卡地納健康 (CAH) 2009 Q4 法說會逐字稿

Good day, ladies and gentlemen and welcome to the fourth quarter 2009 Cardinal Health earnings conference call.

I'll be your coordinator for today.

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

We will be facilitating a question-and-answer session towards the end of today's conference.

(Operator Instructions) As a reminder, this call is being recorded for replay purposes.

Now I'll turn the call over to your host for today's presentation, Ms.

Sally Curley, Senior Vice President of Investor Relations.

Welcome to Cardinal Health's fourth quarter and year end fiscal 2009 conference call.

Today we will be making forward-looking statements, the matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied.

Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation found on the investor page of our web site for a description of the risks and uncertainties.

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

Information about these is included at the end of the slide.

A transcript of today's call is also posted on our website on the investor page.

Since we are approaching the spinoff effective date of September 1, today's format will be a little different in order to accommodate questions from those investors who are solely focused on CareFusion Corp.

First, Jeff Henderson will provide a brief overview of the fourth quarter and year end FY '09 results for total Cardinal Health.

Jeff, will then pass the call to George Barrett, Chairman and CEO of new Cardinal Health post spin, and George followed again by Jeff will provide color on trends we are seeing in the new Cardinal Health businesses as well as provide FY '10 guidance using our pro forma new Cardinal Health numbers released today in an SEC filing as a basis.

We will then conduct a Q&A session and we ask that you focus your questions on either the consolidated results for total Cardinal or for new Cardinal Health.

At 45 minutes into the call, approximately 9:15 Eastern we will hand the call over to Carol Cox, Dave Schlotterbeck and Ed Borkowski, who will provide an overview CareFusion performance and their expectations for FY '10 and who will take questions regarding CareFusion results and expectations.

Because we have a lot to cover today if we don't get to your questions, we will all be available afterward to address them.

I'd like to remind you of a few upcoming dates and events.

First, and related to the upcoming spinoff of CareFusion the record date for purposes of determining shareholders who will receive the CareFusion stock dividend is August 25, at 5:00 PM Eastern.

We anticipate that when issued trading for CareFusion and Cardinal Health will begin on the New York Stock Exchange later this week and run through August 31.

When issue trading, as a reminder will be under CAHWI and CFNWI symbols on the New York Stock Exchange.

Cardinal, CAH, will also continue to trade in the regular way throughout this time.

As of September 1, the effective date of the spinoff, neither Cardinal nor CareFusion will trade as when issued and CareFusion, CFN will begin trading in the regular way on the New York Stock Exchange.

Again, Cardinal will trade, CAH will trade in the regular way, uninterrupted throughout these time periods.

New Cardinal Health will be participating in number of investor conferences during the upcoming months, notably the Thomas Weisel conference on Thursday, September 10, Morgan Stanley's Global Healthcare conference on September 15, the Invest Ohio conference on September 15, and the UBS global life science conference on September 23.

As always, the details of these conferences are or will be posted on the IR section of our website so please make sure to visit that often.

Now I'd like to turn the call over to Jeff Henderson for a review of the consolidated Cardinal Health fourth quarter and year end.

Jeff.

Thanks, Sally, good morning, everyone, and thanks for joining us.

As Sally mentioned we have a lot to cover today so I'll be brief in my comments on our fiscal '09 results under our current reporting structure which includes the businesses that we intend to spinoff as CareFusion.

I should point out that we very much remain on track for the spinoff of CareFusion to be effective after the close of trading on August 31.

You can see the detail of what I'm about to cover in both the news release as well as in the slide presentation which are both available on our website.

First, a quick recap on FY '09.

I won't comment specifically on slides four through nine but will just give some overall comments.

As we mentioned in our earnings release our results reflect solid progress in Healthcare Supply Chain Services and the impact of a challenging environment for clinical and medical products.

Consolidated revenues were up 10% to $25.2 billion for the quarter and up 9% to $99.5 billion for the year.

We posted non-GAAP operating earnings from continuing operations of $509 million for Q4 and $2.1 billion for the year.

Net interest expense and other was $35 million for Q4 and $219 million for FY '09.

The year was slightly lower than we had previously anticipated due to favorable valuation adjustments on certain derivative instruments at the end of Q4.

Our non-GAAP tax rate for the year was about 33.2%.

And we averaged 361.5 million fully diluted shares outstanding.

Our GAAP tax rate was 31.4%.

We reported strong operating cash flow for the year of $1.6 billion which reflects our performance exiting FY '09 combined with excellent working capital management.

Including a reduction of approximately one inventory day during Q4 versus the prior year and three days sequentially versus Q3.

Non-GAAP diluted EPS from continuing operations was $0.86.

For the year we finished with non-GAAP EPS of $3.48.

Which reflects a shift of our Martindale business to Discontinued Operations in Q4.

This shift reduced Q4 '09 EPS from Continuing Operations by about $0.01 and fiscal '09 EPS from Continuing Operations by about $0.03.

The results were in line with our expectations.

Special items were approximately $54 million for the quarter, and $177 million for the year, which negatively impacted GAAP EPS by $0.11 for the quarter and $0.35 for the year.

The primary component was the costs associated with the planned spinoff.

Pre tax impairments and other totaled about $12 million in the quarter and $25 million for the year.

This had a neutral impact to GAAP EPS in the quarter and positively impacted GAAP EPS by $0.05 for the year due primarily to tax benefit associated with the past divestiture of PTS.

Finally, costs associated with the spinoff that were not included in special items, primarily duplicate infrastructure costs totaled $8 million for the quarter, and $10 million for the year and negatively impacted the quarter and the year by $0.01 and $0.02 respectively.

Now a few general comments on segment performance.

HSCS had a strong finish to FY '09.

Revenue increased 11% to $24.3 billion for the quarter.

And increased 10% to $96 billion for the year.

In the fourth quarter we had strong sales growth across all classes of pharma customers.

Bulk pharmaceutical customers grew 16%.

And importantly sales to non bulk pharmaceutical customers increased 9%.

Much better balance than what we have seen for most of the year.

For the third consecutive quarter, HSCS reported positive operating growth.

In Q4, segment reported an 8% increase in segment profit, to $341 million.

Specifically, profit contribution was driven by revenue gains, growth in generics, strong performance in our Cardinal Health fee for service arrangements with brand manufacturers, strength in nuclear pharmacy and disciplined expense management.

For the year, the HSCS segment posted slightly positive profit growth.

All in all we are encouraged by the progress we made the segment over the year which gives us the confidence that we are on the right path.

We realize FY '10 will be a transitional year with important work to be done for long term sustainable growth.

Clinical and medical products segment, segment profit down 9% for the full year, in line with our revised expectations.

The deferral in hospital capital spending and the ship/hold on the Alaris infusion system continue to impact the business in Q4.

As a reminder, the ship/hold was lifted on July 10.

Dave and Ed will cover this in greater detail.

Across the organization we have continued to exercise good discipline regarding operating expenses, reporting total SG&A that was 3% lower than last year's Q4, despite a significant increase in revenue.

Strong cost and capital management will continue to be a key focus going forward.

As I'll elaborate on in my later remarks.

With that I'll pass the call to George to provide an update on new Cardinal Health.

Thanks, Jeff, and good morning everyone.

Let me start by recognizing our retiring Chairman and CEO, Kerry Clark.

The upcoming spinoff underscores the worke he has done to strengthen and refine our portfolio of businesses.

Enabling a renewed focus on our core strength for both Cardinal Health and CareFusion.

And with just two weeks before the spinoff is scheduled to be completed I'd like to personally thank Kerry for his leadership, his support and his friendship.

I feel very good about the Company, what the Company accomplished last year, particularly the strong performance of the pharmaceutical businesses across all customer categories in the second half of FY '09.

Our overall performance was better than we originally anticipated and I'm encouraged by our progress.

We are clear on our priorities to sustain, improve performance going forward and we're taking aggressive action to get that work done.

We're committed to improving the customer experience and we are tracking our progress closely.

We have an extremely robust and ongoing customer feedback initiative that covers all classes of trade and we are actively using the rich data from this program as a management tool.

We saw a statistically significant increase in our customer loyalty index this past year with broad-based improvements across our businesses.

We will continue to focus on margin improvement and let me provide some specifics.

We are more thoroughly segmenting our customers to optimize our portfolio of products and services.

We are taking steps to improve our pricing processes.

We have made -- we have instituted programs to increase customer contract compliance.

We have made significant enhancements to our generic program.

We have taken the necessary steps to rationalize our infrastructure to offset any ongoing costs associated with the CareFusion spinoff.

We will maintain disciplined cost management, making sure our cost structure is lean and appropriately sized for our business going forward.

We further optimized our portfolio with a decision to divest Martindale and specialty scripts pharmacy and as you may recall, we announced in June that we are changing the Medicine Shop international business model to better align this business with our existing operations and put this well-known national brand on the path for growth.

With the CVS agreement in place for four more years we now have a high degree of stability in our chain customer base particularly with our two largest accounts for at least the next two years.

We enhanced our anti diversion system and processes to ensure they are effective at detecting the diversion of controlled substances while minimizing the burden on legitimate customers.

Without question, we can't lose focus here but hopefully this puts the challenges of the past 18 months largely behind us.

These enhancements and our increased focus on retail independent pharmacies help drive an 8% growth in this class of trade in the fourth quarter.

Additionally, improvement in our service levels and enhanced contract buying compliance particularly in generics has resulted in our third consecutive quarter of growth in our DSD or direct store door business.

We also had record attendance last month at our annual retail business conference for independent pharmacies.

We launched exciting new programs to help our customers more effectively market their stores, improve the profitability of their front of store operations and provide value added services through specialized care centers.

We will continue to drive our efforts to deliver meaningful solutions that help independent pharmacies run their businesses more cost effectively and capture a greater share of wallet for Cardinal Health.

We've made significant changes to how we work with generics manufacturers.

We have expanded relationships with key generic partners and feel that these enhanced relationships will provide incremental value to both Cardinal Health and our generic partners.

As well as a number of key benefits for our customers, including higher service levels, greater clarity on their incentives and generic cost of goods, a more consistent product supply and fewer market disruptions for product switches should manufacturer supply shortages occur.

We are confident that this move combined with the other aspects of our Source generics program will provide our customers with a generic offer that is second to none.

And we were pleased to see a 14% growth in our generic business in Q4, outpacing the market.

We achieved exceptional performance in nuclear pharmacy services in FY '09.

Our nuclear team skillfully managed through supply issues and generic launches last year while increasing profit by more than 45% in Q4 and more than 20% for the year.

We also recently announced an accretive acquisition that increases our Cyclotron production facilities in the PET space in the area of strong growth within the nuclear business.

Our medical businesses had a solid year but did see a lighter fourth quarter and let me provide some additional color for you here.

Hospital supply had a tough quarter based on the carry-through of the loss of a large customer earlier in the year.

However, the business did sign two new customers in the quarter, one whose contract will begin early calendar 2010.

And the exclusive software agreement we signed with Deman Data Systems in March providing data cleansing services and information to help hospitals manage spend is progressing well with a good pipeline of opportunities for this value added service.

We are transitioning from a product management approach to a more holistic, category management approach by offering a specific formulary or portfolio of products that satisfies our customers' needs.

We will balance choice and the aggregation of volume to deliver the most cost effective solution to our customers.

Based on the success we've seen with our needles and syringes portfolio we'll be rolling out a number of category initiatives in FY '10.

The work being done in our Presource kitting business has improved our response time to customers and profitability with positive earnings growth in the fourth quarter for the first time in three quarters.

And even with the meaningful revenue increase in FY '09 we leaned out our inventory by nearly 10% year-over-year.

In the ambulatory care setting we entered into a partnership with All Scripts to license their leading web based electronic health records software for physicians' offices.

With this addition to our extensive portfolio of products and services, we truly are a one stop provider for physician's practices.

We continue to expand our position in the ambulatory space as we capture more of the opportunity and as care moves to new settings.

Our work on our medical business transformation is progressing well.

We're now in the strategic design phase of the project and have established two customer advisory groups to directly integrate the voice of the customer in this important work.

Our medical group of businesses is poised for growth with its differentiated portfolio of self manufactured products, unmatched, channel breadth and a broad range of compelling offerings in supply chain services and specialized sales capabilities dedicated to unique needs of our various constituencies.

In summary, we're tackling the issues we need to tackle and we're making the investments we need to make in order to exit FY '10 in a stronger position and put ourselves in the right trajectory going forward.

Let me take this opportunity to make a few comments about our philosophy with respect to earnings guidance.

We are committed to providing you with more color commentary than we have generally done in the past.

We want to ensure that you understand the trends we are seeing and the assumptions we are making.

Balanced by our need for flexibility to make the right business decisions.

While I fully expect the progress we made in FY '09 to continue in FY '10 the results will be somewhat masked by the strategic actions we are taking, customer contract repricings and the assumption of some unfavorable year-over-year comps in generic launches, a factor that Jeff will cover in more detail.

From a segment standpoint we do expect a transition year to be felt more in our pharmaceutical segment as that segment experiences the significant headwinds we discussed on June 2, and which Jeff will discuss in more detail.

We anticipate that this will be partially offset by our medical segment showing strong profit growth.

This segment already accounts for nearly a third of our bottom line.

Before I turn the call over to Jeff let me just say that with the spinoff of CareFusion the new Cardinal Health will remain a business of enormous scale and reach.

Providing comprehensive healthcare and supply chain solutions but one which is more focused, more customer centric, and will act more nimbly.

Now let me hand the call over to Jeff.

Thanks, George.

Before we dive into the details I want to remind everyone that all of our guidance commentary will be based off of the adjusted financial statements for Cardinal Health excluding the operations of CareFusion.

We filed a Form 8-K this morning for that information.

Some of the details are also included on slides 20 to 23.

Turning to slide 13 and a look at our consolidated guidance.

We currently expect revenue to be up modestly on a consolidated basis from the FY '09 base of $96 billion.

Which essentially reflects market based growth across the business with a fairly conservative view of pharmaceutical market growth and the overall economy.

Our pharma business revenue may grow slightly better than the overall market due to our specific basket of customers.

We expect non-GAAP earnings per share on a consolidated basis will be between $1.90 to $2 down 12 to 16% from the adjusted FY '09 base of $2.26.

Which is primarily due to the items we outlined at our June investor event.

I will go through the segment specific assumptions in more detail now.

Starting with the pharmaceutical segment assumptions on slide 14, based on a number of factors we outlined in June we do anticipate pharmaceutical segment profit to decline in FY '10.

From a revenue perspective, although we are encouraged by the recent trends evidenced in retail sales reports, we are projecting the overall segment to grow modestly.

As I mentioned earlier, we are seeing some favorable trends of bulk and nonbulk revenue growth being more closely aligned based in part on the actions we've taken to improve our offers and service to ultimately drive a mix shift in our customer base.

We do anticipate a significant headwind related to the year on year comparison driven by the timing of generic launches and price deflation.

We believe the difference in our respective fiscal years largely explains why our comments on the generics business may not necessarily line up with those of of our direct peers on this topic.

This is actually what we see as the largest head wind we face in FY '10 and exceeds $100 million year on year.

As George mentioned, there are some key strategic moves we are taking now that will provide longer term benefit but have a negative effect on FY '10.

Let me highlight two of them.

First, we expect that our decision to reposition Medicine Shop will weigh on the year.

While this represents an initial decline due to franchise fee restructuring we are convinced this is the right move for the future as we build on that brand to grow our retail independent business.

Second, a transition of our Pfizer relationship to a fee for service model is consistent with our strategic direction and although economically neutral to us over the longer term, will provide a tough comparison during the second half of our fiscal '10 compared to the previous year.

We believe the combination of these two strategic moves represents more than $50 million in segment profit headwinds in FY '10 versus FY '09.

In the nuclear business, we believe it will continue its positive growth with an appropriate risk adjusted view for the recent disturbances in the supply chain.

Now let's take a look at slide 15 and our assumptions for the medical segment.

We anticipate that revenue will grow modestly in the current environment.

We expect a significant benefit from the fall in commodity prices from the highs of last year.

Net net, external market factors are a positive for the year.

Our transformational investments in the business will negatively impact the results initially but position us well for the long term.

Total expenses for these programs in the year will approach $40 million, or more than $25 million incrementally year on year and will be quite front end loaded.

We are also making some strategic moves in the medical segment relating to sourcing, category management and new products which net net are a positive.

On line the net effect on all these factors should result in strong medical segment profit growth for the year.

In addition to the segment specific items noted, I want to highlight that we have taken additional broad based actions to improve the cost profile of our businesses.

In addition to the normal hiring freezes and restraints on compensation and discretionary spending that you would expect during times like this, we have taken some specific actions to ensure that our infrastructure for new Cardinal Health is competitively positioned.

In fact, total headcount for new Cardinal Health is down over 400 people since the beginning of FY '09.

In total, excluding the impact of certain transformational investments, we expect SG&A to be relatively flat year on year.

Finally, while we do not intend to provide quarterly guidance I would just remind you that the business factor headwinds and investments that I have cited here are slightly weighted to the first half of the fiscal year.

Turning to slide 16 and our underlying corporate based assumptions.

We expect interest expense in the 120 million to $130 million range.

Shares outstanding of about 362 million.

We anticipate a non-GAAP tax rate of approximately 36 to 37%.

I should also mention another significant item which I have discussed previously.

For the spinoff of CareFusion, we have to reassess the amount of offshore earnings that will be invested indefinitely overseas.

Given the planned spinoff and the decreased international scale for Cardinal Health, we anticipate that not all offshore earnings will be invested indefinitely offshore, that's an additional tax charge will be incurred attributable to the repatriation.

Initially this is largely a noncash charge but could eventually translate into cash tax payments when we repatriate the cash related to these overseas earnings over time which we anticipate occurring over the next several years.

As previously disclosed, our current estimate of the total noncash charge is approximately $150 million.

This charge is not reflected in the non-GAAP ETR of 36 to 37%.

We expect capital expenditures in the range of 200 million to $250 million.

With vast majority related to investments in IT systems and infrastructure, and the remainder associated with maintaining our physical facilities.

We expect to end the year with a little over $2 billion in debt.

Along the lines of capital deployment, I want to remind everyone that Cardinal Health intends to maintain our current dividend on a go forward basis after the spin which includes the 25% increase that we announced in June.

This will be expected to result in a payout ratio of 30% based on our FY '10 guidance.

Finally, related to upcoming events there are a few that I would like to highlight.

We will be completing some additional SEC filings as a result of the spinoff.

I want to call three of these filings out here for clarity.

The first will be our 10-K filing in the next few weeks.

That will show Cardinal Health financials as the Company existed on June 30, without any adjustments for the spinoff.

Second will be an 8-K filing in early September.

This will be a short form, showing pro forma Cardinal Health financials dating back to fiscal 2007 as if CareFusion had occurred prior to fiscal 2007.

There will be a difference between this filing and the set of adjusted new Cardinal Health financials that were filed today.

Primary differences relate to certain adjustments that are required under the SEC's pro forma reporting rules.

The third filing will be in November and will include adjusted financials.

The adjusted financials will look similar to those included in today's 8-K filing.

With that I'll turn it over to George for a few closing remarks before we go to Q&A.

I hope that we provided enough granularity to give you a feel for what is driving our performance.

We're making important investments and tackling the issues we need to tackle in order to set ourselves on the right trajectory.

While some of these will negatively impact our numbers in FY '10, we do have a good line of sight on how these same factors will play out in FY '11 and this increases our confidence in the path going forward.

First in the pharmaceutical segment, while our competitive market always brings some pricing pressures, we will have a high degree of stability in our chain customer base now that we have signed two major chain customers to multi year agreements.

We expect that our generic comps will improve as generic launches begin to pick up in our fiscal FY '11 and again in FY '12.

Our Pfizer DSA transition will be complete and we'll enjoy a full year of benefit from that switch.

And we expect that our sourcing and medicine shop model changes will begin to bear fruit.

On the medical side, the benefits from our focus on category management, sourcing as well as our ambulatory care business will be more evident in our performance.

Some benefits of our continued investment in our medical business transformation will begin to materialize later in FY '11.

And overall we expect the medical segment to continue the strong growth trajectory we will begin in FY '10.

As I close, let me leave you with this.

First, the demand for our products and services is likely to increase given the demographics and the national focus on providing all Americans access to healthcare.

Second, we are course correcting for the long term.

And finally, I feel good about the progress we're making and about the team we have in place to drive our performance.

Now, we'd be happy to take your questions.

(Operator Instructions) And your first question is from the line of Lisa Gill with JPMorgan.

Please proceed.

Thanks very much and good morning.

Just two quick questions.

First, Jeff, can you maybe just talk about the underlying assumptions for Rx growth in your guidance for the coming year?

And you hadn't talked at all about cash flow.

What are your expectations for cash flow guidance?

Thanks, Lisa and good morning.

As I stated in my remarks, I think we've taken a relatively conservative view of overall pharma growth, probably largely in line with what IMS is projecting over the 10 to 12 period IMS is projecting around flattish growth I think for FY '10, it's up 1 to 2%.

I would say our overall revenue projections for pharma are largely in line with that as I described them modest and relatively conservative.

Regarding cash flow, don't want to get into specifics yet on that but I will say that we did finish FY '09 with very, very strong cash flow due to some excellent working capital management as I said about $1.6 billion, clearly with the spinoff of CareFusion we wouldn't expect anything near that in FY '10 and I would expect our cash flow to be under $1 billion in FY '10.

And then just one follow-up.

When you talked about direct store sales, obviously coming in better than what we were expecting, are you seeing any shift out of warehouse or is this just increased penetration into existing accounts or accounts that you're bringing on?

Yes, Lisa, it's primarily the latter.

I would say it's not particularly a shift.

I think its increased compliance for us, a little bit of recovery of some business that we struggled with during our diversion period so I would say more of that than shift.

Okay.

Great.

Thanks, George.

You're welcome.

And your next question is from the line of Glen Santangelo with Credit Suisse.

Please proceed.

Yes, George, just a quick question on fiscal 2010.

You talked about, a fair amount about all the investment spending that you need to make to the infrastructure in that year.

Could you give us a sense for maybe how much of that spending is kind of one-time in nature.

Because what I'm trying to reconcile is, we think about fiscal '10 as a transition year.

Should we think about fiscal '11 as a recovery year?

If I thought I heard you correctly, you're talking about more generics in 2011, you're anniversarying the Pfizer fee for service transition but yet at your Analyst Day you only talked about earnings growth end of fiscal '10 in the high single digit rate.

How should I reconcile your thoughts on that?

Let me let Glen, let Jeff start and I'll jump in.

Let me address specifically your questions about investment.

I'll talk primarily about capital investment but obviously that flows through to the expense we recognize as well.

Let me refer to incremental investment, virtually all the investment referring to relates to IT systems and infrastructure.

Of the 200 million to $250 million of capital expenditures that I laid out for fiscal '10, up to 80% or so of that relates to IT systems in some form or fashion.

A good chunk of that relates to two very specific programs and one is a transformation that George spoke about.

Second one is some significant improvement to customer facing systems that we're making in the pharma business.

In terms of how many of those are one-time versus ongoing, I would say we have a particular bolus in FY '10 and FY '11 related to specifically those two programs I just cited and that it will level off somewhat after that.

But I would think going forward, capital expenditures in the range of around $200 million, slightly below, probably a reasonable expectation, given the profile of our business and our dependence on the competitive world class IT systems to drive customer interfaces, et cetera.

Hopefully that answers that part of your question.

Just very generally, again as I disclosed in my comments, I think many of the issues that we see in '10 begin to give us some relief in '11.

As Jeff said, the medical transformation is probably the single largest one that will carry on.

My comments in June really were about steady state growth rates rather than intended to be a specific guidance for FY11.

Okay.

So George, just to follow up, is it fair to think that given we have the depressed growth rate in fiscal '10 we maybe could see a little bit higher than normal growth rate in '11 as some of these headwinds become tail winds in that specific 12 month period?

Glen, it's premature for me to start guiding for '11 but I think hopefully in my comments you can get a little bit of a sense of what factors influence us in '10 and then you how those might change as we go into '11.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of Larry Marsh with Barclays Capital.

Please proceed.

Thanks.

Good morning.

One quick question and a follow-up.

Jeff, just at your analyst meeting you went through a number of factors that you said would impact your business for fiscal '10.

I think got you at about $1.90.

I just want to clarify.

Are you suggesting today that every one of those factors is about the same size as what you called out in June?

And if so, which change that gives you a little bit more confidence on the upside?

Is it -- you mentioned raw materials and presource or is there something else there as well that is a little bit of a tailwind?

Good morning, Larry.

Good questions.

I would say if you look at the three buckets that we described at the June investor conference, they were market factors, strategic positioning decisions and transformational investments.

I would say the first and third of those have largely stayed the same.

That would be the market factors and transformational investments.

I would say what's slightly improved is some of the strategic moves, positioning moves that we're making including some of the efforts we're making relating to generic sourcing, and some of the sourcing in category management moves that we're making in medical are delivering returns faster than we had anticipated.

So I would say the improvement has primarily come through some of those performance improvement initiatives and the strategic moves that we're undertaking.

So just a little bit less of a bad guy on some of those initiatives as opposed to anything fundamental that's a lot better versus June?

I would say, first of all, I would say the bad guys as you described them have stayed about the same.

I think we have accelerated the improvements in some of the good guys.

And specifically, we've put in place some very specific short and longer term performance improvement initiatives, like the generic sourcing initiative, like some of the category management and pricing initiatives that we're pursuing on the medical side and I would say that those are bearing fruit more quickly.

I would say operational improvement is happening at a slightly accelerated rate to offset what we knew were going to be the bad guys related to some of the strategic moves.

A quick follow-up on the share count, I'm a little surprised you're guiding to slightly up for this year.

How much in the way of equity program issuance are you assuming and how much in the way of share repurchase, roughly and is there anything unusual with the typical seasonal option grant this year that could boost that where managers have a chance to get more options this year?

First of all, we're assuming relatively modest both issuances and repo.

Issuances from a dollar standpoint of about 50 million and the equivalent amount of repurchase to offset that.

I would say the share count is going up very slightly just because of certain assumptions we're making regarding share price, et cetera and the dilutive impact that has on the diluted number of shares but really we're assuming repo to offset the issuances.

In terms of when grants will be issued, our typical pattern is for options to be priced and grants to be made on August 15.

However, our Comp Committee and Board made a decision to move that back to September 15, this year, really due to the fact that the spin is not happening until September 1, and the complexity of issuing all those shares on August 15 and then having to adjust them post spin just didn't warrant going ahead with the August 15, date so we moved it back one month to September 15, to accommodate the spin.

Thanks.

Your next question comes from the line of Tom Gallucci with Lazard Capital.

Please proceed.

Thank you.

Good morning.

Just sort of taking back to Glen's question in terms of how we should expect the upward trajectory over time off of sort of the transitional year this year, some of the proactive things I guess you've discussed, the generics programs I guess two things there.

One, your relationships with manufacturers and two, getting compliance improved on the purchasing side with your customers.

Which of those is sort of a bigger impact and how do you expect sort of the progress there.

Then on Medicine Shop, same idea.

How do we think about what you're doing there as relates to a negative impact and then when you see the positive effects of that over the next year or two.

Yes, Tom, it's George.

On the first, it's a little bit difficult to disconnect the sourcing and the selling.

In fact, I would argue that in some ways may be a part of our challenge historically have been not tight enough connection between the sourcing and the selling.

So think about it as sort of a balanced issue.

They're both very important to us.

I actually feel like we're making progress on both.

On the sourcing side, it can happen more quickly.

You're talking about fewer relationships.

Obviously on the selling side you've got thousands of customers, each one in its own marketplace, so you're trying to build the credibility of your program and the power of the offering.

But I feel like we're making real progress on both.

So I'm encouraged by that and feel very positive about it.

On MSI, think of as a gradual process.

What we're doing is converting, we'll trade off the royalty or the licensing stream for increased growth in that business and increased compliance and sell-through of our products.

So it's almost like you have to think of a breakeven point during the course of 2010, we'll be below that breakeven.

As we move into 2011, we'll begin to turn the corner there and again, for us long-term strategically it's the right positioning and really allows us again to take advantage of what I think is a powerful brand.

On the generic compliance on the sell side, is there any metric or way that you can give us some perspective on where that stands now versus where you think it could be to help us understand the magnitude of what we're looking at?

I'm not comfortable really providing complete clarity here.

This is pretty sensitive proprietary information, but I would say this.

That we still in some of our segments underperform our peer group as it relates to compliance so we've been working very hard in recent months to look at those factors that are undermining our compliance.

We've actually made some of that turn and we're beginning to see some progress right now.

Thanks, George.

You're welcome.

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

Please proceed.

Hi, thanks very much.

George, could you give us an update on your efforts to retake some of the lost share in the independent pharmacy market?

And if you're willing, give us a sense about what percentage of that -- of your book that class represents?

John, it's such a hard number to reconcile because you don't have a one to one I lost this and therefore I get it back because we're getting other business in the meantime.

So a pure apples to apples reconciliation is probably impossible.

What we can say is roughly what we were losing at our low point and it was roughly a run rate of $1 billion a year.

We're really encouraged to see independent growth in Q4 at 8%.

I don't want to predict that's the model going forward but clearly we're making some headway.

Now that relates to improved compliance but it also relates to picking back up some of these customers, some of whom had left us, so it's -- I wish I could give you a complete reconciliation.

I can't even do it here internally.

But I think we can see from the data that we're making progress in that effort.

Excellent.

Thank you.

And then just a quick unrelated follow-up.

Within the medical business, did you get any benefit, do you think, from swine flu in the quarter?

We did, although in the overall mix of our numbers, it's probably a rounding error but we did see some uptick, particularly in our lab business on diagnostic kits.

So that's probably the place where we saw it most significantly.

But in the overall mix, it's pretty small and I would say probably not all that material.

Great.

Thanks very much.

You're welcome.

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

Please proceed.

Hi, George or Jeff.

Can you gives an update on the divestitures, timing and expected proceeds you hope to get from Martindale and everything else in the category?

And then just secondary, Jeff, did you provide a reason, I saw interest expense and other expenses off sharply sequentially.

Anything unusual in that line item?

Let me let Jeff tackle both of these.

Hey, Bob.

Good morning.

Regarding divestitures, we're in the middle of the process right now so I don't want to comment too specifically on that because we're in the middle of receiving bids and evaluating those.

I would say both sale processes are well under way.

We're seeing a good deal of interest in both.

The Martindale divestiture is a much larger one than Specialty Scripts.

Someone in a call before mentioned $200 million as a likely price for that and I would say that's definitely in the ballpark for Martindale and Specialty Scripts, considerably smaller than that.

Regarding the falloff in interest expense and other, there were a couple moving parts in there but the most significant one was really the way we have to mark to market our counterparty exposure on our derivatives agreement at the end of each quarter.

Through much of FY '09 that was actually a negative hit to us, given what was going on in the credit markets and CDS rates for our counterparties.

Actually, in Q4, those CDS rates came down considerably for all of our counterparties and as a result we actually had a mark-to-market gain on that counterparty exposure at the end of Q4.

That was the primary driver.

Is there a run rate going forward then?

Should we be a little bit more critical in that line item going forward then?

In terms of the total interest and other line for FY '10 I think the guidance that I gave is a reasonable expectation.

If you're talking specifically about the FAS 157 adjustment that we need to make at the end of each quarter, that's almost impossible to forecast, right?

Okay.

It really depends on CDS rates during the quarter.

We built a bit of cushion into our forecast for that but on a quarter-to-quarter basis it's one of those things that very hard to predict, in the current environment.

In a normal environment, you wouldn't tend to see a huge amount of variation in CDS rates.

Clearly FY '09 was an exception to that.

Got you.

Thank you.

Thanks, Bob.

And your next question comes from the line of Randall Stanicky with Goldman Sachs.

Please proceed.

Great.

Thanks for the question.

Just after this upcoming investment year, a follow-up to the previous, how do we think about the profitability or how are you guys thinking about the profitability targets for the distribution businesses going forward?

And George, I'm thinking from a margin perspective.

Let me try to give you a broad answer.

Obviously we're, as I mentioned in my comments we're focused heavily on margin.

There's an interesting dynamic in our business which we have discussed with you that has to do with our mix and so one of the interesting -- the dynamic here at work is that the part of our business that is lower margin in pharmaceuticals which is our bulk distribution happens to be and it's historically been a higher growth part of our business and so we have this dynamic at work which is growth as we've seen now in margin and the components of our business but in the overall mix we've been dealing with an overall weighting that is heavily on the bulk side.

So that's been one of the forces that I think has been really noteworthy about the business.

But I would say in general we're doing the things that we need to do to drive margin improvement and we're focused heavily on doing that.

All of our metrics are tied to that.

Our comp systems are tied to it and focused in each of the components on the driving to margin.

Let me ask a separate question.

In terms of the investment that we're expecting in fiscal 2010 this year, how do we think about the split in that spend between the pharma and med distribution businesses?

I would say slightly more than half of the spend is going to be in medical, in the medical segment, and that's largely because of the large medical transformation that we're in the midst of implementing.

And then just my last question, I'm sorry if I missed it, but on guidance I think George had talked about providing more guidance going forward.

Does that include quarterly guidance going forward?

No, we weren't referring to quarterly guidance.

Our ongoing practice will be to not provide quarterly guidance on a go forward basis.

What George was referring to was really to continue to provide as much color as possible regarding what's driving our results and hopefully we took a shot at that today in going through the individual segments and some of the specific drivers, positive and negative, in each of those segment and we also intend to give as much color regarding some of the corporate drivers like interest expense and shares, et cetera, as possible.

But other than our comments today about H1 being slightly more negatively weighted for the year, we don't intend to give specific quarterly guidance.

Fair enough.

Thanks, guys.

Thanks, Ron.

Operator, actually we promised at about 9:15 Eastern we would turn the call over to CareFusion but before we do that I would like to turn it over to George Barrett for some final comments.

Let me thank everyone for joining us this morning and I would like to hand the call over to Carol Cox, Vice President of Investor Relations for CareFusion Corporation.

Great.

Thank you, George and Sally.

Hi, as I said, I'm Carol Cox, Vice President of Investor Relations for CareFusion.

Thank you for joining us on today's call.

As we provide an overview of the CareFusion business and results of operations for fiscal 2009 ended June 2009, as well as guidance for fiscal 2010 ending June 30, 2010, as a standalone Company.

Joining me on today's call are Dave Schlotterbeck, CareFusion CEO; and Ed Borkowski, our Chief Financial Officer.

Before I turn the call over to Dave and Ed I would like to make a few remarks.

As Sally mentioned earlier, CareFusion expect to begin when issue trading on the New York Stock Exchange on our about August 21.

On August 31, when issue trading is scheduled to end for CareFusion and regular way trading is expected to begin for our common stock on September 1, under the symbol CFN.

In today's call we will reference fiscal 2009 ended June 30, 2009, pro forma results which reflect CareFusion results as if the separation and related transactions had already occurred.

Earlier today we filed a fiscal 2009 pro forma results as well as pro forma results for fiscal 2008 ended June 30, 2008 with the Securities and Exchange Commission on Form 8-K.

Copies of these documents may be found on the SEC's website as well as in the SEC filing section of the investor relations portion of the CareFusion website.

In addition, I would like to remind investors that during today's call we will be making statements that are forward-looking and consequently are subject to risks and uncertainties.

Examples of these statements include statements regarding our fiscal 2010 guidance, our expectations regarding hospital capital spending, our expected standup costs and other costs related to the separation from Cardinal Health and other statements regarding matters that are not historical facts.

You should be aware that certain factors may affect us in the future and could cause actual results to differ materially from those expressed in these forward-looking statements.

Such factors include the risk factors set forth in this morning's press release and those set forth in our Form 10 and in our other filings with the SEC.

We urge you to consider these factors and remind you that we undertake no obligation to update the information contained on this call to reflect subsequent events or circumstances.

With that I will now turn the call over to Dave.

Thanks, Carol.

I want to provide some perspective this morning on how we closed fiscal '09, how we are positioned entering FY '10 as we approach September 1, and our guidance for FY '10.

Before I do that, let me also add my thanks to Kerry Clark.

Kerry's been very supportive of several strategic decisions that have helped set the stage for this spinoff.

These include some of of our more recent acquisitions like Viasys which put us in a leadership position in respiratory care and Anturia, which substantially strengthened our position in infection prevention.

These moves in addition to acquisitions on the distribution side of the business have put both companies in a better position to ultimately create greater long-term value.

More recently, Kerry's steady hand during the past year has enabled us all to achieve all of our major goals for the spinoff in a relatively short period of time.

This has put both companies in a strong position to realize the benefits we all anticipate from the spinoff so thank you, Kerry.

Regarding the spinoff, we have worked diligently to prepare and are ready for our launch.

As we have previously announced, we expect to start regular way trading on the New York Stock Exchange on September the 1st, and when issued trading on or about August 21.

Now, I'll start with our FY '09 results.

We closed the year as we said we would, segment profit declined 9% from the prior year, in line with what we expected.

As we discussed during our quarterly calls, the primary drivers of top and bottom line declines included softness in capital equipment revenue and our inability to install new Alaris system orders due to the ship/hold.

As we announced on July the 10th, following the close of the quarter, we received an important regulatory clearance that enabled us to resume shipments of the Alaris system.

We believe the investments we have made in our quality systems will enable us to leverage product quality across our business lines as a competitive advantage.

During last quarter's call, I mentioned we were seeing some early signs of customer orders increasing and that trend continues.

While I want to be careful not to get ahead of ourselves, we see this as a good sign.

Capital equipment orders in the fourth quarter were approximately 10 to 15% higher than we had anticipated.

This brings more certainty to operating plans for fiscal '10.

There were two particularly noteworthy orders.

The first is our contract with the CDC to supply more than 4,500 ventilators for the national stockpile program.

We've seen increased global interest in our ventilation products as customers think ahead to their preparedness plans for the upcoming flu season.

The second order was with HCA.

As we mentioned at our June 2, analyst meeting, this competitive win is our largest Pyxis order ever.

Pyxis med station systems will be installed across more than 140 HCA facilities over the next several years.

So we have good momentum that has continued into our first quarter as CareFusion.

With results that are more in line with what we expect our P&L to look like going forward.

I view FY '09 as a challenging year where we responded to the economic conditions, invested significantly in quality systems and right-sized the business to put us in a much stronger position, heading into the spinoff.

We continue to have long-term factors working in our favor.

It's important to reiterate the key advantages we will have as we spin off as a separate Company.

This is really about how we are positioned to win in the market.

The first is scale.

Of pure play medical technology companies, our size puts us near the top five or six companies worldwide.

We serve customers in more than 120 countries today and we have the resources to continue to expand in a large and growing segment of healthcare.

We believe we have a global market opportunity near $15 billion and we've taken aggressive steps during FY '09 to put us in an even better position to address it.

We've realigned our global operations to reduce layers between management and customers.

We've established clear segments for our sales teams.

We have defined market opportunities in developed healthcare markets and we are selectively pursuing strategic opportunities in emerging markets.

Next, is our focus.

We are sharply focused on measurably improving patient care.

In both the US and other developed markets, healthcare quality and in particular patient safety has become a clear mandate.

In the US, we're staying close to the work under way in Washington around healthcare reform.

I spend a lot of time with hospital CEOs and they believe reform will create an even more pressing need to sharpen their efficiency and quality of care programs.

CareFusion is in a unique position to help.

We are the Company that can help reduce their OR supply inventory by 50% and double their charge capture.

Our products help maintain their compliance with Joint Commission.

And regulators like the DEA.

Our technology helps them measurably reduce infection rates which annually cost the industry $20 billion in the US alone.

While no one can state with certainty how healthcare reform will look, I certainly believe it will continue to move the industry in the direction of improving outcomes and efficiency.

And this is what we do best for our customers.

Third, our market leading portfolio is a strength today and a platform for growth tomorrow.

With leadership positions in infusion, dispensing, infection prevention, respiratory and surgical products, we are well positioned with our core customers and have strong channel for new products and technologies.

With the increased emphasis we are placing on R&D investments, we see a great opportunity to deliver new products with new value through our existing customer relationships.

A good example of this product line innovation is our Enve ventilator.

This nine pound ventilator delivers features and functions common in ventilators that weigh closer to 90 pounds today.

I talked about this product on last quarter's call and I'm pleased to say we began early customer shipments in the fourth quarter.

Perhaps even more important than innovation within our product lines is the innovation we are driving across our product lines.

We call this horizontal innovation.

And it is a key differentiator for CareFusion.

For example, this fiscal year we will standardize how our devices connect to our customers' networks and we'll focus on capabilities to remotely access and control our devices.

This will improve work flow and reduce the steps and time to adjust therapy.

Over the long term and consistent with our focus on innovation, we expect to use data from our own devices to provide clinicians with the information they need to more effectively intervene.

We believe no other Company can do this like CareFusion.

The final differentiator I want to reinforce is the strength of our management team.

This is a team of proven leaders.

With experience across the spectrum of healthcare and medical devices.

We have assembled a deep bench that are very focused on serving our customers and growing this Company.

I also spent last week with our sales teams for a CareFusion kickoff and sales training meeting.

I can tell you firsthand this is a highly motivated group.

Excited about the spinoff and focused on growing our Company and delivering long-term shareholder value.

Now let me transition to our financial guidance.

Over the long term, I want to reiterate what we told you on June 2.

We're committed to topline growth in the mid single digits and earnings growth in an 11 to 15% range.

For FY '10 our results will look a little different as we stand up the new Company and establish our base operating performance.

Ed will provide the detail but let me give you some of the highlights.

First, we have a fundamental operating assumption that sales of capital equipment will not improve substantially in fiscal '10.

Our forecast is based on where we exited the second half of fiscal 2009.

That said, we expect mid single digit topline revenue growth.

As I said earlier, we already have some momentum entering the year as capital orders have shown some early strength.

But I still expect hospitals to remain cautious in their capital outlays through the year.

For EPS, we will guide on an adjusted basis due to the additional cost we will incur as we stand up the new Company.

In fiscal '10, we will establish a new base for performance.

With adjusted EPS in the range of $1.10 to $1.20 per share.

I want to reiterate as I have said in the past, my goal is to always grow earnings faster than revenue.

As a segment of Cardinal, we had a record of consistently doing exactly that at CMP.

However, you won't see this in FY '10 due to the unique nature of our one-time standup costs.

Moving from FY '10, we are very focused on delivering topline growth in line or better than the market through investment in innovation and globalization as we closely balance SG&A spending with the need to invest in R&D and gain leverage on the earnings line.

Before I turn it over to Ed I want to say thank you to our employees who have worked with inspiring dedication during the past year.

In a very challenging economic year, we layered on the complexity of the spinoff, we continued to upgrade our quality systems and made difficult management decisions to reduce our workforce in response to the environment.

The manner in which our people responded and delivered is, I think, indicative of our strong culture and the results orientation you will come to expect from CareFusion.

Now, I'll turn it over to Ed.

Thank you, Dave and good morning everyone.

Before I provide more detail about our guidance for fiscal 2010, and review our fiscal 2009 pro forma financials, I would like to take a minute to go over our approach to managing our business and providing guidance.

We are committed to delivering long-term shareholder value by generating growth in our earnings as we grow our top line and continue to rationalize our costs.

To grow our top line, we will focus on growing our existing product franchises both in the US and internationally, bringing new products to market through our internal development pipeline and pursuing additional opportunities through business development activities that further enhance our product portfolio.

Operationally we believe that with our continued focus and execution, we can improve our margins by driving efficiencies to improve our cost of goods and decreasing SG&A over time.

We will be providing annual financial guidance that will include certain metrics such as adjusted EPS, revenues, operating costs and tax rate.

We believe that this guidance coupled with the previously filed Form 10 and the pro formas filed today provides you with information that will enable you to better understand our standalone business.

Furthermore, we intend to provide an update on our annual guidance each quarter and may in future periods determine to provide additional metrics if they become more helpful or relevant in understanding our business.

As I discuss our financial guidance for fiscal 2010, I will compare these estimates to the pro forma financial statements and adjusted pro forma financial statements for fiscal ended June 30, 2009, that we filed earlier today on Form 8-K.

The pro formas are unaudited and reflect our results as if the separation and related transaction had already occurred by reflecting the impact of our new capital structure, the separation agreements between us and Cardinal Health and the removal of the businesses that will be retained by Cardinal Health after the spinoff.

Our adjusted pro forma numbers further exclude the impact of one-time merger integration and restructuring costs acquired in process R&D and certain nonrecurring spinoff costs.

We have several slides in today's webcast that lay out financial guidance and corporate assumptions for fiscal 2010.

As compared to our fiscal 2009 pro forma results.

I am not going to review each slide on today's call but have provided the slides as a reference guide.

Before moving to our guidance fiscal 2010, I will briefly walk you through the pro forma P&L for fiscal 2009.

Starting with revenue, we recorded total revenue of $3.7 billion including critical care technology segment revenue of $2.5 billion, and medical technology and services segment revenue of $1.2 billion.

Operating expenses including SG&A and R&D totaled 33% of total revenue, driven by costs incurred to stand up CareFusion which were partially offset by cost controls and the restructuring we undertook in March 2009.

The adjusted tax rate was 16.5%.

Primarily reflecting the benefit of a claim filed with the IRS in the third quarter of fiscal '09 related to secured loan transactions involving certain of our sales type lease receivables.

Finally, our pro forma adjusted diluted EPS totaled $1.54 which excludes $72 million in one-time expenditures.

In June, we provided estimated pro forma diluted EPS in the range of $0.58 to $0.62 for fiscal 2009.

Including an estimated $90 million related to special items.

This range assumed a diluted share count of 452 million shares, based on an expected distribution ratio of one to one.

We subsequently announced a new distribution ratio of 0.5 shares of CareFusion common stock for every share of Cardinal Health resulting in 226 million shares outstanding.

This change essentially modified our EPS estimate to $1.16 to $1.24.

Our pro forma diluted EPS result for fiscal 2009 came in higher than our June estimate at $1.32, due to the benefit of lower interest expense, a lower tax rate, and less spending, all of which were partially offset by lower operating results resulting from the Alaris ship/hold and slightly lower sales in our international capital equipment business.

I would now like to turn to our adjusted EPS guidance for fiscal 2010.

As Dave mentioned earlier for the full year we are expecting adjusted diluted EPS to be in the range of $1.10 to $1.20.

Excluded from adjusted EPS is approximately 120 million to $130 million in one time items which are related to the separation, merger integration and restructuring costs certain other nonrecurring spinoff costs, financing fees and costs to start up certain stand alone functions.

The amount of these one time items is higher than the 80 million to $100 million we estimated at the June 2, Analyst Day due primarily to the inclusion of financing costs that were previously forecasted to be included in fiscal 2009.

The balance of these costs are essentially the same.

The adjusted earnings guidance assumes a diluted share count of 228 million shares.

The expected year-over-year decline in adjusted diluted EPS is primarily driven by the incremental 100 million to $110 million in operating costs we will incur related to employee incentive compensation, R&D and costs associated withstanding up as a public Company.

A significant step up in the adjusted tax rate from 16.5% in '09 to approximately 25% in 2010 primarily reflecting a one time benefit incurred in 2009 and the fact that we recorded stronger results in the first half of fiscal '09 before the slow down in hospital capital spending and the Alaris ship/hold impacted our business in the second half of the year.

Turning to our top line, we expect revenues to grow mid single digits from the $3.7 billion pro forma revenue for fiscal 2009, based on current currency rates.

Contributing to our top line growth assumption is a resumption of sales of our Alaris system that had been subject to a ship/hold since February of '09 and was reintroduced in early July.

Increased sales resulting from our infection prevention businesses and increased sales in our respiratory business.

Our capital equipment businesses which make up approximately 40% of the overall CareFusion business on a pro forma basis were significantly impacted in fiscal '09 by the deferral in hospital capital spending while our businesses tied to admissions and procedures were less so.

In 2009 our infusion business was the most affected by the deferral in spending and medication dispensing the least.

The capital portion of our respiratory business was also down but is not as large a part of our business as our infusion or dispensing.

As Dave said, for fiscal 2010 we expect that deferral and hospital capital spending will continue to impact our capital businesses in of similar manner as occurred in the second half of fiscal '09.

However, we are encouraged by recent increased customer activity.

For our critical care technology segment which includes our dispensing, infusion and respiratory business lines, we record a $2.5 billion in pro forma fiscal '09 revenues.

We expect this segment revenue to increase in line with the overall business in fiscal '10.

The increase is primarily driven by our infusion business due to the resumption in sales of our Alaris system which is the main product in this business line and an important driver of profitability.

The Alaris system was on ship/hold for approximately five months in fiscal 2009 during which time we were able to take orders but unable to ship product.

While on ship/hold we were able to maintain our customer base and resume shipping and installations starting in mid July.

While we had originally anticipated resuming shipments in the June time frame, we do not anticipate any negative impact for fiscal 2010 from the timing of the reintroduction in mid July.

In addition, we expect the modest increase in order rates we saw beginning in April to continue throughout fiscal 2010.

The timing of these installation accounts vary but generally take 60 to 90 days to complete and as a result we expect this pent-up demand to be worked down throughout fiscal 2010.

In the remainder of our critical care technology segment, we expect our dispensing business to be essentially flat year-over-year and our respiratory business to be higher driven by some of the developments that Dave discussed in his remarks as well as an increase in demand for some of our respiratory products in response to the expected uptick in swine flu cases starting this fall.

For our medical technologies and services segment which includes our infection prevention and medical specialties businesses, we recorded $1.2 billion in fiscal '09 pro forma revenues.

We expect this segment revenue to increase in line with the overall business in fiscal 2010.

Led my continued strong sales of our ChloraPrep skin antiseptic product from the Enturia acquisition in 2008 and from sales of our products tied to procedures and admissions.

We continue to expect that the majority of our total revenues will come from domestic sales which represented approximately 70% of revenues on a pro forma basis in fiscal 2009.

We believe that we have the opportunity to expand internationally in several of our businesses and expect that this type of expansion will help drive growth over the long term.

We anticipate that our gross margins will be marginally lower in fiscal 2010 due to the current economic environment that has created pricing pressure as well as intensifying competition in some of our product lines.

Partially offsetting these pressures is the restructuring we undertook in March 2009.

Over the long term, we believe that we can leverage our operations to expand margins from their current levels through improved product mix, increased efficiencies across manufacturing, and continued optimization of our operations.

Operating expenses including SG&A and R&D for fiscal 2010 are expected to increase to 34% of total revenue.

Up from the 33% of total revenue we recorded in fiscal '09.

This increase is primarily driven by 100 million to $110 million increase in incremental operating costs over the prior year period relating to employee incentive compensation, R&D spend and costs associated with standing up as a public Company.

As we have previously stated our long-term goal is to increase R&D investment over the next several years to an amount that equals approximately 6 to 7% of revenues.

At our June 2, Analyst Day, we estimated increase in operating expenses for fiscal 2010 of 50 million to $70 million, based on our expectations at that time for total fiscal '09 operating expenses.

Due to expense controls across Cardinal Health, the 2009 operating expenses for CareFusion came in lower than we had estimated on June 2.

While the total amount of operating expenses has not changed, the increase or delta in operating expenses to fiscal 2010 is higher due to the lower spending base in '09.

As you know, on July 14, we issued $1.4 billion worth of senior unsecured notes in tranches of 3, 5 and 10 years which carry a weighted average coupon rate of 5.6%.

On a GAAP basis the interest rate would be approximately 5.8% after taking into account the discount on the notes.

We have additional liquidity of $720 million through our revolving credit facilities for working capital and other general corporate purposes following the separation.

In addition, at the time of the spin we expect to have approximately $650 million of cash on hand.

We are forecasting our adjusted fiscal 2010 tax rate to be approximately 25%.

The adjusted tax rate excludes 120 million to $130 million in one time items that are primarily expensed in the US effectively lowering our US taxable income and therefore reducing our overall GAAP tax rate.

Our tax rate is dependent upon the mix of US to foreign earnings and could change if our earnings mix changes.

Turning to our cash flow, we estimate cash flow from operations to be in the range of 325 million to $375 million in fiscal 2010.

During fiscal 2010 cash flow from operations will include the impact of a significant amount of one time cash items related to the spinoff and as a result we expect that cash flow from operations will increase significantly after fiscal 2010 and beyond.

Finally, we expect our capital spending to be approximately $180 million during fiscal 2010, and depreciation and amortization to be approximately $170 million.

Before I close, I would like to update you on some SEC filings we will be making in the upcoming months.

These include filing our Form 10-K for fiscal 2009 in mid September.

This document will show CareFusion on an as managed basis as the Company existed on June 30, without any adjustments for the spinoff.

In mid November, we intend to file our post effective amendment to our S-1.

This will include full set of financials and related footnotes for CareFusion incorporating Discontinued Operations.

In closing, fiscal 2010 is our first year as a standalone Company with additional costs to operate a public Company.

It is from this base that we anticipate growing our business and believe that it is the appropriate baseline to measure our growth into the future.

Thank you and we look forward to working with you in the future and I'll turn the call over to Carol for questions.

Thanks, Ed.

Thanks, Dave.

If you could open it up to questions and answers.

I know we have several questions.

So I would ask our analysts if you could limit to one question per turn that would be greatly appreciated so we can work everyone in.

Thanks.

Thank.

(Operator Instructions) Your first question comes from the line of David Lewis with Morgan Stanley.

Please proceed.

Good morning.

Good morning, David.

Hi, Dave.

Dave, you walked through some revenue items here in '10 that I want to kind of see if you could be more specific on.

Specifically on the CDC order, that looks like a pretty sizable order, perhaps 70 million, $80 million type of order.

Is that kind of roughly in the ballpark?

Without being too specific, David, I would say that that is north of 30.

Okay.

And would you expect both the CDC and the HCA order to largely be complete in the fiscal '10 period?

I would expect the CDC order to be largely completed in the -- in FY '10, although there is follow-on service and disposables.

However, the HCA order is a multi-year contract and it will take us some time to actually convert all 140 of their hospitals.

Okay.

That's very clear.

Thank you and just a couple of little financial nits here.

Dave talked about some mix in the fourth quarter, kind of returning to some sense of normalization.

The gross margin we saw in the fourth quarter, is that a reasonable assumption that we can assume for the fiscal '10 period?

We are -- I think what we're projecting for fiscal '10 is probably -- if you look at the annual gross margin that we had, we're talking about probably 100 basis points below the annual number, so slightly probably better than the fourth quarter number.

Okay.

Very helpful.

Go ahead, Ed, if I cut you off.

Go ahead.

I just want to reconcile one more thing here.

The 100 million to $110 million of operating expenses related to the restructuring, and the 120 million to $130 million that you have in your fiscal '10 outlook, that's sort of differential of about $20 million.

What's in that $20 million?

I think there's two things.

One is the 120 to 130 are the one-time expenses that we will incur in -- we project to incur in '10.

That is higher than what we had previously estimated, mainly due to financing fees that we had since the spin had anticipated occur at July 1, that got pushed into 2010.

So that's more or less just a push between years.

The 100 to 110 are the incremental costs related to including incentive compensation, employee incentive compensation for the Company, startup costs for the Company and R&D innovation spend for the new Company so those are slightly different.

They're two different buckets.

Okay.

And just lastly, I'll jump back in queue.

Dave, the competitive pressures that you're seeing in certain product lines, could you be more specific on where specifically the competitive pressures that are pressuring gross margins are occurring?

I would say more so in dispensing than in any of our other product lines, we're seeing competitors resort more to competing on price than we have historically.

Great.

Thank you very much.

Your next question comes from the line of Eric Schneider with UBS.

Please proceed.

Good morning all.

Good morning.

Just when I was going through your pro forma statements on the relative operating margin between your two segments, it looked like even including the benefit of Enturia in the year, that the medical technologies and services are certainly a drag to the overall margins.

Do you look at that ex Enturia basically funding for future growth initiatives or is there some way that you can drive that margin forward given the products that are in that category?

Eric, this is Dave.

The profitability in MT&S is largely driven by what I would classify as a distribution business in Europe, which has a significant amount of revenue and I think everyone understands the margins associated with distribution.

We do see an opportunity to improve that over time.

We have actually already started taking actions to right-size that business.

We have felt that it's a bit heavy on the SG&A side and so we do see opportunities to have that be much less of a drag as we move forward.

Okay.

So SG&A is where you think you have some opportunity there.

How long do you think for the R&D increases that we expect to see in critical care will start to show up in gross margin there due to improved mix?

Well, across the board we have focused on several what I would call game-breaking offerings.

I mentioned the palm top ventilator that we've already begun shipments on.

I'll also mention the RFID supply cabinets, which we are -- which we have already installed in two hospitals and I think the notable quote from the nurses are that it's like magic.

And so we have a strong product pipeline over the next 18 months, 40 new products coming out, an increase in R&D, I would expect we will begin to see the product pipeline strengthen within the next 24 months.

Okay.

Thank you.

And your next question comes from the line of Lennox Ketner with Banc of America.

Please proceed.

Thanks so much for taking my question.

If I could just go back to the incremental 100 million to $110 million in incremental spending that you expect for next year, I want to clarify, is there any portion of that that we should be thinking of as kind of one time in nature that will go away in fiscal year '11 or should we think about all that as recurring?

And then also I'm having a little bit of a hard time reconciling that with the 34% operating expense margin that you expect next year, up from 33.

Seems like that should add about 250 basis points rather than only 100, if you could just help me reconcile that.

First, to the first part, that 100, 110 is not -- that will all be recurring.

Those are all parts of costs of running the ongoing Company.

As to your other question, I mean, I think there are -- the other piece that may be running through there is the offset from the cost savings of the actions we took in the spring to sort of -- the project recovery I guess will help to offset some of that as well.

So in overall we're projecting at a 34% rate for SG&A.

That's just SG&A?

That's SG&A and R&D, I'm sorry.

Okay.

Great.

Thanks so much.

And your next question comes from the line of Larry Marsh with Barclays Capital.

Please proceed.

Thanks.

Good morning.

Dave and Ed.

Couple things, just -- I just want to make sure I understand just reconciling the P&L, a couple of the questions.

I understand sort of the incremental difference in spending.

100 to 110 versus I think 50 to 70 saying the total amount is going to be the same, just the starting point is lower.

But then relative to what you said back in June with the lower tax rate, I'm still getting a higher number if you sort of run all that through.

It sounds like you're saying gross margins would be maybe 100 basis points below this year but then it seems like if you sort of plug in your interest expense assumption I'm getting a higher number.

What am I missing and are you giving us a ballpark on interest?

Well, it's hard to tell from a model but I would say the reason why we've sort of given the guidance is to make sure that what we see at the bottom line, the $1.10 to $1.20 sort of giving you as least the goal post to try to manage the rest of the model that you build.

I think there are -- we gave you interest expense of 5.6% as a weighted average.

There's probably other items that come through, other income that we're not necessarily guiding on, sort of currency and other gains and losses that would and likely come through there on a more let's say regular basis so there's probably some costs that may come through there as well that you may not account for.

I got it.

So don't just take the 1.4 and use a 5.8% rate and offset that with some interest income.

Right.

Okay.

And then just on the tax rate, obviously you're calling about 25% because of the mix.

Sort of as we think about that as on a recurring basis, even 11, 12, should we sort of use that mid-20s rate or should we go back to the low 30s as you had talked about in June?

You know what I think for now and I think based upon the work that we've done to date, I would juice the mid-20s as an ongoing rate in the near term here, next year or two.

Two other quick things.

It seemed like at June you had said some signs of improvement but I took away that you're sort of thinking about revenue growth maybe a little bit better than fiscal '09 but not much as you sort of 1 or 2%, now you're sort of saying 5%.

So clearly some improvement versus this past year.

I think in your comments you're not assuming any change in customer dynamic.

What am I missing there?

Is that just geography mix or was there higher Alaris volumes and if so, that's just being eaten up by maybe gross margins and higher costs, is that right?

Larry, there's a number of factors driving the top line.

I'll start with the one that's the most obvious, which is that the shipments for the Alaris system that did not happen in the five months at the end of FY '09 are spilling over into FY '10.

The CDC order that came in in respiratory is going to help us in FY '10.

The -- I will mention that the -- even though the dispensing business as Ed call out this morning, we expect to be flat for FY '10.

That's considerably stronger performance than what we're hearing out of our competitors who have guided to down 17% on revenue for calendar '09.

Then the last comment that I'll make is that in our medical technologies and services businesses, Enturia in particular continues to grow.

So we have a number of growth drivers, actually providing a tailwind in spite of the economy.

Okay.

And one quick final clarification.

You may not be able to comment.

But should we assume the CareFusion Board compensation committee will be meeting to be granting management options post spin or is that yet to be determined?

I think that's a fair assumption, Larry.

Okay.

Very good.

Thank you.

And your next question comes from the line of Mike Weinstein with JPMorgan.

Please proceed.

Thank you.

Open hope you can hear me okay.

I'm on a cell phone in an airport.

Let me start with the Alaris ship/hold.

How much of that impact earnings, EPS in FY '09?

Well, without being too specific on earnings, I think I could say that the revenue that shifted is about $80 million.

And how much do you have to spend incrementally in -- how much did you have to spend incrementally in FY '09 in order to remediate.

Trying to think of expenses, pluses and minuses.

I'm going to have to reach way back into my head and do the best that I can, but I think it's about $18 million that we reserved for the remediation.

Okay.

I was going to ask on the dispensing business, you guided to flat FY '10 which we kind of looks a little bit better than what the competitors are talking about but it does sound like based on your gross margin guidance that that's coming at a bit of a price.

Could you just talk about gross margin trends in dispensing and what gets those to stabilize at some point?

Well, we have seen some competitive pricing pressures in dispensing but as I mentioned earlier, starting with this new RFID supply dispensing product, that is a one of a kind.

It's the only type of product like that in the world.

It really, really helps customers not only manage inventory but track implantables for 10 years which is required by Jayco.

There's a lot of innovation coming between now and the end of the year in the dispensing business.

And I think over time, we will see less and less sensitivity to price.

And do you think competitively in terms of the dynamics that are dictated in the market right now which is competitors, you own this market, competitors who come in, they used price to a degree to try to take market share, do you think that evolves to being a more technology driven market from where it's at today over the next 12 months, is that what I'm hearing?

Technology is exactly where I see the battle field.

Okay.

And is that the same view on the pump market, that once you get the Alaris issues behind you, that technology again dictates that market and enables you to start capturing share again?

Well, just to clarify, even when we were not shipping, we did not lose one customer and we continued to win nearly all of our competitive orders.

So we continue to take market share.

And what drives that is the technology lead that we have enjoyed for a number of years now and that's really where our investment continues to be.

Two more questions and I'll let someone else jump in.

One, could you talk about the opportunity to consolidate your manufacturing base?

You're spread pretty broadly across I think 32 facilities worldwide including 18 in the US.

Could you talk about the opportunity to rationalize that over the next couple of years?

And then second, could you talk about the TSAs with Cardinal and the ability to improve the -- your profitability as those TSAs expire and transition to internal sourcing?

Just to be clear, Mike, the number of manufacturing plants we have are 23, not 32.

We are in the process of planning the rationalization there and I'm not at a point where I can give you any specifics.

As far as the TSAs go, there is an administrative fee associated with every TSA and we have a target of actually doing better than the base TSA cost that we anticipate this year and in FY '11 and our target is to take down our TSA costs, which are currently $160 million a year by 10 to 20%.

That's helpful.

Thank you both.

You bet.

And your next question comes from the line of Kristen Stewart with Credit Suisse.

Please proceed.

Thanks for taking my question.

I was just wondering if you could help us maybe break out the foreign exchange drag for FY '09.

And then the associated earnings impact that that had and how we should think about foreign currency as we look ahead in 2010 from both a revenue and an earnings perspective?

Well, before I turn it over to the financial geniuses surrounding me here, I'll mention by way of example that from a profitability standpoint in Q2 and we did call this out on the Q2 earnings call, we reported 16% profit growth.

It would have been 27, had we not seen the dollar weaken to the degree that it did.

So there has been profit pressure as a result of foreign currency and so with that I'm going to turn the question over to Ed Borkowski.

Okay.

On currency for '09, what we estimated or what we see is -- just to tee it up, most of our business is US, is a big part of our business is US to dollar denominated.

The profits are primarily US even though let's say 30% of our business is international, there's probably less than 10% of our profits are in foreign currency.

And I would say that approximately the currency effect was less than that.

So I'm not -- I think as we get out and finalize and issue our final statements here, we'll get that out for you, but it should give you a degree of magnitude, it would be less than 10% of our earnings.

So just looking ahead into 2010, have you assumed there will be a positive benefit from currency on both the top line and your mid single digit revenue forecast and associated benefit on the bottom line?

For fiscal '10 we're basically forecasting a current rate.

So there's no real assumption about currency at this point in time.

So sounds like currency could then be perhaps level of upside if we see the dollar around current levels?

That's correct.

That's correct.

Your earnings guidance and your revenue guidance at this standpoint is currency neutral?

That's correct.

And then just looking at the restructuring that you guys had launched back in March, I think you had commented at one point that you should see a benefit in 2010 and then obviously the full run rate to be really realized until 2011.

Is that still the case?

And is that assumed within your guidance today?

That is still the case.

It is assumed in our guidance.

I think we had indicated in our June 2nd comments that the overall benefit by FY '11 would be 110 million to $130 million of annual savings.

We expect to see the majority of that materializing in FY '10.

Okay.

And then the pro forma quarterlies that you guys had put out, are those still including what was called some of those trapped costs if we go back and look at the quarterly detail that was filed with the 8-K today?

No, those would be without those.

I think those are standalone CareFusion.

Okay.

So that's a better base rather than the pro formas that were in the--?

Right, exactly.

Prior Form 10s.

Okay.

Perfect.

Thanks very much.

Your next question comes from the line of Rick Weiss with Leerink Swann.

Please proceed.

Hey, Dave, how you doing?

Hi, Rick.

Just two questions.

First, you highlighted the possibility of the potential -- growth driving potential of more international expansion.

Can you give us a little more perspective on your thoughts there and maybe just the strategic steps you would have to take.

Is this internally drivable?

Do you have to do acquisitions and where would you like to see international mix over the next few years go?

Well, let me start at the end of your question.

We're about coming out a third outside the United States when it comes to revenues.

Two opportunities that I see are to introduce differentiated respiratory disposables outside the US.

This is an area where we have an opportunity to grow.

The second that I will mention is in stimulating the dispensing market and we are currently laying the plans to do that and I would expect that we should be able to begin executing on that near the end of this fiscal year.

So is this a major -- is this sort of international drive going to be a major user of cash or as we look at the free cash flow?

I don't necessarily see it being a major user of cash.

I'm a big believer in organic growth and with our more recent organization we have worked very hard to globalize each of our businesses and focus on bringing products to market that have appeal both in the US and outside the US.

The two that I'll point to that I mentioned this morning are the palm top ventilator, the world's smallest ICU ventilator and the RFID dispensing product.

Turning to operating margins, we've talked about it, you've talked about it in several ways.

The various lines and movement mix and cost reduction and despite higher R&D you expect operating margin improvement.

Can you give us any perspective on what you think is a reasonable goal?

I don't think I heard you say -- over the next three to five years, do you think there's 100 or 200 or 500 basis points of margin potential here?

How do we think about it in rough terms?

Well, Rick, frankly, I think it's a little early to be speculating on where we might land but I think if you take a look at some of my track record, you would see continuous growth in operating margins with or without acquisitions.

You want to remind us at Alaris the change over -- from the time you got involved until Cardinal bought it?

Would that be a useful perspective?

I think everyone can look up the history for themselves on that.

Okay.

Thanks a lot.

Thanks.

And your next question comes from the line of Richard Close with Jefferies.

Please proceed.

Yes, just a quick couple questions here.

When we think about the revenue growth outlook for fiscal '10 you called out I think this was to Larry's question the CDC and I guess the Alaris shipments moving over into fiscal '10.

When we ex those out is it fair to say that you're looking for call it around 2% growth in all the other businesses for fiscal '10?

I can't do that math in my head.

I would point you towards FY '11, when I think we will have a lot fewer of what I would call one-timers that are helping the topline.

And we should be back to a bit more normalcy.

We have always managed to outrun the market growth rate and I intend to continue that.

Okay.

When we -- let me try it a little bit different.

If we think about fiscal '10, are you a little bit more confident than I guess at the Analyst Day back in June?

Yes, a lot has happened since June the 2nd, and as I pointed out, we did receive some of these large orders but at the same time, the modest increase of 10 to 15% that we saw in capital equipment orders that started in April has continued.

And that helps with my confidence level in our ability to perform in FY '10.

Okay.

And then just quick question here for Ed, I guess.

With respect to the one-time items and then the incremental operating expenses, the one-time items, 120 to 130, you said that was primarily the difference from the original 80 to 100 is the financing cost.

On the 100 million to $110 million in incremental operating expenses, did that change at all or is that the same number as it was previously?

It's the same.

It's the same number that we had previous -- it relates to the same 50 to 70 that we had provided earlier on July 2nd.

The only difference was the base from the '09 was lower so the delta was higher.

Okay.

The elements are the same.

Okay.

And then on the interest expense or interest cost you said 5.6%.

What is the level on that again?

In terms of the notes?

There's 1.4 billion the 5.6 is the cash coupon, 5.8 is the all in rate with financing costs.

Great.

Thank you very much.

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

Please proceed.

It's actually Ben Andrew with William Blair.

Wanted to ask about uses of cash.

As we were putting our numbers together before we're not assuming much in the way of stock buyback.

Curious, as you think about the acquisition strategy going forward and the uses of cash, maybe talk to where you would be looking to put that money to work in the next year or so?

Well, Ben, as I've indicated previously, I'm a big believer in organic growth and I think if you look back at the pro forma growth rates without acquisitions, we were among some of the fastest growing med tech companies above $2 billion in revenue.

I would not look for any sizable acquisitions in the near term.

If we do any acquisitions at all, they will be either technology related or tuck-ins or technology licensing that we believe can expand our market position in our core businesses.

Okay.

And then as you look past kind of fiscal '10 into '11, talked a little bit about the portfolio and ventilators and Pyxis.

Where do you think the next leg of growth from the R&D portfolio is going to come from in '11?

Well, without being specific, I will say that we do have an innovation center where we actually organically invest in new business opportunities.

Each one of these investments is a sizable, very sizable annual revenue opportunity.

I wouldn't be surprised if we see something come out of there.

Okay.

Thank you.

I think we have one last question.

And your last question is a follow-up from the line of Kristen Stewart with Credit Suisse.

Just in terms of your operating cash flow guidance for the year, what are the -- just looking at the one-time items related to the spin, how much of those are cash and kind of what should we be assuming for kind of a more normalized rate of operating cash flows?

Kristen, all those are cash items, those one-timers, so I would use that range.

Okay.

And then the -- okay, great.

And then the incremental standalone costs, I think it was the 100 to 110 that you had mentioned, that includes employee compensation.

Should we think about that as more one-time in nature?

As I think about those three buckets start-up, R&D, those will obviously continue but will that employee comp continue in the future or is that one-time?

No, that -- the employee incentive compensation is really -- it's an ongoing expense and it's primarily -- the reason why it's in there is it's part of our normal bonus and compensation plan.

The Company had reduced significantly its payout in '09 as a result of the results that occurred.

So this is really just reloading the bonus plan or reaccruing for the bonus plan that would be normal.

Last question, just going back to the tax rate again, I know you said 25 and I think in your previous remarks somewhere you had said you would use a mid-20s going beyond 2010.

What is really the difference again between the 30 to 32 that you had assumed at the Investor Day back in June relative to this mid-25.

How confident are you that that's now a good, sustainable rate?

I think the 30%, I think that was done back in June, was probably overly conservative based upon what we saw in our -- the different components.

We've done a fair amount of work on it in terms of getting our hands around the tax rate and looking forward, so I think we feel confident about the 10 at least near term the mid-20s as a good tax rate to use going forward.

Okay.

And then opportunities to bring that down going forward beyond that?

Listen, I don't want to roll it out.

I think the mid-20s is a good -- is a pretty decent rate.

We would obviously like to continue to improve that but I think I would just settle on the mid-20s right now.

Okay.

Fair enough.

Thanks very much for the follow-up.

Let me thank everyone for joining us and simply say that we're very excited about becoming a standalone New York Stock Exchange traded Company on September the 1st.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the presentation and you may now disconnect.

Have a great day.