margin segment for us. And we experienced lower volumethere. And overall the produce market is becoming more competitive as well.George Staphos - Banc of AmericaSecuritiesOkay. You may have mentioned this in the past but I justwanted to get a refresher here. Should we expect more in the way of potentialbox plant closings as you complete the program?Rich HansonWe'll continue to look at how we can serve the highestmargin segments of the business, and we will structure our business includingmore rationalization to improve those margins.George Staphos - Banc of AmericaSecuritiesOkay. I'm sorry, Kathy?Kathy McAuleyThank you. We'll have our next question.George Staphos - Banc of AmericaSecuritiesI'll turn it over. Thanks.OperatorOur next question comes from the line of Mark Connelly fromCredit Suisse.Mark Connelly - Credit SuisseJust one question. Rich talked about the excess capacity inthe engineered board businesses. I wonder if you could put that in perspectivefor us. Because, when we look at the numbers this quarter, it looks like yousaw a pretty big drop year-over-year relative to the drop you saw in lumber.Is that just, am I just looking at that too superficially?It looks like engineered wood is getting hit a lot harder than lumber. Is thatnot correct in the big picture?Rich HansonI'll try to respond to what you're looking at. This capacitycomes out in significant lumps. And as we have taken this capacity downespecially coming into the second half of this year, I think you see it moreabruptly happening. But there's been real pressure on this with the loweroperating rates as we've come through the whole year.Mark Connelly - Credit SuisseOkay. That's helpful. Thank you.Kathy McAuleyNext question?OperatorOur next question comes from Richard Skidmore of GoldmanSachs. Please go ahead.Richard Skidmore - Goldman SachsGood morning. Just to follow up on the containerboardquestion, how much of the business is tied to long-term contracts and how muchof the business is currently open for pricing to get better?Rich HansonWell, I can't be specific about that but more than we wouldlike. As I said, we will realize the majority of that price increase as we comeout through yearend. But I really can't be specific about exact percentagesthere.Richard Skidmore - Goldman SachsThank you.Kathy McAuleyNext question?OperatorOur next question comes from Gail Glazerman with UBS. Pleasego ahead.Gail Glazerman - UBSHi. Thank you. Sticking on containerboard, part of yourwhole restructuring has been to analyze the markets a bit more carefully andget hopefully more insight into the demand side. I'm just wondering, lookingpast the fourth quarter into '08, what you're hearing from your customers interms of box demand?Rich HansonI'm sorry, the very last part of your question, you broke upa bit. Could you repeat?Gail Glazerman - UBSI'm sorry. I'm just wondering, I guess, what sense you'regetting from your customers about their outlook for box demand in 2008.Rich HansonI think reasonably positive. Overall, the economy is stillin pretty good shape but there's a lot of concerns about the general economiclevel of activity, but in general positive. As I've said, the price increaseshave been going very smoothly.Gail Glazerman - UBSOkay. Just a separate question. Kathy, can you break outsome of the maintenance cost that you had both in cellulose and containerboardin the quarter and maybe a sense of the magnitude of the shift in the fourthquarter?Kathy McAuleyGail, we don't break out specific maintenance cost items inthe quarter. We did have significant productivity improvements in bothcontainerboard and in the cellulose fiber business. We had less maintenancedowntime in cellulose fibers, which was also a positive in that quarter. Butboth of them saw significant improvements in productivity.Gail Glazerman - UBSOkay. Thank you.Kathy McAuleyNext question.OperatorOur next question comes from Peter Ruschmeier with LehmanBrothers. Please go ahead.Peter Ruschmeier - Lehman BrothersThanks. Good morning. Steve, I was curious if you couldcomment on your view of the timber tax bill both in terms of likelihood, timingof events. The challenges it faces, whether we have funding for the tax cuts.And importantly whether that passage has any impact on potential futurerestructuring plans for Weyerhaeuser.Steve RogelThanks, Pete. First of all, with regard to timber tax, I'mconfident of its passage. You are asking for comment as to when, and that's thedifficult part. So let me tell you the positives about it and it's movingforward. First is I think you're well aware, it has a tremendous amount ofco-sponsorship.The bill has been introduced. It's been attached to twovehicles moving along. Removed from them is the prospects for the main bill,look to Dimmer. But some of those main bills now have higher prospects ofpassage. So our open expectation is that our timber tax vehicle will ride alongwith them.With regard to how it's viewed, it has been scored, which isCongress speak for they have determined what the costs of the bill are. Andthey actually came out pretty well. And they have found ways to fund it. Whatwe hear from the floor is that this will pass. It's a matter of being patientand watch Congress make their sausage.Peter Ruschmeier - Lehman BrothersOkay. And whether it has an impact on your restructuringplans, is it?Steve Rogel3Well, whatever our plans are, the Tree Act is good for us.Because it has elements of support for the entire industry regardless of itsform of ownership. So it's well worth pursuing now and into the future.Peter Ruschmeier - Lehman BrothersAnd just lastly if I could, Steve, does it specifically oncontainerboard, does it have anything to do with the timing on containerboard,the delays we've seen so far on containerboard? Does that have anything to doon timber tax or is it a completely separate issue?Steve RogelThose are completely separate issues.Peter Ruschmeier - Lehman BrothersThanks very much. I'll drop back in queue.Kathy McAuleyNext question.OperatorOur next question comes from Mark Wilde with Deutsche Bank.Please go ahead.Mark Wilde - Deutsche BankGood morning. I heard Lynn Michaelis at a big industryconference about two and half weeks ago. He talked about a housing downturn thatwould be as severe as the early 80s. He was talking about single-family startsgoing down to about 900,000 units with a risk on the downside.I'm just curious, is this the scenario you're using fordecision making in the different parts of your portfolio? And really, what arethe implications of 900,000 single-family starts or less?Dan FultonThis is Dan. I'll take the first crack at this. We're usingLynn's forecast to judge overall demand and to look at economics across theentire country. But when it comes to our individual markets, we are atdifferent points in the cycle, and so we are making decisions based upon localdynamics.However, that kind of a stark forecast does have an impacton policy in the mortgage markets and I think in providing some guidance in Fedactions. So we are taking that forecast into consideration with otherforecasts. But we are managing defensively because of that, focusing onindividual competitiveness in the markets in which we operate.Rich HansonThis is Rich. Just further comment about that kind of anoutlook. Of course it's only prudent to plan for some of this downside. I thinkthat the best example of that is the action that we took in oriented strandboard and timber strand.As we've explained in earlier calls, these closures inCanadian facilities are very costly with regard to severance. And you have tobelieve that there's not relief in the near term in order to do that. So tosome extent, yes, it is impacting our decisions and we think that's onlyprudent.Mark Wilde - Deutsche BankVery good. Is it possible to get a number for thosetimberland sales in the third quarter?Rich HansonThe difference between second and third quarter was in therange of $40 million increase and around $50 million, but it was a quarterly, alarger number than normal in quarterly results.Steve RogelI think we termed these things as lumpy during the year.Rich HansonBecause we negotiate them and we complete the transactionwhen we can realize the best value. So it's going to tend to be lumpy throughthe year.Mark Wilde - Deutsche BankYes. I understood.Patty BedientYou might remember that on our call for the second quarter,we did talk about the fact that we anticipated we would have a greater thannormal amount in the third quarter, because some of those that were planned inthe second quarter actually moved into the third.Mark Wilde - Deutsche BankOkay.Kathy McAuleyNext question.OperatorOur next question comes from Mark Weintraub with BuckinghamResearch. Please go ahead.Mark Weintraub - Buckingham ResearchGroupThank you. First, Steve, I just wanted a quick clarificationwhen you were answering Pete's question, he had asked whether or not the TreeAct and delays on containerboard had any linkage, and you said no. Can you justremind us if you've laid out any timeframes? I wasn't sure, have there beendelays on containerboard? It wasn't clear to me.Steve RogelAs I indicated, Mark, in my prepared remarks, there's verylittle I can say because of confidentiality requirements about that process. Iwill say that we are looking at a variety of strategic directions for it. Thosebecause of the wide variety take more time. Some of them require a great dealof time because it's a due diligence effort on two different classes or sets ofassets. So the kind of process we're following to achieve the maximumshareholder value just takes time.Patty BedientMark, to your direct question and to Pete'scharacterization, we have not talked about a delay in the containerboardprocess at all.Mark Weintraub - Buckingham ResearchGroupFair enough. And then if you could just also provide alittle bit more color, possibly, on what the timberland sales, I guess about$50 million or $55 million of profits in the quarter. Were those some largertracts or were you again doing smaller tracts here, there, and everywhere?Rich HansonPretty normal. I don't have the list in front of me. Nomajor tracts, no.Mark Weintraub - Buckingham ResearchGroupOkay. Thank you. Kathy McAuleyNext question? OperatorOur next question comes with Chip Dillon with Citi. Pleasego ahead.Chip Dillon - CitigroupYes, good morning. Could you just review for us, clarify onething. You said in the press release it says that land sales in the fourthquarter might offset part of the decline you expect from single-familyclosings? I think, Patty, you said on the call you left open the possibilitythat you could see completely offset or even a higher real estate number.Secondly, could you define your backlog? You used to talkabout it in terms of months. Was that 33-day figure that was mentioned thebacklog or was that the inventory of houses? Could you just tell us what thebacklog is?Dan FultonChip, this is Dan. I'll take both of those. We do have saleson an ongoing basis as you know of what we call non-strategic land. That landcould be commercially zoned, apartment zoned land. We sell it in most of theoperations where we have master planned communities or land that may have thosecharacteristics. And with respect to Q4, we have a number of transactions thatare in process.Our guidance that Patty provided was that we would expectthat that would help to offset the decline that we do anticipate insingle-family that would come from margins and pricing. With respect tobacklog, our backlog's at about four months. It's down slightly from lastquarter. When I referred to the number of days of sales, in my remarks that wasreferring to our standing inventory.Chip Dillon - CitigroupGot you. It sounds like it's not likely. But if a lot ofthese land sales did come together, that would allow you to beat the $83million you had without impairments in the most recent quarter. But if it'ssort of a best guess, maybe it's not quite as high as that.Dan FultonCan't handicap it to date.Chip Dillon - CitigroupThank you.Kathy McAuleyNext question.OperatorOur next question comes from Don Roberts with CIBC WorldMarkets. Please go ahead.Don Roberts - CIBC World MarketsThank you. Steve, two questions. First of all, just gettingback to the Tree Act, you mentioned it's attached to two vehicles that arelikely to pass. Could you just refresh me on when are sort of generally themilestones we should be looking at for those vehicles in terms of timelines?Steve Rogel67 Oh, I can't speculate on when any individual bill might gothrough. Politics is everything. And what I was really referring to is a coupleof bills that appeared dead because of huge differences between the twoparties. Now it seemed to be coming back to life because they are in conferenceand working out differences. But it would be extremely hard for me as anamateur at that sort of stuff to give you a prediction of when those bills willmake it out.Don Roberts - CIBC World MarketsOkay. And an unrelated question, you had mentioned in youropening remarks about the strategic initiative with Chevron on the cellulosicethanol. Any kind of updates or How much sort of credence or emphasis we shouldput on that type of initiative.Steve RogelWell, our work with Chevron has proceeded forward, as weindicated at the outset. That was a letter of intent to be negotiated into ajoint venture and that's proceeded well. So as two companies, we have somesimilar philosophies and we seem to be getting along well in that area. Andwe're moving right forward with the venture.Don Roberts - CIBC World MarketsOkay. And again, any kind of timeline where we might expectan announcement on when that's finalized, the venture?Steve RogelI can't give you a forward time.Don Roberts - CIBC World MarketsThank you.Kathy McAuleyNext question.OperatorOur next question comes from Ross Gilardi with MerrillLynch. Please go ahead.Ross Gilardi - Merrill LynchMorning. Thank you. Just had a couple of questions. On theTree Act. If you do get some form of tax relief legislation, would youpotentially become a more active acquirer of timberland?Steve RogelCertainly we've indicated many times that Timber R Us. If wedo get tax relief, that allows us to be more competitive in the acquisition oftracts. But I couldn't speculate for you which or when. But it does allow us tobe more competitive in the market.Ross Gilardi - Merrill LynchOkay. Thanks. Just in terms of the wood products business,Weyerhaeuser has really taken a lot of aggressive actions to control supply anddemand internally. What do you think it will take to see more a aggressiverationalization by the industry of Canadian lumber capacity and do you foreseethat occurring?Steve RogelI can't talk about the strategies of other companies inNorth America, but certainly I think this industry has become more mature inits management of capacity against demand. The actions we've taken I think demonstratethat.Kathy McAuleyNext question.OperatorOur next question comes from Steve Chercover with D.A.Davidson. Please go ahead.Steve Chercover - D.A. DavidsonQuestion for Dan Fulton. If we would try to handicap therisk in real estate, should we look at the land that real estate processed forsale and is already being transferred in fair market value and therefore notthat risky, but the land that's held for future development is the risky part?Dan FultonNo, I don't view it that way. We have a longer-term landposition than most. It's been part of our value proposition in this businessfor a long time. The length of our land position varies by market and it's afunction of the challenge of gaining entitlements and processing land in moreconstrained markets. What that does for us long-term is it translates intohigher margins.We believe a core competency in processing and managing landdevelopment. So our longer position is generally reflective of the fact we hadit tied up at lower prices for a longer period of time. We're creating valueand in fact think that that's why we have industry leading margins. So I maynot be addressing your specific questions, I'm concerned about that. But wedon't view the longer-term position to be more risky. We, in fact, view it tobe less risky.Steve Chercover - D.A. DavidsonOkay. So I guess just to clarify, it appears that you'redoing this differently than publicly traded competitors. Would you thereforeconclude there's less risk, although certainly you never said there was norisk?Dan FultonThere's always risk. We understand that. Most of ourcompetitors have a shorter position. I would say the one notable exception tothat is Toll Brothers, which like us maintains a longer position, does moreprocessing, and also generates the kinds of margins we do. So it's a differentbusiness model. We like ours.Steve Chercover - D.A. DavidsonThank you.Kathy McAuleyNext question.OperatorOur next question comes from Mark Connelly with CreditSuisse. Please go ahead.Mark Connelly - Credit SuisseThank you. Just a question on the buybacks. I wonder if youcould tell us the average price for the quarter. Is the buyback complete? Doyou have an intention to ask the board for another buyback program?Patty BedientHi, Mark. This is Patty. I'll take that. We'll actually bedetailing all of the detail of the repurchases for the quarter in the Q thatwill be filed next week. We have now completed the buyback. I will tell youthat over the course of time that 18 million share repurchase authorization wasabout a little over -- a little less than $1.2 billion at a price just north of$64. We have completed that now and we also have reduced our shares earlierthis year by over $25 million shares in conjunction with the Domtartransaction.So, I think where we might go from here certainly would beup to the board. I think, as we look at our financial priorities, returningcash to shareholders is an important financial priority for us, both in termsof the stock buyback that we have completed as well as the dividends that wehave increased 50% since 2005.I wouldn't want to speculate what the board might do fromhere. I think our near-term priorities, as I mentioned in my outlook, iscontrolling our working capital and cash management and to bring our debtlevels down over the course of the quarter.Mark Connelly - Credit SuisseVery, helpful. Thanks, Patty.Kathy McAuleyNext question.OperatorOur next question comes from Paul Latta with McAdams WrightRagen. Please go ahead.Paul Latta - McAdams Wright RagenGood morning and thanks for taking my call. Just a questionon the non-strategic timberland sales sounds like fewer non-strategictimberland sales for the fourth quarter. I have two questions. Is thatseasonal? And then also, how does the New Zealand transaction this morning thatwork through that timberlands? Does that go through the timberlands segment orwhere is that accounted for?Rich HansonExcuse me. This is Rich. I'll start with the timberlands.No, they are not necessarily seasonal. And by the way, I looked at the numbersand the increase compared to the second quarter was $34 million. We tend tohave an ongoing program of divesting of non-strategic timberland.It tends to come in lumps. It's not seasonal. It's afunction of the negotiation and getting the best value for completing thetransaction. So, on New Zealand, yes Steve, do you want to comment on NewZealand?Steve RogelYes. We just had an announcement about the sale of ourportion of the New Zealand timberlands this morning. It?s a deal that waspreviously announced and completed today.Paul Latta - McAdams Wright RagenRich, on the $34 million, is that just clarifying, is thatin proceeds or is that in operating profit contribution? What does the $34million mean?Rich HansonThat's an operating profit contribution.Paul Latta - McAdams Wright RagenGreat. Thank you.Steve RogelI think that one of the other things that contributes totiming as we always look for some 1031 exchanges.Rich HansonWell it yes Steve makes it important point that I believewe're in the 90% range on doing a 1031 exchange on those sales. So in otherwords, keeping the transaction tax-free.Paul Latta - McAdams Wright RagenOkay. Great. Thanks for taking my questions.Kathy McAuleyNext question.OperatorOur next question comes from Mark Wilde with Deutsche Bank.Mark Wilde - Deutsche BankThanks. Rich just a follow-up on timberlands. We typicallysee kind of saw log prices lag the wood products market by six to 12 months.You mentioned that log prices came down in the third quarter. Would it be fairto assume that on average your sawtimber prices are likely to be lower for kindof full year '08 versus full year '07?Rich HansonI'd have to look at that. But they really have hung up along time. So, and they tend to also be still not follow directly the productprices down so not necessarily.Mark Wilde - Deutsche BankDo you have any sense, kind of as you do your own planningfor next year, what you're thinking about in terms of kind of performance outof the timberland business both from timber sales as well as some of thesenon-strategic sales?Rich HansonWell, we do, but we're not going to comment on a forwardlook that far out.Mark Wilde - Deutsche BankOkay, very good. Thanks.Kathy McAuleyI think we have time for one more question.OperatorThank you. Our final question comes from George Staphos ofBank of America. Please go ahead.George Staphos - Bank of AmericaSecuritiesThanks everyone, two quick question. You mentioned thatconfidentiality agreements understandably restrict what you could say about thestrategic review in containerboard. Just for the record, last quarter were youunder confidentiality agreements relative to what you could say about thestrategic review? Just checking on that.And then separately, I was just wondering if you could giveyour thoughts on the board and voting term changes that you put into place.What was behind the moves? We view them positively, just was interested in yourthoughts there. Thanks, guys. Good luck on the quarter.Steve RogelAll right thanks. Well, two questions, George. First one isconfidentiality. Since we have entered the process, we have confidentiality inplace. So you can assume that we did in the previous quarter. With regard toour change on majority election of directors.Our board continuously reviews or governance practices andthey were proactive in implementing this amendment because they think it's inthe best interest of the company shareholders. The Washington law was changedrecently that allows for majority voting.In addition, plurality was kept in the law. That freed us upas a Washington chartered company to look at some changes that fit our company.And we think work pretty well for our shareholders.George Staphos - Bank of AmericaSecuritiesThanks for the call, Steve. Again, good luck in the quarter.Steve RogelThanks.Kathy McAuleyThank you very much for joining us this morning. If you haveadditional questions, I'll be back in my office in a short time. The telephonenumber is 253-924-2058. Have a good day.OperatorLadies and gentlemen, that does conclude the Weyerhaeuser2007 third quarter earnings conference call. If you would like to listen to areplay of this call, you may do so by dialing 800-405-2236, or internationallyat 303-590-3000 and entering pass code 11098530.Once again, those numbers are 800-405-2236, internationallyat 303-590-3000 and entering pass code 11098530. This does conclude theconference and you may now disconnect. 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  HealthSpring Incoporated Q3 2007 Earnings Conference CallTranscriptComplete Story »

  Inverness Medical Innovations, Inc. (IMA)Q3 2007 Earnings CallOctober 31, 2007 10:00 am ETExecutivesDoug Guarino - Director of Corporate Relations.Ron Zwanziger - Chairman and Chief Executive OfficerDave Teitel - Chief Financial OfficerAnalystsZarak Khurshid - Caris &CompanyMark Richter - Jefferies &CompanyGregg Simpson - Stifel NicolausSara Michelmore - CowenBruce Cranna - Leerink SwannRobert Gilliam - UBSPresentationOperatorGood morning. My name is Jessica and I will be yourconference operator today. At this time, I would like to welcome everyone tothe Inverness Medical Innovations Third Quarter Earnings Conference Call.All lines have been placed on mute to prevent any backgroundnoise. After the speaker's remarks, there will be a question and answer period(Operator Instructions).It is now my pleasure to turn the floor over to your host,Doug Guarino, Director of Corporate Relations. Sir, you may begin yourconference.Doug GuarinoThank you very much, Jessica and good morning and welcome tothe Inverness Medical Innovations conference call to discuss our results forthe quarter ended September 30, 2007. We are joined today by Ron Zwanziger,Chairman and CEO and Dave Teitel, CFO.Before we get to the discussion, though, I would first liketo draw your attention to the fact that certain matters discussed in thisconference call will constitute forward looking statements within the meaningof the U.S. Securities Laws.These statements reflect our current views with respect tofuture events or financial performance and are based on management's currentassumptions and information currently available.Actual results and the timing of certain events could differmaterially from those projected or contemplated by the forward lookingstatements due to numerous factors, including, without limitation, our abilityto successfully integrate our acquisitions of Biosite, Cholestech and our otheracquisitions.Our ability to consummate our pending acquisitions, ourability to successfully develop and commercialize products, the marketacceptance of our products, the content and timing of decisions by regulatoryauthorities both in the United States and abroad, the effect of pending andfuture legal proceedings on our financial performance and the risks anduncertainties described in our periodic reports filed with the Securities andExchange Commission, including our form 10K for the year ended December 31,2006.Our company undertakes no obligation to updateforward-looking statements. Additionally, please note that during this call wewill discuss non-GAAP financial measures.For each non GAAP financial measure discussed, thepresentation of the most directly comparable GAAP financial measure and a reconciliationof the differences between the non GAAP financial measures discussed and themost directly comparable GAAP financial measure is available on the company'swebsite at Invernessmedical.com either as part of our earnings release for thesecond quarter or separately.In particular, we report earnings on a cash basis, which isa non-GAAP measure. Earnings on a cash basis are adjusted for non-cashamortization, stock-based compensation expense and certain other nonrecurringand other charges and income.During this call amounts referred to as adjusted, unlessotherwise expressly indicated, are adjusted on a cash basis.And with that, let me turn the call over to InvernessMedical Chairman and CEO, Ron Zwanziger. Ron?Ron ZwanzigerThanks, Doug and good morning everyone. Obviously, I'mpleased report another strong financial performance in the quarter. Inaddition, significant progress has been made in the integration programs atBiosite and more recently at Cholestech.Our original expectations have been exceeded both in termsof timing and cost savings, which is attributable to the very high quality ofemployees already in place in at each of the acquired companies.We've identified a large number of individuals within theseorganizations to fit the leadership characteristics important to Inverness suchas being innovating and committed to achieving results, able to managecomplexity, being influential and capable of clear strategic thinking.This core management team has embraced the challenge ofquickly and successfully integrating their organizations with Inverness. As aresult of their contributions and capabilities, Inverness has never been betterpositioned for future growth and profitability.In mid-October, we merged the U.S. position office salesforce at Biosite and Cholestech and Inverness into a single structure. It's nowa number 96 sales and marketing group. This unified group now carries theentire portfolio of Inverness' rapid diagnostic products targeted to thedoctors. Often it is by far the largest such organization of its kind in theU.S.We're currently in the process of cost rating the salesforce and we feel we're off to a very good start. Including the sales forcechange just described and consistent with our previous disclosures, we'veeliminated or are in the process of eliminating approximately 240 positionsfrom our North American work force through a number of separate initiatives inorder to better align the company's internal structure with its long term goals.These reductions have affected Biosite, Cholestech and manyother Inverness locations including Waltham and have included all functionalareas of our business.In addition to the figures just provided, we've eliminatedapproximately 128 contract employee positions from our Biosite San Diegocampus. As a result of these and other actions, to date we've achieved $39million in annual savings from the combination of Biosite, Cholestech andInverness.We remain optimistic that we will achieve our previously communicatedgoal of at least $70 million in total annualized cost savings from theseorganizations within three years.Indeed, following our further post closing evaluations, wethink there is a reasonable possibility of exceeding these targets in 2009 andbeyond. This would be accomplished through additional cost reductionopportunities at the current manufacturing locations as well as through salesand marketing initiatives in Europe and our transition to a shared servicecenter model in North America.In the third quarter, the Biosite International businesscontinued to achieve significant growth rate and a quarterly year over yearincrease of 34% to nearly $14 million. In addition, the physician office salesteam experienced one of its strongest quarters ever for new meter placements.We generally take one or two additional quarters to reachfull utilization. As a result of these and other indicators, we believe thatthere has not only been minimal disruption to Biosite sales efforts during thetransition period, but that we can expect higher rates of growth for the nextseveral years.Clearly, an important factor to our earnings growth has beenand will continue to be the successful integration of current and futureacquisitions. We'll continue to be diligent with any future acquisition inassessing the leadership of the target company's not only to help with theintegration of their business into Inverness, but also to assist in futureacquisitions in their area of expertise.Now, I'd like to turn the call over to our CFO, Dave Teitelto take us through the reported financial results for Q3.Dave TeitelThanks, Ron and good morning everyone. Adjusted net revenuesfor the third quarter of 2007 were $237.6 million, up 64% as compared to $144.9million for the third quarter of 2006. Organic overall growth in our productrevenues adjusted for the impacts of the inception of our consumer diagnosticjoint venture with Procter and Gamble was 8.4% for the quarter.By business segment, product revenues for our professionaldiagnostic segment were $177.5 million in Q3 2007 as compared to $78.5 millionin Q3 2006. Acquisitions accounted for $94.3 million of this increase,including $6.6 million contributed by Cholestech during the period that weowned the business in Q3.The adjusted organic growth in professional infectiousdisease and drugs of abuse revenues, excluding acquisitions, was approximately4.6%. This growth rate was adversely impacted by short-term transition issuesfrom acquisitions, which are in the process of being resolved.Considering the full quarter results for each entity,revenues from Biosite and Cholestech improved by approximately 7% during thethird quarter of 2007 compared to the same quarter a year ago.Product revenues from our consumer diagnostic businesssegment were $30.3 million in Q3 2007 compared to $43.9 million in Q3 2006. Forthe 2007 period, these revenues include $26.8 million of manufacturing andservices revenues for products and services provided to the joint venturecompared to third party revenues of $43.9 million earned on our 2006 pre-jointventure revenues, a decrease of $17.1 million related to the inception of thejoint venture.Revenues from our nutritional business were $20.7 millionfor Q3 2007, up $2.2 million from Q3 2006 or 12.2%. These revenues are upsequentially from our Q2 results of $15.1 million reflecting a recovery fromthe adjustment in customer inventory levels, which adversely impacted Q2results.Our adjusted gross margin percentage was 52.3% for Q3 2007compared to 45.4% for Q3 2006. As previously noted, the quarter reflectsapproximately $27 million of products supplied to our consumer diagnostic jointventure at a 5% margin.Margins from our professional business were 57.7% compared to45.7% in Q3 2006. As compared to last year, the quarter benefited from higherthan average margins earned on revenues from recent acquisitions and from theimpact of Avon, our low cost manufacturing facility in China.Adjusted research and development expense was $19 million orapproximately 8% of sales, up from $9.5 million in the comparable quarter lastyear reflecting our recent acquisition and continuing investment in ourquadrilogy related research.Adjusted sale and general administrative expense for thethird quarter of 2007 was $62.9 million or 26% of revenues compared to $40.7million in the third quarter of 2006 or 28% of revenues.The increase in spending related primarily to acquisitionsoffset by the favorable effects of the formation of the joint venture. Excesscosts related to the transition of our consumer business into the joint venturestructure have reduced the overall favorable impact on SG&A of the transferof the consumer business.Assets impact various cost savings reduction initiativesthat were undertaken during recent, related to recent acquisitions, but didn'thave a full effect in the quarter. We expect the impact of cost reductioninitiatives undertaken in Q3 to be more evident in our Q4 results.At $42.4 million, our adjusted operating income reflects$27.4 million increase over the third quarter of 2006. Overall, we expectimprovements in adjusted operating process comparable prior year quarter tocontinue through 2008.Adjusted interest and other expense, with $25.7 million inQ3 2007 compared to $1.5 million in Q3 2006. Included in this line item isinterest expense, net of interest income of $27.6 million in 2007 compared to$7.8 million in 2006.Other income in Q3 2007 includes $700,000 related to ourshare of earnings from the joint venture. Cash basis earnings per diluted sharefor the third quarter were $0.29 per share compared to $0.15 per share in 2006.Finally, our Q3 GAAP results include $169 million chargerelated to the Biosite acquisition, which was included in our GAAP results, butwhich we have adjusted out as non-cash results that I previously discussed.This charge relates to the write off of in process researchand development projects at Biosite based on appraised values.And now, let me turn the call back over to Ron.Ron ZwanzigerThanks, Dave. I'd like to provide a brief update on ourother activities during the third and fourth quarter. While our recentacquisition of the Biosite health care group significantly increases ourprofessional capability in the U.K.The addition of Panbio, which is subject to the approval ofPanbio shareholders, will increase our sales coverage in Australia and gives usaccess to a rapid diagnostic dengue fever, as well as a test for West NileVirus.Our pending acquisition of Meditech will significantlyaccelerate our entry into the home coagulation testing market and enable us tocontinue that market share expansion in this rapidly growing sector.Additionally, our pending acquisition of Meditech providesus with access to an established market of the detection bladder cancer andrepresents our growing interest in developing effecting cancer diagnosticssupported by excellent discovery capabilities in this area at Biosite.Last week, we announced our agreement to acquire AlereMedical. As pioneers in the health management with a focus on diagnosticdevices in the home, Alere is a near perfect fit with our strategic direction.The health management industry itself is expected to grow atan 18% compounded annual growth rate to nearly $2 billion of revenues in 2008according to recent report by Boston Consulting Group.Inverness and Alere share a common vision of facilitatingtimely data driven interventions at the point of care to improve clinicaloutcomes. The technology and development are Sterling; Biosite and Clondiagfacilities coupled with technology available through Alere have the potentialto rapidly change the way patients are managed.Patients using Inverness technology will be able to takeadverse changes in their clinical situation sooner and with their healthcareprofessionals avoid unnecessary worsening of symptoms.Inverness and the patients will benefit from living longerwith a better quality of life and health care payers will benefit from a lowercost of care achieved through fewer unnecessary hospital admissions.Clearly this acquisition is an important step in ourlong-term health management strategy and we look forward to working inpartnership with Alere's accomplished team to further develop this business.In R&D, we're particularly pleased that the approachwe've adopted at Biosite of working on pure programs in a more concentratedmanner is showing early results. In addition, recently we received clinicaldata on (inaudible), a unique market for kidney damage.But, studies predating our ownership of Biosite that arevery encouraging and we look forward to providing more detail on this andanother promising near term opportunities in 2008.Our Clondiag security remains on track with theirdevelopment efforts toward a new rapid format platform and we expect to launcha product based on this technology possibly next year to help improve thetreatment of HIV.The transfer of manufacturing to China remains a keypriority. To date, approximately 50 million units have been moved from othermanufacturing sites and we are on track to have transferred 100 million unitsfrom other locations into our ABON manufacturing facility in Hangzhou bymid-2008.These transfers are in addition to approximately 110 millionunits already being manufactured at ABON. While we're obviously pleased with Q3results, we feel that it is more important to reflect on the overall progressat Inverness.In great part, as a result of the early integration resultsof Biosite, we remain confident that we're on track to exceed $3 billion inannual revenues by the end of 2012 with continued earnings growth throughoutthis five-year period. We expect to achieve this top line goal approximatelyhalf through acquisitions and half through organic growth.Our brands sales growth will be driven by a number offactors including the movement of the coagulation monitoring from the doctor'soffice into the home; the movement of congestive heart failure monitoring fromthe hospital into the doctor's office and later into the home and a variety ofnew innovative rapid diagnostic products to help change the way medicine ispracticed in the area of interest to us.In the short term, earnings growth will be fuelled by costreduction programs associated with recent acquisitions and reduction in cost ofgoods driven by further transfer of products to be manufactured in China, aswell as cost reduction in other operations primarily in California and, ofcourse, from regular revenue growth.At all times, we'll remain committed to strategicallystrengthening each of our business units as we continue to develop ourselvesinto a focused diagnostic driven health management company. With that, we'llopen up the call to questions. Jessica? Question-and-Answer SessionOperator(Operator Instructions) Your first question comes from ZarakKhurshid of Caris &Company.Zarak Khurshid - Caris &CompanyHi, Zarak from Caris and Company. Thanks for taking thequestions, guys. Looks like a nice quarter. Quickly, just on the tax rate. Itlooks significantly lower than I think people had expected. Could you just giveus some color on what's going on there and if this effective rate issustainable going forward?Dave TeitelSure. We've talked about on a cash basis to expect to be ataround the 30% rate on a going forward basis. We were a little bit late of thatduring the quarter and may again benefit a little bit in the fourth quarter,but should average close to 30% over time.The short term benefit comes from the use of certain NLOsthat goes through the P&L versus create goodwill and that's what you seeshowing up in the quarter.Zarak Khurshid - Caris &CompanyGreat.Dave Teitel(Inaudible)Zarak Khurshid - Caris &CompanyGood. And then I'm not sure if it's broken out in therelease, but royalty revenues in the quarter and how should we think about thatfor the remainder of the year?Dave TeitelWell, royalty revenues were little over $9 million in thequarter, which is a bit higher than we've traditionally been running. We didbenefit, we now have the Biosite royalties rolling into our numbers as well. Sothat's a bit higher than it's been in the past.Fourth quarter is traditionally is a strong royalty quarter,particularly related to the royalties tied to the flu products that tend to goup in the quarter.Zarak Khurshid - Caris &CompanyOkay. And the Biosite royalty is from the relationship withBeck and Coulter?Ron ZwanzigerNo, they have a number of small arrangements.Zarak Khurshid - Caris &CompanyOkay. And then, Ron, going back to the Alere Medical, whatwas the organic growth that you were discussing there?Ron ZwanzigerWell, I didn't mention their organic growth, but it's beenquite significant.Zarak Khurshid - Caris &CompanyOkay. Okay. Great. And then lastly I'll jump back in thequeue, the CLONDIAG progress sounds interesting. Could you give us a littlemore color on that HIV product and is it indeed a molecular test and how, Iguess, would that be positioned in the marketplace?Ron ZwanzigerI don't want to comment any more than we just said. It's ona new platform and we might comment on it relatively soon because we may startshowing it to potential customers and at that point it will become apparentwhat it is.Zarak Khurshid - Caris &CompanyOkay. Thanks a lot.OperatorYour next question comes from Mark Richter of Jefferies andCompany.Mark Richter - Jefferies &CompanyHi, guys. Good morning and great quarter.Ron ZwanzigerThanks.Mark Richter - Jefferies &CompanyCould you guys give us just an update just on the P&Gfront? It sounds like things are going well, but maybe just a little bit morecolor on what percentage of pharmacies are you now in versus what pharmacieswere you in and then progress being made there as compared to plan?Ron ZwanzigerWell, you recall that in the last quarter, we said that thefirst two countries to transfer were Italy and Germany. And we are in factseeing increases in distribution already. I think by maybe six percentagepoints or approximately that in Germany.So really, that's the only ones that have been -- that Iwant to comment on because those are the only ones that have been transferred.And, of course, the process only started in the beginning of July, so it's veryearly days. We can't very well comment on the U.S., which is the nexttransition because that started at the beginning of October.So that is just quite getting under way. And next two othercountries such as the U.K. and France will be next. So, while it's hard tocomment, it certainly seems to have got off to a good start.Mark Richter - Jefferies &CompanyOkay. That's perfect and very helpful. And just in terms ofthe Chinese manufacturing facility, can you give us a sense maybe a quantity oftests or how you see the manufacturing shift progressing on the Biosite front.Maybe how many potential tests moving overseas for Biosite and sort of savingsper test in your eyes?Ron ZwanzigerWell, we haven't actually said that we're literally going tomove products from Biosite to China. If the products that we're in the midst ofmoving to China and are on track to do are from other facilities that producelateral flow of products in the United States and the U.K.The comment, we made about cost reductions on the call isthat we think we can make very significant cost reductions in the cost of goodsline actually in California for both Biosite and Cholestech and clearly itsbecause of their much larger size.At Biosite, we expect to have a much larger savings rate inCalifornia and other issues such as fast thinking about other sites includingChina will come later. We'll consider them to make decisions later.Mark Richter - Jefferies &CompanyAll right. Got you. Okay, that's fair. And then David, Iknow you don't give guidance, but can you help us think maybe beyond '08 justfrom a 30,000-foot level with the integration of Biosite. How we can sort ofthink about the ballpark from maybe a top line sort of bottom line growthprospects? Even, if it's a three to five year outlook.Ron ZwanzigerWell, the point is, we have already done that, Mark, becausewe've essentially said that we expect that we can get to $3 billion inannualized revenues in five years with roughly half of that coming from organicgrowth and half of it roughly coming from acquisitions.So we've effectively already given some idea, albeit veryapproximate, of growth. We do expect organic growth rate to accelerate due tothe factor that we've indicated the particular change in where diagnostic focusheart failure is taking place for the movement from the hospital into thedoctor's office and similarly in coagulation monitoring with far more testing,which will be done at home in addition to the doctor's office as well asothers.So, we think our growth rate will be accelerating throughthis period, both because of the change in testing for the existing products aswell as the impact of new products being launched. So, we expect to seeaccelerating revenue growth through this period.Mark Richter - Jefferies &CompanyOkay. Thank you. And then, the last question is just onAlere. Can you help us get a sense of sort of what the business has kind ofgrown historically and then margins of that business, operating margins?Ron ZwanzigerI don't want to get into specific numbers, but it's a ratherprofitable business that has been growing. We are certainly hoping toaccelerate the growth of that business.Mark Richter - Jefferies &CompanyPerfect. Thanks, and again, great quarter.Ron ZwanzigerThanks.OperatorYour next question comes from Gregg Simpson of StifelNicolaus.Gregg Simpson - Stifel NicolausOkay. Thanks. Good morning, guys.Dave TeitelGood morning.Gregg Simpson - Stifel NicolausDave, you gave us more detail than usual on the breakdowns,which was very helpful. So, let me be a little bit of a pick here and ask formore. On Biosite, you gave a lot of detail, but can you give us the overallrevenue contribution for Biosite in the quarter?Dave TeitelSure. It's just over $80 million.Gregg Simpson - Stifel NicolausOkay. All right. Great. And then, on the gross margin side,same thing. Can you give us -- can you still break it out? Can you give us theBiosite and Cholestech gross margin in the quarter? And specifically what I'mlooking for is kind of the base that we go from a modeling perspective goingforward.Dave TeitelYeah. I don't think, we're going to go through. I know,we're not going to go through gross margin by individual business unit. I don'twant to get into that trend over time.Gregg Simpson - Stifel NicolausOkay. Then let me ask it a different way. Any improvement inBiosite gross margins contributed to the third quarter -- third quarterresults?Dave TeitelThe margins were slightly up from where they've historicallybeen.Ron ZwanzigerBut you notice that Dave made a comment that we would expectto see improvement in the subsequent quarters as a result of actions we'vealready taken. So, I mean, I think we have, are, and will take a lot of stepsin the area of growth, in the area of cost of goods, which will obviouslyimpact and improve the gross margin.Gregg Simpson - Stifel NicolausNo doubt about it. I guess, let me ask you this then, basedon the steps you've taken and the steps you will take without getting intospecific guidance on that gross margin front with respect to Biosite, but howquickly what kind of pace might we see in the margin improvement?Again, I just gave you the opportunity to answer that in avery general way, but I'm just curious how soon that will translate into grossmargin improvement.Ron ZwanzigerWe indicated that we thought that in the various cost savingand general improvement at Biosite that we're optimistic that we might actuallyexceed the three year goal. I would have thought there's a pretty good chancethat we'll see improvement not only in '08, but that it will continue to comein significantly into '09 as well.Gregg Simpson - Stifel NicolausOkay. All right. Great. And then I'll make this a fairlygeneral question, but could you go over the new product timeline both for homeCHS tests and can you comment on the product pipeline for the JV as well tosome extent?And then in a more general sense, can you maybe discuss theroad map now with Alere in mix, kind of the road map to move testing,especially CHS, but testing into the home setting?Ron ZwanzigerWell, we're very excited about being able to have a rapidplatform beyond what our Biosite already has in the doctor's office and thenfiguring how to use that to take it into the home. And obviously, the Sterlingplatform is one avenue where we're extremely encouraged by the progress that'sbeing made. Actually, both at Biosite as well as potentially at Sterling.So, we think there's a possibility that a product can comeout in '09 in a sense that we will be selling it and perhaps getting clearancefor the true home setting, but the same product we anticipate getting earlierapprovals possibly in '08 and are working toward doing it in '08 where the sameproduct which potentially could be used in the home, the identical one, butthat we would get approval initially in the doctor's office to get the messageout to the community about the availability of that product before seekingclearances for the home.Now, as we have those professional products, we will seeabout how we can use the Alere platform to also help in selling these productsand perhaps the professional products as well.Gregg Simpson - Stifel NicolausOkay. And then on the JV, anything new you can -- any newinsight you give us on the new product front?Ron ZwanzigerNo. I mean, things are progressing well. There's a number ofprograms that we are in development when we entered into the JV and they'reprogressing and looking pretty good. They'll become apparent in the not toodistant future.Gregg Simpson - Stifel NicolausIn the first half of '08 will we see something?Ron ZwanzigerYes.Gregg Simpson - Stifel NicolausOkay. Thank you. Okay. That's it. Thank you.Ron ZwanzigerOkay.OperatorYour next question comes from Sara Michelmore of Cowen.Sara Michelmore - CowenGood morning, Ron and Dave. Just a few clarifications. Dave,could you run through what this inventory charge is, the $6.3 million relatedto the write up of fair market value inventory?Dave TeitelSure. That's a GAAP requirement. When you buy a business,you're required to write principally the finished goods up to fair value andfair value is basically defined as selling price less cost of sale and themargin on the cost of sale.So, it's fairly typical in an acquisition that you have thiskind of write up. We've had them traditionally in the past, it's just the sizeof the Biosite and Cholestech acquisitions resulted in larger charges.Sara Michelmore - CowenA larger number. Okay. Are there any cash flow statisticsthat you can share with us in the quarter, either free cash or operating cashflow or even a true EBITDA number?Dave TeitelWe have published the EBITDA number, which is a little over53 for the quarter.Sara Michelmore - CowenOkay. And in terms of CapEx expense, what's the incrementalstep up related to some of these newly acquired companies in terms ofmaintenance CapEx?Dave TeitelThere will be some, but it's not a huge increase. TheBiosite plant in particular was fairly well built out so there aren'tshort-term capital needs that will be significant there.Sara Michelmore - CowenOkay. In terms of the cash on the balance sheet, I think atthe end of this quarter you're down to $156 million. And then I look at theacquisitions that you've announced in October and between Bio-Stat, Panbio andAlere, it looks like you've go kind of cash requirements just under $200million associated with those acquisitions.So, I'm wondering if you can just kind of run through thefinancing or the use of cash associated with those acquisitions and where it'sgoing to come from?Dave TeitelWell, we do have the availability under a line of credit ofabout $110 million.Sara Michelmore - CowenOkay.Dave TeitelSo, between that and the cash on hand, we have sufficientcash to handle those acquisitions.Sara Michelmore - CowenAnd in terms of the cash flow trends, when do you think youguys are you assuming in 2008 that the business is really going to begin togenerate its own returns based on some of these cost savings and the higherrevenue base that you're at now heading into the first part of next year?Dave TeitelCertainly that's our expectation.Sara Michelmore - CowenOkay. I guess, Ron, if you could just talk - it does seemlike the pace of acquisitions here. I know a lot of them have been kind of sub$50 million, but certainly an absolute number. You guys have been pretty busyand it looks like the pace is accelerated there. Based on your comments on your$3 billion target, should we assume that kind of the pace of acquisitions inthe near term remains at a pretty high pace?Ron ZwanzigerYes. I think its a fair assumption that it will stay at thekind of pace we've seen recently. What's interesting about the acquisitions isthat it might be somewhat counter intuitive, but our ability to integrate theacquisitions has improved significantly and the systems we have in place totackle the acquisitions, each one has a plan and has improved because of thefact that we're not only larger, but we've got a wider group of people now andare able to participate including the revised improved management team both atBiosite and Cholestech and elsewhere.So, I think our actual ability to integrate has actuallyimproved significantly.Sara Michelmore - CowenAnd as you go out to these acquisition targets, can you justtalk about, when you think about offering cash versus stock, kind of what athought process is there and what these acquiring targets are interested interms of maybe doing stock transactions? Thanks.Ron ZwanzigerWell, you probably noticed that folks, sellers, with theobvious exception of Biosite, which wasn't the most-friendly transaction, thesellers increasingly want the stock, want our stock. In a way, as you negotiatea transaction and as you try to figure out how to satisfy the needs of thesellers, it is another way for us to look at it.Separately from a financial perspective, as you know,historically we have leveraged up to around six times trailing EBITDA and we'vedeleveraged once we felt our stock has got to a level at which we are preparedto issue stock to deleverage. And what we've been doing since the Biositetransaction is self-evident.We've actually started the process of deleveraging by buyingsome of these companies in stock and therefore naturally deleveraging throughthe acquisition of EBITDA, but also we're naturally deleveraging anyway becauseour earnings are going up.Sara Michelmore - CowenGreat.Ron ZwanzigerSo, we are quite careful about watching these numbers.Sara Michelmore - CowenOkay. Great. Thank you both.OperatorYour next question comes from Bruce Cranna of Leerink Swann.Bruce Cranna - Leerink SwannHi, Good morning.Ron ZwanzigerHi, Bruce.Bruce Cranna - Leerink SwannRon, I wonder if you could just touch on San Diego for asecond; specifically obviously the Biosite facility and I imagine what allfires out there, you guys lost some time. Can you quickly tell us what impact,if any, that disruption may have caused for you and should we look for anyimpact in Q4?Ron ZwanzigerWell, we ran a skeleton staff for two days, not because theplant was in danger in any way, but because obviously employees wanted to be athome with their families and looking after their own properties. So, we randown for two days and I think we're almost caught up. I doubt there'll be anyimpact in the quarter.Bruce Cranna - Leerink SwannSo, just two days of shutdown time?Ron ZwanzigerYes.Bruce Cranna - Leerink SwannOkay. And then Dave, I hate to ask this question, but I haveto because if I take out Cholestech and Biosite, the impact or their additionto the quarter, I'm left with, I don't know, $6 million or something like thatof acquired revenues that weren't in the prior period. So, what else is inthere? Can you just remind me besides those two?Dave TeitelWhat else is in the acquired revenues?Bruce Cranna - Leerink SwannYes, that wasn't in the prior period. I jotted down so much,I can remember.Dave TeitelIt's a long list. It's principally the small distributionbusinesses that we've acquired over the years and I won't go through theindividual ones and their individual contributions, but if you go back throughthe list of all the individual distribution acquisitions, they've allcontributed a bit as has the First Check acquisition we made earlier this year.Bruce Cranna - Leerink SwannOkay.Ron ZwanzigerIt's not really that material, Bruce. If you really want thedetails, we can give you that offline because I don't think those are materialnumbers.Bruce Cranna - Leerink SwannI just wanted to make sure I wasn't missing anything.Something sizable. And then your comment on the back-end business, I think, ormaybe you said both Bioside and Cholestech up 7% or something. It looks to melike if you did north of $80 million at Biosite or with respect to Biosite thaton a year-over-year basis that business was up something like 10% or 11%. Isthat about right?Dave TeitelIt was up 7.2%.Bruce Cranna - Leerink SwannI had them doing $70 million in the prior period. Is thatwhat you had?Dave TeitelThe number I just gave you was combined product and royalty.Bruce Cranna - Leerink SwannOkay, so the contract revenue is in that number?Dave TeitelOkay. So, what's your question, Bruce?Bruce Cranna - Leerink SwannI'm sorry, that was the question. So, the contract revenuein the prior period you've included the contract revenue number?Dave TeitelI did. I included it all.Bruce Cranna - Leerink SwannOkay. I just wanted to iron that out. And then can you giveus a sense within Biosite was there a piece of it that outperformed or was itthe POL? It sounded like that was healthy. I guess what I'm getting at is howdid the Beckman Piece go in the quarter? Have you seen any changes there withrespect to their performance?Ron ZwanzigerNo. It was basically okay. The only thing of note in thequarter related to the fact that as we commented that the outside the U.S.sales are up sharply and the placement of new instruments in the doctor'soffice setting is going really well.Two areas, which are obviously important to us, particularlyas we try and figure out ways of getting the revenue growth to accelerate andthose were two areas that we were looking forward to and they're happening.Bruce Cranna - Leerink SwannWould you ever give us the actual, the doc office number,Ron, because Beckman used to. Is that a number we might be able to pry out ofyou at some point? How many physician office labs you're in with triage?Ron ZwanzigerI suppose we could. I'm not exactly sure why that would benecessary, but we could do, I suppose. We'll think about that for next time.Bruce Cranna - Leerink SwannOkay. And then lastly, Dave, on the Q4 share count, can yougive me a little help maybe assuming Alere doesn't close, but Hemosense does.What sort of share count do you think you're looking at for Q4?Dave TeitelLet me try that a slightly different way. We ended thequarter with about $55.1 million shares outstanding. Hemosense will contributeabout $3.6 million and that should close around November 6th. Meditech willcontribute about $650.Bruce Cranna - Leerink SwannOkay.Dave TeitelAnd Alere will be slightly over $3 million and probably hasabout a month impact in the quarter if it does in fact close.Bruce Cranna - Leerink SwannGreat. Thank you.OperatorThank you. Your next question comes from Robert Gilliam ofUBS.Robert Gilliam - UBSHi, good morning.Dave TeitelGood morning.Robert Gilliam - UBSSo, just want to make sure I have all the synergy numbersdown. I think you disclosed to us it was $39 million in synergies today. Isthat right?Ron ZwanzigerThat's right.Robert Gilliam - UBSOkay. And as far as operationally, what is included in thesynergies run rate right now and what is left? And so I guess the remainingpieces of synergy to catch up to $70 million.Ron ZwanzigerWell, the number that we've quoted is what we've done andwhat's going to show up in our numbers pretty much immediately. The othersavings, which is per share service center and costs are coming over time, wehaven't included in the number and those costs will contribute towards the $70million over time.Robert Gilliam - UBSOkay. I guess did the synergies to date include any benefitsfrom cost of goods sold for Biosite?Ron ZwanzigerWell, I mean, if they did in the quarter it would beminimal, but that was the point that Dave made earlier about some of thechanges in activities that we did in Q3, which will probably show in Q4. That'sone of them that will probably show in Q4.Robert Gilliam - UBSOkay. I guess my question -- in our conference you guys madethe comment that you saw up to a 50% benefit in cost of goods sold at Biosite,so by my math that's about $50 million in cost savings right there withpotential additional upside by moving the Biosite operations -- manufacturingoperations over to China.So, it seems like the $70 million number that you've put outthere, given these other data points is pretty conservative. And just I guessI'm wondering at what point you might revisit the $70 million number.Ron ZwanzigerWell, the number you're quoting we were talking about wastheoretically possible, but these are medical devices and have to be treatedvery carefully as such.Look, we did say that we thought we had a sporting chance atexceeding our number based on what we know today and we're feeling much moreconfidence about the number we gave and we think there is a good chance that wemight well exceed the aggregate numbers of $70 million in '09 and beyond.So, I think we've really already signaled that it's going inthat direction. I think if you watch it for the next quarter or two and let'ssee what happens in Q4 and Q1, I think you'll be able to form where this issetting. We're feeling quite optimistic.Robert Gilliam - UBSOkay, that sounds good. Just wanted to make sure I had allthe data points. And then as far as the manufacturing of units of China, youwent through pretty quickly on the call.I just want to make sure I understand where we stand andwhere we might go. Just hoping you could give the total number that can bemanufactured in China and what already is manufactured there?Ron ZwanzigerWell, we've already switched in the second round of transferof product into the Hangzhou facility ignoring the ones that we previously didfor Shanghai. We have now got approximately $50 million switched over and we'vegot another $50 million to go and we're pretty much on track for doing that bymiddle of '08.And those units are constantly being transferred. They'rebeing transferred all the time, but not uniformly. Some quarters more will betransferred than others depending on what product is in those particularproducts being switched.So, we are quite comfortable actually that the additional 50will go. What we're talking about here is lateral flow products from plants inthe U.S. and the U.K.Robert Gilliam - UBSOkay. So, another $50 million, and then, you might havegiven it, I may have missed it. As far as contributions from the JV, precisefrom the JV that I guess you reported an after tax basis. Just curious whatthat was.Dave TeitelAround $700,000 in the quarter.Robert Gilliam - UBS$700,000? Dave TeitelYes.Robert Gilliam - UBSOkay. Ron ZwanzigerIt's an interesting issue, actually, the transition becauseas we transition the product we've added the overhead in Geneva, which is not acute place to run a business. But many of the businesses are still being runfrom the existing Inverness facilities.So, obviously, this isn't going to continue, but right nowwe're carrying effectively two overhead, two sets of overhead, which isimpacting the business and clearly is impacting the quarter.And that will change as more of the business getstransferred operationally as a practical matter into the JV and then we'll haveto look at further cost savings and what needs to be done with the reducedfacilities from which the activities are being transferred into the JV. We'lllook at those separately probably next year sometime.Robert Gilliam - UBSDo you have any estimate for when that might occur as far asthe removal of redundancies for overheads?Ron ZwanzigerI think it will phase down by the middle of next year andthen we'll have to consider what to do with some of the other operations.Robert Gilliam - UBSOkay. And then I've got a couple questions on Biosite, also.I guess, given the comments, sales are up in Biosite, a little bit of head ofat least what I had and also I guess Dave made the comment that gross marginsare up.One, is it safe to say that pricing pressure in BNP isessentially unchanged or essentially flattening?Ron ZwanzigerYes. There hasn't been that much activity.Robert Gilliam - UBSOkay. I think that does it for me. Thanks a lot.Ron ZwanzigerOkay. Thank you.Operator(Operator Instructions) Your next question is a follow upfrom Zarak Khurshid of Caris &Company.Zarak Khurshid - Caris &CompanyHi, thanks for taking the follow up. I think you gave usenough information to figure it out, but just to be clear. How fast isCholestech growing and have you stripped out all or most of the public companyG&A?Ron ZwanzigerWe haven't owned it for that long and I think we did givethe number, which I think was 7%. And we did say that some activity had alreadytaken place included in the announcement in our recent filing on restructuring.Some of that was in there.Zarak Khurshid - Caris &CompanyOkay. Perfect. And then lastly, did we see any positiveaffect from acquired distribution contracts expiring in the quarter or in theprior quarter? And have the most recent acquired distributors come with thosekinds of contracts? Thanks.Ron ZwanzigerThat's a good question. I actually didn't check before thecall to see if there was anything of particular note.I'm not actually aware of any particular one that came up inthe quarter, but one of the issues around this, of course, is that Biosite andCholestech, which were recently acquired have some sales will be there's notthat much going through some distributors and some direct, but a good chunk ofit through distributors.So, we have to deal with this thing in the next fewquarters.OperatorYour next question comes from Greg Simpson of StifelNicolaus.Gregg Simpson, Stifel NicolausYes, thanks. Ron, a follow up on the acquisition strategy.I've known you long enough, so I won't ask you if you're going to stop doingacquisitions. But now with the Alere acquisition is obviously the key piece ofyour disease management strategy.Other than maybe further distributors and maybe some smallIP related acquisitions, what else is kind of out there - what else do youneed, do you think, going forward in kind of a general sense?Ron ZwanzigerWell, it's not in our style to comment about the directionwe are heading, but we do, I think it's important for us to understand that ineach of our business areas and we run our businesses from each onestrategically individually.So if you look at our cardiology business, obviously that'sthe biggest one, but which actually itself has multiple strategic businessunits within it or if you look at infectious diseases or if you look at bloodborne pathogens or if you look at respiratory drug of use, oncology.We have a plan for each one in terms of what's going tohappen through our product launches that are internally developed. What's goingto happen to increase the business strategically by licensing or gettingdistribution, getting other products in that space under distributionagreements from third party, and what is required to strategically fromacquisitions to improve these businesses. We have a plan for each of thebusiness areas and we're executing.In addition to that, we have an overriding plan to adddistribution, which is applicable to all our units, such as the two we recentlydid in the U.K. and Australia. So we have a framework for growth and target asto how we're going to get to exceed $3 billion in five years based on a planapplicable to each of our business units.Gregg Simpson - Stifel NicolausOkay. All right. Thank you.OperatorYour next question is a follow up from Zarak Khurshid ofCaris &Company.Zarak Khurshid - Caris &CompanyHi, guys. Thanks again. Sorry for the second follow up. Anycolor on your plans to arm distributors or I guess to arm players with lowercost private label flu tests for the upcoming flu and cold season?Ron ZwanzigerDo you mean the flu season that's literally getting underway? Or do you mean next flu season, next year?Zarak Khurshid - Caris &CompanyI guess have you been successful arming folks in front ofthis pending flu season?Ron ZwanzigerWe think we're very well positioned for this flu season. Wehave a whole bunch of plans that we're working with our key distributors. We'vebeen very careful in terms of production and operationally I think were gearedand I think we're ready.I think we're very well positioned for the flu season. Iwould hope that our market share goes up yet again this pending flu season.Zarak Khurshid - Caris &CompanyOkay. Thanks.Operator(Operator Instructions) There appear to be no furtherquestions at this time. I would now like to turn the floor back to Ron Zwanzigerfor any closing remarks.Ron ZwanzigerThanks very much for listening in to the call. I would askthat investors sort of reflect not only on the quarter itself, but also what'shappening in general in the company and how we're positioned for growth inearnings growth, both in the short-term and the medium and long-term.And I would encourage you to think about your investmentfrom that perspective because I think if you do that and you look carefully andanalyze what's going on here, you can see that we've structured the companywith a portfolio where we can get earnings growth in '08 and '09 throughshort-term effects of the integration that's going on, both at the gross marginline and the expense line.We're seeing the beginnings of revenue growth, which willdrive earnings growth toward the end of '09 and '10 in terms of some of thestructural changes within the industry as products are moving more in certaincategories towards rapid testing both in the doctor's office and home and beyondthat with new markets.So, we feel that we structure the company for significantearnings growth for the next five years. Thanks very much.OperatorThank you. This concludes today's Inverness MedicalInnovations conference call. You may now disconnect.Copyright policy:All transcripts on thissite are copyright Seeking Alpha. However, we view them as an importantresource for bloggers and journalists, and are excited to contribute to thedemocratization of financial information on the Internet. (Until now investorshave had to pay thousands of dollars in subscription fees for transcripts.) 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