卡地納健康 (CAH) 2006 Q3 法說會逐字稿

At this time, I would like to welcome everyone to the Cardinal Health earnings conference call. [OPERATOR INSTRUCTIONS] Thank you.

Mr. Strohm, you may begin your conference.

Good morning.

Welcome to Cardinal Health's Financial 2006 third quarter earnings release conference call.

Our remarks today will be focused on the Company's consolidated and business segment results for the quarter which are included in the press release and the attached financial table.

In any of you have not yet received a copy of our earnings release or the financial attachment, you may access it at our investor page at www.cardinal-health.com.

Additionally, there are a handful of slides that we'll be reviewing which can also be found on the Web site.

Speaking on our call today, Kerry Clark, President and CEO, Jeff Henderson, Executive Vice President and CFO, and Bob Walter, Cardinal's Chairman.

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

In anticipation that our comments will take some time, as we have a lot of things to cover during the call, we'll allow a few additional minutes for questions.

As always, when we get to your questions, we ask that you limit yourselves to one question.

Before we begin, please remember that this call may include forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995.

These forward-looking statements are subject to risks and uncertainties that can cause actual results to differ materially from those projected, anticipated, or implied.

The most significant of these risks and uncertainties are described in Cardinal Health's filing with the Securities and Exchange Commission and includes those listed at the end of today's press release.

In addition, statements in this presentation include adjusted financial measures governed by Regulation G. A reconciliation of these financial measures included at the end of the slide presentation is also posted on the investor relations page at www.cardinal-health.com.

At this time, I would like to turn the call over to Kerry Clark, Cardinal Health's President and CEO.

Kerry?

Good morning everyone and thanks for joining us today.

I've been on the job for little more than a week.

Over this time, Bob, Jeff and I have visited eight facilities across the country, met with key managers, and have addressed almost 3,000 employees in Town Hall meetings.

I've also worked with Jeff on this release and have begun in-depth reviews with my managers.

Next month as month of our normal business process, we'll be digging into our quarterly review of the businesses and our plans for the coming year.

So far I have been impressed with the enthusiasm and capabilities of the Cardinal people I've met.

They are aligned to the Company's mission and have plans to continuously improve their businesses.

There's a lot going on.

There are good financial, strategic, and people planning processes in place.

We are engaged in some very important initiatives including One Cardinal Health, shared services and operational excellence.

Of course there are opportunities to improve, but I see these as evolutionary rather than revolutionary.

We have a committed and optimistic management team.

My sense is that the CDPS business has stabilized with the new business model and should show improvement as it anniversaries the change.

ETS is performing very well.

ETS and MPS are making improvements.

At our next discussion, I'll be able to give you more detailed observations.

But what I've seen so far leads me to believe the business is continuing down a good path to recovery and long-term growth.

Now Jeff will walk us through our third quarter results.

Jeff?

Thanks, Kerry.

Good morning and thanks for joining us today.

As you might imagine, we've had a couple of exciting weeks here at Cardinal.

As Kerry mentioned, we had a great trip, meeting with many of our employees last week.

We're all very excited about having Kerry as part of the team and I look forward to working with him going forward and not just because we're both Canadian.

My comments today will focus on the financial results for the Company and the underlying issues driving them.

After my formal comments and few comments from Bob, both Bob and Kerry will be available with me to answer your questions.

Before getting to numbers, I'd like to start with a few high-level take-aways from the quarter.

A common theme we've been discussing and experienced in the business during the first two quarters of this fiscal year is improving sequential operating performance in our businesses and on a consolidated basis.

I'm happy to say this momentum continued in Q3 and we generated increased operating margins in all but one of our segments and for Cardinal overall.

Certainly seasonality impacted our sequential margin improvement at CDPS where it was clear it was 70% of our branded margin now on deep service agreement.

We've significantly dampened the impact of this quarterly volatility.

We also saw meaningful margin expansion at MPS and CPS.

I would describe the PTS results as slightly down versus Q2 although Q3 margin was above that in the first half.

Later in my comments I'll address each segment in more detail.

Our focus on improvements and performance and good balance sheet management resulted in a very strong sequential increase on return on invested capital, increasing about 80 basis points over the second quarter excluding special items and equity comp.

We more than fulfilled our goal to return up to 50% of our operating cash flow to shareholders as we completed our previously announced $1 billion share repurchase program.

Additionally, we also announced today the approval of an incremental $500 million share repo program that I would expect to be substantially completed prior to the end of the fiscal year subject to market conditions.

We also had some additional activity during the quarter related to divestitures and acquisitions.

I'd like to take just a moment to summarize all these activities.

You've heard me talk about portfolio optimization for quite some time now and I want to provide some clarity on our recent action.

Let me start by saying our number one focus remains on organic growth and the fundamentals required to drive revenue acceleration and margin expansion in our existing businesses.

There are great growth opportunities within all of our business segments.

We believe we are well poised to capitalize on them.

Accordingly, we view our acquisition and divestiture activities as a way to seamlessly complement our organic growth and to ensure management focus on key opportunities that exist internally.

In that vein, we recently acquired, or signed definitive agreements to acquire ,two companies: Per Med and Denver Biomedical.

Per Med, is a Pharma distributor utilizing mostly a telemarketing force which will complement our full-line distribution capabilities.

Denver Biomedical, which will be part of our medical products manufacturing business, develops, manufactures, and markets medical products which complement our existing manufacturing portfolio and also provides additional opportunities internationally.

Both of these acquisitions fit our previously communicated plan to acquire small to medium sized businesses that can be easily integrated into our existing portfolio.

We also took some steps during the quarter to divest of non-strategic assets as well, part of an ongoing plan to evaluate all of our business assets based on strategic fit, return on invested capital and growth potential.

We sold our pharmacy staffing business which was part of our clinical services and consulting business and part of CTS.

This allows this group to more closely focus on the core pharmacy management business.

We also classified both our healthcare marketing services business, which is part of PTS, and our intercare pharmaceutical distribution business which is part of PDPS as held for sale and discontinued operations.

We are currently actively working with potential buyers for both businesses.

With respect to healthcare marketing services, this business simply no longer fits with our strategic direction.

Going forward, our complete attention within PTS will be on oral and sterile manufacturing and packaging services.

Services that provide the greatest value for our customers.

Regarding the intercare distribution business, it does not fit strategically with our current fee for service model as this business is focused on parallel importing and has a relatively short line of products.

You might recall Cardinal obtained this business with the acquisition of Unicare in December of 2003.

Finally, we just recently reached an agreement with OTN in which we will sell the majority of our specialty pharmaceutical distribution business to OTN a wholly=owned subsidiary of an Oncology Holding, Inc.

OTN is a second largest distributor of oncology products do hospitals and doctor's offices in the U.S.

As a result of this transaction, Cardinal will maintain a minority ownership position in Oncology Holding.

This combination allows OTN to substantially increase its scale and compete more effectively in this market segment.

So, while the process of portfolio optimization continues, I am happy with the progress we have made to date.

On today's call, I'll discuss our fiscal 2006 third quarter consolidated results and discuss our segment results in the same period.

Also I'll review our FY 2006 second half focus items.

These are items that we the Company are focused on.

I'll also provide an update to our financial target and goals.

Now let's turn to the third quarter results.

Please note that my comments will reflect the financial results from continuing operations and excludes special items unless I indicate otherwise.

Overall revenues were up 9% to 20.6 billion, reflecting strong demand for our diversified offering of products and services.

This includes bulk revenues for pharmaceutical distribution of 7.6 billion compared to 6.2 billion for the same period last year.

Operating earnings were 582 million, a decrease of 8% over the same period last year.

Net earnings for the quarter were 371 million, an 8% decline over prior year results of 403 million.

Diluted EPS for the quarter was $0.87 compared to $0.92 last year.

Consolidated SG&A expenses for the Company increased approximately 15% over the prior year. 7 percentage points of which related to equity compensation of 49 million for the quarter.

The balance of the increase is largely driven by current investments in One Cardinal Health and a significantly higher management incentive bonus accrual this year compared to last year due to current operating performance.

Combined, these investments in One Cardinal Health and increased bonus accrual impacted the consolidated SG&A expense by little more than 3% over the prior year.

This increase in overall spending, particularly at the corporate level, has resulted in fairly large increases in our corporate allocation amount to the individual business segment which have had a negative impact on segment operating growth rates.

As I discuss the performance of the individual business segments, I'll point out this effect on earnings growth.

I should also note that this ramp up in corporate spending is happening this year as we increase our scale and capability in certain defined shared services.

Over the medium turn, you'll begin to see the impact of this as a reduction of the costs in the segment and overall moderation of SG&A expense.

A specific example here is within our financial shared services as we're currently stocking up our service centers while at the same time continuing to employ individuals doing the same jobs in the field.

The same issue is currently underway in our customer call center.

Operating cash flow for the quarter was 271 million and return on equity, excluding special items and equity comp, was 18.6%, about even with the same period last year.

And that's about 225 basis points sequentially compared to our fiscal 2006 second quarter.

Turning to the next slide, I want to try to simplify our financial presentation by pointing out to you specific items that had an impact on current and prior year operating results and earnings per share, specifically special items, equity compensation, impairment charges and other, and nonrecurring and other items.

First we'll review the special items.

During the quarter, net special items totaled 23 million or 16 million after tax, impacting diluted EPS by $0.04 per share versus $0.06 per share in Q3 of 2005.

Included in this amount were merger integration related costs, restructuring items mostly related to our One Cardinal Health program, and other items including a $11.9 million antitrust litigation settlement gain.

Now let's turn to the nonrecurring and other items.

For clarity, these costs are included in our diluted EPS of $0.87 discussed a few moments ago, in total a gain of $0.01 for the quarter compared to a cost of $0.01 last year in Q3.

During the quarter we took a 2.4 million pre-tax credit within our pharmaceutical distribution and provided services segment which is an adjustment related to the $31.8 million charge taken in our first quarter of this fiscal year.

As I mentioned last quarter, as we continue to work with vendors, minor adjustments to the original reserve are necessary.

Beginning in fiscal 2007, our intent is to no longer call up these minor adjustments as nonrecurring and simply absorb them within the business regardless as to whether the impact is positive or negative.

Asset impairments within continuing operations in the quarter totaled 8.2 million or 5.4 million after tax amount and impacted earnings by $0.01 in the quarter compared with $0.03 last year in Q3.

Regarding equity compensation, the impact in the quarter was 49 million or $0.08 per share compared to less than $0.01 per share last year.

Due to the impact from recent management changes and the impact of the stock price, for the full year we now anticipate the total impact of all equity compensation to be approximately $240 million or $0.35 to $0.37 per share up from our previous expectation of $0.32 to $0.34 per share.

Going forward beyond our current fiscal year, we would expect this cost to substantially decline year-over-year.

We have made significant changes to our equity compensation program, including a reduction in the overall number of options granted in a given year.

I expect the EPS impact to decline by about 20% each year over the next two fiscal years.

When we provide our fiscal 2007 guidance, we'll include equity compensation as part of that guidance.

I also want to point out to you a meaningful loss in discontinued operations that was taken.

During our third quarter, this loss was $209 million net of tax.

Approximately 200 million of this relates to a noncash writedown of goodwill and other assets associated with both the healthcare marketing services and the intercare pharmaceutical distribution businesses which as I stated before are now classified as held for sale and discontinued operations.

Since this raises the issue of impairment, I want to further explain the accounting here for you.

As we have determined to exit these businesses and classified each of these businesses as held for sale and discontinued ops, we have to compare the net book value with the fair market value of each business.

During this process, we determined that the net book value was in excess of fair market value and therefore had a noncash writedown of goodwill and other assets.

While I can't guarantee that additional impairment charges will not occur, particularly as we continue to focus on optimizing our portfolio, I do believe we're making good progress here.

Now I'd like to turn to the performance of the individual business segment.

In PDPS revenue increased 10% to 17.1 billion in line with our expectations.

Strong revenue growth was driven by customer demand and increased direct volume from Walgreen's during the quarter.

We're also seeing incremental demand from United Drug members as we were ahead of our original expectations in signing up new members.

You might remember that we signed an exclusive agreement with a retail independent GPO during our second quarter.

Operating earnings for the segment were $289 million, a decrease of 14% over the prior year.

These results include a 6.5 million LIFO credit primarily as a result of increased generic deflation.

Impact on the operating earnings declined during the quarter is a transition to fee for service compensation for our services.

Remember, now that 70% of our branded margin is now under fee for service agreement, we have significantly dampened the seasonality of our business, resulting in a much more stable earnings stream while at the same time taking substantial capital out of the business.

While saw significant earnings growth year-over-year during our first half of the fiscal year, we anticipated a net earnings decrease during the second half due to last year's greater seasonality.

To give you a better idea of how this business model change has impacted earnings seasonality, I should point out that in FY '05 ' about 65% of this segment's operating earnings were realized in the second half of the year.

In fiscal '06, that second half percentage is expected to be more along the lines of 55%.

I should also point out that, while the industry pricing environment remains competitive, our focus on cost control, stronger than anticipated brand inflation, and generic, helped offset this negative impact on earnings.

We are in the process now are of renegotiating DSA agreements with manufacturers we had one-year agreements with, and we are very satisfied with the results that we're seeing.

We're also very satisfied with the level of compliance around our DSA agreements with manufacturers.

As you might expect we monitor each agreement very closely, and I believe we are being paid fully for all of our service options.

Looking forward, our focus in this segment continues to be driving expense control, a focus on differentiating customer programs, and building unique marketing capabilities.

One such capability, our National Logistics Center, remains ahead of our utilization projection as we added significant customers during the quarter.

Turning to medical products and services, I actually want to discuss this segment in two parts.

Our medical products distribution and manufacturing business and then our specialty pharmaceutical distribution business.

Within our medical products business, revenue grew 6% during the quarter driven by strong demand from new prime vendor contracts.

Revenue from the specialty distribution business declined 17% during the quarter compared to the same quarter of last year driven by the expected loss of a large customer of this business.

Combined, this segment generated revenues of 2.5 billion essentially flat over the prior year.

As I have previously mentioned, we have announced that we will sell a substantial portion of this specialty business to OTN therefore removing revenue and related earnings associated with this business in this segment following the close of the transaction.

For reference for the nine months ending March 31st, 2006, revenue for this impacted business was approximately 1.3 billion.

Operating earnings for the quarter were 173 million, down 5% over the prior year.

Earnings in the quarter were impacted by the allocation of increased corporate spending which negatively impacted the operating earnings growth rate by approximately five percentage points.

In addition, the performance in the specialty distribution business negatively impacted the quarter's operating earnings growth rate by approximately 3 percentage points.

Our medical products distribution business saw good growth during the quarter largely due to our sourcing efforts and expense control.

Medical products manufacturing saw strong growth primarily driven by gloves and respiratory products.

Earnings from our international operations were negatively impacted due to foreign exchange rates as well as lower sales in Europe.

Our Canadian operation, you might recall that we reacquired the remaining interest in Source Medical Operations in 2002, continues to perform well with very good earnings growth.

As I mentioned earlier, we just recently signed an agreement to buy Denver Biomedical which is now part of this segment.

However, the acquisition has not yet closed.

It had no impact on our third quarter earnings.

Pharmaceutical technology and services revenue increased 6% to 715 million while operating earnings declined 2% to 78 million.

The earnings decline was partially due to increased corporate costs which impacted the segment's operating earnings growth rate by approximately 6 percentage points.

Performance in oral technologies, packaging services, and nuclear pharmacy services grew revenue and earnings over the prior year with sequential gains in packaging services driven by increased volumes, and nuclear pharmacy services which have been seeing increased volume growth and stable pricing.

Additionally, our pet business which is part of the nuclear business, continues to be strong with over 20% revenue growth driven by increased education of doctors regarding the positive benefits of such a procedure.

Oral manufacturing was stable during the quarter compared to our fiscal 2006 2Q.

Segment earnings were down 6% sequentially compared to our second quarter this year driven in part by not yet optimal performance within our sterile manufacturing operations in Albuquerque.

Also, you might recall our second quarter result benefited from a one-time $14 million payment related to one specific product.

And again, while these types of payments are normal this was much larger than normal.

While we are clearly not satisfied with our performance in our Albuquerque operation, we believe the appropriate steps are being taken to improve profitability.

Unfortunately the progress we are making is not yet reflected in the operating results.

But we are confident that the performance will improve in the near term as we expect second half margin improvement in this segment compared to the first half of this year and sterile will be an important driver of that.

Demand for these types of services remains high, and we will continue to see a strong pricing environment.

Now moving to clinical technologies and services.

CTS had another very good quarter as segment revenue increased 15% over the prior year to 603 million.

Revenue growth was driven by exceptional performance from both of the manufacturing units within CTS, Pyxis and Alaris, which combined grew revenue over 23%.

The third leg of the CTS segment, clinical services and consulting, grew 8%.

Operating earnings increased 73% over the prior year to 101million.

Strong earnings growth was generated by our overall segment sales mix from the higher margin products of both Pyxis and Alaris and operational quality improvements initiated last year specifically at Pyxis.

I should also point out that earnings were favorably impacted by an $8 million reserve adjustment Pyxis related to bad debt.

Now, while operating performance was strong, we continue to invest in the business as well most notably in areas such as R&D to drive revenue growth in fiscal 2008 and beyond.

Alaris and Pyxis are [indiscernible] and are now working together to create products that can't be replicated by competitors of each business separately.

We anticipate continued investment spending through fiscal 2007 that should begin to yield contribution in late '07 and into fiscal '08.

Pyxis' backlog ended the quarter at 243 million with committed contracts for the quarter coming in ahead of internal expectations a strong indication of continued demand.

Driving the strong demand is our Medstation 3000 product as nearly 75% of new orders were for this product similar with prior period.

Customer service initiatives are paying off as customer satisfaction rates continue to improve.

We are still seeing significant new customer opportunities for Alaris product as it grows its customer pipeline as approximately 40% of Alaris' pump sales in Q3 were from competitive displacement compared to about 25% to 30% historically.

You might recall we saw similar metrics regarding competitive displacements in Q2.

We believe this metric is being driven not only due to our technology and leadership but also as we have seen success in obtaining sales through other Cardinal relationships.

The integration of Alaris and Pyxis also continues to go well and the management team continues to focus on operation excellence initiatives and remains well ahead of our original schedule to realize benefits from the integration.

Okay.

I want to take a few moments now to share with you items that we have been focused on this the second half of this fiscal year that continue to drive value.

There's nothing new here as I had discussed the same list last quarter.

Continued focus on improving business fundamentals would help drive organic revenue and margin enhancement across all business segments as I'll comment upon in more detail in the next slide.

I would expect to see sequential margin expansion in every business segment in the second half of the fiscal year compared to the first half.

This earnings growth combined with a lower capital requirements particularly within our pharmaceutical distribution business will continue to drive our returns on invested capital.

We'll remain focused on good balance sheet management with increased return on equity, strong cash flow, and a focus on portfolio optimization.

We ended the quarter with a net debt to cap ratio of 7% with over $1.7 billion of cash on the balance sheet.

We also continue to be disciplined around capital deployment.

As I previously mentioned, we completed the previously announced $1 billion share buy back during our third quarter and approved an additional $500 million share repurchase.

Over the longer term, we'll maintain our goal to return up to 50% of operating cash flow to shareholders both from increasing dividends and share buybacks.

Our next slide I want to provide to you a little more detail on specifically how we see these initiatives discussed above affecting our financial performance.

The first column represents our actual first half fiscal 2006 results by segment and on a consolidated basis.

The second column provides the same information for our third quarter results.

To the right I wanted to provide to you how we see the second half of fiscal 2006 compared to the first half and the second half of fiscal 2005.

Compared to the first half of this fiscal year, our second half should be higher in all of these metrics.

Compared to the second half of last year with the exception of operating margins in PDPS and the consolidated company operating margins, all metrics should be higher to stable as well.

We continue to be confident in our ability to achieve these results as evidenced by our actual third quarter results which showed improvement as compared to our actual first half results.

As I previously explained, the issue within PDPS is that our transition to our fee for service agreement has taken much of the seasonality out of the business which affects the year on year comparison.

This transition within PDPS also impacts our consolidated operating margins as well.

Now I'd like to discuss our financial targets and goals slide.

You will note on this slide that I've highlighted the left side where there are no changes in our long-term goals.

Now I'll discuss fiscal year 2006.

Similar to our longer term goals, we have no changes in our fiscal 2006 expectations either as we have reaffirmed our fiscal '06 earnings per share of $3.30 to $3.55 excluding special items, the impact of equity compensation expenses and impairment, nonrecurring and other charges.

As was noted in our earnings release, we have increased confidence that we will finish the year in the upper half of this EPS range.

And as I noted earlier, we now anticipate equity compensation of $0.35 to $0.37 per share for the full year as a result of recent management changes and the impact of the stock price.

All other fiscal 2006 targets, including the segment specific items, remain the same.

We continue to expect return equity to be in line with our long-term goal of 15% to 20% and operating cash flow to be greater than 100% of net income.

Before turning the call over to Bob for a few comments, I want to make just a few additional concluding comments to wrap up my thoughts on the quarter.

I am very happy with the progress we've made to date, and I believe we are focused on the right things to drive incremental value in each of our businesses.

We executed on our goal of returning up to 50% of operating cash flow to shareholders as we completed our $ 1 billion share repurchase program well ahead of schedule.

Additionally, I'm pleased that we announced an incremental $500 million share repurchase.

Our strong focus on improving the fundamentals of our business will continue to drive growth and our balance sheet management and focus on portfolio optimization will continue to generate and improve returns on capital, ultimately resulting in increased shareholder value.

We continue to be very focused on capital deployment and building internal capabilities including management count and depth, and implementing operational excellence across all of our businesses.

The addition of Kerry as a leader of the team will only help to accelerate these items.

Thanks everyone.

I'm out of breath now, so I'm going to turn it over to Bob who has a few words to say.

Bob?

I'm not out of breath. [ LAUGHTER ] Thanks, Jeff.

Before we take your questions, I'd like to say just a few words that may preempt some of those questions.

With our earnings release today and the announcement about Kerry last week, we've made two significant announcements in less than two weeks.

Both are very positive in my mind, and I'd like to discuss three areas related to these announcements.

I suppose it's just natural that questions arise when Cardinal only changes CEOs once every 35 years.

The first area to address is Kerry's impact on Cardinal's future.

As Kerry mentioned, last week we went on a whirlwind tour of our U.S. operations.

I was glad Kerry had this experience during his first week on the job, because it really set a great tone for the people in the Company but also for him about where we are as a company.

He saw firsthand the commitment, enthusiasm, and optimism of our associates in our business segments.

He had a chance to ask a lot of questions as we visited distribution centers, manufacturing sites, our solutions center, and our segment headquarters.

And we had ample time to talk about our plans for the future with associates in all parts of the Company.

After one week, we certainly wouldn't put him in a position to have him opine on Cardinal's short-term or long-term business plans.

Jeff and I will enthusiastically do that.

But the trip demonstrates to all of us the value he will bring in helping us achieve our full potential as a healthcare company.

He's already deep into understanding our operations and strategies and is assessing how to best accelerate achievement of our goals.

A couple of observations struck me as we traveled together last week.

Kerry connects easily with people.

He is a natural leader for our management team and associates.

He's already demonstrating a strong cultural fit with Cardinal Health.

Second, his methods of discovery are awesome.

He's very inquisitive.

This will be a fun ride for me as a founder transitioning to a new role, for our employees as they gain even greater confidence in our future opportunities, and for all of us as shareholders with a strong interest in the Company's direction.

The second area to address is questions raised about Kerry's appointment as CEO, and I want to be very direct here.

The general questions I've heard over the past week are, well, who's Kerry Clark?

Why was he brought in, and why at this particular time?

Like most of the questions on our earnings calls, this is really a multipart question, but frankly all these questions really are begging the question about what's going on inside of Cardinal Health.

Well, first of all, I think you already know who Kerry is.

He's a senior operational manager from one of the most respected companies in the world who has experience running broadbased and complex businesses in a global environment.

Most of you have already checked him out by calling your P&G contacts and know he's a great hire for Cardinal Health.

So why was he brought in?

He was brought in to lead us to our future from a current position of strength and momentum.

He's an excellent strategist and understands our market leading positions and where we aspire to take the Company.

So why now?

That's frankly the biggest question.

The answers are the best time to bring in a new leader is during positive times.

As Jeff just told you, we have good momentum, strong initiatives in place, and management confidence in our short-term and long-term outlook.

So some of you have wondered, though, could the Company have lost some momentum and that is why we brought him in now?

Well, the answer is quite simply no.

Our momentum is intact, and we're executing our plans that will take the Company to the next level.

And the final concern about the exact timing of this move is whether Kerry was brought in to satisfy any regulatory concerns.

Another simple direct answer is no, he was not.

The Board succession planning process and Kerry's appointment were completely independent of and in no way related to any regulatory concerns.

The Board's succession planning process has been a long one and frankly well orchestrated.

Now, I've also heard concern about a new CEO may abandon our FY06 guidance or long-term outlook.

As you saw in our news release this morning, we are comfortable to indicate our expectations for this year's results to be in the upper half of our FY06 guidance range of $3.30 to $3.55 earnings per share.

We're giving you further guidance about our performance this year because we thought it was appropriate to let you know about our short-term confidence at this unusual time of a change in Cardinal's CEO.

And for the long-term, certainly Kerry has been brought in to help us achieve our full potential, so I will not in any way tie his hands before he's had a chance to fully review all of our business plans in detail, but Jeff and I can say with great confidence that we believe all of the elements are present to achieve the three-year financial plan that is in place right now.

My expectation is that Kerry will develop strategies and deploy resources to enhance our performance in market leadership so that we can be just as confident about our performance beyond the three-year plan expectations.

Now, I want to address quickly one other item, and that is CalPERS' focus on Cardinal's governance processes.

We have been in dialogue with CalPERS for the last six months or so regarding their suggestions for improved governing and we will continue to have constructive dialogue going forward.

We have a strong track record of good performance and high corporate governing standards.

We have a commitment to uphold the highest standards of corporate governance and look for continuous improvement.

So, now, I doubt that I've preempted all of your questions.

I'll act as a moderator here.

As we said earlier on, we know the comments have gone longer, so we're going to make sure we give you a little extra time for questions.

Operator, would you open up the call to questions?

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Andy Speller with A.G. Edwards.

Good morning.

Hope to get some more color around PTS, and I was really disappointed in the revenue number this quarter.

I was glad to see the margin go up, but with the revenue down sequentially I want to get a better sense of where the recovery is there, especially at Sterile, and how we look at that moving into the fourth quarter and FY '07.

Hi, Andy.

It's Jeff.

Let me address your question.

I'm getting a little bit of feedback on the line.

Let me see if we can get that fixed.

Back to your question about PTS.

First of all, keep in mind that HMS has been classified as a discontinued operation, so its revenue and earnings are no longer appear in the segment of continuing operations.

But beyond that, let me comment on a few other things within the segment.

Year-over-year, [audio difficulties] packaging and nuclear were up which we think are great signs.

Sterile was down year on year due to some of the difficulties that we noted.

And I'll come back to that in a moment.

But our focus quite frankly has been on sequential improvement within PTS and we're seeing progress on the key initiatives and some of the financial results as well.

On a sequential basis, packaging and pharmacy was up and I would characterize them as up in a very big way, which was particularly positive for nuclear given some of the competitive issues we had been facing early in the year.

I'll describe oral as fairly flattish in Q2 to Q3 and sterile was down sequentially, but largely it was down because, as you may recall, we had a one-time 14 million payment in Q2 from a particular customer, and obviously that wasn't replicated in Q3.

That all said, we still have some work to do in sterile.

I had also point out that really we're in a significant transition phase within our sterile operations.

So in terms of getting Albuquerque running at optimal performance and also striving to bring our new sterile facilities in North Raleigh and Brussels up to speed.

So I would describe the curve point as a bit of a growth platform for the future where we see nothing but potential upside going forward as we bring North Raleigh online.

And finally a comment on Albuquerque.

Clearly we were a little disappointed with the performance in Q3.

The significant refurbishments that have been underway are complete, so it's not a matter of not having the capacity available to us, but we have faced some unique operational challenges over the course of Q3 that prevented us from being able to release as many lots as we would have expected.

The good news is demand remains strong in this segment.

It's forecast remains strong into the foreseeable future, and pricing has been attractive for us as we've taken some opportunities to realize some pricing gains in the sterile unit.

So we continue to look for sequential improvements, and we are very much expecting that heading into Q4.

Next question.

Your next question comes from the line of John Ransom with Raymond James.

Good morning.

A couple of interrelated questions.

It looks like the growth in your pharmaceutical distribution segment is all coming from bulk.

I mean, that's just stating a fact.

And also your margins are significantly higher than some of your peers who actually have on paper a higher mix of customers.

As you look at this business longer term, how do you get comfort in a more competitive pricing environment that your margin is going to ultimately prove to be sustainable above your peers?

Let me comment on your question about the revenue growth, and maybe I'll let Bob address the second part of your question.

Yeah.

As you correctly pointed out, a significant amount of the revenue growth in PDPS came from bulk business.

I will point out ,as I have in the past, that that is incremental business.

It's not a transfer of DSD business over to bulk.

So we are taking on additional bulk business largely from Walgreen's which is incremental to what we had previously, and I should also point out it's a profitable business for us albeit at lower margins.

On the DSD side of the business, growth was about 3%.

If you actually adjust that for the year0on-year impact of the loss of the public's business, it's more like 6% growth in that part of the business, which we view as largely in line with overall pharma growth.

Bob, did you want to address --

I think, John, your question was really about the fact that our margins, even accounting for that we have a high mix of bulk business, which incidentally is profitable -- it's been very profitable to us in terms of return on capital has a low return on sales, but your question is, since we have a lot higher return on sales than our competition, is that sustainable?

My answer is that that is sustainable.

We will, as we said at the last call, be rolling out to you in '07 what our objectives are for raising -- what our guidance will be for raising return on sales in PD in the future.

Why it's sustainable is really the following things.

First of all, on a historic basis, we have also had substantially higher return on sales than the competition has and I'd say that is because of three things.

First of all, we have unique offerings.

Secondly, we believe that we acquire product continuously at more favorable ways, and we have expertise in that area and in our sourcing.

That continues.

That's a distinct advantage that we have.

Third, we have a cost structure that is a result of a long-term modernization, auto automation and installation of a distribution network throughout the country and centralization structures that gives us an advantage.

We've also priced for value.

And so those elements are sustainable, and we expect to be able to maintain our return on sales and hopefully give you guidance about how we intend to raise it in the future.

Thank you.

Your next question comes from the line of Christopher McFadden with Goldman Sachs.

Thank you.

Good morning.

And, Bob, thanks for your comment as part of this call.

Very helpful.

I have two questions.

One, Jeff, could you just maybe go into a bit more detail concerning I think what you described as some of the operational issues at the sterile facility in Albuquerque?

I don't want to beat this issue too badly, but it's certainly a little bit of a disappointment having spent time on this call a quarter ago talking about some of the improvements that had begun on there and to still hear we got a little bit of some execution still to be accomplished and maybe reflect on how you envision those performance metrics to play out in the fourth quarter.

And then, Kerry, we've talked here about international as an opportunity.

Now that you've had the chance to get to know more of the Cardinal organization and more of the lines of business, could you just reflect maybe at a high level on what types of opportunities you've identified to really help to grow Cardinal's non-U.S. presence as that's obviously a significant long-term area of opportunity?

Thank you.

Hi, Chris.

How are you doing?

Chris, I heard your first question, and I heard your third question.

I didn't quite catch your middle piece.

So if I don't answer it all, please come back.

I believe your first question was can you give us a little more detail about the operational issues at Albuquerque.

Let me start by saying that our sterile business is obviously a lot more than Albuquerque, and we've been focused on that largely because that's been the part of the PDS business that's in transition.

I do want to point out there are other parts of the sterile business that are coming along quite well.

For example, Woodstock.

And I know many of you on the phone had the visit with Woodstock a few months back to see just how impressive that operation is.

That operation I would characterize as being very profitable on an ongoing basis and provides a great platform for growth in the future.

And I could echo that comment for other parts of our sterile operation which have been relatively stable and doing well.

That all said, I do recognize the focus has been on Albuquerque.

We did refurbish that facility beginning a few quarters back.

We got that fully back online in Q2 and as you know, we were expecting slightly better performance in Q3 than ultimately materialized.

But I would use the word slightly because, again, as the building comes up on-screen there are always some operational difficulties.

I describe those difficulties as relatively one-time event,, certain things that just happened during the startup that we had to deal with, no ongoing issues in terms of permanent operational difficulties there.

I should also point out that we have made a recent management change moving one of our best general managers over to that facility.

So without going into more detail or dwelling on Albuquerque, let me characterize sterile again as really two pieces.

We've got the Woodstock and a few other facilities that are historically and expected to be very profitable going forward, and then we've got the Albuquerque, North Raleigh, and Brussels facilities that are all in various stages of transition and provide a great platform for growth in the future.

Do you feel like you exited the fiscal third quarter at sort of a target rate of productivity across that portfolio of facilities?

Not necessarily.

I think we still have some room for improvement there.

Let me me on to the other question you had about international.

First of all, Chris -- I'll answer that -- obviously it's pretty early in the process, and we're still trying to go through all our reviews and understand all the parts of it.

But just as at 100,000-foot flyby, I think the key thing is going to be getting the right portfolio of products that can allow us to do more international expansion in away that's not dilutive.

We're going to be looking at what's the right portfolio products, what's the right country, what's the right management structure to make sure this is accretive to the business.

Thank you.

Your next question comes from the line of Bob Willoughby with Banc of America.

Good morning.

Bob or Kerry, 50% of operating cash flow returned to shareholders still seems like a drop in the bucket relative to the cash reserves you do have and what you will build over the next three years.

It really -- doesn't an unwillingness to return more cash to shareholders near term possibly send a negative signal about your confidence in the rebound?

I had a little bit of trouble hearing.

I think there's a question and there's a statement.

I think the question really is, Bob, related to our commitment to return cash flow to shareholders.

And then the statement is is our reluctance to return more cash flow to shareholders a reflection of lack of confidence in the turnaround.

Let me just deal with the last one first, because it's pretty easy.

No it's not a reflection of confidence in the turnaround or plans in place or a growing cash flow.

I think both Jeff and I have tried to give you an indication -- not try -- we have given you and indication of our confidence level in that.

The issue of returning cash flow to shareholders, I think Jeff said our objective is to return at least 50% of cash flow to shareholders, also to deploy some cash flow to investing in our business as being beyond normal internal investments, meaning acquisitions and things like that.

We want to make sure we have funds available to to do that.

Now, if we were to look back in the last three years, I can't do the numbers right now, but I would guess we've returned more than 50% of our cash flow to our shareholders.

Jeff indicated we intend to adhere to what you said earlier to move our dividend rate up towards the 20%.

I think we intend to do that as the Board will be addressing that over the next several meetings.

But to me that's an indication of a further commitment of routine returning of cash flow to shareholders.

But we have opportunities to make investments that will strengthen our business long-term strategically, that will give us an outstanding return on invested capital, and I think you'd want us to do that.

This is a blend of returning a certain amount to shareholders and investing further in our businesses and making sure that we're comfortable in the way we do it.

So I'm quite confident we can live up to the outline that Jeff has laid out to you.

I guess when we first did it about nine months ago.

But obviously we have a very strong capital position right now in terms of a very low debt ratio, and it is certainly encouraging that our cash flow is as large as it is, and we feel very confident about our future cash flow.

One final comment to build on that, Bob.

With this announcement of the additional $500 million repurchase, that will put us well above our 50% goal for the year.

As a matter of fact, probably much closer to 75%.

And that's also consistent with the comments that I've made previously to all of you that our goal is to not sit on a huge pile of excess cash.

Just to the extent we don't have great investment alternatives and/or cash comes in from divestitures, we will also look to return that cash to the shareholders, and I believe we very much have lived up to that commitment.

Next question.

Your next question comes from the line of Glen Santangelo with Credit Suisse.

Just two quick questions.

First on the medical products and services division, clearly the revenue was down, and you obviously cited specialty, and I think you mentioned, if my notes are correct, you expect a loss of a large customer.

Could you maybe give us some information about that?

And it seems like the margins might have been a little bit lower.

Any commentary along those lines would be helpful.

And then secondarily, Jeff, you took a $6.5 million LIFO credit in the quarter.

As more generics roll on in the second quarter, do you expect to see more LIFO credits as the calendar year progresses?

Thanks.

Thanks, Glen.

Let me address both of those.

Just for clarity, that loss of a customer related to specialty product distribution, and it was the announced loss of U.S.

Oncology that we've been talking about for the better part of a year that actually started to take effect in Q2 and Q3 of this year.

That was not new news.

That was simply consistent with that.

As I said, that was from our specialty pharmaceutical distribution business most of which we just announced we're going to be selling to OTN.

Second question actually I can't recall what it was.

The return of LIFO credits.

You took a LIFO credit this quarter.

Yeah.

We expect to actually use up the remaining LIFO reserve that we have over the course of this year, which means that the expectation is that we'll have an additional credit of $6.5 million in Q4 assuming the current factors that are in our forecast remain intact, including high generic deflation.

Thank you.

Your next question comes from the line of Larry Marsh with Lehman Brothers.

Thanks.

And good morning.

Thanks for all the details.

I guess my question is really around divestitures.

Can you talk a little more about the decision to sell the majority stake in your oncology distribution business, kind of what drove that, and are you disclosing the size of your minority interest still?

And I guess also I wanted to confirm is the reorganization into supply chain services in medical products manufacturing still set to be rolled out in the first quarter of '07 or is that yet to be determined?

Thanks.

Let me just address them quickly.

One is that we've not disclosed the size of our minority interest.

The question is why did we do it?

And I think it's pretty -- I can be pretty straightforward.

We assessed our position around that phase, certainly it's not the only phase of specialty pharmaceuticals, but that phase of specialty pharmaceuticals which is focused around oncology, that we didn't have the kind of scales that we'd like to see.

On the other hand, you had OTN that had certainly more scale but didn't have some of the capabilities we had around distribution.

In conversations with them, we said we put these two things together and combined resources -- you know -- physical resources and customer bases and systems and things like that that we will combine at significant better scale to compete in the future, and we thought that was a really good move for us and made lots of sense, so that's why we did that.

The issue about reorganization around our supply chain area, the organization under Ron Labrum is certainly moving forward.

I'd say that that's certainly part of the whole review of the planning process that Kerry's involved in, but we would expect it to move forward on the same structure was what we've outlined before.

Ron Labrum is leading it.

We expect to leverage the unique capability with supply chain.

We are the largest healthcare provider with that kind of capability worldwide, and we're going to leverage that internally and externally.

And so Ron is well on his way in terms of how you organize it and bring in additional resources and people.

That's well underway.

With regard to reporting on it, Jeff might make a couple comments on that his expectations are.

As we've been saying for some time now, our intent starting with fiscal year '07 is to report on the new segment being medical products manufacturing or MPM, clinical technology and services, which really remains unchanged, pharmaceuticals, technologies and services which will have nuclear and a few other minor pieces stripped out of it going forward and then supply chain services which is a combination of pharmaceutical distribution, med/surg distribution, and nuclear pharmacy services for the most part.

Our goal is to record SPS as a segment but what we also said previously our intention is still very much to provide visibility into the pharmaceutical distribution part of that business to ensure that all of you still have good visibility into what's going on in that important part of our business.

Thank you.

Next question?

Your next question comes from the line of Steven Halper with Thomas Weisel.

On your process of renegotiating some of the short-term fee for service agreements that you've had in place, I know it's early, but can you say if you're better or worse off, all else being equal?

And then can you comment on where you feel sell margins are heading these days?

On the fee-for-service agreements, I think what we've said is we felt that the manufacturers will realize realize the value of what we deliver and we'll get paid for it.

We have a certain number of agreements that were only one year in term.

That was our choice.

We expect to continue to get paid for the value we deliver, which means equal to what we've been -- equal to or greater than what we've been paid in the past, and we've continued to demonstrate that value to manufacturers and frankly to offer them additional values around information and more efficiency in the supply chain management.

So I'm quite optimistic about that, and I think that's really going quite well.

With regard to the sell side, it remains competitive out there.

Sell side margin remains competitive out there.

Our sell side margins are down some.

One of the most important aspects of that is we have a shift in mix of business towards larger customers.

But I guess, as we look at the overall business model, we think there will be good growth in pharmaceutical distribution top line.

We think that our margins on the branded side from fee-for-service are solid, intact, and rising.

We have a shift towards generic which gives us the enhanced margin opportunity.

There's some pressure on the sell side.

We're getting more efficient on the cost side.

And so we're optimistic that we will maintain and rise our bottom line return on sales as we move forward.

Great.

Thanks.

Your next question comes from the line of John Kreger with William Blair.

Question for Kerry.

Given your extensive history at P&G and your experience with distribution as a supplier, as you get more up to speed with the pharmaceutical distribution business, do you have any early impressions?

Do you think the way that's been structured in terms of suppliers paying for logistic service has been optimized or is there more improvement that you could perhaps bring to the table?

I have to honestly say I don't have a firm opinion on that, so I'm not going to try to answer that question.

Ok.

Great.

Thanks.

I'd only ask, give him a quarter at least. [ LAUGHTER ] Thank you, John.

Next question?

Your next question comes from the line of Lisa Gill with J.P. Morgan.

I just really had a couple of follow-on questions.

Lisa, we can't hear you here.

We're trying to turn it up, but maybe you could speak a little closer into the phone.

Can you hear me now, Bob?

Not great but just barely.

I'll try to talk really loud.

On the PTS side of the business, you talked about signing five new clients.

I'm wondering if this means that you've received FDA approval for your Ovations relationship and therefore will be able to move forward on producing product in North Raleigh?

I can address that.

No it does not indicate that.

We are still going through that process with Ovation.

Based on what we've heard, it remains on track.

The new pilot agreement shows that people are getting increasingly confident with the timing of opening of that facility and the quality of the products that we're going to be manufacturing there.

So, again, I think it shows we're building some good momentum, but no we do not have the final FDA approval yet.

Any thoughts on the timeline of that?

We expect it to be at the beginning of if is FY '07.

We have no reason to believe we're not on track to do that.

One other follow-up on PTS.

You said nuclear pharmacy contributed this quarter.

Last quarter it seemed it was actually taking away from some of the opportunity.

I was wondering what the difference was between the two quarters, [indiscernible[ what was the driver.

Actually, we were pleasantly surprised by the progress of nuclear pharmacy this quarter.

Nuclear pharmacy has always been a very good business for us and will continue to be so in the future, but clearly I indicated last quarter that we are seeing some sales pressure and pricing pressure and we also had some supplier issue related to generic as well.

I'm pleased to report that in Q3 unit volume was up and pricing had stabilized, so we saw some good sales results, and that's closer to the bottom line.

Clearly some of the trends we're seeing in Q2 seem to have resolved themselves or reversed trends.

And so we would expect that things should be on course going into the fourth quarter as well?

Yeah.

We would expect continued good performance in nuclear going forward.

Great, and just one last follow-on.

On CTS I want to make sure I heard correctly that 40% of Alaris' sales came from displacement of competitor or was that 40% of the growth?

40% of the sales.

What that means, Lisa, just 40% of -- as you know, we sell pumps and we sell disposables.

So 40% of the new contracts for pumps -- you know -- which is certainly the razor blade.

It's the razor part of the equation. 40% of those were from displacement of competitors.

That means we're taking market share based upon our technology, our superior technology.

And so that is a good indicator of future earnings for that business, for that Alaris business.

Next question?

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

I just wanted to clarify what part of SPD Cardinal is actually keeping.

It sounds like there's a small piece that's going to be in-house after the OTN deal, what are the plans for the specialty distribution centers?

And then finally just clarification on the discontinued operations.

It looks like most of the charge is noncash in nature.

Can we a tribute the cash portion to losses that were occurring within the intercare distribution and HMS business or were there other factors in that?

Eric you were very faint, so I just heard the first and third part of your question.

Within SPD, we're keeping the plasma business and a few other small pieces of the business but pry mare live the plasma business from the existing SPD business.

And specialty distribution center plans?

I'm sorry.

The specialty DCs?

The plans for your specialty units?

They are going -- one of those distribution centers is going with the sale of the business to OTN.

And the final question, just to repeat it, from the discontinued operations, the intercare distribution business and HMS, I'm just curious -- you know -- initial glance here looks like most of the charge on the discontinued ops was related to noncash items.

Of the smaller portion that was cash in nature, I'm curious if that's a reflection of operating losses within those discontinued units or if there are other factors driving that .

You're exactly right in your analysis.

The remaining piece, which was under 10 million, was related to the operating losses in those units themselves.

Great.

Thanks, guys.

Your next question comes from the line of Barbara Ryan with Deutsche Bank.

Thanks very much for taking my question.

I think, Bob, you spoke to this specifically and sort of deferred it to when you begin to give guidance for next year, but given the source of growth and the change in mix in your drug distribution business and where you are today, I'm wondering what your thoughts are in terms of the comments you have made in the past about what you would view as a target level for the drug distribution business.

I think you had said, getting back to 250 or better, and I just wondered if you could speak to that more in a longer term directional perspective given the change in mix obviously?

I apologize to you all.

We're really having some trouble on the phone lines here.

I think I'll see if I've got your question right, Barbara.

First of all, good morning.

Good morning to you.

Mixes or sales are changing, conditions are changing and things in pharmaceutical distribution.

Can you give us some indication of where you expect bottom line return on sales to go in the future?

Is that your question?

Yes.

Well said.

Okay.

And I think what I said is that certainly we have said at one point, just to remind everybody, that we thought our return on sales -- this was before we went through the transition from buy and hold to fee for service that we thought our return on sales would be in the future -- you know -- after we get through all this, we would aim towards a 2% to 2.5% return on sales.

Now, when we said that, we didn't include at that time all of the bulk sales as part of the denominator.

So now stated with all sales, including bulk, that wouldn't be our objective.

So somebody says what would be your objective?

And so at this point we haven't given you ultimately what our objective is.

That would be something that will come out of our FY '07 plans.

We have good ideas internally, but it's something also we would want -- and certainly Kerry will participate in.

I think it's safe to say that we think the elements are there to continue to improve our overall return on sales in the pharmaceutical distribution business.

Based upon our current mix, which has about 40% of it is bulk and 60% nonbulk, at that level, we're in the 150 to 160 basis point return on sales.

We would expect to have plans in place that will raise that over the next several years.

I'd just ask if we can defer that until we complete our planning process.

We make sure that we've got -- of course I would also say we're allocating corporate costs differently but that we'll give you that as guidance.

Probably around June when we come out with our guidance.

But I think the elements are there that would give us the optimism that says we will be able to raise this.

You've followed us for years.

We've set long term guidance when we had a different model about being able to raise it.

I think he elements are there to raise our guidance.

The elements are, we see further opportunities to improve our cost structure.

That's the first.

Secondly, generics will grow faster than branded.

And that is more profitable to us in terms of a return on sales.

Third, we think we have strong and growing fee-for-service margins from our branded manufacturers.

And fourth, we do still have some margin pressure on us in terms of from change in mix in the sell side and from the competitive environment.

All of that put together, we would say we expect to raise our returns.

But in June we'll come out with what we think our long-term plans are in that area.

Understood.

Thank you very much.

Next question?

I think we'll just take one more question if that's okay.

Your next question comes from the line of Thomas Galucci with Merrill Lynch.

Thanks for letting me slip in under the wire there.

Just a quick one, kind of a follow-up to the last one and an earlier one.

On the sell side, you had talked about more sell side margin stability.

What kind of changes have you seen in the last few months to change the description to more from a pressure standpoint, and then what percentage of the business is kind of up for renewal in the next year?

Well, I'm going to turn it over.

I don't know what percentage.

Maybe Jeff knows it.

Let me just kind of comment.

Whenever you win an account, you always win it because we were superior, and whenever you lose one, you lose it because somebody else was too competitive.

I don't think there's any big change in signals we're sending to you this quarter versus last quarter.

All I'm trying to say, moods kind of shift around here.

Is it getting more competitive or less competitive?

I don't think we're trying to send you any major signals.

It is competitive there.

We've seen some examples where we thought competitive offerings were more aggressive price-wise than we think they should have been, but that kind of comes and goes.

So we're generally cautious around making statements like that.

We are going to continue to price based upon the value we deliver to the customer.

Jeff, do you have an answer to this and maybe we will turn it over to Kerry to close the questions out?

We saw sell side margins being stable to down is I believe the verbatim I used at a recent conference.

And I would continue to describe it generally as being that, stable to down.

On your question about customers coming up for renewal within PD, obviously we don't comment on specific customer negotiations buff the two most major contracts coming up for renewal in '07 are Express Scripts and Kmart, but we believe our relationship with both of those customers is very strong, and we expect the business to be renewed.

Well, clearly I have a long way to go to master the details of the business, but I did want to reaffirm some of the things that we talked about today as we go forward and that is first we are going to put our primarily effort against improving the fundamentals.

Here we're talking about revenue growth in all our key lines of business, leveraging our supply chain scale, and that's going to particularly help us in the supply chains services group.

Looking at cost control, particularly trying to bring home all the shared services that we've been working on and help turn that into more cost control at the business unit level and looking at how we can optimize our portfolio to make sure that our businesses all are giving a good return on equity.

We're also going to continue to be very focused on good balance sheet management and capital deployment, and we're going to continue working on our capabilities, and there are three areas where we're going to continue working on even though there's good systems in place we're going to drive these harder.

These are really in the strategic planning area by business unit.

That's going to be continuing to have a good business management process that keeps us on top of what's happening out in the field and making sure we're making the right choices, and it's going to have to do with continuing to improve the talent development system in this company and leadership development by having a good talent system in place.

So those three connecting rods are areas we're going to be focusing on over the next year.

I look forward to talking to you again in our next quarter.

I hope I'll have a bit more command of the business.

I'm looking forward to the challenge.

As I said at beginning, I'm really excited.

There's a lot going on here which will really help this company deliver results in the years coming.

So thank you very much for joining us today.

This concludes today's Cardinal Health conference call.

You may now disconnect.