卡地納健康 (CAH) 2012 Q4 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the Cardinal Health, Inc.

fourth-quarter 2012 earnings conference call.

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

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions) As a reminder this call may be recorded.

I would now like to introduce your host for today's conference, Sally Curley.

Ma'am, you may begin.

Thank you.

Welcome to Cardinal Health's fourth quarter fiscal 2012 and our FY13 guidance conference call.

Today we will be making forward-looking statements.

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

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

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

Information about these measures is included at the end of the slides.

Now I'd like to turn the call over to Mr. George Barrett.

George?

Thanks, Sally.

Good morning and thanks to all of you for joining us today for our fiscal 2012 fourth quarter and year-end call.

2012 was a year of considerable accomplishments.

We achieved virtually all of our financial goals, including revenues, operating profit, earnings per share, margin rate growth and capital efficiency.

We made excellent progress in most of our strategic priorities.

And continued to strengthen our organization through a focus on talent development and supplemented through the addition of some world-class talent.

It was also a year which brought its challenges.

But through this, we continued to grow and to learn, a necessary ingredient for any organization with bold, long-term aspirations.

The work we've done in fiscal 2012 continued to move us down a path we started on three years ago when we spun off CareFusion and set in motion a plan to transform Cardinal Health.

Today, we serve a total of over 25,000 retail pharmacies, including chain, food combo, and over 7,500 independents, a group that three years ago numbered around 4,000.

We possess a significantly broader network of positron emission tomography facilities.

We're well-positioned to grow and benefit from the exciting developments in neuroscience and oncology.

Today, our Specialty Solutions group serves more than 1,700 oncologists through almost 400 oncology practices.

We serve in excess of 150 urology practices, 70% of the nation's largest practices.

All customers with which we had virtually no presence just a few years ago.

We've grown substantially in our ability to serve healthcare customers in acute settings, and to follow patients through the continuum of care.

Our preferred medical product programs offer significant value for our customers.

And this area is growing at a rate significantly in excess of market rates, contributing disproportionately to our margin.

We've built an IT platform for our Medical segment which would allow us to marshall the full capabilities of Cardinal Health portfolio.

Which will create value for our customers.

Replacing a patch work of systems which in the past made it difficult to work across business lines.

Today we have a business in China which is positioned to serve this enormous population.

And will act as a platform for growth for a number of business lines and as a platform for innovation.

These operational and strategic accomplishments have helped us achieve important financial goals.

You may recall that during our December 2010 Investor Day, we laid out some long-term financial objectives.

These included achievements of a compound annual non-GAAP EPS growth rate and operational TSR of at least 10% and 11%, respectively.

Operational TSR being defined as EPS growth plus dividend yield.

We have tracked well ahead of those trajectories in 2011 and 2012 and remain committed to those long-term goals.

Let me offer some observations about the quarter just completed and then I'll provide some color on our expectations for fiscal year 2013.

We had a strong fourth quarter.

While our revenues were essentially flat, largely an outcome of brand-to-generic conversions, our non-GAAP EPS of $0.73 was up 22% versus last year's fourth quarter.

Our Pharma segment continued its strong performance with 15% profit growth, as margins continued to expand.

Performance under our branded agreements, new customer wins and strong contributions from our base of independent pharmacy customers contributed to profit growth.

Our Pharma distribution business held its 21st annual retail business conference just a few weeks ago.

We enjoyed the largest turnout to date, with nearly 7,500 people in attendance, representing 4,100 pharmacies.

The event provides peer-to-peer networking, buying opportunities, continuing education sessions.

And programs and technologies to help pharmacists improve patient care, efficiency, and profitability.

And last week we closed on our acquisition of the regional wholesaler DIK Drug, giving us the opportunity to serve another 500 independent pharmacies.

This acquisition is consistent with our strategy to both build out our retail independent customer base and grow our generics business.

Our Specialty Solutions group posted another quarter of robust revenue growth.

The business continues to build important relationships with both providers and payers by offering innovative and value-enhancing programs, as evidenced by increased revenues from both new and existing customers.

Highs from the quarter included continued traction in the focus areas of oncology and rheumatology.

On the provider front specifically, we've been named as the primary healthcare solutions partner for the Medical Oncology Association of Southern California purchasing network.

We added several major new GPL accounts and achieved important wins in rheumatology.

At the same time, we introduced new technology solutions to enhance payer and physician collaboration to improve the quality and the cost of caring for patients with complex diseases.

Our nuclear performance in the quarter was again characterized by two distinct patterns.

Demand in the low energy business remains soft, indicative of the industry's macroeconomic and reimbursement trends.

While the PET business continued to show growth.

As I mentioned last quarter, we've been taking the necessary actions to insure we're operating as efficiently as possible in our low energy business.

On the other hand, we remain very excited about the future of PET.

I would note that PET doses have grown at a compound annual growth rate of 16% since fiscal 2008.

We continue to support numerous clinical trials.

And we're pleased to note that we have begun producing commercial doses of Amyvid, Eli Lilly's new diagnostic brain imaging agent.

Turning to Medical.

Revenue increased 5% to $2.4 billion.

Profit increased 2% to $79 million due to strong growth of our preferred products, offset by the expenses related to MBT, our medical business systems transformation.

And the year-long commodity headwind moderated, as expected, during the quarter to around $6 million.

Our 2012 stream of Cardinal Health branded product launches, designed to bring quality, value, and enhanced clinical benefits to our customers, has been well received and contributed to revenue growth in the fourth quarter.

And just a few weeks ago we announced the launch of our new integrated orthopedic solutions offering that will allow hospitals and surgery centers to access high-quality, fair-priced orthopedic products.

We believe our unique blend of product and supply chain expertise can bring greater cost effectiveness to our orthopedic customers.

The ambulatory care channel, physicians' offices, surgery centers and other sub acute markets continued to record good growth in the fourth quarter.

We will continue to expand our position here, as care continues to move into more efficient and specialized settings.

Our Canadian business had a strong fourth quarter with double digit revenue growth.

The integration of Futuremed, our third-quarter 2012 acquisition, continues to go well.

We feel confident that Futuremed will complement our existing acute care medical surgical platform.

And enhance our ability to serve Canadian patients across the healthcare continuum.

Now I'd like to give you some color on our expectations for fiscal year 2013.

Because of the enormous shift in dollars associated with the conversion of over $30 billion of brand name to generic drugs over the past nine months, and the non-renewal of the Express Scripts distribution contract, we expect that our 2013 revenue will decline by approximately 7%.

However, our margin will continue to expand.

System-wide, we anticipate continued growth in overall prescriptions as pharmaceutical therapy remains the most cost-effective component in our health system.

We do see generic utilization approaching 80%.

And while the number and value of generic launches is likely to be lower in fiscal year 2014 than it was in fiscal year 2012, and therefore the uplift from generics less pronounced, we do see our generic business continuing to grow, driven by overall utilization, improved customer and product mix, and program strength.

Specialty Pharmaceuticals will continue to be a valuable part of a provider's set of treatment options and a growth driver for the industry and for Cardinal Health.

We expect to continue our solid top-line growth in this area.

And while our Specialty Solutions bottom line growth will be slowed somewhat in fiscal 2013 by the business loss we mentioned last quarter, the data supporting our momentum is unambiguous.

We expect our Medical segment profit to grow at a double digit rate in fiscal year 2013.

We have made the major infrastructure investments.

And we have the talent and the portfolio to create value for our provider customers and our medical device partners.

We no longer expect to see commodity costs as a headwind for the year.

We expect to reap some of the benefits from our medical business transformation to improve margins and lower inventories, as we resolve some of the short-term disruptions associated with the installation and the corresponding change management processes.

We've also grown out our medical segment clinical capabilities, critical from implementation of our preferred products strategies.

As we put all the pieces together for fiscal 2013, and this new clarity on the Express Scripts decision, we are providing a fiscal non-GAAP EPS guidance range of $3.35 to $3.50.

We enter 2013 with a strong position with a scale and reach to help shape our market, with detailed care experience and insights, and with a commitment to long-term shareholder value creation.

Before I turn the call over to Jeff, it seems strange to provide a year-end recap without making just a few comments about the Supreme Court's landmark ruling on the Affordable Care Act.

We have operated under the assumption that all or part of the Affordable Care Act would be upheld.

But also with a strong belief that even had it not been, that healthcare would go through, and has already gone through, some significant changes.

The realities of demographics and our nation's economic situation demand it.

More Americans need to come into the system through the front door, so to speak, not being dependent on emergency rooms as primary care.

We know that our system needs to be more highly coordinated and efficient.

It needs to be safer.

And we will need to incentivize the right outcomes rather than activity.

And consumers will play a greater role in their own wellness and their own healthcare consumption.

And this has implications for Cardinal Health.

We will continue to focus on productivity, to efficiently support the additional patients in the system.

And deal with the corresponding pressures to reduce healthcare costs.

We will use our scale, our broad reach across the system and our portfolio of services and products to help bring coordination and efficiency.

We will continue to innovate around new ways we can help all of our partners, both upstream and downstream, provide high-quality care in the most cost-effective way.

As we look forward, these are the things around which we will mobilize.

And finally, I'd also like to thank all of our employees for their contributions this year.

Your dedication to our customers is what will continue to drive Cardinal Health's success.

With that, I'll turn the call over to Jeff to provide more details on the quarter, the full year and on guidance for fiscal 2013.

Jeff?

Thanks, George.

Good morning, everyone.

It's great to be reporting a strong fourth quarter and a conclusion to a very successful fiscal year.

Let me begin by highlighting key financial trends and drivers of our fourth-quarter and full-year performance.

Then I'll provide additional detail on our fiscal '13 guidance, including some of our key expectations and underlying assumptions.

Starting on slide 5. During the quarter our non-GAAP EPS growth was driven by 13% non-GAAP operating earnings growth, lower share count and a more favorable tax rate versus 2011.

Interest and other expense came in $5 million unfavorable compared to last year, largely driven by changes in the value of our deferred compensation plan.

Our non-GAAP tax rate for the quarter was 36%, which is lower than the prior-year quarter, but largely consistent with our 2012 third quarter and our expectations.

The year-over-year favorability was driven by a slightly lower state tax rate and net favorable discrete items versus last year.

The 349 million diluted average shares outstanding during the fourth quarter compares to 355 million in the prior year's quarter.

The fiscal '12 share count reflects $150 million of share buybacks in Q4.

And brings our share repurchase to a total of $450 million for the year.

I should also note thus far in fiscal '13 we purchased another $100 million of shares, bringing the authorization remaining under our existing Board approval to $200 million.

Before shifting the discussion to the segment results, let me comment on a few items from our consolidated cash flows and the balance sheet.

We ended Q4 with approximately $2.3 billion in cash, of which about $380 million is held overseas.

This cash balance does not include our investments in held-to-maturity fixed-income securities, which totaled approximately $70 million at quarter end.

For fiscal 2012, our operating cash flow figure was approximately $1.2 billion.

Cash flow in the fourth quarter was dampened somewhat by a tax deposit of $100 million we made with the IRS during the period.

Our working capital days were higher at quarter end versus the prior year due mostly to inventory increases related to onboarding a new pharmaceutical customer.

As well as a temporary increase in receivables related to medical business transformation implementation.

Now let's move to segment performance, starting with Pharma.

I'll be referring to slides 6 and 7. Revenue in the Pharma segment decreased 0.5% to $24.3 billion for Q4, due to the continued brand-to-generic conversion.

This decrease was anticipated and was partially offset by increased revenue from new customers.

We again experienced strong growth in our generic programs, up 23%.

And our Specialty Solutions business continues to add new distribution customers, growing revenue this quarter 79%.

Pharma segment profit increased by approximately 15% to $354 million in the quarter, driven by the overall strong performance under our generic programs.

And the benefits of expanded business with new and existing customers, including strong contributions from retail independents.

We also benefit from performance under our branded agreements.

Margin rate increased by 20 basis points compared to the prior year's Q4, with the rate increasing in each of our Pharma distribution classes of trade.

We also benefited from a continued mix shift, as our non-bulk customer percentage of sales reached 61% in Q4 versus 57% in Q4 of 2011.

Generic deflation in the quarter was not as steep as we anticipated, due to material inflation on a few generic products.

As we discussed on previous calls, our nuclear business has continued to be challenged due to the softness in the low energy space or spec legacy business.

During the past several months we've taken steps to realign our business model with what we believe is the new normal demand curve.

While at the same time investing in the growing PET side of the business.

Overall, a very strong quarter, once again, for the Pharma segment.

Now turning to Medical.

For the quarter Medical segment revenue increased by 5.2% to $2.4 billion.

Let me highlight a few drivers of this result.

In our Q1 call I discussed refinements we made in the way we report results for our international commercial operations.

In the fourth quarter this change contributed 2.3 percentage points to the Medical segment revenue growth rate.

As we've now lapped this transition, this will be the last time I quantify its impact on Medical revenue growth.

Our Futuremed acquisition, which closed in Q3, contributed 2.1 percentage points to the segment revenue growth rate in the quarter.

Our ambulatory channel, another strategic growth area, posted 8% revenue growth for the quarter.

And we are very pleased that the Medical segment returned to profitable growth of approximately 2% for the quarter versus prior year.

We believe we've turned the corner in Medical and are well positioned for strong growth in fiscal '13.

We continue to see the positive margin benefit of increasing sales of our preferred products.

Consisting with the forecast we provided in last quarter's call, we saw approximately $8 million of incremental depreciation expense associated with the medical business transformation.

Commodity prices negatively affected our current period cost of products sold by $6 million versus Q4 last year.

In line with our expectations and significantly lower than the previous three quarters this fiscal year.

I'll provide comments regarding our forward-looking commodity assumptions later when I discuss FY13 guidance.

Foreign exchange was an additional negative $3 million impact for the quarter.

On a different note, Cardinal Health China once again posted double digit revenue growth.

And we continue to see outstanding growth from our local direct distribution business, which grew its revenue by more than 50% during the quarter.

As of the end of Q4 we've expanded to 11 distribution sites in China.

In this regard, I wanted to highlight one regional acquisition among several we made in fiscal '12.

And one which significantly enhanced our geographic reach.

The acquisition of Da Sheng Group, which closed recently, expands our direct channel platform in the Ningbo market, which is the 11th largest city in China with a population of almost 8 million.

This is exactly the type of investment which allows us to build on our core platform, expand our local direct distribution business, and will help to accelerate our growth long term.

On slide 8 you'll see our consolidated GAAP results for the quarter which include items that had a negative $0.05 per share net after-tax impact.

Primarily related to the exclusion of $0.03 of amortization of acquisition related intangible assets from our non-GAAP results.

In the same quarter last year, GAAP results were $0.02 lower than non-GAAP results, again driven by acquisition-related costs.

I do want to call out one item we recorded in Q4 related to our Specialty business.

Based on discussions with the founders and previous owners of P4 Healthcare, we negotiated a final earn out payment, reducing the remaining amount payable to $3.5 million.

And recognizing the $19 million reduction from our previous balance as income.

This amount is part of the acquisition-related cost line and excluded from our non-GAAP results.

Now let me make a few comments about 2012 in total, starting with slide 9. For the full year, non-GAAP EPS was at $3.21, an increase of 15% year on year and essentially at the upper end of our most recent guidance range.

Operating earnings of $1.9 billion increased 13% versus fiscal '11.

In particular, I am very pleased with the strong progress on our goal to expand margins, with both gross margin rates and non-GAAP operating margin rate increasing versus last year.

Up 17 basis points and 13 basis points, respectively.

I echo George's comments about our achievements this past year and thank our employees for their contributions.

We had a strong financial finish for the year, marked by significant progress against our strategic initiatives.

And our results enabled us to return $750 million of cash to shareholders in 2012, to go with our differentiated dividend policy and share buybacks.

Our performance in 2012 provides a solid foundation from which to navigate 2013.

So, turning to slide 12.

Our outlook for non-GAAP earnings from continuing operations in fiscal 2013 is $3.35 to $3.50 per share.

This range reflects the expiration of the Express Scripts contract at the end of September.

It also includes the potential range of expectations for external factors such as generic launches, branded inflation, generic deflation, commodity prices, and the med device tax schedule to begin in January.

Revenues are projected to be down approximately 7%, again reflecting the Express Scripts contract expiration and the impact of brand-to-generic conversions within Pharma.

Regarding utilization, we are taking a reasonably conservative view of any potential variation in the coming year Particularly as it relates to the markets our Medical segment serves.

And with respect to nuclear MPI procedures impacting our spec volumes.

Slide 13 outlines a number of our key corporate expectations for the year.

We anticipate our overall tax rate to be between 36.5% and 37.5%, comparable to the 2012 rate.

Although tax rates will fluctuate quarterly.

Our diluted weighted average shares outstanding are assumed at approximately 347 million shares in fiscal '13.

Again, we expect the benefit from share repurchases to be partially offset by share issuances and the impact of share price on the dilution calculation and exercising of options.

We estimate interest and other to net between negative $105 million and $115 million.

We will continue to invest appropriate resources in our identified strategic initiatives, continuing the momentum we gained in fiscal '12.

We expect capital expenditures in $210 million to $225 million range, with a continued focus on IT investments.

As of the end of June 30, 2012, our estimate for future acquisition-related intangible amortization expense is approximately $77 million.

This only incorporates deals closed before year end and so will change over time.

Given the variability of our operating cash flows, we generally don't provide any type of guidance in this area.

However, I will point out that, all else being equal, our cash flows will be moderated next year by two one-time items, which together total over $500 million.

The first relates to some large tax payments expected when we ultimately resolve past audits with the IRS, which is our expectation for the coming year.

The second relates to the negative working capital impact that results from the non-renewal of the Express Scripts contract.

Now I'll spend a few minutes going through some of the segment-specific assumptions, starting with Pharma on slide 14.

Clearly Pharma segment sales will be down for the reasons I cited earlier when I spoke about consolidated revenue trends.

With a corresponding impact on our branded margin dollars.

Our expectation for brand inflation is that the rate will be similar to FY12.

We continue to forecast year-over-year growth from our generic programs.

Despite the benefit from new launches being substantially less than fiscal 2012.

And the expectation for steeper generic deflation in 2013, driven by certain large products which have come off exclusivity in fiscal 2012.

We expect to benefit from growth in both our China and Specialty businesses.

Turning to slide 15 in the Medical segment.

We expect mid-single-digit revenue growth and double-digit profit growth in fiscal '13, reflecting the benefits from our recent investments and the momentum we've gained.

Preferred products will again be an important contributor to our profit growth and continue to grow in significance in our portfolio.

The medical device tax associated with the Affordable Care Act has an estimated impact in the second half of the year in a range of $13 million to $23 million.

Our guidance includes the assumption of a neutral to slight benefit related to commodities and foreign exchange on a year-over-year basis.

As we've discussed previously we use the Chemical Data Index and related forward curves as a basis for our commodity price forecast.

On a simplistic basis, our guidance effectively assumes oil prices per barrel in the $90s for oil-related commodities.

Just a final word on FY13 guidance.

While we do not provide detailed guidance for the quarters, I did want to mention we expect the first quarter of fiscal 2013 to be generally in line with our full year growth rate range.

So, in closing, let me reiterate that I am very pleased with our overall performance for the quarter and the year.

2012 is a period of strong operational execution and financial results.

I am confident that we will continue to execute in our priorities and drive performance throughout fiscal 2013.

With that let me turn it over to our Operator to begin the Q&A session.

(Operator Instructions) Glen Santangelo of Credit Suisse.

Just wanted to ask two quick questions, George, regarding generics.

Based on some comments you made, you said that you saw generic deflation that was not as steep as you had anticipated.

I was wondering if you could maybe quantify that a little bit in terms of what you're seeing.

And then, secondly, you said that you expect the generic uplift to be less pronounced in fiscal '13.

I think everyone is aware of that based on the timing of the patent expiration schedule.

But as we think about that within the context of the fiscal '13 guidance, could you give us a little bit of a sense for how big that headwind is year-over-year?

Good morning, Glen.

Thanks for the question.

I'll take the first and maybe Jeff will chime in.

There are a couple of issues that you talked about.

One is the general direction of pricing on generics and what we've experienced.

Again, largely what has been happening is a lot of movement driven by the exclusivity that's coming up with some of the major drugs.

So that is something that I know you all expect to see and see regularly.

Generally speaking, what we've been seeing has been interesting.

That a few of those products deflated at a slightly slower rate than we had modeled.

As I've mentioned to you before, we have a very large portfolio of generics.

We've got close to 4,000 products in there.

Many of the products that are in their mid maturity are behaving much as we've typically seen them.

Some of the older products, particularly, have been inflating a bit.

And then what we've seen is the variability on these products that are losing their exclusivity.

And so the general direction of that has been slightly favorable to our forecasting.

The second one which is again I think probably about quantifying it, and there's only so much that we're comfortable providing as it relates to actual numbers in this.

I don't know if you want to add anything, Jeff?

No, I might mention deflation rate.

I'd say it was slightly better in Q4 than what we saw in Q3.

And again, that was in part driven by some unique inflation we had on a couple of products.

Overall I would describe deflation as flattish in Q4.

And regarding the impact of generic launches, I don't want to get into a specific number there.

I will say it's a fairly significant drop off from FY12 that we're expecting.

Which has been our assumption all along.

And keep in mind that that requires a fair amount of estimation and probabilization of expected launches.

But based on everything we see at this point, I would describe it as a fairly significant drop off in value.

From the new launches.

Okay, thank you.

John Kreger of William Blair.

Could you give us an update on the broad utilization patterns you're seeing across your portfolio, the changes in the quarter versus the March quarter or as the quarter played out?

Yes, thanks, John, good morning.

It's a very choppy set of data.

Again, we do probably what you do in terms of looking at external data and we've got a number of sources.

Generally speaking, I would say Q4 looks slightly improved on overall utilization trends versus Q3.

But I would still say, if you look at it on a broader basis, it's still pretty soft.

And it tends to be very choppy by month.

So I would still say we're operating in a reasonably soft utilization market.

And should we assume that that pattern is roughly unchanged as fiscal '13 plays out in your budget?

Yes, I mentioned that in my comments, John.

We're not expecting a significant variation in the pattern of utilization heading into next year based on what we've seen this year.

Just to get a little bit more specific on the trends by area -- and, again, we're seeing a lot of the same data you are so I'm not sure this is necessarily new news.

But for office space position trends, it did appear based on external data that there was some pick up in our Q4.

But keep in mind that that data is quite choppy.

But for the three months in Q4, we saw growth in each of those quarters.

I would say with respect to surgical volume it depends on whether you're looking at inpatient or outpatient.

Outpatient appeared to have a fair amount of increase year on year.

For the data that we have for Q4, I would say for inpatients it was down year on year for the quarter.

And then with respect to prescription volume, I'd say overall script trends was pretty flat.

Excellent.

Thanks.

One follow-up question.

I realize it's early but what is your initial thinking as the ACA build is implemented?

What sort of growth benefit would you expect?

Boy, that's a tough one to answer, John.

I think over the long term, we do expect additional patients coming into the system.

But also, I think, as you all know, some of those patients find their way into the system, as I say, through the back door.

And so modeling the actual increase from this is extremely difficult.

So I would say again, over the long term, we'll see some benefit.

Very hard to quantify for you right now on the very short-term.

Again, that's not something we're modeling in for the very short-term.

Great, thanks very much.

Ricky Goldwasser of Morgan Stanley.

I have a couple questions, but George if you can provide us with some of your perspective on pricing environment in the industry.

And has it changed from what you've seen historically?

Thanks, Ricky.

This is always a difficult one to answer, partly in that we operate in multiple markets.

I've said this before and try to emphasize that we operate across our markets in very competitive markets.

And that's true today.

I would have a very difficult time discerning a particular pattern or giving a generalized characterization of pricing.

It tends to be very business-line specific, customer specific, sometimes even region specific.

So I'm not sure I could give you, Ricky, a discernible trend break right now, other than to say that we generally operate in a competitive environment.

And I don't see that differently right now.

Okay.

And then Jeff, just to confirm the guidance for the first quarter.

The growth rates provided for EPS was $0.76 to $0.78.

So how should we think about the headwinds and tailwinds in the September quarter?

And then when you think about the rest of the year, should we think about fiscal year '13 as being a year where growth is fairly smooth quarter to quarter?

Thanks, Ricky.

This is Jeff.

Let me answer your second question first.

I don't want to give specific quarterly guidance, but as I said for the first quarter, and I'd probably extend that to the first half of the year, we generally see the growth rates for those quarters to be consistent with the growth rate range that we gave for the full year.

So that's probably as far as I'll go in terms of quarterly guidance.

In terms of headwinds and tailwinds, I'd say for the most part the headwinds and tailwinds for Q1 are similar to what we see for the full year.

With the one notable exception being the fact that our Safeway contract extends through September 30 so we'll begin seeing the impact of that last volume only in Q2 and beyond.

I'm sorry, Express Scripts, not Safeway.

Express Scripts contract expires September 30 and so we'll begin seeing the impact of that last volume starting in Q2 and beyond.

But more broadly, the headwinds, both for Q1 and the full year, I would say, from a macroeconomic trend standpoint, as I said we're being relatively conservative in our assumptions on utilization.

Particularly with respect to medical procedures and nuclear MPI volumes.

So I'd say probably best case that's neutral year on year.

Also, as we said, less anticipated generic launch benefit year on year and that would be true for Q1, as well.

We are expecting steeper generic deflation for the year than we saw this year, given the products that have come off exclusivity.

We've got lots of some branded buy margin, just given the fact that we've had a very large amount of branded products go generic this year.

Obviously that impact will be felt throughout next year, just given the less brand volume that we have.

We've got the normal pricing erosion that we would typically see in any period.

And I would say in terms of tailwinds, we are in the process of beginning to realize the benefit from our MBT implementation within Medical.

And that will ramp up over the course of the year.

But we're driving to start achieving those benefits as early as Q1.

And I'd say generally we're expecting better Medical performance, both given the lack of headwinds In commodities and FX which is generally delivering on the investment that we've made over the past year or two.

We've got a couple new customers.

Department of Defense in Medical, and Safeway in Pharma that I would describe as tailwinds.

We're going to continue to be very focused on operational efficiencies, both in Q1 and the full year.

And I would say we expect some growth from Specialty in China, as well, as we continue to invest and realize benefits from those investments in Q1 and the full year.

By the way, there's one other headwind I forgot to mention that is not going to happen in Q1 but will occur in the second half of the year.

And that is the medical device tax that I referred to earlier of somewhere between $13 million and $23 million for the second half of the year.

And again, as I said before, the reason we have a fairly broad range there is there's still some uncertainty regarding exactly how the medical device tax will be applied to certain of our products.

We're still sorting that out with the regulators.

I hope that helps.

But at the high end you assume worst case scenario for the device tax.

Is that fair?

Yes, that would be the worst case, happier impact.

Okay, thank you very much.

Lisa Gill at JPMorgan.

Just a couple of questions on the Medical (inaudible) segment.

George or Jeff, can you talk about your expectations around mid single digit growth?

Are you taking market share, number one.

And, number two, can you talk about the different segments where, if you are taking market share, where you're taking it from?

And on the ambulatory care side, is that more of the IDNs buying physician practices and picking up that business?

Or are you actually winning business out in the marketplace and taking market there?

Lisa, I'll start and then Jeff will, of course, feel free to chime in here.

It's really, again, recognize we have a broad set of lines that are covered in our Medical business.

And so, generally speaking, we have been doing well in our medical/surgical business.

I wouldn't say dramatic swings in share.

Jeff mentioned DOD.

We've had some good progress, and I think some good progress with key IDNs who are performing very well in the market.

And that's been beneficial to us.

I think we've had solid growth in ambulatory.

I think particularly surgery centers has been an area.

As you know, as care has been shifting to some extent from the acute setting into more ambulatory treatment centers.

We have been well-positioned to serve those surgery centers and I think we've picked up some share there.

But they've also grown their businesses there.

And the physicians office area we've probably grown a little bit past market.

Some of this, again, has to do with what you described, which is some of the practices moving into the IDN affiliated networks.

And some of it just, again, increased attention on our part with things that are more finally tuned towards the needs of a smaller practice.

So again, the growth has been broadly distributed, I would say.

And then just secondly, on the commodity aspect.

I guess this is a question for you, Jeff.

I'm just surprised that there's not more of a tailwind in 2013, just given how big the headwind was in 2012.

Is there anything else that goes into that calculation?

Oil in the $90s is fairly comparable with what it was in '12.

But aren't we seeing some of the other commodities looking better as we move into '13?

Yes, we've seen latex and cotton definitely improve.

But I would say, from a oil-based derivative perspective -- and keep in mind oil-based derivatives make up well more than 50% of our commodity exposure -- I would say in that regard we're seeing fairly similar rates throughout FY11.

Probably the average price of oil we experienced was in the high $90s to low $100s.

We're modeling a rate in the $90s so there's a little bit of pick up there.

But we don't want to get too aggressive with our assumptions, just given the volatility we're seeing in oil prices.

Obviously if oil stays, or if it goes to the low $80s, which is what we saw a couple weeks ago, that would provide some additional benefit.

But we don't want to count on that yet just given the volatility.

Great, thank you.

Charles Rhyee of Cowen & Company.

I had a question, Jeff.

If I heard you correctly, you guys bought $100 million of shares back in the fourth quarter and another $100 million now in the first quarter.

Can you talk about your plans for share repurchase versus dividends this year?

If you have a higher dividend yield than your competitors and (inaudible) value with share repurchase.

Any way to think about that and how that continues into next year on dividends?

Thanks.

Charles, you're breaking up a little bit but I think I got most of the gist of your question.

Good morning, by the way.

Just to clarify, the amount we've purchased in Q4 was $150 million and the amount we purchased thus far this year was an additional $100 million.

Regarding our plans for the year, I never like getting too specific about our plans in this regard, I think for somewhat obvious reasons.

But I will say what our assumption is.

And our assumption is basically, in the 347 million average diluted shares outstanding that I referenced in my prepared remarks, that basically assumes that we're done repo for the year, quite honestly.

That doesn't mean that we may not do more but, for guidance purposes, that is the assumption we've made.

So the $250 million we bought over the last two months is effectively what's reflected in the guidance.

Over time, we will have opportunities to consider repo again in the entire portfolio of things we may invest in.

But also keep in mind that our cash flow will be a little bit lower next year for the reasons that I've stated.

So it will be somewhat of an abnormal year in FY13 from an operating cash flow standpoint because of the impact of the tax payments and the ESI non-renewal that I referenced in my remarks.

Regarding the dividend, I really can't comment on that.

Ultimately that's up to our Board to decide our dividend policy going forward and that's probably all I can say on that.

If I can follow-up then.

You guys have roughly $2 billion in cash on the domestic side, (inaudible).

But then you're estimating here a higher interest expense for the next year.

I couldn't really hear, I might have missed it.

What are you expecting (inaudible)?

Keep in mind that we issued $500 million of debt a few months ago, which was intended to partially pre-fund several hundred million dollars in debt that comes due at the end of FY13.

So that's one of the major drivers of the higher interest expense.

We're just simply carrying more debt this year than we did in FY12.

We'll also have slightly higher debt overseas, as well, related to our Chinese operations, as well.

So those are the two primary drivers of the higher interest expense year on year.

Okay, great.

Thanks.

George Hill, Citigroup.

I want to follow-up on Ricky's question on pricing.

And I'll let a little more specific in the largest national accounts.

Obviously ESI got great pricing on their renewals, which you guys chose not to match.

How should we think about, as we look forward with the other national accounts that you guys serviced?

Is that level of pricing going to be the prevalent rate that we should think about at which business gets done?

Or will there be anything special about that contract?

George, thanks for the question.

Good morning.

Again, trying to compare some of these large accounts one to the other is quite difficult.

They have very unique strategies, very unique business models, and very unique needs in terms of servicing.

So applying some set of conditions across them would be really difficult.

I think it's very difficult to try to give you some kind of forward-looking observation about what's going to happen in particular renewals.

I would just say this.

We're extremely efficient at the servicing of these large accounts.

We've built our systems around them, we're flexible, we're tuned to the needs of their complexities.

We provide a very broad range of service components, connectivity, management of significant amounts of working capital.

So I think you have to put that into the equation and then you have to put it in the equation the business mix that each of those accounts manages.

In the reference to the Express Scripts business, that was largely a bulk business for us.

And it played out as it did.

But as it relates to our other large customers, they have very distinct needs and we're very happy to be serving them.

And we'll hope to continue to do that and bring the services, the tools and the capital to bear to make sure we do that well.

Okay, great color.

And then maybe, Jeff, just a quick follow-up on the tax rate guidance.

The high end of the tax rate guidance range would be above (inaudible).

Anything specific that would tend to drive the range higher?

One of the big drivers of our range is our foreign mix and the exact combination of earnings overseas both related to products we manufacture and source overseas, as well as products that we sell commercially in places like Canada and China et cetera.

So that's one significant driver.

And then, as always, there's discrete items that come up over the course of the year as you fine-tune reserves on tax liabilities, et cetera, and/or reach resolution with the IRS or other taxing agencies on outstanding audits or appeals.

So it's really meant just to cover those two ranges of variability, which are fairly common in any given year.

But there's nothing really unusual beyond that, that I would point to.

George, in answer to your prior question, just two other things I'd like to mention regarding differences in accounts.

As George said, Express Scripts, being a mail order account, is virtually 100% bulk.

Whereas most of the rest of our large customers are a combination of bulk business as well as direct store delivery business.

So, again, you have to look at each of those based on the profile of the business that we serve.

The other thing I'd say, and this is often not very visible to all of you, but is obviously very important as we price accounts.

And that depends on the terms and the capital that either gets generated by the business or that we have to deploy into the business.

And obviously those terms can have a pretty significant impact on the pricing that we give because obviously there's value to that capital in both directions.

I appreciate the color.

I'll hop back into the queue.

Thank you.

Tom Gallucci of Lazard Capital Markets.

The reception doesn't seem so great here today.

I think in that last question we were talking around some of your biggest customers and we cold ask a lot about Walgreens and CVS.

Could you just remind us, are they up for renewal next summer?

And is there anything in your fiscal '13 guidance that would account for any assumptions for any changes there?

We're getting some feedback here so hopefully you can hear us.

We're doing the best to hear you, Tom.

Our Walgreens contract expires at the end of August of next summer.

Our contract with CVS/Caremark expires at the end of June, just about a year from now.

Would there be any assumptions in your fiscal '13 guidance for any change there?

I know you wouldn't want to get into the details but is that really more viewed as a '14 event or (inaudible) consideration of this year's guidance?

I wouldn't want to get into specifics there just due to the confidential nature of those agreements.

But in any given year we make certain assumptions regarding when we're going to renew and the impact, et cetera.

So this would be no different in that regard.

But again I wouldn't want to get into specifics.

Okay, fair enough.

And then, George, in your prepared remarks, I know you had highlighted in the press release, I think, for the last few weeks the (inaudible) offering on the med surg side.

Could you give us a little more background on that?

I thought it was interesting (inaudible).

Yes, just very generally.

As you know, we've been investing here in building out our own capabilities, particularly clinical capabilities, to support preferred products offerings.

This is a little bit, in some ways it has characteristics of the generic industry.

But in other ways it's quite distinct in that these are products that really need to be sold to clinicians who don't necessarily have a rating system, such as an AP rating that happens on the drug side.

So you have to have the clinical capabilities to be able to support your offering of preferred products.

We have seen the area of orthopedics as an interesting area.

A place where we have some skills, we've been able to track some skills, where we could build a partnership with a player who could support the technical needs of delivering and supporting that market.

So we're really excited about this.

It's early days but we have a lot of enthusiasm for it.

And we're getting some high level of interest from business partners downstream on the provider side.

Okay, thank you.

Robert Willoughby from Banc of America.

Can you remind us why the CapEx number falls as much as it does in '13?

Was there something unusual in '12?

And just as it relates to the fuel spending in the coming year, just the normal dinks and dunks?

Or was there some appetite for larger deals?

Let me cover the first one.

The biggest reason for the fall off in CapEx, Bob, is simply because the medical business transformation program ended.

Most of the spend ended actually in Q3 of FY12.

So the drop off of that program is by far the biggest contributor to the lower CapEx next year.

And the dinks and dunks -- a term obviously I learned in business school.

Our thinking about acquisitions is pretty much as it has been.

Which is, we are trying to continue to make sure we're positioned in the best way to drive long-term sustainable value.

There are strategic areas that have been of particular interest to us.

We've made some investments in those areas.

There's nothing particularly to highlight other than to say, to the extent that we can find, or do find, the opportunity to drive shareholder value through a move, we are ready to do that.

But nothing specific to call out at this stage, Robert.

Wonderful, thank you.

Ross Muken of [ICI] Group.

On the China business, it seems like you've had some pretty good growth momentum there.

Obviously that market remains healthy.

You've done some interesting acquisitions.

I think you highlighted one.

As you look forward, do you think the biggest incremental opportunities is moving into some of the tier 2 or other tier 1 cities that you don't currently service?

Or is it also expanding the breadth of products distributed on the medical side, maybe lab, and running a broader product set through the distribution network that you've built?

Why don't you start, Jeff.

The honest answer is both.

And I think they are mutually dependent, too, quite honestly.

In that, we need to continue to build out our geographic presence so we can cover more of the country, not only allowing us to cover more hospitals and pharmacies, but also giving a greater coverage that in turn our manufacturing partners can utilize to push product through.

So that's the basic part of the strategy, is to build out geographic presence.

As I've said before, our goal is to get close to 25 focus areas.

We currently have 11 DT sites so we're about half way there.

And we'll continue to focus on that, both through organic and inorganic means.

However, at the same time, and really in parallel, we need to expand our portfolio in terms of products that we push through that channel.

And I think we have an opportunity to do that in ways that are perhaps very different from the US, as we've said before, because it's a very different market.

And the needs of our manufacturing partners are very different.

And how we get to market made vary a little bit, too, in terms of, for example, providing specialty pharmaceuticals all the way directly to the patient.

Which we've done through several specialty pharmacies that we've set up now in two different cities.

So I would say it's both.

And, like I said, they depend on each other because we need the channel in order to provide enough coverage to, in turn, expand our portfolio of products and drive that through to the market.

And maybe on the specialty business, you quoted growth.

I know it's off of a small base.

But do you feel like, with the deal you had, the win you announced in the quarter, and some of the momentum you've seen there, and building a bigger platform in content (inaudible) three marquee wins.

I know there's a lot more you're looking at, (inaudible), do you feel like you've got it now where you really compete with the other two larger players in that market and take some share?

Yes, this is George.

You sort of hit it, which is you have to establish a certain amount of scale presence which brings additional credibility which allows us to reinvest.

It's a virtual cycle.

So we are beginning to see that momentum.

We had a really great presence out of Chicago at the Cancer Association meeting, Oncology Association meeting.

We're beginning, I think, to establish ourselves as not only capable of doing everything in this space but of innovating in this space.

I feel very encouraged about our growth.

As you said, we're still smaller and therefore at a different stage.

But I like where we are and we are gaining momentum.

And I think others are seeing that and seeing what we're doing and that helps us as we approach each customer.

So I feel really encouraged by it.

Great, thanks guys.

Robert Jones of Goldman Sachs.

I just wanted to talk about the Express loss, just wanted to make sure we're thinking about that correctly.

Is the EPS impact for next year really as simple as taking a bulk margin against the $7 billion of sales?

Or is there some lost P&L leverage that we should expect from losing a customer that size?

Any more quantification around the impact on fiscal '13 would be helpful.

Given the confidential nature of any of those discussions, I can't get into the specific rate that we had previously for Express Scripts.

But I do think, taking the lost sales volume and applying our bulk rate, which for the year, by the way, ended up at 38 basis points in the full year FY12, I think that's a reasonable proxy.

Now, inherent in that rate is some allocated fixed costs that we would need to cover.

But I would say compared to most of our business, the fixed costs associated with bulk business are relatively light because we generally allocate fixed costs based on activity.

And activity associated with mail orders clearly much less than you'd see with the other classes of trade.

So bottom line, I think applying the general margin rate is probably a good proxy.

Thanks.

And then just on the med trends, you guys laid out a lot of the assumptions here.

And I know previously on the medical transformation you said the financial benefits would out weigh the costs in '13.

I might have missed this earlier on the call but I was just wondering what the view is today as you look to fiscal '13.

And any more quantification around that financial benefit would be helpful, thanks.

What I said previously still stands, that we expect depreciation of about $35 million in FY12.

And we expect the benefit to net be accretive to that number.

As George alluded to, they both come in the areas of margin, which would be gross margin improvement, as well as SG&A reduction.

And then separate from that we would expect to see some inventory reductions, as well, which would help our operating cash flow.

Thanks for the questions.

Steven Valiquette of UBS.

First for FY13, just given the earlier discussion on direct store delivery versus bulk, should we assume that the Safeway contract addition is likely more profitable for Cardinal than the Express Scripts subtraction?

Or is that not the right assumption?

And the second one, just quickly.

If I missed this I apologize.

You guys announced this DIK Drug acquisition.

Is that material enough in size to move the needle on EPS accretion for FY13?

Or should we assume it's not that material or therefore more neutral to EPS?

Thanks.

Yes, Steve, good morning.

As you can imagine, we really can't answer the first question.

I'm sorry about that.

But really specific to individual customer contracts is a place where we can't go on these calls.

But Jeff, do you want to comment on the second part of the DIK question?

Yes, I would say it's relatively immaterial for next year.

Net-net it's accretive but by a very small amount.

So I'd say for modeling purposes it's relatively insignificant.

Does it get more accretive over time or just assume overall it's just not big enough to really move the needle?

I would say as a general statement that it's not big enough to move the needle.

But I would expect by the second year for it to be $0.01 or $0.02 accretive.

Okay, got it.

Thanks.

David Larsen of Leerink Swann.

For 2014, assuming that 35 million more people do actually get health insurance, how are you guys thinking about how that may impact your business?

And let's say a good portion of those end up being either exchange base plans or Medicaid plans.

Would that potentially result in lower reimbursement for you guys?

And would that be offset with higher volumes?

Can you talk about that at all?

Yes, Dave, good morning.

I can only give you a generalized statement on this.

But again, we would assume that in 2014 there will be additional people coming into the system.

As I said, our overall healthcare system is going to go through this dynamic.

One, which is more people coming into the system, both through legislative change and demographics.

And then the other is how are we going to, as a society, pay for all this.

So we just assume that we're going to have to continuously improve our productivity, focusing on our own productivity but also productivity for our customers so that we can enable them to compete in their landscape.

So I think it's reasonable to assume that that's the dynamic we'll be experiencing generally as a system and for Cardinal Health.

Great, thanks.

Larry Marsh of Barclays.

Two quick ones.

First on nuclear.

I know last year you had a tough low energy environment around utilization.

But this fall some exciting potential developments on clinical trials and such.

You may have already addressed this, but how are you thinking about the outlook for nuclear this year in your guidance?

I'm going to say generally very much as it has been in the past few months, which is soft demand or utilization on the spec on the low energy side.

We're growing at a nice clip on PET, although it's much smaller.

We do believe that, again, the evolution of the diagnostic agents, particularly right now in the short-term in neuroscience, are important.

I think part of the long-term driver here will be what's happening on the therapeutic side.

The combination of the therapeutic and the diagnostic is a critical link.

And so we'll be watching carefully, not just to see what's happening on the diagnostic side but what's happening in the therapeutic side.

Any breakthroughs there would be very helpful.

Okay, very good.

Could be some variability.

And the second quick follow-up is on cash flow.

I just want to make sure I got this right.

I'm normally think of you guys generating about 75% of EBITDA in cash flow from operations.

This fiscal year, fiscal '12 was a bit below that with the fourth quarter.

Jeff, you had said expect cash flow to be impacted this year by, I think, $500 million and then some negative working capital implications with Express.

Are you suggesting that's going to be a reflection off of the $1.2 billion you generated this year or just off of normalized trend?

And would there be any reason to think about cash flow trends being different from that sort of typical 75% EBITDA as you go forward?

Yes.

First of all, I would say this year's cash flow of $1.2 billion was a little bit light because of the $100 million tax deposit we made with the IRS in Q4.

So on a more normal run rate basis, if you can call it that, I would have expected closer to $1.3 billion.

I'd say next year that's $500 million off of a normalized run rate.

Again, Larry, I just want to make sure, I thought you said $500 million plus the Express and I don't think that's right.

The $500 million is a combination of both the expected tax payments we have to make next year, unique tax payments we have to make next year, as well as the impact of unwinding the Express Scripts business.

Okay, I've got it, thanks.

And that's off a normalized rate so it won't be a dramatic difference versus cash flow from this year, it sounds like.

No, I got to tell you, (inaudible).

If you assume this year is somewhat normal other than the $100 million, it would be $500 million lower.

Off of that?

Yes.

Okay.

Eric Coldwell of Robert W. Baird.

My questions were actually recently answered so I'll let you guys wrap it up here.

Thanks very much.

All right, Eric, thanks and good morning.

So I think we will wrap it up.

I'd like to thank all of you for joining us this morning.

And we look forward to the opportunity to speak with many of you in the coming days.

So thanks, and have a good day.

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

This concludes today's program.

You may all disconnect.

Everyone have a great day.