卡地納健康 (CAH) 2007 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2007 Cardinal Health Incorporated earnings conference call.

My name is Katina and I will be your coordinator for today.

At this time all participants are in a listen-only mode.

We will conduct a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Bob Reflogal, Vice President of investor relations.

Please proceed.

Thanks, Katina.

Good morning, everyone, and welcome to Cardinal Health's fiscal 2007 fourth quarter conference call.

I first want to start off by apologizing for the delay.

I understand that there's been a problem with individuals getting connected to the call and we'll try to work through those right at the beginning.

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

If any of you have not yet received a copy of our earnings release or the financial attachment, you can access it over the internet at our investor page at www.cardinalhealth.com.

Additionally, there are handful of slides that we will be reviewing, which can also be found on the website.

Speaking on our call today will be Kerry Clark, CEO of Cardinal Health, and Jeff Henderson, CFO of Cardinal Health.

Also participating with us today for Q&A is Mark Parrish, CEO of Healthcare Supply Chain Services After the formal remarks, we will open up the phone lines for your questions.

As always we ask that you limit yourself to one question at a time.

During the course of this call, we may make forward-looking statements.

The matters stressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied.

Please see our press release and SEC filings for a description of those risk factors.

In addition, we will reference non-GAAP financial measures.

Information about these non-GAAP measures is included at the end of this presentation and posted on Cardinal Health's investor page.

At this time, I'd like to turn the call over to Kerry Clark.

Kerry?

Good morning, everyone.

Let me get started by providing my perspective on the quarter and the year, then Jeff will walk you through the segment details.

There are three thoughts I'd like to share with you on the business.

First, fiscal '07 was a very good year for Cardinal and marked a return to strong growth and a simpler, more-focused business model that will provide a foundation for continued growth in the years to come.

Fiscal '07 non-GAAP EPS of $3.42 was up 20% from last year.

This is great progress from a decline in EPS in fiscal '05 and single-digit growth in fiscal '06.

Let me touch on the highlights.

Last winter, we divested PTS at an excellent price.

This enabled the entire Company to focus on our healthcare provider customers and our mission to help make healthcare safer and more productive.

Using proceeds from the sale, we repurchased an additional $3.1 billion in shares for a total of $4.1 billion in fiscal '07 and to date.

We announced yesterday a two-year $2 billion repurchase authorization, so we are continuing our goal to return around 50% of our operating cash flow to shareholders in the form of share buybacks and dividends.

With the proceeds from the PTSsale, we also made a $30 million contribution to the Cardinal Health foundation, which is used to fund initiatives that are aligned with the Company's mission.

Last year we also simplified and streamlined our business model by organizing around two sectors; Healthcare Supply Chain Services, which includes our Pharmaceutical and Medical Products Distribution businesses, and Clinical and Medical Products, which includes our manufactured technology products.

This design allows management of each sector to focus on the unique growth drivers to better serve customers and deliver operational efficiencies.

While these two sectors have important differences, they are strategically connected to our common hospital selling organization, which leverages our scale.

Hospital sales now account for approximately $20 billion in annual sales for Cardinal and more than 40% of our overall profitability.

Last spring, we acquired Viasys Healthcare, establishing Cardinal as a leader in the $4 billion respiratory care market.

The Viasys acquisition also broadens our global reach and strengthens Cardinal's small, but growing international business.

As you will hear later, the integration is going very smoothly.

And just recently, we reached agreements to resolve the SEC matter and all other related securities ligation with respect to the Company.

So, financially and operationally, I believe fiscal '07 was a very good year.

Second, fiscal '07 was the year that our Clinical and Medical Products sector emerged as a significant value-creating growth engine for the entire Company.

This sector houses our clinical technologies and medical product segments and represented more than 25% of total Company segment profits.

Fiscal '07 revenue for this sector was $4.5 billion, up 11% from last year, and profits were $584 million, an increase of 20% from last year.

With an expanding profit margin of 13%, this sector will continue to be an important driver of consolidated operating margin growth.

When we look at this sector in Q4, the results are even more impressive.

Revenue increased 15% to $1.3 billion and profit grew 42% to $202 million.

Clinical and Medical Products has a bright future at Cardinal.

Finally, our Healthcare Supply Chain Services sector delivered strong results this year and did so despite the challenges in our medical supply business.

This sector houses our Pharmaceutical and Medical Supply segments, which combined grew revenue nearly 9% to $84 billion and profit 11% to $1.6 billion.

This sector is core to the Company and a substantial generator of operating cash flow.

Our goal in supply chain Services is to create a world-class distribution business, and we're heading in that directions.

Regarding Supply Chain medical, we have good turn around plans in place and I remain confident that we'll return to target growth rates in the latter part of fiscal '08.

As I said on our last call, this business is strategic to our broader hospital offerings, and I believe we're on the right path to turn it around.

Of course, Supply Chain Pharma is the core of the sector.

In total for fiscal '07 this segment had a strong year, with revenue up 9% and segment profit up 14%.

We expect revenue growth in fiscal '08 to track with market growth, of course adjusted for our mix of generics and customers.

As we said in June, we expect fiscal '08 segment profits to be at the top end of our 7% to 10% long-term goals.

In Q4, segment profit was down 3%, primarily related to the timing of several items included in the fourth quarter of last year.

This is what we communicated to you four weeks ago, so there is absolutely nothing new here.

And we're on track for a solid Q1 and to deliver our targets in fiscal '08 for Supply Chain Pharma.

So all in all, I am pleased with the progress we've made in the past year.

The combination of a world-class distribution sector and a fast-growing, higher-margin Clinical and Medical Product sector differentiates us from competitors and provides an advantage that will deliver value to customers and shareholders over time.

And we intend to continue to extend this advantage.

For example, in fiscal '08, we anticipate our Clinical and Medical Product sector will account for more than 30% of our profits.

Net-net, we are very focused on delivering our long-term growth goals and I believe we have the right platforms and teams in place to do that again in fiscal '08 and beyond.

So now over to Jeff for more detail about our segment performance.

Thanks, Kerry.

Good morning, everyone, and thanks for joining us.

After my comments today, we'll open up the call for your questions.

During my formal remarks, I plan to discuss our FY '07 fourth quarter consolidation and segment results.

In addition, I'll review our fiscal 2007 full-year financial performance, which as Kerry mentioned was very strong, as we substantially exceeded our long-term growth targets in many respects.

Finally, I'll provide an update on our acquisition scorecard that now reflects our acquisition of Viasys, and briefly review our outlook and assumptions for fiscal '08 that I discussed in detail back in June.

Now let's turn to the fourth quarter results on slide 6.

Please note that my comments will reflect the financial results from continuing operations on a non-GAAP basis and reflect the divestiture of our Pharmaceutical Technologies and Services segment.

Consolidated revenues were up 5% to $22.3 billion, and operating earnings were up 3% to $538 million.

A strong top and bottom line growth in Clinical Technologies and Services and Medical Product Manufacturing segments were somewhat offset by an expected and previously communicated weaker Q4 compare in our Supply Chain Distribution business.

Net earnings for the quarter were $345 million, up 5% over prior year, and diluted EPS was $0.89 compared to $0.78 last year, up 14%.

Operating cash flow for the quarter was negative $292 million, due primarily to class action litigation settlements, and return equity was 17.3%, up about 110 basis points over the same period last year.

Now, turning to the next slide.

During the quarter, special items totaled $118 million or $108 million after tax, which impacted diluted EPS by $0.28.

$88 million of the $118 million were merger-related costs of which $84 million was in process R&D, associated with the Viasys acquisition.

The remaining $31 million was split between net litigation of $19 million and restructuring costs of approximately $12 million.

The next item is impairment charges and other items.

During the quarter, impairment charges had a minor net gain of $0.6 million that had negligible impact on diluted EPS.

As a reminder, our Q4 FY '06 non-GAAP diluted earnings per share from continuing operations of $0.78 excludes PTS.

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

As I discuss the results in each of our four segments, I want to remind everyone that we are now burdening our segment results, including current and prior year, with equity compensation expense, which currently has a positive impact on our segment growth rates.

In addition, we have reallocated to our remaining segments a portion of corporate overhead expenses that were formally allocated to PTS.

Within Healthcare Supply Chain Services Pharmaceutical, revenue for the fourth quarter increased 4% to $19.6 billion.

Pharma distribution direct store door revenue was up 7%, and revenue from bulk customers was up 4%.

Key factors impacting year-over-year Q4 revenue include branded to generic conversions, the lapping of large bulk increases in Q4 of '06, and the sale of our specialty business to OTN in the fourth quarter of last year.

The negative revenue impact of this divestiture alone was -- versus Q4 last year was $225 million.

Segment profit was $303 million, a decrease of 3% over the prior-year period.

As we discussed during our last earnings and guidance calls, our fourth quarter Supply Chain Pharma performance was impacted by the difficult compare with FY '06.

As a reminder, a few of the items in Q4 '06 did not recur in 2007 are a manufacture price increase and a DSA agreement that benefited from our retroactive fee adjustment..

Together, these represented approximately $25 million in FY '06.

As mentioned above, last year we still had our specialty distribution business for part of the quarter.

This contributed approximately $10 million to '06 earnings.

And finally, we benefited from a $7 million LIFO credit a year ago and had none this quarter.

All totaled these accounted for approximately $40 million of earnings last Q4 but did not reappear again this year.

Looking forward in Q1 of '08, we are expecting Pharma profits to return to solid growth.

However, as we've always said, quarter-on-quarter variability exists in this business, due primarily to the timing of vendor price increases and generic launches.

Within our segments, we continue to focus on effective use of capital as an important lever to improve economic returns.

In this regard, one of our biggest drivers -- excuse me -- days of inventory on hand was down about two days over Q4 of last year.

Despite progress in capital reduction, Supply Chain Pharma's economic profit margin decreased one basis point to 78 basis points in the quarter compared to 79 in the same period last year, due to the previously-discussed lower Q4 profitability.

However, for the full year, EP margin is up, improving 11 basis points over the prior year to 0.86%, driven by both earnings growth and reductions in tangible capital.

Turning to slide 9, our Healthcare Supply Chain Services Medical segments revenue was $1.9 billion, up 5% over the prior year, supported by strong growth in lab, ambulatory and Canadian operations.

Total segment profit for the quarter was $83 million, down 2% over Q4 '06.

Profit in the quarter was impacted by operational investments, particularly in our customer service processes, and customer-related write-offs that increased by $7 million over Q4 of last year.

Economic profit margin in Q4 declined 14 basis points over the prior year to 1.36%, due primarily to declines in segment profit.

Medical Product Manufacturing delivered an outstanding quarter, marking the return to its first half performance that we expected and communicated previously.

Revenue increased 14% to $500 million and segment profit increased 27% to $58 million.

Revenue and profit growth was driven by strong demand across most businesses, including demand for new products in gloves, respiratory, and surgical instruments.

The recent acquisition of Viasys also played a role in driving sales, adding approximately three percentage points to top line growth.

Profit margin expansion in this segment was driven by a shift in mix to higher-margin products, improved sourcing -- excuse me -- and manufacturing cost reductions, which were somewhat offset by costs associated with the Viasys acquisition.

Unlike the revenue benefit, Viasys had a negligible impact on MPM's segment profit, due to the limited time it was in the books and the impact of purchase accounting adjustments.

Moving on to slide 11, Clinical Technologies and Services had an excellent quarter, as well.

Segment revenue was $756 million, up 17% over the prior year Q4, and segment profit was $144 million, up 50% compared to the prior year.

Several factors led to the exceptional quarter delivered by CTS.

First, at the beginning of the fiscal year, we added approximately 100 people to our installation teams.

They are now fully trained and contributed meaningfully to the exceptional quarter.

At the same time, demand for Alaris and Pyxis products is very strong, as we are seeing prior investments in innovation, quality and customer service paying off.

PTS has delivered double-digit earnings growth in seven of its last eight quarters and the future looks very strong, as well.

Pyxis ended the year with 40% year-over-year growth in its backlog and 36% growth in Q4 committed contracts.

Committed contracts for Alaris were up as well, with a 19% year-over-year increase, a clear sign that the business is extending its leading position.

In addition to the strong top0line performance I've just discussed, the business delivered substantial segment profit margin expansion, reflecting improved gross margins from product sales mix, operational excellence initiatives, and focused efforts on cost control.

Now let's turn to the fiscal 2007 full-year results.

Again, please note that my comments will reflect the financial results from continuing operations on a non-GAAP basis and the historical numbers reflect the divestiture of our PTS segment.

Consolidated revenues were up 9% to $86.9 billion and operating earnings were up 12% to $2.2 billion, reflecting strong demand and profitability in our Supply Chain Pharma, Clinical Technologies and Medical Product segments.

Earnings from continuing operations for the year were $1.4 billion, up 13% over prior year.

Diluted EPS for the year was $3.42, compared to $2.86 last year, up 20%.

As we said in the June guidance call, the PTS-related share buyback had a positive impact or approximately $0.08 per share on earnings, improving growth for the year by approximately three percentage points.

So as you can see, even without the PTS impact, Cardinal performed exceptionally well in fiscal '07.

(inaudible) for the quarter on slide 13 I want to discuss the specific items that had an impact on current and prior-year operating results and earnings per share.

First, let me quickly review the special items.

During the year, special items totaled $772 million, $529 million after tax, impacting diluted EPS by $1.31 per share versus $0.14 per share in fiscal 2006.

$630 million of this was litigation-related costs, which we discuss at length during our third quarter earnings conference call.

Impairment charges and other was $17 million and reduced EPS by $0.04 per share by FY '07 versus $6 million and $0.01 per share in FY '06.

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

There were no nonrecurring other items for fiscal '07.

For fiscal '06, these items totaled $26 million for the year and impacted EPS by $0.04 per share.

Just to remind you, the $26 million charge in '06 related to a vendor credit adjustment within our HSCS Pharmaceutical segment.

As I indicated at the beginning of FY '07, we are not planning on labeling these types of items as nonrecurring anymore.

We will simply absorb them in the business, regardless of whether the impact is positive or negative unless there is something truly extraordinary we need to call out.

As such, we don't expect to be calling these out in future earnings calls.

On slide 14, I want to take a few minutes to discuss our FY '07 segment performance.

In short, three of four segments delivered outstanding results in fiscal '07.

HSCS Pharmaceutical delivered revenue growth toward the top end of our long-term guidance range at 9%, and segment profit growth of 14%, significantly exceeding profit growth targets.

This was driven by increased generic margins, strong branded buy-side margin from both DSA fees and pharmaceutical price appreciation, and focused cost control.

HSCS Medical was in line with the bottom end of revenue growth targets, but delivered relatively flat profit growth for many of the same reasons that we cited previously.

Moving on to Medical Product Manufacturing, by any measure, MPM performed exceptionally well in fiscal '07, delivering both revenue and profit growth well above management's FY '07 targets.

With strong demand for new and existing products and the inclusion of recently acquired Viasys Healthcare, MPM is poised to have another breakout year in 2008.

Despite being hendered by product launch delays and a recall charge in Q1, Clinical Technologies and Services turned in strong performance in the remaining three quarters to deliver revenue growth in line with long-term goals.

In addition, profit growth was at the top end of the segment's previous 15% to 20% growth goals, reflecting continued and strong demand for Alaris and Pyxis products, the impact of new product launches and focused cost control.

Two things shouldn't be lost in the segment-by-segment review.

First, as expected, CPS and MPM have emerged as significant growth engines for Cardinal.

Second is the fact that Cardinal Health delivered an outstanding 2007, with non-GAAP EPS growing 20% versus prior year, and this with only three of four segments delivering strong performance.

Slide number 15 is our acquisition scorecard.

Here I've listed our acquisitions over the past three years or so.

Though we look at many factors when we do this analysis, our primary measure is the actual economic profit delivered and forecasted versus our expectations at the time of the acquisition.

We do this for a three-year period after deals have closed.

I'm happy to report that since instituting the new acquisition integration process, that we developed with our Alaris purchase, all acquisitions have received a passing grade.

Please note that Viasys has been added to this list since last quarter.

I'd like to provide you with some details of the acquisition, because I'm sure you have a few questions surrounding the impact of purchase accounting and how the integration is progressing.

With respect to the accounting, for Q1, we expect little or no profit impact from Viasys.

This is due to the purchase accounting associated with acquisition.

Key items impacting Q1 profits include inventory and deferred revenue adjustments.

Also in the full year and going forward, we expect the amortization of intangibles to be approximately $35 million annually.

With respect to the integration itself, we now have a number of teams working full time on making the integration a success, including the corporate integration playbook we developed during the Alaris integration.

Specific plans for the integration of the Viasys corporate office function and shared services are already well into implementation.

At the same time, plans for country-by-country go-to-market strategies and manufacturing facility optimization are being put in place.

The Viasys U.S.

sales team is joining our national sales meeting this week to commence the process of integration into our sales operation.

Bottom line, we are well on our way to delivering the first year synergies and more.

We'll continue to review our progress in this important area with you quarterly going forward.

Moving on to our FY '08 financial targets and goals.

on slide 16, I'd like to briefly remind everyone of our 2008 performance targets.

We originally provided outlook on June 27th, which is exactly the same as I've provided on this slide.

For FY '08 we continue to expect diluted non-GAAP EPS from continuing operations to be $3.95 to $4.15 per share, which represents an EPS growth range of 15% to 20% for the fiscal year.

Turning briefly to the segments.

As briefly discussed, we are expecting good performance from our HSCS Pharma segments, with profits at the top end of our long-term growth goals.

In particular, we expect Q1 to be a return to solid profit growth, but expect the overall profitability growth of this segment will be weighted to the second half.

As you're all well aware, we're in the midst of turning around the performance of our HSCS Medical segment.

Overall, we expect flat profit for the year, with performance improvements and growth expected in the latter half of '08.

I'll discuss in more detail later, but as a reminder, for fiscal '08 we have refined the overhead allocation methodology within HSCS.

This change negatively impacts our Supply Chain Medical segment growth by approximately seven percentage points.

Moving to CTS.

As we discussed during our June guidance call, we increased our three-year performance goals for segment profitability from 15% to 20% to 20% to 25%, and we expect FY '08 performance to be in line with these targets.

There is clear momentum in the business, with benchmark performances being delivered across the segment.

For MPM, you may recall that we substantially increased our three-year performance goals during our guidance call, as well.

Revenue goals were raised from 6% to 8% to 8% to 12%, and our segment profit goals increased from 10% to 12% to 25% to 30%.

Again, this not only reflects the impact of our Viasys acquisition, but also reflects the strong demand within our existing Medical Products Manufacturing segment and our expectations for improved profit margins.

As I stated earlier, Viasys will have little to no profit impact on Q1 '08 due to purchase accounting, but it will have a positive impact in the second half, due in part to the large planned synergies we are expecting.

Overall, we view FY '08 to be a strong year for Cardinal and continuing our momentum for outstanding future performance.

We believe we have a platform for strong sustainable growth with a best-in-class healthcare distribution company that is differentiated by the size and growth potential of our Clinical and Medical Products business.

In that regard, we expect our CMP sector to be more than 30% of operating earnings next year and well on on its way to 35% to 40% operating earnings by 2010.

And we're not finished.

We're developing plans to build even further on this performance trajectory.

Turning to slide 17, I'd like to wrap up our outlook for FY '08 by updating you on some of our underlying assumptions around performance.

As of mid July, we completed our $4.1 billion share repurchase, having purchased 1.6 billion in the fourth quarter and completing the remainder in the first few weeks of Q1.

Also, our board just authorized an additional $2 billion in share repurchase that we expect to execute on over the next two years.

Those repurchases, combined with our expectations for the impact of option vesting and exercises, result in a forecast for our average shares outstanding during FY '08 to be in a range of 375 million.

Other performance drivers for fiscal 2008 include SEC and related litigation settlements, which were incurred in FY '07, but have a negative impact on this year's interest expense of at least $0.05 per share.

In total, we expect interest and other to be in a range of $220 million to $235 million.

We have an expected non-GAAP effective tax rate in the range of 31.75% to 32%.

And finally, once again, the refinement for our methodology for allocating corporate costs in FY '08 that we discussed during our June guidance call are reflected in the FY '08 numbers.

As a reminder, last year Cardinal started fully burdening its segments with corporate costs to get a true picture of performance, while at the same time we moved to our new reporting segment structure.

While this was a big step forward, improvements were needed to better reflect the changes to our structure and to reflect actual resource consumption based on a year's worth of experience.

Refinements for FY '08 have improved our allocation between Cardinal's two distribution segments HSCS Pharma and Medical.

As previously discussed, this will cause some year-on-year comparability challenges within HSCS that we will openly discuss throughout the year so that everyone is aware when assessing Cardinal's performance.

For FY '08, the refinement to corporate allocations should positively impact HSCS Pharma's profit growth by approximately 1.8 percentage points and negatively impact HSCS Medical profit growth by approximately 7.3 percentage points.

Well, that completes our formal remarks.

I'd like to thank everyone for their time this morning and open up your call to questions.

Operator?

Thank you.

(OPERATOR INSTRUCTIONS) Your first question will come from the line of Lisa Gill representing JPMorgan.

Please proceed.

Good morning.

Jeff, could you just talk about the cash flow in the quarter and maybe just give us a little color around the accrued liabilities and them coming down by so much?

And then secondly, Kerry, could you just talk to us a little bit about your acquisition strategy going forward?

Should we be looking for other tuck-in acquisitions like Viasys?

Should we be looking for you to make larger acquisitions as you potentially grow out your international presence?

If you could just give us some thoughts, that'd be great.

Morning, Lisa.

Thanks for the questions, this is Jeff.

Really the answer to both your questions is effectively the same, that our operating cash flow in Q4 was distorted by the substantial litigation-related payments that were largely booked in Q3, but went into escrow in Q4.

And as a reminder, for our litigation class action settlement, we reserved $600 million at the end of Q3 and that flowed out the door in Q4, so that was the primary driver taking what would be a relatively normal operating cash flow period and driving it to the tune of $200 million negative plus.

The answer to your accrued liabilities question is also the same.

We had established a reserve at tend of Q3 for that SEC settlement and once we made the payment, obviously that accrued liability reduced in the range of $600 million.

Okay, great.

And just as a follow up to that, can you just tell us where you are with the class action lawsuit at this point?

Is there any update?

We really can't comment on that.

As we've indicated previously, we've reached agreement with the plaintiffs in this regard, but it's still subject to final approval by the court.

Okay.

Kerry?

Yes, Lisa, hi, good morning.

Just talking about the general level of acquisition and tuck-ins.

First of all, we would have never have suggested that Viasys was a tuck-in acquisition.

It was an important acquisition for us and we are focused very, very much on making sure that we deliver our goals.

You know yesterday we announced a $2 billion share buyback program over the next two years.

I think that gives you a lot of visibility of how we're thinking about our priorities.

First of all, we do think right now our share is a very good investment value and so we're going to be using a fair amount of our cash to repurchase shares as it becomes available throughout the course of the year.

However, we do reserve each year, a portion of money for tuck-in acquisitions.

We also have a budget for that this year and we do have a few small things in the pipeline that sort of fit in to our larger plans.

But I think that going forward over the foreseeable future, our strategy is taking maybe to 20% to 25% of our operating cash flow for tuck-in acquisitions.

But the rest we're going to be focused on making Viasys work and using the opportunities that present themselves in the coming months to buy back our shares.

Great.

Thanks for the detail.

Next question.

Your next question will come from the line of Tom Gallucci representing Merrill Lynch.

Please proceed.

Thank you.

First just a quick one.

I want to confirm the $0.05 impact from charitable contribution is not excluded from the EPS numbers that you talked about, Jeff?

That's correct, Tom.

Okay.

And then I guess looking more closely at the segments, CTS clearly had a good quarter.

But as I'm looking at the numbers, it would seem that you're not considering the fourth quarter a run rate for next year, as I think about the targets that you set for that segment next year fiscal '08.

So is there something unique that happened in the quarter that isn't going to continue or am I looking at it incorrectly?

Thanks, Tom for the question.

Yes, regarding CTS, first of all, I would agree with you that they had a very strong Q4 and I do want to point out that there were no significant one-timers in Q4 that drove up the earnings.

However, I would say that I think we saw perhaps the impact of the installation teams allowing us to deliver on some pent-up demands and pent-up committed contracts and perhaps get more installed and recognize more revenue than we would normally see in a more average quarter.

So I would say Q4 was a bit of an exception in that regard.

Again, in large part, just to the success of our installation teams, but I think our guidance for FY '08 still stands based on what we see right now.

Okay.

That's good.

Thank you very much.

Your next question will come from the line of Ross Muken representing Deutsche Bank.

Please proceed.

Good morning, gentlemen.

As we listen to the call today, there was obviously a clear focus on your hospital facing businesses.

And you talked about how you're now leveraging the three platforms really as one within the hospital to really be able to drive some additional gains there in each of the businesses and leverage the scale.

Can you talk a bit about what's changed over the last 12 months?

And then also, with the addition of Viasys, I understand from a product perspective what it brings to the portfolio, but strategically, can you also comment about how that really strengthens in a few areas, specifically like international and your R&D efforts those hospital-facing businesses?

Hi, Ross.

Good morning, it's Kerry.

I'll just talk a little bit about that and maybe Jeff will add some thoughts, as well.

I think first of all, what's really happened over the last 12 months was effective of October of this fiscal year, we completed the integration of our multiple hospital selling organizations into a single-integrated selling organization.

And that was rolled out effectively October 1st, and we've -- so we've had a few months with that under our belts and we've learned how to make it better and over the coming months we'll be rolling out some additional improvements on how we do that.

What it is really allowing us to do is with our full range of products, it allows us to be a very large, if not the largest supplier that hospitals are interfacing with.

It is allowing us access to top-level executives because of the portfolio of our products, and we're able to create longer, more-complete deals with our hospital customers.

And we've closed a couple of those fairly recently that we think really is the advantage of going to market as one customer.

And I think also gives a lift in some ways to our capital equipment businesses because, again, it would become part of a more complete operating -- or offering to our customers.

So what we're seeing is the scale of our business allows us to work directly with senior execs in the hospitals to create broader and more comprehensive longer and stickier deals with our hospital customers.

Viasys is another advantage here.

In fact, this type of selling organization will be advantage for Viasys because, again, it will be able to come under the complete Cardinal umbrella with our customers.

In the U.S., it's going to be a big factor for us.

Internationally, Viasys is perhaps even more important because externally outside the U.S., I would say relatively speaking, Alaris is a bigger part of our business than our med surg component, so Viasys is a big part of it.

To give you some perspective, today Viasys has 40% of its sales outside the U.S., but Alaris, for example, has 30%, so we have actually an opportunity globally that Viasys' international footprint will be an aid to our existing growing international business.

Let me just build on Kerry's comments with a couple of specific examples that come to mind that I think provide even more tangible evidence of progress we're seeing with the hospital customers.

First of all, our Integrated Medical Solutions, which really have just gotten off the ground over the past year or so, are exceeding all our sales targets, and really that demonstrates the power of bringing all of our offerings together through one sales force with our key customers.

The second big example I'll give is an international one in Canada, which I know very well because it reports to me operationally.

But we traditionally have had a very strong hospital med surg distribution operation in Canada, but it's really been over the past nine months or so that we've brought our three businesses together in Canada.

And that's allowed us, really, to go to the hospitals where we already had a strong relationship of the [sweet-suite] due to our Source Medical Distribution business and leveraged that strength to begin winning contracts for CTS products, which quite honestly in the past were dramatically under represented in Canada.

So already we're seeing a significant benefit of bringing those groups together, leveraging our presence in the hospital, and seeing real tangible results coming out of it.

Next question, please.

Your next question will come from the line of Larry Marsh representing Lehman Brothers.

Please proceed.

Thanks, and good morning, Jeff and Kerry, thanks for the clarity.

First question, really, and a question of clarification.

First on drug, Kerry, you're communicating you see your business growing top line at market adjusted for mix.

Should we assume that your mix helps you in that top line as you've already guided or not?

And then along with that, as you think about that business for the next year or so, how much visibility do you have around top line of margins, given we're coming into an election year, the publication of AMP, and this big drop off in anemia product sales?

Does that give you that variability or do you feel like your business gives you great visibility despite all that?

Morning, Larry.

Well, I think first of all, in terms of top line growth, since our business mix is more weighted to some of the larger retail drug chains and these companies are growing at a slightly faster rate tends to give us a bit of advantage in top-line revenue versus overall market trends, so we see it as a slight upper versus general market growth dynamics.

Looking down the road over the next 12 months, we've tried to get a real sense on what we think top-line revenue growth is going to be in the market, and both our internal look and tapping as many external people as we can and we're really seeing, probably over the next 12 months, market growth in RX of around 6%.

So that's what we've been baking into our numbers, and so with your customer mix, we should be a little bit faster growth than that, but not much, but we will get a little bit up on that.

So in terms of operating margins going forward, we have a lot of initiatives underway, and our view is we should be able to keep our operating margins really stable to slightly up on the year, and that's the basis of how we're going forward.

I'd like to have Mark -- ask Mark to add a little bit more perspective.

Thanks, Kerry.

Maybe to comment specifically, Larry, on your point about elections and AMP and anemia drugs and what impacts those might have on the business going forward.

The elections are something that we certainly look at very carefully.

We've -- actually last election cycle's spent a great deal of time studying what happens with the branded manufacturers and there's really no clear pattern that's emerged over the last four or five election cycles.

In fact, last election cycle we didn't see much change in behavior at all from the branded manufacturers.

And right now we're projecting that the branded manufacturers will behave consistent with the way they have behaved over the last few years.

AMP is a different situation.

I think it's very fluid.

Certainly the rule is out and we have a good visibility as to what that rules looks like, but there are also pieces of legislation that are moving both within the House and the Senate that seem to have an impact on it, so I think it's too early to call any type of impact on the business.

We frankly are not directly impacted by AMP in the way it would be played out in the marketplace.

And there are factors such as the dispensing rate that the stores may receive from the state that is have to be considered, as well, and a number of unknowns.

We obviously watch it carefully.

We will continue to watch it carefully.

We'll continue to be involved in the legislative process and the regulatory process and the comment period here, but at this time, we don't project any negative impact.

Finally, the anemia drugs are certainly an issue in the marketplace.

They're not a huge issue for us at this particular time and we haven't had the exposure to that situation that some of our competitors have.

Okay.

And just a -- thank you -- a clarification maybe for Jeff.

Jeff, I know back at the end of June you guided to interest expense of about $220 million this year, and I think you're saying now $220 million to $235 million interest and other.

I just want to make sure what are you including in other or are you just giving us the same range but broadening it out a little bit?

Larry, I'm basically giving it the same range and broadening it out.

Nothing unusual has been added since last we spoke.

Okay.

All right, great.

Thank you.

Thanks, Larry.

Next question?

Your next question will come from the line of Ricky Goldwasser representing UBS.

Please proceed.

Good morning.

Morning.

Morning.

A follow-up question on the drug distribution business.

When you look at the June quarter, can you quantify for us what percent of the profit decline was from lack of investment buying or inflation opportunities versus some lower prices on generics?

And then as you look ahead into fiscal year '08, I know that you're talking about very strong first quarter Pharma profits now expected to return the strong earnings growth.

Does this reflect better inflation of the branded side that you've already seen in the quarter?

And if so, is this ahead of your initial expectations or are you just getting back what you lost in the June quarter?

Hey, Ricky, let me -- this is Jeff.

Thanks for the question, and good morning.

Let me start with that and if Mark wants to add anything, by all means he can jump in.

Regarding your question on the impact on Q4, we had a significant price increase from a major vendor in Q4 of '06, which didn't replicate itself in Q4 of this year.

That was worth about $15 million worth of earnings for the year, that specific issue.

Now, look forward into FY '08, yes, we make certain projections regarding when the price increases are going to happen for the year.

I would say several of them have at least partially happened in Q1 thus far, so we seem generally to be on track for Q1.

One of those, quite honestly, was the one that didn't happen in Q4 that got delayed into Q1.

So do we have perfect visibility?

No, there's always a certain amount of uncertainty regarding exactly when and which quarter they're going to happen, but we have to make our best estimates for that.

And generally over the course of the year, they even out and just results in some quarterly volatility over the course of the year.

Now, is the $15 million that you're talking about in the Q4 '06, is this kind of the number that we should think about for 1Q '08?

Yes, I don't want to get that specific, Ricky.

That was one specific vendor.

In Q1, there've been a couple increases, but price increases happen in different ways.

Sometimes it's the whole portfolio, sometimes it's a portion of the portfolio, so I wouldn't want to get too specific, plus the quarter's not over yet so it still remains to be seen what actually will materialize.

Thanks, Ricky.

Next question?

Your next question will come from the line of Randall Stanicky representing Goldman Sachs.

Please proceed.

Great, thanks for the question.

And I apologize if I missed it, but did you talk about the one Cardinal Health program?

and some of the cost savings and reinvestment of those cost savings (inaudible)?

No, we haven't talked about it, but it's a great question.

As I indicated actually back in the November call, and I can reiterate what I said there because we're still very much on track towards our ultimate goal of realizing $500 million of run rate savings versus FY '04 by FY '08.

Now, I will mention, however, that about 35% or so of those savings were attributed to PTS, and obviously now with the sale of PTS, those savings were sold with the business, as well.

Now, the good news is, I believe, we got the benefit of those savings when we sold the business and I think that's one of the reasons we were able to get the attractive price we did.

If you back out that amount and look at the remaining portion for the remaining businesses, we're still very much on track to achieve effectively 63% of that $500 million.

In FY '07, we realized about 75% of that total, so you could say there's still an incremental 25% to go in FY '08.

Now, regarding your question about reinvesting it, I've indicated in the past that we're planned to invest -- reinvest about 20% to 30% of the savings.

I would say 25% is a good number that we've been putting back in the business and we'll continue to put back in the business, primarily for things like new products, R&D, and new services that we're developing.

And obviously the benefits from one Cardinal Health not only partially flow to the bottom line, but it provided us the opportunity to make very solid investments for the longer term health of the Company, as well.

Thanks, Randall.

Thanks.

Next question?

Your next question will come from the line of David Veal representing Morgan Stanley.

Please proceed.

Great, thanks, and good morning.

With respect to the drug distribution business.

When we look at the bulk business, until about two quarters ago, that business was growing at 20% plus and this quarter came in around 4%, which is the weakest we've seen in a number of years.

Could you discuss what may be driving that trend and how you're thinking about the growth rates of the two different buckets in fiscal '08?

Yes, thanks for the question.

This is Mark.

The specific activity in the bulk business -- and I think we've shared this fairly consistently over the course of the years -- is that we had a large win from one of our major customers in the bulk area last year and this was the quarter that we had finally lapped that win.

And we expect the bulk business to approach more normal growth during the course of the year, again adjusted for the customer mix that's buying the bulk products from us.

But we're not surprised by the result.

We expected this, and there was a slight -- maybe a little bit of less bulk business, I would say, in Q4 than we expected, only because of a timing issue with one of our bulk customers, as we did pick up some of our additional bulk business from one of them, a small amount that will help our growth rate, but that did materialize in Q1.

So we're very bullish about the bulk sector.

It's a good business for us.

It's not a high margin business at the gross margin line, but it's a good operating margin and a very good use of capital for us.

So you'd more or less expect those two -- the two segments to grow roughly in line with each other?

Roughly in line with market as we've indicated, yes.

Okay, thank you.

Next question?

Your next question comes from the line of Charles Boorady representing Citigroup.

Please proceed.

Thanks, good morning.

My first question is just sort of housekeeping.

On the interest expense and other line of $19 million, about how much of that was from investment income versus interest expense versus other?

If you could break it out into those three.

Yes, we generally don't break out that sort of detail.

I do want to comment on the Q4 number, though, because you look at that number and then you compare it to the total FY '08 forecast that we're looking at and it's hard to correlate the two.

Right.

But I just want to remind people of a couple very unique things that happened during Q4.

First of all, at the very beginning of the quarter we received about $3.1 billion of cash related to the PTS divestiture.

And over the course of that quarter, we had that cash basically earning interest income on it as we were doing our share repurchase over the course of the three months, but clearly we had the benefit of that cash for a good chunk of that period.

The other significant thing that happened toward the end of the quarter is that we had two large cash outlays; the $1.5 billion or so for Viasys and the $600 million related -- going into escrow related to the cash action settlement.

That cash came out the door at the end of the quarter and obviously impacts both our debt position and our cash position heading into FY '08.

So I would say for those reasons, Q4 was a bit of an anomaly, and FY '08 really reflects, I would say, more constant levels of cash and debt that we expect to maintain in the company.

Thanks, that was helpful.

And my second question's just on the Pharma segment.

You mentioned 6% market growth expectations and that your revenue growth expectations assume reasonably that you'll gain some market share, as well.

And I'm just wondering if you could break out the pricing versus volume component of that 6%, or your 7% to 10% expectation, and how patent expirations impact that in terms of potentially lowering the unit price component and maybe having an impact on the volume side, as well?

Yes, thanks, Charles.

Just kind of a correction to the comment as to our growth rate.

We do not expect to be picking up market share as a result of that growth rate.

What we say is we think the market's going to grow about 6% and we believe that it will be based upon our mix of customers, the customers that we have today, We expect rather to be slightly above that.

So the issue is not a question of taking share in the marketplace, it's a question of the relative growth rates of our customers in the segments that they operate within.

Relative to pricing versus volume, I prefer not to talk directly to that, but what I can tell you relative to patent expirations and so forth is that we are watching very closely the schedule of patent expirations that is a fairly public piece of information that most of you also take a look at.

And what you can see during the course of the year is that for the balance of this calendar year, the scheduled patent expirations are fairly modest compared to what will come out in the first six months of calendar year '08.

So I think from a patent expiration standpoint, you can assume that in our expectations that we're looking to the second half of the year, and I think you heard Jeff refer o that earlier.

The second half of the year is to be a more active year for patent expirations.

Thanks, Charles.

Operator, we have time for one more question.

Thank you.

Your final question will come from the line of Steve Halper representing Thomas Weisel Partners.

Please proceed.

Hi, good morning.

You talked about 40% pickup in backlog at Pyxis, could you put that into perspective and what it's been doing the last several quarters?

Thanks, Steve, for the question.

I don't want to give specific numbers, but I would say we've -- Q4 was an exceptionally large pickup, and due in large part to the end of the hospital buying period typically we see large capital expenditures in Q4.

That all said, I would say backlogs throughout most of FY '07 were strong and building momentum as we went out through the year and heading into FY '08.

Great.

Thank you.

I just want to make one final comment related to one Cardinal Health because I was asked a question earlier about the cost savings.

The other thing I wanted to mention related to one Cardinal Health, which is very important, is the platform it has given us now as we make acquisitions like Viasys to basically plug the new company into an established platform in the Company.

One of the reasons we're able to feel confident about the synergies that we can get from a Viasys-like acquisition is that we can take their existing corporate functions and shared services and sales forces, for that matter, and really plug them into an integrated, well-functioning operating structure, and we didn't really have that opportunity in the past.

So in addition to the real time savings it's giving us, it's also providing substantial opportunity for value creation in the future as we look at the Viasys of the world and our other smaller tuck-in acquisitions that we've done.

That concludes our call for today.

Thanks everyone for your participation.

Thank you.

Operator?

Ladies and gentlemen, on behalf of Cardinal Health Inc., thank you for your participation in today's conference.

This concludes your presentation.

You may now disconnect.

Good day.