卡地納健康 (CAH) 2010 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth-quarter 2010 Cardinal Health conference call.

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

(Operator Instructions).

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Sally Curley, Senior Vice President of Investor Relations.

Please proceed.

Thank you and welcome to our conference call today.

Because we will be reviewing our fiscal fourth-quarter and year-end results, as well as our fiscal 2011 outlook on today's call, our prepared comments may be a little longer than usual.

Therefore, we plan to extend the call to end at 9.45 AM Eastern to allow plenty of time for Q&A.

Also, 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 in the forward-looking statements slide at the beginning of our presentation found on our Investors page on Cardinal Health.com for a description of those risks and uncertainties.

In addition, we will reference non-GAAP financial measures, and information about these measures is concluded at the end of the slide.

Before I turn the call over to our Chairman and CEO, George Barrett, I would like to remind you of a few upcoming investor conferences in which we will be participating and webcasting, notably the Morgan Stanley Global Healthcare Conference on September 13 in New York; the Robert Baird Healthcare Conference on September 14 in New York; and the Stifel Nicolaus Healthcare Conference on September 15 in Boston.

The details of these events are or will be posted on the IR section of our website, so please be sure to visit that site often for updated information.

We look forward to seeing you at one of these or other upcoming events.

Now I would like to turn the call over to George.

Thanks, Sally.

Good morning, everyone.

This morning's call offers me the opportunity to reflect on our first year - as what I will describe for the last time as - the new Cardinal Health.

It has been an important year for us in many ways and this morning, I will give you my observations about the year we just completed, as well as my perspective on the year in front of us.

I will devote most of my commentary to the state of our transformation and our overall positioning, and let Jeff cover in detail the numbers for the quarter and for the full year.

I will, however, start with a few numbers.

We ended fiscal 2010 with non-GAAP EPS of $2.22, down slightly versus fiscal 2009 and considerably better than we anticipated back in August of last year.

Full-year revenue was up 3% to $98.5 billion.

Our organization did an outstanding job managing our working capital, and we generated $2.1 billion in cash from operations.

Overall, these were significant accomplishments given the considerable strategic changes and investments we made in the business.

Some of you have asked me during the course of the year how I feel about the extent and rate of our progress.

As you know, we entered the fiscal year with a commitment to take action to improve our performance, our strategic positioning, our internal culture, to shift our center of gravity more decisively out to the customer and, of course, our trajectory.

We also knew there were some systemic issues that we would have to weather, some mechanical challenges like the large year-over-year negative negative comp in generic launches.

Having said all that, if you had asked me a year ago whether or not I would be pleased with where we are today, the answer would clearly be yes.

We have made enormous progress on our road to position the Company for renewed growth, and we have moved the needle considerably faster than we had anticipated.

This is still a journey, but I believe we have a lot to be excited about.

Certainly it was not a year of perfection.

We hate to lose a single customer, and we lost very few.

But, in the earlier part of the year, we did fail to renew a few key customers on the hospital side, as well as one on the retail chain side, and that was disappointing.

We stabilized our margin rate in Hospital Supply; however, we would have liked to have seen it moving up.

And while we made enormous progress in our efforts to simplify the lives of our customers, we know we can do even better.

Nonetheless, our customers are telling us that we are on the right path.

Our employees are telling us that as well - that they believe in where we are going and they are energized by the journey.

As we told you at the beginning of the fiscal year, our focus in FY10 was on strengthening the core of our business, and we have done just that.

In our Pharmaceutical segment, we renewed many of our largest chain customer contracts well into fiscal 2012.

We also renewed and entered into new agreements with a number of very important large branded manufacture partners.

All of this is critical to stabilizing our pharmaceutical segment base and putting us in a position to move margin in the right direction.

Pharmaceutical segment profit declined 3% for the full year.

This performance was considerably better than we anticipated, driven by strong execution on key initiatives, some of which I will cover in a moment, disciplined cost management, and aided somewhat by the positive impact from some unplanned generic launches.

We placed a great deal of emphasis on our retail independent pharmacy channel, and after a patchy couple of years, we returned this part of the business to full-year growth for the first time since fiscal 2008.

Just a couple of weeks ago, we held our 20th Annual -- and largest ever -- Retail Business Conference for our retail independent pharmacy customers.

Well over 4000 stores were represented at the event in Denver.

We launched a number of offerings designed to help pharmacists run their businesses more efficiently, including Order Express, which provides retail pharmacies with a more convenient and user-friendly online buying experience.

Feedback from customers has been very positive.

We made great strides in our generic sourcing initiatives, and we developed a highly attractive generic offering for our customers.

As a result, we exceeded our full-year improvement target of 10% in generic penetration, or what we refer to as share of wallet.

And our focus on driving sales force effectiveness through initiatives like our Sales College has provided us with additional traction and speed.

We recognize that our sales reps are crucial to delivering an even higher level of service to our customers, and we continue to invest in their ongoing training and skill development.

We also reevaluated our Pharmaceutical segment portfolio and made a number of key decisions.

We felt that the Medicine Shoppe network could be enhanced by providing an alternative model for our franchisees that moves them from a royalty-centric model to a more flexible, fee-based model.

We decided to divest SpecialtyScripts and Martindale, and we made a meaningful move into the fast-growing area of specialty pharmaceutical services.

As we discussed previously, our goal was to enter the specialty service area in a differentiated way, and we are convinced that the acquisition of Healthcare Solutions, or P4 as it is known in the oncology community, provides us with that platform.

The commercial activities within Healthcare Solutions serve key participants across the chain of specialty care, including physicians, pharmaceutical companies and payers by providing essential tools, services and data to help improve patient outcomes and increased efficiency in the delivery of healthcare.

While this acquisition will have only a modest impact on FY11, it positions us to participate in the growth of specialty categories going forward.

We are very excited about the growth potential in specialty and about the enthusiasm of the Healthcare Solutions leadership team to help us achieve our goals in this area, and also about how they are working with us to integrate these activities into Cardinal Health.

We expect the integration to be substantially complete by the end of the second quarter of FY11.

We also made investments in a relatively small, but growing positron emission tomography unit and are well positioned through the manufacturing, dispensing and distribution of PET imaging agents and the key role we play in supporting clinical trials.

And in the face of exceedingly difficult raw material shortages, our nuclear pharmacy organization performed extremely well in FY10.

I'm very proud of this group and how they've worked so closely with our customers to ensure the needs of patients were met.

We are looking forward to a return to more normalized levels of supply in the September timeframe from both the Chalk River reactor in Canada and the Petten reactor in the Netherlands.

Our Medical segment had a busy and successful year.

We finished the fourth quarter up 22% over prior year in segment profit, and up 11% for the year.

Additionally, we achieved a number of key goals and moved forward with several important transformational initiatives.

We developed our segment strategy around channel and category management, which we believe will better align with our customers' needs and enhance our ability to apply our core capabilities.

And we completely rebuilt our sourcing model for medical products expanding our global sourcing capabilities and our leadership there.

I believe this will be an increasingly important asset for us and for our customers.

We made good progress on our substantial commitment to simplifying the customer experience and made critical investments in IT and customer-facing activities.

In particular, we began the medical business transformation work to enhance our technology platform and processes, and we are progressing well against our critical milestones.

We returned our Presource kitting unit back to a positive growth trajectory, enabled by our Lean Six Sigma and operational excellence initiatives and our expanded presence in surgery centers.

We made investments focused on growing our ambulatory footprint, and we expanded our sales organization, while at the same time enhancing our Web ordering capabilities to better meet the needs of this channel.

We also established a cross-selling effort with the Pharmaceutical segment, which is off to a good start.

Our lab channel grew both revenue and profit by mid-single digits for the year, helped by demand for flu-related products in the first half, and Canada had an exceptional year with double-digit revenue and profit growth also helped by the demand for flu-related products, along with some upside from foreign exchange.

In all, Medical segment revenue was up 3% in the quarter and up 7.2% for the full year.

I should say something here about demand, as a number of companies have noted the softness in the hospital and physician office channels.

We commented in last quarter's call that demand was somewhat soft, and we can report that we saw no real improvement from a macro standpoint in our June quarter.

At the Cardinal Health enterprise level, in addition to our efforts to strengthen our strategic positioning, drive performance management and revitalize our culture, I'm particularly proud of how we managed our capital in an extraordinary environment.

During this past year, we were able to raise our dividend, as well as do some share repurchase as Jeff will discuss.

We have invested in areas of our business critical to supporting our customers and driving future positioning, and we have used capital opportunistically to make moves that enhance our strategic positioning and shareholder value.

We enter fiscal 2011 with a very strong balance sheet, which gives us excellent financial flexibility.

In keeping with our commitment to drive shareholder value, we have launched total shareholder return, or TSR, internally as a capstone metric for measuring our performance, and I'm really pleased that our organization is rallying around this concept.

We have been setting internal goals around this metric, and I'm sure you will hear us reference it in the future.

Following the spin-off, we took the opportunity to recruit four outstanding new independent board members with exceptional healthcare and consumer backgrounds.

These individuals have been terrific additions to our board of directors.

Additionally, we bolstered our management team with several important additions.

At the corporate level, we added Mark Blake, EVP of Strategy and Corporate Development; Patty Morrison, CIO; and Gilberto Quintero, Senior Vice President of Quality and Regulatory Compliance.

In the Pharmaceutical segment, we added Tim McFadden, EVP of Sales and Marketing, and most recently in the Medical segment, Lisa Ashby, who has successfully run our Lab business for several years, was promoted to President of Category Management.

We did all of this while successfully managing the CareFusion transition, and this was no small feat.

Let me discuss our guidance for fiscal 2011.

Jeff will cover our specific assumptions in some detail in a moment.

Now, as you know, we provided a preliminary outlook for our fiscal 2011 three months ago when we announced our third-quarter results.

Since that time, we have finalized our budget, and we have been able to get more clarity on several key variables like the availability of raw material for our nuclear pharmacy unit.

Of course, one of the variables which is hard to model is the rate of recovery of the US economy.

Although, over the years, healthcare had been relatively insulated from fluctuations in the economy, it is not immune.

We've seen consumers alter their behavior regarding their own healthcare consumption based on their personal economic and employment status.

So, although we've projected a relatively modest low single-digit growth rate on the revenue side, we do feel that we have come out of fiscal 2010 with some momentum.

In the Pharmaceutical segment, we enter 2011 with relative stability in our customer base where many of our strategic initiatives are beginning to take hold and with pharmaceutical supply agreements on terms which we feel are right for us and for our business partners.

We feel some momentum in our retail independent pharmacy channel and with our generic programs across all customer segments.

In FY11, we will continue to focus on increasing generic penetration.

Additionally, we will more effectively utilize all the tools in our tool chest, including the expertise and resources we have in our Pharmacy Solutions business, to improve the customer experience and provide incremental value.

And while we are not expecting the acquisition of Healthcare Solutions to have a big economic impact on fiscal 2011, we are very excited about the new platform it gives us in specialty pharmaceutical services.

In the Medical segment, we expect that our new focus on category management will enable accelerated growth of our preferred products and private brand programs, enhance our ability to provide additional value to our customers, and offer potential for margin enhancement.

We will continue to invest in our Medical segment transformation and drive our timelines aggressively because it is essential to our repositioning in the industry and to delivering on our commitment to our customers.

We will also focus on the ambulatory channels as we continue to see healthcare services move to smaller and more disease-specific units of care.

We will remain an active partner with all players in the system as we help to improve the cost effectiveness of healthcare, and we will make sure that our voice is heard in Washington and at the state level as healthcare reform enters the implementation phase.

We will also continue to look for opportunities to complement our capabilities and grow our strategic position.

And finally, we will hold ourselves to ambitious goals on those things we control while modeling more cautiously on those events we don't control.

So taking into account all of the known factors at this point and balancing this with some remaining market uncertainty, we are raising our initial outlook and providing an FY11 non-GAAP EPS guidance range of $2.38 to $2.48.

We are building momentum and feel good about our progress.

As we move through the year, we will talk about our key initiatives on these quarterly calls, and I will also be sure to comment on the environmental factors that are important for you to understand.

I'm very proud of the work that we began in FY10 and look forward to continued progress in FY11 and beyond.

Now I will hand the call over to Jeff to provide more details on the quarter and the full year, and our fiscal 2011 guidance assumptions.

Jeff?

Thanks, George.

Good morning, everyone.

Thanks for joining our call today.

Let me expand on our Q4 and fiscal 2010 performance for a few moments.

Then I will add more color around our FY11 guidance, including our assumptions from both a corporate and segment standpoint.

Rather than repeat the numbers that in our earnings release and slide presentation, I will try to focus more on some of the underlying financial trends and drivers.

Let me start with a few comments on segment performance in Q4, referring primarily to slides 10 and 11 and starting with the Pharma segment.

As George said, we are pleased with the business progress and financial results in Pharma.

Although as we allude to back in our April call, the year-on-year segment profit trend was a bit of an anomaly in Q4 due to some timing and other unique issues.

More on this in a few moments.

Pharma segment revenue increased by 0.2%, with non-bulk growing considerably faster than bulk.

For the quarter, non-bulk sales rose to 52% of total segment revenues.

As previously mentioned on earlier calls, the ending of our relationship with two customers in the first half of fiscal 2010 has dampened sales growth throughout the second half of the year.

The impact from those two terminations was approximately 1.5 percentage points in Q4.

We will begin to lap those losses by mid-fiscal 2011.

Importantly, revenues from retail independents grew at 3.3%, a rate which was above the overall market.

And overall generics growth was 10%, driven by close to 20% growth in our generics source program for the quarter.

From a profit perspective, the segment decline can be attributed to a few expected but somewhat notable factors beyond the drivers and trends we would normally see.

As anticipated, we did not see the same level of branded price inflation from our remaining contingent vendors as we experienced in Q4 of FY09.

We continue to face headwinds from the Medicine Shoppe transition and the timing impact of a large vendor DSA transition, both of which flowed through as anticipated and were worth about $20 million of downside in total for the quarter.

The ongoing severe global supply shortage in our nuclear business also had a significant negative impact.

In fact, the loss of moly isotope availability for much of the quarter was by itself worth about $28 million, although we were able to offset a portion of this in our nuclear pharmacy unit through the use of alternative imaging isotopes and cost efficiencies.

On the positive side, we continued to benefit from the strong performance of our generics programs.

Our medical segment had another strong quarter, posting a segment profit increase of 22% to $102.5 million.

This increase was driven by volume growth with existing customers and solid expense management.

We also had a few notable items in our cost of goods sold, which worked in opposite directions -- a one-time vendor adjustment, which negatively impacted last year's Q4 by about $5 million and thus benefited the year-on-year compare by that amount, and the negative impact of commodities worth a little less than $5 million of downside in the quarter versus last year.

I point out the commodity downside as it represents a distinct reversal from the benefit we were seeing in the first half of the year.

Let me now cover a few items at the consolidated level.

Non-GAAP operating expenses were flat for the quarter versus last year with strong expense controls and bad debt accrual reductions offsetting an increase in investment spend and incentive compensation.

Our non-GAAP tax rate for the quarter was 37.7% versus 32.6% last year.

The higher rate in the current quarter was attributable to changes in income mix and some discrete items both this year and last.

Specifically this quarter's discrete items included adjustments to our FIN 48 reserves, a reduction in the deferred tax asset valuation allowance related to our business in Puerto Rico, and a provision true-up related to our state tax returns.

The net of discrete items was worth about $4 million of additional tax expense for the quarter.

In FY09 our effective tax rate benefited from a one-time state tax settlement.

So with those comments behind us, let me reprise the EPS walkdown that I did for you in April where I tried to explain the drivers of our year-over-year decline in Q4.

I will use most of those same categories I referred to then.

Where appropriate, I will indicate where they may differ from what we had anticipated three months ago, but in most cases they are quite consistent.

The Medicine Shoppe and the pharma vendor DSA transitions were together worth $0.03 of downside.

A decline in other contingent brand inflation was worth $0.04.

Generic launches turned out to have about a neutral impact year on year in the quarter, slightly better than the expected $0.01 to $0.02 of downside we had called out previously.

The impact of the nuclear supply shortage was as much as $0.04, a little higher than the $0.02 to $0.03 impact we envisioned, really because our supply situation was made even worse by certain air travel restrictions from Europe during the quarter.

The Q4 tax rate resulted in $0.04 of impact compared to last year's unusually low rate.

And increased investment spend was worth about $0.02.

Generally speaking, the rest of the business performed better than forecast, and our expense controls remained very tight.

So we are able to deliver a final Q4 EPS slightly above the range we had projected in April.

Lots of detail, I know, but hopefully that closes a loop on what was a somewhat unusual Q4 from an earnings standpoint.

Now shifting gears slightly, let's talk about cash and balance sheet management.

Earnings and continued focus on working capital efficiency drove an additional $324 million of operating cash flow in Q4.

Of note, we finished Q4 with 21 days of inventory on hand versus 23 last year.

I may add that this level of inventory is a little lower than even we had expected and probably represents a pull ahead of some operating cash flow from Q1 of FY11.

Our days receivable improved to 18.6 from 19.1, and importantly, our account delinquencies reduced by more than $75 million year on year, despite the continuing tough climate for many of our customers.

I would also like to mention a few other items of note that occurred during the quarter.

With the Q4 sale of our Martindale business in the UK, along with the earlier divestiture of SpecialtyScripts, we completed the portfolio rationalization activity that we had projected for this fiscal year.

We did not sell any of our CareFusion stake in Q4.

And finally, I will not go through the detailed GAAP to non-GAAP reconciliation that appears on slide seven.

I will highlight that the most notable item this quarter is approximately $41 million pretax on litigation income related to an antitrust settlement.

As per our usual practice, this type of item has been excluded from our non-GAAP earnings.

Now let me take a few moments to comment on FY10 in total, starting with the personal reflection that I'm extremely proud of the progress we made during the year, particularly given some of the headwinds, both environmental and the result of some conscious positioning and investment decisions, that we knew we would face when the year began.

Before the start of this year, we identified a few key financial metrics on which we needed to focus to win -- specifically margin and working capital improvements.

Driven by a number of the performance initiatives that George has already referenced, we have made great progress in these areas.

First, on margin rates.

Although we did see a decline in overall consolidated operating margin versus last year, we performed considerably better than we expected heading into 2010.

Let me comment on two key areas in this regard.

First, our Medical segment expanded its segment profit margin by 17 basis points for the full year.

Contributors to this were the mix impact of the relative growth of our ambulatory, Canadian and lab businesses, the recovery of the Presource kitting operations, and the continued growth of our preferred products.

We also benefited from the positive impact of commodity prices, although that benefit was primarily limited to the first half of the year.

Within the Pharma segment, although segment profit margin was down by 6 basis points, this really was driven by our bulk business.

In fact, non-bulk pharma profit margins remained relatively flat for the full year at 1.94% for FY10 versus last year's 1.95%.

Regarding working capital, I view this as a tremendous success as we've continued to see the hard work of our employees bear fruit.

In every quarter of the year, our inventory levels and days receivable were favorable to FY09.

In fact, changes in net working capital contributed almost $1 billion to operating cash flow for the year.

Overall we finished the year with very strong cash flow and a robust balance sheet.

Total operating cash flow for the full year was over $2.1 billion.

In addition, we sold $271 million of CareFusion shares during the year and generated over $150 million incremental from other asset divestitures.

A good portion of this cash flow was invested back in the business as we had capital expenditures of about $260 million, mostly in information technology related projects.

We committed to our acquisition of Healthcare Solutions, for which we made a payment of $517 million in July.

We also returned cash of over $500 million to shareholders, reflecting dividends of $253 million and share repurchases totaling $250 million, including the $200 million we executed in June.

By the way, in case you are wondering why our statement of cash flows was $230 million of share repo for the year, it's because $20 million of it actually settled after June month end.

Our total cash position was about $2.8 billion at year-end, of which approximately $400 million is held overseas.

Further, our CareFusion stake was valued at approximately $700 million as of June 30.

We remain committed to monetizing the stake in the coming periods, although the specific timing will depend on market conditions and other factors.

Our June 30 long-term debt position was $2.1 billion, which is effectively our target level at this time.

So we enter fiscal 2011 with a fair degree of balance sheet flexibility.

We intend to use it wisely in a balanced and prudent manner to maximize shareholder value for the longer term.

Now let's turn to slide 13 to 16 and a look at our FY11 guidance.

Now that we have completed our planning processes and have been better visibility into the year, we are updating the preliminary outlook we shared three months ago.

As background for our revised non-GAAP EPS range of $2.38 to $2.48, let me expand on some of the information that we had provided back in April, starting with overall company expectations.

The revenue expectation is for low single digit growth on a consolidated basis, reflecting our somewhat cautious view of the overall market dynamics.

Our focus on expense management will continue.

Organic operating expense will be close to flat for the year, but the addition of our Healthcare Solutions business and its expenses related to both the amortization of intangibles and the cost of its primarily customer-focused resources will boost the SG&A growth rate moderately.

We are expecting an annual non-GAAP effective tax rate of approximately 37%, a little lower than FY10, although it will no doubt fluctuate on a quarterly basis.

Our diluted weighted average shares outstanding should be in the range of 355 million to 357 million, reflecting total FY11 share repurchases which we currently anticipate will approximate our FY10 levels.

In this regard I should note that we did execute $150 million of repo in July, leaving us $100 million left on our outstanding board authorization.

As you know, the actual diluted shares outstanding we will average for FY11 will depend on a few factors, including the timing and size of completing any additional repurchases and the impact of share price on the dilutive impact of employee stock options.

Finally, our guidance includes no new significant strategic initiatives, either acquisitions or divestitures, beyond our Healthcare Solutions acquisition.

Now let's spend a few minutes going through some of the segment-specific assumptions in more detail.

On slide 15 you can see the Pharmaceutical segment assumptions.

Let me hit on a few highlights.

Importantly, our FY11 guidance assumes a renewal of key customer contracts.

We expect the rate of brand inflation to be similar to FY10.

We also expect neutral earnings effect from generic launches versus FY10.

We have a risk-adjusted basket of potential at-risk launches in FY11 to account for our forecast.

We do expect continued benefit from our generic sales and sourcing programs, which gained momentum last year.

In the nuclear business, we expect moly supply levels to stabilize by the end of Q1.

In this respect, let me comment briefly on the latest news out of Canada.

Repairs to the Chalk River Reactor are complete.

However, the reactor has experienced some temporary delays in the startup process related to instrumentation.

We understand that this is being sorted out in the next couple of weeks.

So at this point, we believe our assumptions for the resumption of normal supply remain reasonable.

And we will keep our unrelenting focus on lean operational excellence initiatives to improve supply chain efficiency and working capital.

However, I anticipate improvements in net working capital days to be much less than what we experienced in FY10, particularly given the quite low inventory levels we achieved at June end.

Now let's take a look at slide 16 in the Medical segment.

We do anticipate a negative impact on cost of goods sold from commodity price movements.

For the full year, we currently estimate that it could be more than $40 million.

About half of this relates to oil price movements with the remainder driven by latex and other commodities, most of which have experienced some pretty significant price increases in the recent past.

We expect to benefit from both customer and product mix shifts, including the growth of our higher-margin ambulatory care business and increased sales of preferred products.

We do not anticipate the extraordinary demand from a pandemic flu season as we saw in the first half of fiscal 2010.

Our transformational initiatives expense will continue at a similar level to FY10 as we continue to position our Medical segment for long-term growth.

Lastly, I did want to touch specifically on Medical's Q1 as it is a somewhat unusual quarter from an earnings trend standpoint.

We do expect a significant first-quarter segment profit decline due to a tough compare related to unique fiscal 2010 Q1 events, namely the early and extreme flu season and $14 million of income recognition accelerated by the CareFusion spin, as well as a year-on-year negative impact of commodity prices.

So, in summary, as I look forward towards the remainder of fiscal 2011, I'm confident of our ability to execute on our priorities and continue the momentum we began in 2010.

There are clearly some uncertainties related to items largely outside of our control such as the impact of the economy on healthcare consumer behaviors and the ongoing movement at commodity prices.

But I feel very positive about our organization's ability to respond and deliver as the year unfolds.

Let me make one final administrative comment before we turn to questions.

In a further effort to make our SEC filings more user-friendly, we have undertaken a review to streamline our reporting.

With input from a number of sources, we have made an effort to make the upcoming 10-K a little more reader-friendly.

Hopefully you will notice a difference.

We've also decided that it would be more meaningful going forward to report pharma bulk and non-bulk margins on an annual basis rather than quarterly.

If there are unusual or significant trends, we will clearly call those out for you.

The periodic fluctuations have rendered these metrics fairly volatile on a quarterly basis and not necessarily representative of longer-term trends.

We believe that the annualized rate is more indicative of the company's progress.

We will begin the annualized reporting process in fiscal 2011.

With that, let me turn it over to the operator to begin the Q&A session.

(Operator Instructions).

Tom Gallucci, Lazard Capital.

Jeff, I was just curious piggybacking on your last statements there, is there anything else that you could say about the seasonality that we should see or the quarterly progression in fiscal 2011?

Obviously a lot of moving parts last year and this year over and above the Med/Surg that you mentioned at the end.

As you know, Tom, we generally don't give quarterly guidance.

We focus more on the annual EPS end drivers, but let me provide a little more color in addition to the comments I made about the Q1 for the Medical segment.

I would say from a revenue standpoint, revenue growth will be a little bit more backend-loaded.

As a reminder, as I said earlier, we are still lapping the termination of two large customers that occurred in Q1 and Q2 of FY10.

So that will tend to slightly depress our revenue growth below market rates in the first half of the year.

Also, in the second half of the year, we are expecting at least one additional customer to join us.

And we will also begin to see some of the revenue impact of our Healthcare Solutions acquisition as well.

So our thinking about a revenue standpoint, again, those factors will tend to make the backend a little bit more revenue-intensive than the first half.

From an earnings perspective, I really don't want to comment more than what I have already said about the somewhat unusual compare in Q1 for the Medical segment.

Okay.

George, you mentioned proactively volume trends in the Med/Surg business, doc offices and hospitals.

Could you just -- I guess we have heard a little bit that it was a little softer in June than maybe the rest of the quarter and continued to be weaker in July.

Are those trends consistent with what you have seen?

I'm not sure that I would necessarily validate that monthly description.

I think largely what we saw in Q3 carried into Q4, just a general sluggishness.

The month-to-month variation for us, I'm not sure that the data is all that sensitive to draw a conclusion from that.

But I certainly did not see an improvement in Q4 versus Q3.

Lisa Gill, JPMorgan.

Jeff, could you maybe talk about what your expectations are for generic contributions in 2011 versus 2010?

I know there is a lot of debate around timing of things.

If I recall correctly, there is a number of drugs that are coming in the back of calendar 2010, which would be good for your fiscal year, that will have exclusivity.

So maybe if you could just give us any color around that.

Yes, I will repeat some of the comments that I gave in my prepared remarks.

Generally I think the impact of generic launches FY11 versus FY10 will be about neutral plus or minus a reasonable range.

I will not comment specifically on quarterly trends, but I would expect our general expectations are in line with what some of our peers are observing.

I will say, however, that the momentum we gained in some of our generics programs in FY10, both sales and sourcing, despite the very strong performance we saw from those in FY10, we expect continued benefit from those heading into FY11.

But if I compare 2011 versus 2010, it looks like there will be more drugs that will have some exclusive period.

If I remember correctly, isn't that better for you?

So shouldn't we -- even though it is equal as to the number of drugs that will come to the market in your fiscal year, shouldn't that be better profitability for you in 2011 versus 2010, or am I thinking about that incorrectly?

Let me jump in for a second on this.

This is actually not necessarily the case.

I think it varies product by product.

And so particularly, when there are exclusive launches, you have to look at the market characteristics of those launches.

So, for example, there has just been an approval recently well-known out there of Lovenox.

This is a drug with really unusual characteristics.

It is a compound with heavy institutional presence, but also a meaningful retail presence.

A single source launch, particularly because it has an institutional -- such a large institutional presence, the competitive behavior between the brand of generic is quite different.

And again, in this case, because there is one generic approval, you are very dependent on the design of any companies' plans for how to launch that product around their own launch strategy.

So I guess what I would suggest to you is the economics of a single source launch can actually be quite variable depending on the characteristics of that drug, its channel, the nature of the launch, how much supply is in the system and the innovator response.

So I know that is a long answer, but I would just say, exercise some caution on assumptions on single source launches.

They can vary quite dramatically.

I think when you get into a two or three-player launch, actually the characteristics can change and tend to be more favorable.

But again, my advice would be exercise caution.

In the general sense, I think Jeff's observations are right on a year-over-year basis.

I would say relatively comparable.

And, of course, the part that we don't know exactly is what will happen to some of the at-risk launches.

So our approach is to model with a risk adjustment, and then if all goes well, we have modeled too cautiously, but I think it is the right way to approach this.

And then just secondly, as we think about some of your guidance around revenue being low single digits, can you maybe help us understand, is that based on what you see, George, as far as the market growth rates, especially if we have more generics coming in on the Pharmaceutical side?

How should we be thinking about that in context of where Cardinal is versus the industry?

So let me just make a quick comment, and then I will turn it to Jeff.

Actually where we are relative to the industry I feel pretty good about.

So I think for us, the primary variable will be what is happening with overall demand.

I think our positioning has improved and we like that.

Of course, to some extent, our revenues are tied to the performance of some large customers as well, and so there is always sort of a second order effect there.

But Jeff, do you want to add to that?

Sure.

Let me start by giving a little bit more detail about what we mean by low.

In our view, FY11 revenue will likely be less than 4%.

Just to be a little bit more granular around that guidance.

Implicit in that revenue number are probably four or five key inputs.

The first one George already referenced.

It reflects a relatively cautious view of the overall market growth, given what we're seeing right now in the economy.

Secondly, as I indicated previously, it does assume the resumption of our key contracts continuing into FY11 with the exceptions being again those two large contracts that were terminated toward the beginning of FY10.

It also reflects any known customer adds that we are aware of at this point, and then finally, it includes the add-in of our Healthcare Solutions acquisition and the revenue that it will bring as the year progresses.

So those are the key inputs that go into that revenue guidance.

Richard Close, UBS.

Jefferies.

With respect to you mentioned exceeding the 10% improvement target for penetration on the genetics, can you talk a little bit about what your expectations are, maybe set a number out there are for the coming fiscal year?

Jeff, I think you stated that you expect the momentum to continue.

Let me take this, and good morning, Richard.

I think our expectation is that we will target the same kind of percentage growth.

Obviously, as we get higher up, it is a little hard to make that happen.

But we feel like we have got momentum.

So the percentage growth that we targeted for this past year is -- which was 10% -- is a pretty reasonable assumption that we will try to target a similar growth rate.

But we are making really good progress here.

Okay.

And another point, as a follow-up to your comments, George, you mentioned cross-sell between Pharma and Medical and some initiatives you're doing on that front.

Can you give us a little bit more clarity or an update on how that is progressing and what stage we are in?

We are in the very early stage.

We really just began this activity probably in the last three months or so.

What we are seeing, of course, and it is a general trend, is that there is sort of a confluence of where care is delivered and how it is delivered.

I have said this to some of you before, but what used to be quite a bright line between what was institutional or hospital business and what was retail business seems to be disappearing, and the world seems to be converging in many ways.

So we are trying to make sure that when we are in ambulatory settings is that the service center or a physician's office to the extent that there are needs that exist both for Medical/Surgical lab products and drug products, that we are able to deliver that.

And so that is an early-stage project, but our teams are working really well together, and we are excited about it.

Okay.

And I just have one final one here.

We were on a conference call last night with MedAssets, and they talked about not really seeing a decline in utilization or volumes.

They mentioned hospitals going direct to manufacturers for some of the supplies, medical supplies.

Are you seeing that at all?

Maybe an increase of the hospitals going direct to the manufacturers?

It is a two-part question, so let me try to address the first very generally.

I think the data systemically -- let's forget about Cardinal-specific data -- I think the data systemically is relatively clear.

You can look at data at admissions and discharges, and it certainly suggests that there has been a bit of flatness in the market.

From the standpoint of manufacturing being -- I would not describe any particular change in behavior actually.

I think our value proposition to work with our manufacturers is really clear.

We feel better and better about it, and I hope they do as well.

So we are not seeing -- I would not describe a systemic change there.

Thank you.

Congratulations.

Robert Jones, Goldman Sachs.

Actually, Jeff, just one point of clarification.

There were a few moving pieces in the quarter, and you mentioned the litigation settlement.

As we look at this segment performance -- so the 1.02 of operating margin in Pharma and the 4.75 in Medical -- is that adjusted for that and the other one-time items in the quarter?

Yes, Bob.

Good morning.

Thanks for the question.

Any of the items that we exclude from our non-GAAP financials are not pushed down to the segment.

So the segment numbers and growth rates that you see reported are consistent with the non-GAAP numbers that we report on a consolidated basis.

So that is a long way of saying that the litigation income both this quarter and any litigation effects that we ever see are held at the corporate level and don't impact the segment growth rates.

That is great.

Thanks.

And then, George, just a big picture question on looking at the $2.38 to $2.48 range.

Could you maybe talk about -- I know there is a lot of detail and a lot of ins and outs -- but could you maybe talk about -- boil it down to some of the major pushes and pulls you see around that guidance?

Is it generic pricing?

Is it surprise launches?

How should we think about what could push you towards the top end or the bottom end of that range in fiscal 2011?

So let me give you sort of a general description of the puts and takes.

I cannot quantify each of them, but just sort of give you a quick sense.

I would say on the challenge side we have got the impact of year-over-year repricings, as Jeff mentioned, until we relap some of these H2 second-half fiscal, second-half fiscal 2011.

Commodity prices clearly one that Jeff commented on and actually gave some sense of economics on.

We had the CareFusion revenue recognition.

I would say the flu, although not a dramatic impact on us, clearly was unusual last year.

In the positive sense for us, generic programs I would say across the board on the selling and the sourcing side, really feeling encouraged there.

Growth in Nuclear we are hopeful and at this point confident that we will get some material back into normal status and be able to work in a more traditional way with our customers.

We are really looking forward to that moment.

Growth in performance really across all of our businesses, frankly, a good progress.

And the Healthcare Solutions acquisition I would say is neutral to slightly positive.

On the generally neutral side, I would put year-over-year generic launches.

Again, that can vary depending on what happens, particularly on at-risk launches or settlements.

And then I would say from the spending standpoint, Med Trans is probably a year-over-year neutral.

It is probably no change.

So those would be the big moving parts.

As I mentioned in my comments, we feel very, very good about the things that we control.

So we've got very targeted initiatives to drive the performance of this Company.

And I think the parts that we are just going to have to watch carefully are the things that are a little bit out of our control, particularly related to economic environment and demand.

Thanks for the detail.

Steve Valiquette, UBS.

Two questions here.

First, on Med/Surg you guys mentioned that growth was driven by existing customers.

But given how much you outgrew the industry, you don't think you're taking any marketshare at all?

I'm just curious to get your thoughts on that.

I do think we are making some progress in marketshare, but I would also say, probably as I mentioned earlier in the year, we probably had a couple of disappointing losses.

So what I would say is this.

Probably in the last six or eight months, we have a general sense that our priorities are clear, our value proposition to our customers is better understood, and we think we have been making some progress there.

But part of it is, again, expanding our footprint, as I mentioned earlier, just even on something like Presource, expanding our ability to drive value into surgery centers, which was sort of a new market for us.

So we're trying to grow in all dimensions, expanding markets, expanding with existing customers, and we think we can create value through services market share as well.

Okay.

And just on the generic profits, as we were tracking this all year with your guidance, first, on over $100 million and $75 million and $50 million, just out of curiosity where did you end the year on generic profits in fiscal 2010?

I'm just curious where that number ended up.

As I said, our Q4 was a little bit better from a generic launch standpoint than we had anticipated.

So the $50 million down year-on-year number that we quoted three months ago is probably closer to a $40 to $45 million negative comparison versus FY09.

Larry Marsh, Barclays Capital.

Let me clarify a couple of things and maybe a question for George.

First, just on the clarification, to the extent you can comment, Jeff, you alluded to the addition of one customer, I guess, of some size later in the year.

Has that been publicly disclosed?

And I know in the past you have talked about renewing Kroger and Kmart.

I think you have already renewed Kroger, and the allusion was you suggested Kmart was closed.

Has that been done at this point?

I will take that.

Yes, we did, in fact, renew Kmart, and we are excited to continue that very solid relationship.

Since I think at this point it is in the public domain, what we will add into our business is the Duane Reade business.

As you know, that was an acquisition completed by Walgreens.

And so that effective about January 1, we will begin to pick up that business through our relationship with Walgreens.

Okay.

Great.

I understand.

And then just staying on the Medical business, I think you calling out a couple of things.

Obviously a $40 million negative on commodity prices.

I assume that would roll in pretty evenly throughout the year.

I think there was another pushback of $14 million.

So if I was doing my numbers correctly, it seems like you might be down midteens year-over-year in Medical.

Is that the right ballpark?

And I know you don't guide to quarters, but if you sort of filtered that through without a big offset in Drug, you know, Nuclear is not going to be a good guy this quarter, it seems I would get maybe flat to slightly up in EPS in the first quarter.

Is that basic directionally right?

Let me tackle the Q1 issue for Medical a little bit more.

Without giving a specific growth rate, I will put a little bit more color around the three drivers.

First of all, the accelerated CareFusion income related to the spin that was worth about $14 million.

The stronger than normal flu season in Q1 of FY10 was in the $6 million range.

And then I would say the commodity impact, although it is slightly above $40 million for the full year, that impact will be a little bit more front-end loaded because some of the price increases began creeping into our cost of goods sold in the second half of the year, but they were quite favorable in the first half of FY10.

So I expect that comparison to be a little bit tougher in Q1 and Q2 for Medical.

Okay.

And that is all you are going to say about the actual quarter at this point, Jeff?

Yes, other than repeating that we expect these Medical segment profits to be down significantly --

Got it.

That is more than mid-teens.

Okay.

And then, George, as I know, we have beaten this a bit on this call, but Med Trans you have talked very excitedly about the opportunity in that business under Mike's leadership, your leadership and the coordination through the IT and such.

And I think the message is you can really grow your margins meaningfully over a period of time, and that is a bullish indicator of your business.

This year you are fighting against, I guess, a commodities negative.

So how do we think of sort of the longer-term opportunities there?

When do we really start to see the margin expansion for Medical because it does not look like it's going to be this year?

Do we really think of that as fiscal 2012 and 2013 in your mind?

Let me start and then I'm actually going to turn it to Jeff a little bit.

But sometimes it's hard to describe this project.

It is so deeply embedded in that Medical segment at this point, it is really about taking what I think are just enormously valuable assets that we have, making sure that we can deploy them in the most efficient and simple way.

And there are times that the sheer magnitude of what we have to offer actually gets in our own way.

And partly what we tried to do is to make sure we are rebuilding our processes and the IT platform to simplify our business internally, but more importantly to make the experience for the customers extremely easy.

And this is really what it is about, and I think we will be able to not only bring efficiencies to the way we operate, but I think we will be able to deploy our tools more effectively to bring efficiencies to the customer by this initiative.

So we are excited about it, but, as I said, it's a pretty heavy investment, which we have absorbed this year, and we will continue next year.

But let me turn it to Jeff to give you a little sense of how we see the timing and the value drivers.

The Medical Transformation, at least the biggest bolus of it, we expect to be completed in FY12.

And some incremental significant benefits related to that will begin to accrue in FY12 and beyond.

That all said, we are striving for margin expansion in Medical every year, and we are not waiting for Medical Transformation to necessarily be complete.

That would definitely facilitate an acceleration of some of the initiatives that we already have underway.

But, as I said, we expanded the margins this year, and that will be an ongoing goal of ours through increased growth in our Ambulatory business, which we continue to invest in through continuing to sell more preferred products, through offering additional services, value-added services, to our customers.

And then Medical Transformation will help accelerate some of those things and make them easier, but many of those things are already underway and accelerating as we speak.

So just to be clear, you said most of the spending would be completed I think you said by fiscal 2012.

Do you mean by the end of fiscal 2011, or is that going to continue to roll over in cost in fiscal 2012?

By far the biggest bolus of spending is in FY11.

The spend will begin to ramp down in FY12, and we will have completed implementation of a good chunk of our distribution network by that point.

John Kreger, William Blair.

George, your question about key customer renewals, should we think about that as being fairly evenly spread for you from year to year?

And if not, how does fiscal 2012 and 2012 look relative to 2011?

It is probably not that evenly spread.

It can be a bit lumpy.

So here is what I would say.

Now that we have a number behind us, I would say fiscal 2011 will be a year of relatively minimal new renewals that were aware of.

I think we have really worked our way through most of that.

And I would say at this point, 2012 is not a year of tremendous renewal activity.

There is always some.

It is more lumpy on the Pharmaceutical side than the Medical side, which is almost a constant sort of process.

There are so many different hospital systems.

There is almost a constant renewal process of those.

But I would say among the big pharmacy customers, that tends to be a little bit more uneven.

But I would say the next couple of years we feel pretty solid about that.

Thanks.

And how do you feel about the competitive pressures out there at this point as you go through renewals and new client wins?

Do you feel like competitive pressures are increasing or pretty stable?

It is really hard to say that.

They tend to be episodic.

Every renewal has its own story.

I would not point to any change, particular change in competitive behavior right now.

This is, as you know, certainly a funny, competitive market.

But I would not highlight any particular unusual behavioral pattern right now.

Think of each -- certainly each renewal is sort of its own story.

It is like its own little mini-market, and that is the way it tends to work.

Robert Willoughby, Bank of America.

George, at the time of the CareFusion spinoff, you broke out some costs that you expected to incur year one, year two as you kind of grew into that CareFusion hole.

Can you review what those numbers were, how you think you did year one, and what that expectation for year two is?

Are you ahead of plan or pretty much on track still there?

Bob, let me punt this to Jeff to take that question.

That's a great question.

I actually have not gotten that one for a while.

The fixed cost that got reallocated back to Cardinal Health after the spin, which we have referred to in the past as negative synergies, we more than offset those in FY10 to our infrastructure cost reduction efforts.

So they really did not appear anywhere in FY10.

You probably noticed I did not call them out as a driver at any point in the year because we were able to more than offset them to reducing infrastructure in the remaining Cardinal business.

In FY11, I would say likewise you will see a relatively minimal impact, if any, from that.

To begin, we have been able to hold and reduce costs related to our infrastructure.

I would say the final potential period there is FY12 because that is when the final IT transition services agreement is expected to expire.

Actually it expires -- it is in the summer at the start of FY12.

So there is a slight potential there for some fixed cost overhang in the Cardinal Health business.

But again, our goal is to work to offset most or all of that.

So my objective is that I will never call that out as a negative driver year on year because we are struggling to offset it.

So I would say the long answer to your question, but I would say the progress has been great in terms of making sure those don't materialize.

Okay.

Great.

Thank you.

By the way, before we go out, I want to complete my answer to Larry of a couple of calls ago related to the Medical Transformation just so there is no lack of clarity.

When I referred to the bolus of spend in fiscal 2011, I was referring to capital expenditures.

And this will be the highest year for capital expenditures related to the Medical Transformation.

But from an expense standpoint, actually FY11 versus FY10 is completely neutral, just to be clear.

John Ransom, Raymond James.

I just wanted to go back and revisit for a minute the P4 acquisition.

First of all, what is the effect this year on -- remind me, the effect on amortization expense from that deal, or has that been figured out yet?

Yes, we are still having an outside firm complete that analysis.

But when we announced the deal, I alluded to the fact that it could be as much as $30 million to $35 million of annual amortization, and that is the assumption we are continuing to work with until the outside accounting firm completes its evaluation.

But I think that is a reasonably safe number.

Now is that -- I think I tried to figure this out last quarter, and I remember I had to circle back.

Is that tax-deductible amortization or not?

Yes, it is.

For tax purposes, because of the way we structured the deal, the entire step-up in the basis of the Company is tax-deductible over an extended period.

So yes, it is tax-deductible.

Okay.

And just getting to the real question, what is the EPS effect of that deal in fiscal 2011?

Could you remind us of that, please?

Yes, we said neutral to modestly accretive.

And you still think that is the case?

Yes, we remain very on track with all of our both quantifiable and nonquantifiable goals and milestones for that.

If anything, I would say that the integration of that team into the Cardinal family has gone extremely well.

We continue to make great progress on that business and combining that business with the Pharma -- the existing Pharma businesses.

Okay.

And then just I remember working through the business plan online and talking to George about it, but it still is a little bit -- could you maybe use very small words and speak really slowly and explain exactly what they do to make money?

I was not -- it did not register the first time around, and they do a bunch of different things, but it was not clear where the money is being made.

Well, look, there are largely three sources of income.

Again, this is not rank order nor weighted particularly.

But the P4 business, as we call it, Healthcare Solutions really resides in the space that connects the providers and the payers and the pharmaceutical companies, and those are essentially the sources of income.

So we provide service tool software for particularly oncology practices today.

That is a source of income.

We provide marketing tools and services for pharmaceutical companies and biotech companies, and we did some work in providing data to payers to help them manage their portfolio and their expense.

So these are all the components of it.

Think of this, again, as a service offering.

It is a business that works to provide services to each of those components and does some work in what I would say aligning the interest of those three players in the system to create more value.

It is really about having the data and the network of physicians who really work closely with us, and that is at the heart of it.

And would you have to pick up additional distribution business in oncology to really make this a homerun, or do you think that that is not really built into your expectation?

We certainly intend to integrate that with our activity, and we feel very confident that our increasing presence in the community of providers given a basket of services will make our distribution offering more attractive and more logical.

But the business model in and of itself is attractive to us.

But we certainly -- part of the reason Jeff talked about the integration is we certainly think of this not as a stand-alone activity, but as something that will very much link to our overall pharmaceuticals strategy.

So you have to think of this as linked, but we built very modest expectations into our economics as it relates to distribution today.

Ricky Goldwasser, Morgan Stanley.

Some follow-up questions here.

First of all, on the generic contribution in fiscal year 2011, what should we assume the impact of generics without the operating efficiencies and improved share of the wallet?

Are we just trying to understand what is coming really from the product versus your success in improving compliance rates?

It is probably going to be very difficult to disaggregate the contribution of components of our system.

I mean, I think on a general standpoint, I will give you some observations.

The system is generally growing.

As you know, generic penetration continues to increase.

We also know that, as we model the rate of deflation of the older generic products, we are not noticing or seeing any particular trend one way or the other.

So that looks like it is fairly typical.

And we hope to continue to grow our position with every one of our customers, as well as picking up new customers.

So picking apart the components of that is probably not something I'm comfortable doing.

It is hard to -- I mean the value you get from making sure you do a very effective launch for your customers contributes to your overall positioning.

So you have to think of it more as an integrated program, and that's one of the reasons why we don't spend a lot of time highlighting individual products.

So I think it is all contributing, but I don't think I could give you the components of that and weigh each one.

But would you say that if your generic compliance was held constant and it was just all the other things, would the contribution from generics be lower in fiscal year 2011?

(multiple speakers).

Let me just say this very generally because, again, I cannot answer the question exactly as you are asking it.

But let me give you some help.

There is always some deflation in the generic system.

That is part of the keys to generics in general is the flow of new products.

Now obviously for us there is another component, which is we want to add more customers and we want to add as high a share of wallet as we can.

We want all of our customers to source all their generics from us.

So those are the moving parts.

So there is always some what's called base rate of deflation in the pricing.

It is the nature of that business, as you know, quite competitive, but the flow of new products is a very important part of that stream.

Okay.

And then on the inventories, inventories were down about 12% sequentially.

Is this a new level, or does this relate to some specific manufacturers?

Our inventory level at our fiscal year-end is always very low.

It is generally the lowest it will be during the year.

I would say there were no specific vendors that drove this.

It was just the hard work within our distribution centers to optimize the efficiency of those centers and at the same time ensuring we have great service to our customers.

I will say it was a little bit lower than we expected, and like I said, it probably was a bit of a pull ahead from some gains we had otherwise expected to get in FY11.

But I think generally it was a good level, and we are proud of the progress we made this year with respect to inventory.

Operator, next question.

(Operator Instructions).

Eric Coldwell, Robert Baird.

For the second time, I will take most of mine off-line, but just a quick clarification on Duane Reade.

Amerisource had previously talked about that as being a $500 million to $600 million account and not expecting to renew it after December 31.

Should we assume a similar run rate for Cardinal beginning in the March quarter of 2011, and is that a fair statement?

Eric, I think that is probably fair.

[Jamin Patel], Greenlight Capital.

It is actually Vinit Sethi.

Two questions.

One is, you commented on flat generic launch impact to profitability in fiscal 2011.

We were wondering what your early thoughts were on the impact from generic launches in fiscal 2012.

And second, you guided to about $115 million of net interest expense in fiscal 2011, and we are starting the year with $2.1 billion in debt and a little over $2.7 billion in cash.

So we wanted to better understand why there is such a large interest expense assumption against the net cash position.

Okay.

The first question again was about generic --?

The impact from generic launches in fiscal --

I will take that, and I will let Jeff handle the second question.

So, again, I think we should assume without quantifying it today that fiscal 2012 we have modeled at this point to be a more robust year for generic launches.

So we would expect that to be an uptick in 2012.

Jeff, do you want to take the second part?

Sure.

That number that you quoted is our interest expense in Other.

I think the primary variation year on year actually relates to the other, not the interest expense itself.

Our debt levels will be about the same in FY11 as they were in 2010.

And although we will be carrying a higher cash balance, as you know, the earnings we are getting on that cash right now is relatively small, so it is not a significant driver.

But what is changing year on year is the Other piece, and that really is a result of some positive Other that we got in FY10, including some foreign exchange gains, as well as some deferred comp gains.

So those tended to drive other positives in FY10, and we're not assuming that same level of benefit in FY11.

The Other is going from what to what?

I'm sorry.

The Other is increasing in the range of $15 million to $20 million.

Okay.

So the rest of the interest expense assumption is based on the starting debt balance offset by interest come from the current cash balance?

Exactly.

And, as I said, the interest income assumption is relatively modest given the money market rates we are seeing currently.

Garen Sarafian, Citigroup.

A couple of questions.

One is, I guess, follow-up to an earlier question regarding your recent HSH acquisition.

I noticed it has only been a few weeks since the deal closed.

But if it is not too early, can you point to any hope that that is giving you in winning new clients as a result of having this?

So essentially what your targeted list of clients has said during this acquisition.

I will try.

It is, of course, very early.

We literally just closed this deal a couple of weeks ago.

So I would not point to any things that we can say, put it in the bank; it already happened.

What I can tell you is that the business that they are running is increasing its reach, it is having wonderful client meetings, continues to serve its customers well.

And, as Jeff mentioned, integration work into Cardinal is going exceedingly well.

But it is way too early for me to declare any victories here.

Obviously we will let you know as we are making progress, and I fully expect to.

There was a second part to your question?

Well, the second part was just the feedback from clients, as well as equally importantly just from the drug manufacturers.

What is the feedback then, and how is that going to help deepen the relationships?

It is really positive.

Anything that we do -- we have very close relationships with our manufacturing partners.

What this does it broadens our offering to them if you think about a relationship upstream.

It brings in more biotech players with whom we already have good relationships, but now gives us another avenue of value creation for them.

So this is part of the excitement for us.

It is not just about the business model in and of itself, but it is the ability to enhance our value proposition through the entire pharmaceutical channel and with all partners.

So I'm really excited about that.

We've gotten very good feedback from providers, really good commentary from our manufactures, a number of whom I have met with on this.

So we are really encouraged about it.

Great.

And then a quick follow-up.

Maybe I just missed this in the prepared remarks, but one of your competitors recently stated signing a fee for service contract with a major branded manufacturer where they did not have one previously.

So I'm wondering have you done the same, and how will that impact seasonality compared --?

Without calling out individual companies, I think you can assume that we have likewise renewed all the key manufacturing relationships that we needed to do.

So assume that and I don't know what else will affect.

Jeff?

Yes, I would say anytime that we make a greater proportion of our branded Pharma agreements more DSA-based, that tends to take a little bit more of incremental seasonality out of our business.

That all said, keep in mind that about 20% of our branded Pharma income still is contingent-based.

And I would say, even agreements that are largely DSA-based, sometimes still have a certain contingent element to them.

So you could still see some seasonality from those contracts due to certain price increases that happen over the course of the year.

So, in summary, I still expect to see the general pattern of quarterly seasonality that we have seen in the past.

But I think each year that goes by, it probably gets muted a little bit more.

Operator, I think we have come up on the time.

I don't know if there is anybody else in queue.

If we can maybe take one more question, and then anybody that we have left in queue, please feel free to call my office.

Helene Wolk, Sanford Bernstein.

I will be quick.

Two quick questions.

First, on Medicine Shoppe, can you give us a little bit of an update around your outlook for, does it become positive contributor in 2011, or how should we begin thinking about that?

I would say -- good morning, by the way, and thanks for the question.

Yes, I would say that the transition that we had planned for FY10, although I expect there will be some ongoing transition that will happen in FY11 and beyond, I would say it is largely complete now.

So we sort of reestablished a new base, and I expect that we will grow modestly from that base in FY11 and beyond.

And then I guess a second question, any update on Long's and conversations there, and presumably it is not included in your guidance, is that correct?

Yes, there would be no update to that.

Ladies and gentlemen, this concludes your question and answer session.

I would like to hand the call over to Mr.

George Barrett, CEO, for closing remarks.

Thank you so much.

Thanks, everybody.

I know this was an unusually long call, but the end of a very important year for us.

So my apologies if we went so long, but I appreciate all the great questions.

And, as you know, we are here to the extent that people have follow-ups.

So, thank you, again.

We are really pleased about where we are coming out of this first year after the spinoff, and we look forward to 2011, and thanks for your time this morning.

Thank you for your participation in today's conference.

This concludes your presentation, and you may now disconnect.

Have a great day.