卡地納健康 (CAH) 2002 Q4 法說會逐字稿

Good morning.

My name is Brian and I will be your conference facilitator today.

At this time I would like to welcome everyone to the Cardinal Health 4th quarter and fiscal year 2002 results conference call.

All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question and answer period.

Instructions will be given later in the conference to instruct you of how to ask a question.

I would now like to turn the call over to Mr. Steve Fischbach, Vice President of Investor Relations.

Mr. Fischbach, you may begin your conference.

Thank you.

Good morning.

Today we'll discuss Cardinal Health's fiscal 2002 4th quarter and full year relates.

A portion of our remarks will be focused on the business segment tact of our earnings release.

If you haven't received a copy of that, you can access it over the Internet at www.Cardinal.com.

Speaking on our call will be Bob Walter, Chairman and Chief Executive Officer and Dick Miller Executive Vice President and Chief Financial Officer.

After their formal remarks, we will open the phone lines for your questions.

We will have available Jim Millar, President and Chief Operating Officer of Pharmaceutical Distribution Medical and Surgical Products segment.

As always, as we get to questions, we ask you limit yourself to one question at a time.

Please remember today's call may include forward-looking statements which are subject to risks and uncertainties which could cause actual results to differ materially from those projected or implied.

The most significant of those uncertainties are described in Cardinal's Form 10-K and Form 10-Q reports and exhibits to those reports.

Cardinal undertakes no obligation to revise any forward-looking statements.

In connection with Cardinal Health's proposed acquisition to Syncor International, information regarding the identity of persons who may be deemed to be participants solicitation of Syncor shareholders is set forth in a schedule 14-A filed with the SEC by Syncor on June 14, 2002.

In connection with me acquisition Syncor has filed a preliminary proxy statement on schedule 14-A and intends to mail a statement prospectus to its share holders and Cardinal Health intends to file a registration statement.

Investors and stockholders of Syncor are urged to read the definitve proxy statement carefully when it becomes available because it will contain important information about Cardinal Health, Syncor and the proposed acquisition.

Free copies of the documents will be available from the SEC.

When it becomes available, a free copy of the definitive proxy statement prospectus may also be obtained from Syncor and Cardinal Health.

I'll turn the call over to Bob Walter to begin today's discussion.

Good morning.

Cardinal Health had a great 4th quarter.

Completed another tremendous year for our company.

The financial results were outstanding.

Matching the forecast we made all year.

No surprises.

And that's how we like it, and I'm sure that's how you like it also.

For the next few minutes I will comment on the 4th quarter and then turn the call over to Dick for more details on the financial results and then give you a brief overview of the future.

This past quarter we had excellent revenue growth and combined strong top line performance with rising returns on sales and capital in every one of our four business segments and consequently for the combined total company.

In short, we executed again by paying attention to details of our business, delivering for our customers and working each and every piece of the income statement and balance sheet.

There were no major surprises in any of our businesses and the revenue growth was favorable across all segments.

Our diversity of earnings power continues to be a real strategic advantage for us.

For the quarter, all of our businesses met or exceeded our expectations.

Standouts were pharmaceutical distribution with a demonstrated strong revenue growth and automation information services continued to show extremely positive momentum building its backlog of committed contracts.

With rising returns on sales and capital in every segment we are not just growing earnings, we are also generating quality earnings results by paying attention to our expenses and the balance sheet.

And we are generating extremely strong cash flow.

Operating cash flow amounted to almost one billion dollars for the year, approximately 87% of reported net earnings.

While our performance remains strong, we continue to make strategic investments and take those investment costs out of our current earnings.

Investment spending was 29 million dollars for the quarter and about $100 million for the year.

These investments were in all four segments and will drive earnings improvements in future years.

This aggressive investment approach is an extremely important element of our business model and one that will continue in the future.

As a result of our high return on capital and strong cash flow, incidentally, 1.4 billion dollars in the fourth quarter, as a result of our high return on capital and strong cash flow, we ended the year with the lowest net debt to capital ratio in our history, 12%.

Our financial flexibility is enviable.

We are always looking for continuous improvement opportunities during the quarter and fiscal year.

We made changes to all of our businesses to increase performance and position ourselves for the future.

Two noteworthy examples were the change in the business model for Pyxis.

At the beginning of the year which resulted in record margin improvements and gave us tremendous visibility into future revenue streams.

The second was a restructuring plan at Med-Surg products and services that will better position management to achieve higher efficiencies and more effectively get our products and services to market.

This quarter was highlighted by the announcement that Cardinal Health would acquire Syncor International.

Not only does Syncor strengthen our position in nuclear pharmacy services, a very fast-growing high-return segment of the market, but also provides a strong base for growing Cardinal's specialty distribution presence in health care providers.

This is a market that will increasingly demand patient-specific products.

I'm very excited about what Syncor will bring to our broad service offerings and distribution network.

It represents an additional service offering to our existing customer base.

We have just recently passed the FTC waiting period under Hart-Scott Roddino and expect the deal to close by the end of calendar 2002 following the completion of other customary regulatory matters.

Regulatory reviews.

The final item I want to address at this point is an issue that is of interest to many and that is the certification of our financial results for the year.

I realize that we are in a unique time in the history of the public markets and I believe it is a good idea for the executives to certify in writing that the company's reported results are accurate and honest.

This is not a big deal for Cardinal, Dick or myself.

Most of you may not be aware of the affect that for a long time Cardinal senior officers have attested to Dick and me in writing as to the accuracy of their financial results and completeness of their disclosure.

The signing of a public document is just an extension of our internal practices that have been in place for a long period of time.

I can personally say I am very close to our numbers and always have been so I don't have any issues whatsoever of attesting the accuracy and completely of the SEC filings.

I built this company from the ground up and with substantial shareholder and care deeply about its fundamental financial soundness and reputation in the investment community.

I am proud to sign Cardinal's financial statements because they reflect the honest performance that our team does every day.

Integrity is an important part of what Cardinal is all about.

We help make health care better and more efficient.

Dick and I will certify in writing Cardinal's results that were reported today.

Since we are a June year-end company our certification will accompany the filing of our 10-K in September.

In addition, Earnst and Young's audit opinion completed and dated today will be filed with our 10-K.

I don't know how long it will take the markets to move out of this period of mistrust, but what I do know is investors need to be able to trust management.

For the 19 years we have been public, we have worked hard to provide the best disclosure possible to allow you to see very clearly what goes on in our company.

It will be important to us that the investors understand our business and make informed decisions about investing in Cardinal Health based upon the strength in the markets in which we compete and our consistent delivery on the promises we make.

At this point let me turn the call over to Dick.

Thank you, Bob.

Cardinal has once again delivered an outstanding record-breaking quarter to top off an excellent year.

A year in which we have delivered on the commitments we made at this time last year.

In my comments today I want to focus on the fact we continue to deliver high quality real revenues and earnings.

I realize this has always been important to our constituents, it has taken on new meaning in today's environment of corporate disappointment and misconduct.

I will frame my comments around the following areas.

I will talk about the status of our year-end audit, the quality of our financial performance, the strength of asset management and cash flow.

A discussion of our special charges and then give you a brief outlook for fiscal 2003.

Before I begin, let me remind you since we adopted FASB 142 at the beginning of this fiscal year we have no good will amortization in our numbers.

This makes our reported growth rates higher than what you get with an apples to apples comparison since our reported numbers for the prior year still contain good will amortization.

In an effort to provide accurate comparability, we have eliminated goodwill amortization from the prior period numbers when providing financial details.

We have been very clear on this point in our press release and all amounts, ratios and growth rates that I will discuss today reflect an accurate apples to apples comparison.

Additionally, all of our remarks exclude the impact of special items which are comprised primarily of merger-related charges in the current period as a result of the prior acquisitions, primarily Bindley.

Let me start with our year-end audit.

Since our board appointed Earnst and Young as our new auditors on May 8th, they have blanketed Cardinal with a vast team of high quality auditors.

I am pleased to report to you today they have performed a very thorough audit of Cardinal and will issue a clean audit opinion on our financial statements dated today.

As you have come to expect from Cardinal, there are no surprises and our accounting is sound.

Let me also address the new SEC certification requirements that Bob mentioned.

There has been a lot of conjecture around the degree of consternation this may cause in the executive suites of corporate America, let me assure you like Bob, I have always felt we were taking a similar level of responsibility for our financial results and I will definitely sign the required certification without reservation.

For years now we have received internal confirmations from each of our business and financial leaders attesting to the accuracy of our financial information.

These assist Bob and me in carrying out our fudiciary duties for transparent, accurate financial reporting.

Just one other note own this topic.

There has been a lot of hype around the August 14 date relative to the certification process.

That is the date the company's filing quarterly reports with the SEC will be required to certify.

However, because Cardinal is a June 30 fiscal year end, our next filing with the SEC will be or annual report on Form 10-K which is due by September 30.

Therefore our certification will be filed with our 10-K in compliance the SEC regulations.

Let me turn to the results for the quarter.

Once again we delivered strong balanced results across each of our segments with exceptional performance from pharmaceutical distribution and provider services and automation and information.

From my perspective, the key indicators of quality and substance in our performance are as follows.

In every segment and on a consolidated basis we delivered rising returns on sales on capital while improving productivity.

Over 96% of our revenues upon delivery of tangible products on the passage of title and ownership risks to our customers.

The rest are recognized on either installation of a product or completion of a contractually agreed upon service.

Over 2/3 of our assets are either cash or fast-turning receivables and inventories.

Our operating cash flow in fiscal 2002 was over 87% of our net earnings.

That means that for every dollar of earnings we reported, we converted 87 cents into cash.

We continued our philosophy of investment spending to drive future growth.

During the 4th quarter we incurred over $29 million of expense for R&D and other start-up projects that we expect to be catalysts to earnings growth in the future.

That brings investment spending for the year up to almost $100 million.

In pharmaceutical distribution and provider services, strong revenue growth, led by 20% growth in our retail chains and alternate site customer classes, nearly 21% earnings growth in a 4th quarter record return on sales.

Disciplined asset management delivered an all-time record return on capital of 34%.

Unique dynamics in the gross margins in his segment requires explanation.

Vendor margins remain very strong both during the quarter and as we head into 2003.

However, in the current quarter we have certain items that cause a dampening of our gross margins.

First and foremost, as we continued to accelerate the Bindley facilities progress.

We identified a number of instances where we were required to take a one-time charge to cost of sales in the fourth quarter to properly Bindley inventories consistent with Cardinal's conservative inventory valuation policies.

We did this despite the fact that it caused the segment to show a decline in gross margin rates and substantially mitigated the benefits from Bindley merger synergy.

Additionally, we recorded a LIFO credit of $2.3 million this year versus a credit of 4 1/2 million last year.

This also had a dampening effect on our gross margins rate.

Absent these items we would have shown an improvement in our gross margins rate versus last year.

Nevertheless, our continued focus on expense leverage and the benefit of synergies from the Bindley merger yielded an all-time low expense ratio of just 1.92%.

Our first time ever below 2% in a key catalyst to the 21% earning growth.

The ability to generate this kind of performance while covering the nonrecurring earnings rate charges is a real testimony to the strength of this segment and speaks to the momentum we take into next year when these one-time adjustments won't be repeated.

In medical-surgical products and services record revenue and an all-time low expense ratio, delivered 12% earnings growth and a 4th quarter record return on sales.

Asset management in this segment was outstanding.

Our focus on streamlining operations and improving productivity resulted in a 5% sequential decline in committed capital driving an all-time record return on capital of over 39%.

As expected, Pharmaceutical Technologies and Services continued to be impacted by delayed product launches.

As we previously communicated, the launch of two key products for this segment, [Isotechnelan] and Clairnex will not occur until fiscal 2003.

Nevertheless, revenue grew 13 % to an all-time record and combined with expense leverage to yield 15% earnings growth in the 4th quarter record return on sales.

The key to this segment is the outlook to the future.

With key product launches imminent in fiscal 2003, the opening of our pharmaceutical technologies services center and the integration of strategic acquisitions completed during the end of 2002.

We expect this segment to be the growth leader next year.

Automation information services had another outstanding quarter that goes beyond reported results.

Recall that this is the last quarter when we will have the mismatch of revenue recognized on an equipment installed basis this year versus revenue recognized on an equipment delivery basis in the prior year.

Our decision to change our revenue recognition method to mirror the operational improvements being made at Pyxis at the beginning of this year was the right thing to do.

This is reflected in the quality financial performance with 13% revenue growth to an all-time record $170 million with revenues to 21% earnings growth and record returns on sales and capital.

Driven by the operational improvements implemented during the year.

While these results are outstanding, representing the best quarter ever for this segment, they would have been dramatically better if we had not changed our revenue recognition method.

During the 4th quarter we continued to experience strong customer demand across all of our product lines.

Causing our backlog of committed contracts to grow by $26 million to end the year at $209 million.

Therefore, if we had not changed revenue recognition methods, through revenue and earnings we have grown in excess of 30% and for the year our growth would have exceeded 25%.

Going forward on an apples to apples basis we expect this segment to grow revenue and earnings above 20%.

Interest and other nonoperating items declined dramatically.

A continuing favorable interest rate environment and our strong cash flow combined to generate a 5% decline in our interest cost.

The remainder of the decline was related to a net one-time nonoperating gain that added an extra penny per share to our results.

We continue to drive tax efficiency with tax planning strategies related to our international and domestic business mix.

In the 4th quarter and for the full year, our tax rate declined by 30 basis points creating additional earnings leverage.

Now let me turn to another bright spot, asset management and cash flow.

A real highlight in this area is receivables management.

We have consistently reduced our receivable days and the 4th quarter was no exception.

We ended the year at the record low 17 days of receivables down from our former record low of 18 days last year end.

Let me just give you additional facts that will emphasize the quality of this performance.

In a year when our revenues grew 15% we actually reduced our receivables, generating positive cash flow of $188 million.

Year-over-year we have reduced the delinquencies that are resident in our portfolio and June 30, 2002, our receivable collectability reserve is conservatively positioned at over 100% of delinquencies in our portfolio.

Our record earnings combined with disciplined working capital management to generate record operating cash flow for the quarter and the year.

As expected due to seasonal patterns for inventory purchasing 4th quarter cash flow was exceptional at $1.4 billion led by over $500 million of inventory liquidation.

We previously committed to generating between $800 and $900 million of operating cash flow for the year.

Our reported cash flow of $984 million exceed this range due to the inclusion of $150 million from the securitization of Pynxis in the first quarter of the year.

After capital expenditures and dividends our free cash flow in the year was $672 million which was invested in making strategic acquisitions and buying back our stock.

As a result of our strong cash flow, we ended the year at an all-time record low 12% net debt to total capital ratio, down from 15% a year ago and 21% at the end of the third quarter.

This provides with us significant capacity and financial flexibility as we head into fiscal 2003.

Despite being at record low debt levels we continue to raise our return on equity, it should be an all-time record 20.5% for the year.

Let me just comment briefly on our special items for the quarter.

While our 10-K will include the detailed breakdown I wanted to highlight a couple of items.

First the majority of the charges for merger related costs incurred during the quarter as a result of the Bindley merger.

In compliance with SEC guidelines we report these charges which are primarily related to the closing and integration of Bindley distribution centers in the period when they are incurred.

As of June 30 we are well ahead of our original timeline for integrating facilities having already consolidated 14 of Bindley's total 16 distribution centers.

As significant progress was made in the 4th quarter, we were required to take more charges for facility exit and severance costs.

This in turn will serve to reduce the future costs to be incurred in 2003 as we complete the integration process ahead of schedule which will accelerate the rate as which we achieve synergies which are on track to deliver over $100 million annually.

Two other items during the quarter are worthy of mention.

First we recorded a $14 million charge for severance and other employee-related costs incurred in connection with an operational restructuring allegiance designed to realign and optimize its domestic distribution operations as well as restructure the custom surgical cutting businesses.

These moves will allow us to be more efficient and leverage its cost structure in the future.

Second, we had a special income item related to the settlement of a portion of all litigation against certain vitamin manufacturers which totalled about $13 million.

Let me finish now with some comments about next year.

In the interest of time I will not get into a lot of details here.

We'll save that for the investor meeting on August 15.

What I will say is that we are entering fiscal 2003 with a lot of momentum.

We have finished our budget and are in a position to reaffirm for fiscal 2003 the earnings model we laid out this past January.

In general, our commitment for next year is to continue to generate 20% EPS growth with rising returns on sales and capital, strong cash flow and a continuation of investment spending as a vehicle to ensure long-term sustained growth.

Thank you for your attention.

I will now turn it back over to Bob for closing comments.

I will now talk about the future of Cardinal Health.

That future is built on a growth model that has worked so well for us in the past.

The model has four key elements that will allow us to continue to grow with consistency and strength.

First we are focused on the health care industry, an industry that is and will continue to be driven by easily identifiable market demand factors and extremely attractive economics.

The world has an aging population that will consume more health care.

Our business deals with products and services that enjoy steady growth, demand that is nonphysical and nonseasonable.

We serve both health care providers and manufacturers of a very broad segment of this market.

The second element of our business model is that we strive for scale in everything we do.

Every major business we operate is either number one or number two in sales volume in its markets.

In terms of profitability in absolute dollars and terms of return on sales and committed capital, we are the clear leader in every one of these businesses where we are not number one in sales volume.

Most importantly we don't have any business today that earns below a 20% return on committed capital.

Therefore we have already achieved scale in all of our current offerings.

Third, our management team firmly believes in building integrated offerings for our health care customers.

The more we have to offer a customer, the more value we can bring by providing unique solutions to a customer's problems.

With broader offerings, we interact with the customer more frequently giving us even greater insights how we can design solutions.

Our broad offering to the customer has a number of benefits to our financial equation also.

Our diversity of product offerings and customer profiles reduce risk, both absolute risk and relative risk.

The fourth element of our business model is to continuously make whatever we do more proprietary and unique, both individually and collectively as a company.

It's a simple fact you make more money if you offer something unique and valuable.

So continuous improvement to our offering is a part of everything we do.

These four elements of our business model are the basis for a financial model that starts with strong revenue growth combined with improving returns on sales on capital and driving excellent cash flow.

This is a model we have been driving since going public over 19 years ago.

Sometimes it's nice to look back.

In the last ten years we have certainly grown in size and diversity of revenue and earnings and balance sheet strength.

We have also stayed focused on health care.

In that ten-year period our return on sales has grown from 2.88% to 4.44%, a 54% improvement in return on sales.

In that same ten-year period our return on committed capital has grown from 15.43% to 32.51%. 110% improvement in return on capital.

This demonstrates continuous improvement in our value equation for customers and for our shareholders.

We are now entering an even more profitable phase in our evolution.

This new phase demonstrates the benefits of driving our financial model and should result in a level of cash flow generation that dramatically exceeds what is required to support our strong internal growth.

Cardinal expects to generate over $3 billion of operating cash flow over the next three years.

That's an exciting prospect and one that will benefit shareholders.

We will use this cash flow to fund internal expansion, pursue complementary acquisition and repurchase shares.

And with the market that exists today our cash is much more valuable than it was just six months ago we end the period with only 12% net debt to total capital, so debt repayment is not an issue for Cardinal.

Obviously, we are excited about the opportunities that lie ahead for us in fiscal 2003 and beyond.

We are going to continue to provide our customers, shareholders and employees with a strong performance with a business run with integrity and an absolute focus on building shareholder value.

Not just in the short term but for the long term.

Let's open up the call now to questions.

At this time I would like to remind everyone in order to ask a question, please press star then the number one on your telephone keypad.

We'll pause for just a moment to compile your Q&A roster.

Your first question comes from David Reisinger of Merrill Lynch.

Congratulation on the phenomenal quarter including the very strong cash flow.

I just wanted to ask about your outlook for the pharmaceutical distribution and provider services segment which obviously had a good quarter.

Looking to fiscal '03 can you talk about your revenue growth and margin trend assumptions particularly both the gross margins and EBIT margin.

Specifically on that subject if we exclude the reduction in the gross margins that occurred in the fourth quarter due to inventory write-down and we look on it on a more normalized basis, what type of gross margins improvement would you expect in fiscal '03, are you looking for single basis point increase in the gross margin or flat gross margin.

Can you help us understand that?

David, we expect -- we expect our pharmaceutical distribution and provider service segment to grow their revenues in the mid to upper -- in the mid to higher teens.

On the revenue side.

Which is slightly faster than the overall market growth which we expect to be somewhere in the 12, 13% rate.

That growth rate, revenue growth rate as we pointed out in the past, is -- we are in a favorable position because we actually have a favorable mix of customers.

In other words we are focused more towards faster growing customers, so that gives us a bit of uplift in growth rate in that segment.

In regard to the overall business model, what we're expecting as we go forward, as you pointed out, we are -- our margins this year would have been basically flat.

Gross margins for the first time in that segment that I can remember in ten years at least.

As we are looking forward, we think there are a couple of things that are positive on the gross margins side.

One is continual strong income on branded vendor margins being strong, we expect the generic margins to be strong and more important part, we will have some degradation of our selling margin as the growth that we are getting from some of our larger customer segments, and so overall our gross margins will probably be flat to slightly down.

We expect to continue to drive our operating expenses down as a percentage as we have done every year.

So so we expect overall return in this segment to be up slightly over return on sales.

I think I might -- that's pretty realistic, I say, I would also say I'm slightly more optimistic that frankly our gross margins might be flat to instead of be down.

If they're down at all, it won't be very significant given some of the upward opportunities we have on the vendor side.

When you add in the year-over-year benefit of not having to write down inventory, that would probably yield them thus up in the low single digits?

That's right.

That gives us upside opportunity.

David, I do point out, we are getting some -- one of the things benefiting our top line is the growth of our larger customers, institutional customers and larger chain customers, and so our growth margin to customers as a percentage is lower, but our net margin is about the same, but -- so that's something that brings down our overall reported margins, but I think it's -- we are cautiously optimistic about our gross margin percentages as we go into next year and don't expect any surprises for that.

We will benefit from more synergies from the rest of the consolidations around Bindley and won't be incurring, as Dick pointed out, anymore inventory -- one-time inventory items which basically consumed the major part of the synergies we got from Bindley.

A lot of positive things going on in that segment.

That's great.

Congratulation on a great year.

Thanks, Dave.

Next question.

Your next question from Robert Willoughby from Credit Suisse First Boston.

Thank you, Bob.

Can you give us an update on the share repurchase activity in the quarter and any changes to the authorization you anticipate going forward?

I'll let Dick give you the statistics on the quarter, but with regard to change, we have authorized, I think, $500 million out.

I have indicated to you that -- I have indicated to you that I expected our cash flow to be strong for the next three years, and our cash flow will exceed what's required to fund internal growth and so you can expect that I personally will be recommending to the board that we expand our share repurchase programs.

And for that item the board will be considering yet this week.

Dick.

Yeah, Bob.

In the quarter we bought back about 193 million, bringing us to year to date about 350 million under the 500 million authorized.

That's great.

Thank you.

Your next question comes from Len Yaffee of Banc of America.

Hi.

Could you give us the breakdown on drug distribution between percent of [INAUDIBLE] independent health systems and other and can you tell us what the charge was in the quarter relating to the write-down of the Bindley inventory.

Len, I had a little trouble hearing your question.

Could you give us the breakdown on Pharma distribution in terms of chains, independents, health system and others and tell us the dollar amount of the one-time charge relating to the Bindley inventory?

On the one-time charge relating to Bindley inventory, I think -- Dick, you want to cover that.

Let me ask Jim to give you a break down of our mix of business.

The special charge, the net impact was $28 million.

That's in the press release.

In terms of the mix of the business in fourth quarter replicated the four years.

Both numbers will apply.

But the independent is about 14% of our business, chain about 47%.

The institutional hospital business, health systems, about a 19 1/2 and then our alternate care mail order and that combination also at about 19 1/2.

Those are consistent for the full year and the quarter.

Thank you.

I think when I answered I said special charge.

That 28 million was in cost of goods.

But it was the special one-time inventory write down.

Next question.

Your next question comes from Glen Santangelo of Solomon Smith Barney.

One quick question, Bob.

I just want to understand the revenue growth estimates of drug distribution a little bit.

Is this coming from greater penetration of existing accounts or coming from new accounts.

Essentially what I'm trying to understand and I'm looking for a little more clarity.

Are the big chain customers doing more manufactured direct or less manufacture direct?

Okay.

Chains are doing less manufacture direct, that's the answer to your question.

In other words, we are doing more business with our chain customers through us rather than them buying directly into their warehouse.

So if that answers your question.

So essentially the above-market growth rates is coming more from further penetration of existing accounts and what's driving the trend, that the margins have come down over the last couple of years or what do you think it is?

We have very effective purchasing programs that help the chains be more profitable, and those programs we have worked on for a long period of time.

We have strong buying power and have expertise that we essentially sell to the chains.

The other thing, you talked about growth, we get other -- talk about growth, we have the chains that we do service themselves have growth in the market faster -- their growth rate is faster than the overall growth, for example, neither CVS or Walgreen's as two examples of chains that are experiencing growth above the overall market growth rates.

So to the extent we are their primary supplier to them, we are going to grow -- they raise our overall growth rates.

So that segment has a positive impact on Cardinal's overall growth rates.

That's the same for the PVMs?

The PVMs?

Is that the same for the PVMs, sort of the same trends?

Yes.

Thanks for the comments.

Appreciate it.

Your next question comes from John Souther of SG Cowan.

You talked about PTS being a growth leader for '03.

Can you give a little bit more detail on the timing of that, sequential acceleration in the revenue or maybe a little bit of detail how we should expect PTS to roll out.

Well, I don't want to get into too much detail by quarter because I don't think we tried to do those projections.

I would say you would see their growth rate accelerate over the first half.

Some of their growth rate, exact timing of it relates to the final product -- the final dates for product launching of products that is imminent and will happen, because we can't exactly call which month that will happen in, it will happen.

That's not all of PTS's growth tied to product launches.

We are growing our analytical services rapidly, growing our market services rapidly and packaging service rapidly already in the market.

Pharmaceutical manufacturers come to us and ask if the product currently in the marketplace and seeking to manufacture capacity and packaging capacity.

The -- there's a lot of dynamics happening here.

Manufacturers are looking to -- are looking at consolidation for many reasons, like the Pfizer and Pharmacia, they're looking for consolidation for many reasons.

One of which is to seek efficiencies.

We are a provider of efficiency -- we are an outsource provider of services to these manufacturers.

There's just more demand for what we do, and demand for our high quality manufacturer reputation.

There's our sterile manufacturing capability is in a rapidly growing area.

There's a lot of factors happening in the PTS area that gives us the confidence to say that this will be a very -- will be our fastest growing area as we move into the next couple of years.

Thanks, Bob.

Some of these questions around drug distribution revenue growth, but what I was trying to answer is that we expect our revenue growth to be in the mid to upper teens.

That doesn't really assume any major market share shifts.

It just reflects mostly a strong market and the fact that we have positioned ourselves in the faster growing portions of that market.

And so that helps clarify our growth expectations.

Other questions?

Your next question from Chris McFadden of Goldman Sachs.

Thank you, good morning and let me add my comments on a nice quarter.

Bob, in the past you have talked about an ongoing sort of analysis of the medical-surgical business to understand the profitability and returns of the distribution and manufacturing operations.

You talked in the release today about some ongoing reorganization efforts there.

Can you give us an expectation or your view on how you expect some of those initiatives to be reflected in the medical-surgical performance as we move through 2003?

Will we see it show up in improving margins, revenue and I guess update us on efforts to expand into the alternate care side of the medical-surgical market?

Thanks.

I'm going to let Jim address some of that.

Before he addresses it.

I want to make sure that we all understand that this is not exactly a slouch operation we have up here in our Med-Surg business.

They have grown their return on capital over five years from the high teens to I think this quarter they hit 39%, which is phenomenal, return on capital.

That doesn't mean there aren't further opportunities.

They have grown their return on sales to either today approaching 9%.

And I think 8.6%, and that's five years ago was in the 5% range.

But they have -- you look at their business and they are self-manufacturer and distributor.

And one of the things that Cardinal is good about is breaking down problems, getting specific -- breaking down problems and opportunities and operations and getting specifically to what are driving costs and margins in each of these particular areas and we have been working hard with Ron Labrum and his group to do that.

As a result of that, they've identified opportunities to improve our cost structure and get to market more efficiently.

Jim, you want to make some comments on what's happening there?

Yeah, Chris, a lot's going on in the notation of a charge, it shouldn't be viewed as something negative.

In fact, we are doing some organizational changes, as Bob alluded to, streamlined the businesses in making them sync into four key areas.

A lot of that structure that had to go was related to existing from one allegiance to a couple of years ago with Cardinal with our cross-selling initiatives, a lot of duplication and overlap that needed to come out.

And so we really are positioning the businesses better on a go-forward basis.

Looking at changes in the alternate care marketplace, we need to make certain different types of investments in the infrastructure to that business.

It is not a business that fits neatly inside of a Med-Surg business.

It needs kind of its own infrastructure and going to market.

We will be making adjustments there so we can capitalize on that market opportunity.

Bob alluded to changes in the business.

We are looking at new sourcing opportunities, new product opportunities as well for new sourcing opportunities for manufacture, we are looking at new product base materials for the manufacturing of existing products.

We have a lot of stuff going on in this business that are -- I'm extremely optimistic and even more so than the competitors have reported in their business performance.

I'm very high on what we're doing with this business.

Jim, if I might ask a quick follow-up.

What's the right chronology to begin to anticipate the impact of some of these improvements into the business as we see the quarterly financial results?

Well, I think the revenue line I think has been -- you got to admit is looking good to everyone.

We are one of the best revenue line growth of our peer group.

Where you're seeing most of this translating in the cost side, you saw an significant improvement in our SG&A in that segment.

You've seen improving return on sales.

So I think you're going to see it throughout the P&L.

You look at the gross margin line and see a little bit of pressure there.

That's the competition.

That's it's a tough market, it's a slow growth market.

We are doing the right things all the way through the income and balance sheet.

I think we can take one more question.

Your final question comes from John Krieger of William Blair.

Thanks.

Can you gives an update on K mart and to what degree that had a negative impact on your growth in the quarter.

Secondly, Jim, as you look out over the next two quarters, do you expect the buying opportunities within Pharma distribution to be hearing or smaller than you had last year?

I will go ahead and grab this one.

Kmart obviously closed about 10% of their stores earlier this year.

The impact was about 1% on our total revenues.

So it's -- it did hurt us.

We would have had a higher number.

As for the buy side of the equation.

We are seeing price increases still running in about the 5%, 5 1/2% range, depending on any given month.

Opportunities are still made the same way they have always been made, we have to work, look at the deal, make sure it makes economic sense for us.

In other words we just don't make blind buys.

It's important to understand anything we do on the buy side of the equation, we recognize the income when we sell the product.

So it's not a cash -- we reserve those price increases and always measure the cost, asset return equation before we take any of those positions.

As Bob alluded to earlier in his comments and Dick, the margins have -- were fairly -- we are cautiously optimistic looking ahead.

Thank you, Jim.

Thanks to everybody for participating in the call.

I'm sorry if we cut anybody off that wanted to ask a question.

I need to run.

We are going to be on CNBC at 12:30.

I need to go to the studio for that.

We obviously feel confident about the future and look forward to our conversations over the next several months.

On August 15 in New York City we will host an analyst meeting where we will talk in detail about our business, financial models and strategy for fiscal 2003 and beyond.

Look forward to seeing you then and looking forward to 2003.

Thank you.

This concludes today's Cardinal Health 4th quarter and fiscal year 2002 conference call.

You may now all disconnect.