卡地納健康 (CAH) 2013 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to Cardinal Health Q4 2013 earnings conference call.

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

Later, we'll conduct a question-and-answer session and instructions will be given at that time.

As a reminder, this conference call is being recorded.

I would now like to turn the conference over to your host, Sally Curley, Senior Vice President, Investor Relations.

You may begin.

Thank you, Marcy.

Thank you everyone and welcome to Cardinal Health's fourth-quarter fiscal 2013 earnings conference call.

Today we will be making forward-looking statements.

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

Please refer to the SEC filings and the forward-looking statement slide at the beginning of the presentation, which can be found on our Investor page of our website, for a description of risks and uncertainties.

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

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

I'd also like to remind you of a few upcoming investment conferences and events in which we will be webcasting.

Notably, the Morgan Stanley Global Healthcare Conference in New York on September 9 and the 2013 Baird Health Care Conference in New York on September 10.

In addition, we will be hosting an Investor Day on December 10.

Details will be forthcoming by special invitation.

For those who do not receive an invitation to attend in person, based on limited seating, we will be webcasting the event so that everyone has a chance to participate live.

The details of these webcasted events are or will be posted on the IR section of our website at cardinalhealth.com so please make sure to visit the site often for updated information.

We look forward to seeing you at an upcoming event.

Now I'd like to turn the call over to our Chairman and CEO, George Barrett.

George?

Thanks, Sally, and good morning.

It's safe to say that this has been a full year for all of us at Cardinal Health, concluding with a strong fourth quarter.

And for the year, we exceeded virtually all of our financial goals.

Our non-GAAP operating earnings were up 10% to $2 billion.

Our non-GAAP diluted earnings per share from continuing operations were $3.73, up a robust 16%.

This included a favorable tax settlement of $0.18 per share in the third quarter.

In addition, our Organization did a great job of driving capital efficiency, generating $1.7 billion in cash from operations for the year.

We returned over $800 million to shareholders in fiscal 2013 through both our differentiated dividend and share buybacks.

We finished our fiscal 2013 with financial strength, scale, a strong customer and product portfolio, and a deep bench of Organizational talent and we accelerated the strategic repositioning we began several years ago.

Based on all of these dimensions and in a time of great change within the industry, it was an excellent year.

Over the past few years, you've heard me say that healthcare is an incredibly exciting place to be.

I feel the same today as we close out another fiscal year but it's with a clearer sense of what is going to make it exciting.

We are in the early stages of an unprecedented demographic wave, which is bringing nearly 10,000 people per day to eligibility age for Medicare.

Even if we put aside the political implications surrounding that reality, the fact is that we have an aging population, many of whom suffer from at least one chronic illness and whose life expectancy has already increased by nearly nine years in less than 0.5 a century as a result of medical innovation.

And the needs of this population will only increase over their lifetime.

We have built our strategies and our actions around five key principles.

First, demographic, economic, and industry forces will require a healthcare system which places a high priority on efficiency and cost effectiveness.

Second, care will need to be more coordinated and delivered in multiple settings, leaning towards those settings which are most cost effective.

Third, people will want and need care in the home and they will become increasingly knowledgeable and involved in their own healthcare.

Fourth, our healthcare system will need continued innovation of pharmaceutical and medical products but also cost-effective alternatives to mature products.

And fifth, as part of the system shift from fee-for-service to payment-for-outcomes, hospitals and IDNs will increasingly look to partners with specialized expertise in this new environment.

With that as a backdrop, I'll provide further color on our 2013 performance.

Our Pharmaceutical segment delivered another strong year of profit growth and margin expansion, while growing our customer base, expanding our generic programs, and broadening our specialty offerings to providers, biopharmaceutical companies, and payers, and I'll touch on all of these.

We've also been making the appropriate Organizational and strategic adjustments in anticipation of the end of the Walgreens contract, which expires on August 31.

We are of course pleased to have renewed our supply agreement with CVS and this, combined with other customer renewals and wins and with outstanding work by our Pharmaceutical distribution team, has strengthened and diversified our customer portfolio.

We completed the acquisition and integration of Dik Drug, adding to our independent pharmacy base, while we strengthened our position with hospital and institutional pharmacies.

We expect pharmaceutical demand to increase in the coming years.

This is among the most efficient components of our US healthcare system and, from a value standpoint, our system get high returns and outcomes from the 10% of healthcare spend which goes toward drug costs.

Our evolving product mix in our Pharma segment closely aligned was the trends in the pharmaceutical industry.

Generic drugs are assuming a greater position in the overall pharmaceutical pie with each passing year, now accounting for 83% of total US prescriptions.

We've grown our position and our scale in generics and we work closely with generic companies around the world to bring value to them and to the market.

This has been a strong contributor to our overall Pharmaceutical segment profit margin expansion of around 30 basis points, for both the fourth quarter and for the year.

At the same time, we realize that an increasing portion of pharmaceutical research and innovation is going into specialty drugs, which address unique medical needs.

Further, biopharmaceutical companies are studying and targeting smaller subsets of patients who need to be served in an integrated and high-touch way.

Supporting this, our Specialty Solutions group has continued its steep revenue growth.

Our confidence continues to grow that we have a valuable approach to working with providers of care, biopharma companies, and payers to encourage that these drugs are delivered and used in a patient-centered model and one which acknowledges the need for cost-effectiveness.

Before I leave the Pharma segment, I'm sure you saw in our press release that we're taking a substantial impairment charge associated with our Nuclear Pharmacy Services division.

Jeff will discuss this in more detail but let me say that Nuclear Pharmacy has contributed almost $1.6 billion to the Company's profits over the past decade.

But the change-in-demand dynamics for a number of these products has resulted in a lowering of its future financial outlook.

Accordingly, we recorded a goodwill impairment charge to reflect our analysis of the estimated fair value of the business.

I should remind you that we are the industry leader in this business and we will to work closely with our large and broad base of customers who depend on our radiopharmaceutical products and our expertise in this field.

2013 was a very important year for our Medical segment.

We took significant steps in repositioning this business to align with the evolving marketplace, including completing major investments to rebuild our IT infrastructure; reorganizing and redeploying our assets, both human and capital; and ramping up activities in areas of strategic priority, which I'll detail in a moment; and of course we completed the very significant acquisition of AssuraMed, which enables us for the first time to follow the patient to the home.

These efforts led to margin expansion of 25 basis points and double-digit segment profit growth for fiscal 2013 for the Medical segment.

We've been pretty clear that we place a high priority on anticipating the changes in our marketplace and on taking the actions necessary to continue to deliver value to hospitals, IDNs and alternate sites of care, as well as to our manufacturing partners.

We've reconfigured our go-to-market model and our offerings so that we can work with medical device and lab equipment companies and with providers to get products to patients more efficiently and throughout the continuum of care.

The acquisition of AssuraMed was a major step in that direction.

Over time, more care will be delivered in the home.

All of us are likely to experience this directly ourselves, or with members of our family.

And integrated healthcare systems and payers alike recognize that patients who are well cared for at home are less likely to be readmitted the hospital so we're excited about the acquisition of AssuraMed.

The integration is going extremely well and it's exceeding our expectations.

Our efforts around our preferred product portfolio address the continuing need for lower-cost alternatives to mature medical devices and our activities in this area accelerated during the year, increasing overall penetration and opening the opportunity for greater growth.

This past year we broadened the reach of the portfolio by adding over 150 products in nine categories.

As relates to medical utilization, we have now seen a somewhat sustained period of soft utilization in the US market.

We've all heard the debates around whether this is a result of consumer caution, a by-product of our slow recovery from recession or a more structural slowing of utilization linked to changes in benefit design, incentive systems, and a more consumer-like patient.

I'm not sure that we can really be precise in answering that debate.

But we do believe that while these trends will tend to moderate per capita utilization, the inescapable and overwhelming force of demographics will continue to be a driver of overall growth four our Business in the long term and the composition of our product and service lines should give us the opportunity to grow our profits even in a slow growth, short-term environment.

Many of these same healthcare forces are at work in other markets and we recognize the opportunity to expand our healthcare expertise.

Specifically in China, we've been using our capabilities, scale, and unique value proposition to build a strong and sustainable reputation and enhance our strategic alignment with biopharma and medical device companies, essential to participating successfully and for the long term in this rapidly growing healthcare system.

This year our revenues in China grew 45% reaching $2 billion.

We are tremendously excited by the opportunities to broaden the scope of our business model, to match the needs of that market, and to support our manufacture partners who want to grow their businesses there.

So with this as a backdrop, let me put some context around our expectations for 2014.

For the Pharmaceutical segment, we expect revenues to decline in fiscal 2014, primarily due to the expiration of the Walgreens contract.

That said, you will see a continued emphasis on building generic scale and capabilities, as we further enhance our ability to move market share for our manufacturer partners, and to assure best-in-class availability, quality, and pricing for our customers.

This should continue to drive both generics' profitability and overall segment margin due to utilization, customer and product mix, and our program strength.

We also see opportunities to grow both our specialty and biopharma businesses through innovation and new business models that create additional value for providers and manufacturers who focus on high-touch, high-cost disease areas.

This will include the continued introduction of new technology solutions such as our PathWare tool that along with payer and physician collaboration can create standardized clinical pathways to improve the quality and the cost of caring for patients with complex diseases.

We will continue to strengthen our offerings to our independent pharmacy customers in fiscal 2014.

We're starting the year off with a gathering of thousands of owners and pharmacists at a retail business conference next week.

The focus is on sharing best practices, networking, continuing education, and providing the latest tools and technologies available to help these critical members of the healthcare system improve patient care, efficiency, and profitability of their businesses and we will increasingly bring our experience to hospital systems who can benefit from our expertise in clinical pharmacy.

Switching to our Medical segment.

Our ability to serve across the continuum of care with a broad line of products and services has never been more important.

We are working closely with our diverse set of customers and manufacturers to help them thrive in a changing landscape.

Our preferred products portfolio will be ramping up and throughout fiscal year 2014, you will see accelerated new product introductions designed to bring quality, value, and enhanced clinical benefits to our customers.

We know there are significant opportunities to increase our services to hospitals, ambulatory settings, and the home and we will be aggressively pursuing the cross-enterprise opportunities, which leverage the AssuraMed acquisition and our supply chain management expertise.

In summary, our Medical segment brings many tools to drive efficiency for our partners, whether it's a unique 3PL supply chain offering or a specialized surgical kit which reduces movement around the operating room and the likelihood of a safety event or a set of offerings geared towards system which are focused on increasing healthcare coordination, our lower cost alternative to a trauma product or now with AssuraMed, our ability to address patient needs in the home, we are positioning our Medical segment for growth.

In China, we look for another year of strong revenue and profit growth as we continue to expand our geographic footprint in 2014 and add new business partnerships and programs in areas like consumer health and direct-to-patient distribution.

Cardinal Health as a brand has become more important, not only to healthcare providers but to consumers as well, as we continue to grow our direct-to-patient specialty pharmacy business there.

We believe we have already built strong equity as a trusted partner, a partner who can offer strong and compliant business practices that are critical in this transforming marketplace.

So putting this all together, given our ongoing momentum, we are projecting fiscal 2014 non-GAAP diluted EPS in the range of $3.45 to $3.60, an increase from our initial expectations we provided earlier this spring.

So we have turned the page on fiscal 2013, a year that was anything but ordinary, one which we regard as an important inflection point in our strategic and competitive position.

I want to express my appreciation for all our colleagues, all 34,000 of them.

And to our customers, our manufacturer partners, and our shareholders who have supported us through a year which had more than its share of twists and turns, but from which we emerge stronger and more confident in our future.

I'll end with a reminder that the notion of being essential to care is not just a tag line to us, it's what drives us.

And with that, I'll hand the call over to Jeff to provide more details on the quarter and the full year and guidance for fiscal '14.

Thanks, George, and good morning everyone.

This morning I'll review the drivers of fourth-quarter and full-year performance.

Then I'll provide additional detail on our fiscal '14 guidance, including some of our key expectations and underlying assumptions.

You can refer to the slide presentation posted on our website as a guide to this discussion.

Let's start with consolidated results for the quarter.

We reported an 8% increase in non-GAAP earnings per share in our fiscal 2013 fourth quarter versus the prior year's period.

This was driven by robust 11% non-GAAP operating earnings growth, partially offset by a higher tax rate and additional interest expense.

Let me go through the rest of the income statement in a little more detail, starting with revenues.

[Consolidated] revenues were down 5% to $25.4 billion, which was better than our expectation.

The decline was due to the expiration of the Express Scripts contract at the beginning of Q2 of this fiscal year.

Gross margin dollars increased 10%, with the rate up 66 basis points versus prior year.

As a result of our strategic initiatives, including our efforts to drive favorable customer and product mix, we have successfully expanded our year-over-year gross margin rate every quarter for the past three years.

SG&A expenses rose 9% in Q4, driven by recent acquisitions which comprise 6.1 percentage points of this growth and investments in certain strategic priorities.

Due to our continued focus on cost controls and efficiency of our operations, our core SG&A costs were essentially flat versus last year.

Our consolidated non-GAAP operating margin rate increased 27 basis points to 1.86%.

You will notice that our net interest and other expense came in higher in the fourth quarter than in prior quarters, primarily due to the new $1.3 billion of debt associated with the AssuraMed acquisition.

The non-GAAP tax rate for the quarter was about 37%, versus the prior year's 36%.

Our non-GAAP diluted average shares outstanding were 345 million for the fourth quarter, approximately 4 million favorable to last year.

As I indicated on our third-quarter earnings call in May, we expected to complete at least $250 million of share repo in the subsequent months.

We did accomplish that during Q4, which brought our full-year share repurchases to a total of $450 million.

We had $400 million remaining on our Board-authorized repurchase program at the end of the quarter.

During fiscal 2013, we also returned another $353 million to shareholders in the form of dividends.

Now let's discuss consolidated cash flows and the balance sheet.

We generated $300 million in operating cash flow in the quarter, ending the year with approximately $1.7 billion in cash flow from operations.

This was much better than our original expectation, driven by earnings performance, product mix, our continued focus on working capital management, and timing.

At the end of Q4, we had $1.9 billion in cash in our balance sheet, which includes around $425 million held internationally.

During the quarter, we also repaid $300 million for the 5.5% notes that matured in June, leaving our year-end debt balance at $3.9 million.(sic-see press release "$3.9 billion") Our working capital days ended the quarter virtually flat versus the prior year, with increased days inventory on-hand offset by higher payable days, primarily driven by product and customer mix.

Now let's move to segment performance.

I'll discuss Pharma first.

In line with our expectations, Pharma segment revenue decreased 6% to $22.8 billion due to the expiration of the Express Scripts contract.

This decrease was partially offset by revenues from expanded customer relationships.

Of particular note, sales to non-bulk customers continued to increase, up over 5% for the period and contributed close to 70% of Pharma segment revenues.

Our generic programs once again performed well and we continue to see [contingent] brand inflation in the high-single-digits, about as we expected.

Pharma segment profit increased by 11% to $395 million, driven by the overall strong growth in generics and strong performance under our branded Pharma contracts.

With respect to generics, we did as expected, see less contribution from new generic launches in this year's quarter versus Q4 of fiscal 2012.

Sequentially from Q3, generic deflation moderated slightly to the lower-single-digits.

Pharma segment profit margin rate increased by 28 basis points compared to the prior year's Q4, a reflection of the strength of our generics programs and our focus on margin expansion including customer and product mix.

In addition, within customer categories, margin expansion and Pharma distribution was strong across most of our customer classes of trade.

Before wrapping up my discussion of Pharma, I want to spend a few moments on Nuclear and then touch on a Pharma-related reporting change.

As George mentioned, the challenges stemming from lower forecasted demand from the radiopharmaceutical industry have increased.

In conjunction with the preparation of our consolidated year-end financial statements, and as an output from the completion of our annual planning process in June, we recently completed our annual goodwill impairment test.

As part of this annual test, we conclude the entire goodwill amount of our Nuclear Pharmacy Services division was impaired, resulting in a non-cash impairment charge of $829 million or $799 million net of tax.

As background, the majority of the goodwill of Nuclear was acquired through our acquisition of Syncor International Corporation in fiscal 2003.

Before the impact of the impairment charge, we had a total of approximately $1 billion of invested capital in Nuclear, accumulated over the past 12 years.

Over that same time, excluding allocated corporate costs, Nuclear has contributed almost $1.6 billion in profit to the Company and been very margin-accretive to the overall Company results.

However, as previously disclosed in our second and third-quarter 10-Qs, Nuclear has been experiencing significant softness in the low-energy diagnostics market.

During the second half of fiscal '13, we experienced sustained volume declines and price erosion for the core low-energy products provided by this division.

In addition, we saw reduced sales for some existing high-energy diagnostic products, slower-than-expected adoption of new high-energy products, and recent reimbursement development that may adversely impact the future growth of these products.

Using this information, we adjusted our outlook and long-term business plans for this division in connection with our annual budgeting process, which we recently concluded.

This update resulted in significant reductions in the anticipated future cash flows and estimated fair value for this reporting unit.

I should note that this impairment charge does not impact our liquidity, cash flows from operations, or compliance with debt covenants.

Before I leave our discussion on the Pharma segment, I also want to make you aware of a Pharma-related reporting change going forward.

For some time now, we've been reporting bulk and non-bulk revenues and margins.

Given that a large portion of our bulk business either has been or will soon be removed through the expiration of two contracts, bulk margin is no longer a relevant data point for our business.

Therefore, beginning in fiscal 2014, we will no longer be breaking out bulk and non-bulk revenue or margin.

Our fiscal 2013 10-K will be the last reporting period showing this data.

Now moving to the Medical segment performance.

Medical revenue growth was up 11% versus last year, an increase of $265 million.

The AssuraMed acquisition was a primary driver of revenue growth in the quarter.

In addition, we are pleased to report 31% Medical segment profit growth in Q4.

The AssuraMed acquisition was a primary driver of profit growth.

I'll note here that the full-year net accretion impact of AssuraMed, including the related financing costs was $0.04, versus our original expectations of $0.02 to $0.03.

Our preferred products were also a positive contributor to profit growth in the quarter as we focused on product improvement and cost efficiencies.

As George discussed, we again saw procedural volume softness in the US market, which had some moderating impact on our segment results.

Also partially offsetting the Medical segment profit growth was the year-over-year increase in incentive compensation, much of which is based on total Company performance and allocated to the segments.

Finally, Cardinal Health China, which spans both segments, posted strong revenue growth of over 70% for the quarter.

And as George mentioned, China achieved a $2 billion revenue figure this year.

I am very proud of our Management team and employees in China who continue to drive results and expand into new geographic areas and product lines.

Turning to Slide number 8, you will see our consolidated GAAP results for the quarter, which include items that reduce our GAAP results by $2.51 per share compared to non-GAAP.

Included in this figure is the exclusion of $2.32 worth of impairment, almost all of which relate to the previously mentioned goodwill impairment charge in the Nuclear division.

Also included is $0.11 of acquisition-related costs, which reflects $0.09 of amortization of acquisition-related intangible assets and $0.06 of restructuring costs.

In Q4 last year, GAAP results were $0.05 lower than non-GAAP results, primarily related to acquisition-related costs.

While on the topic of GAAP results, I did also want to point out our unusual GAAP effective tax rate for Q4 in the year, which were primarily driven by the goodwill impairment charge in Nuclear, most of which had no tax benefit.

I have one final housekeeping item related to our GAAP results.

Due to the loss in continuing operations during the fourth quarter of fiscal '14 per accounting guidance we used the basic share count when calculating both the basic and dilutive Q4 GAAP earnings per share.

Now let me make a few comments about 2013 in total.

For the full year, non-GAAP operating earnings were up 10%.

I am very pleased with our excellent progress on margin expansion, with both the gross margin rate and the non-GAAP operating margin rate increasing versus last year, up 65 basis points and 29 basis points respectively.

As reported, our FY '13 non-GAAP EPS of $3.73 represents 16% year-on-year growth, which you may recall includes an $0.18 favorable tax settlement in Q3.

Excluding this settlement, we reported double-digit non-GAAP EPS growth.

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

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

And again, our results enabled us to return over $800 million to shareholders in fiscal '13 through both share buybacks and our differentiated dividend.

Our performance in fiscal '13 provides a solid foundation from which we have launched 2014.

Now we'll move to our fiscal 2014 outlook.

As you know, we provided some early thoughts on the year on our May call and at that time we indicated our preliminary target for fiscal 2014 non-GAAP earnings per share was to be at the high end of the range of $3.42 to $3.50.

Today, having completed our [budget] process, we're providing formal guidance and are raising our range to $3.45 to $3.60.

We do expect revenue will be significantly lower as the Walgreens contract will only contribute two months during the year and Express Scripts will anniversary its one-year expiration on September 30.

We'll now walk through our Corporate assumptions for the year.

Our anticipated diluted weighted average shares outstanding of approximately 343 million benefits from the $250 million in recent share repo I mentioned earlier and assumes a small amount of additional repo.

We will continue to assess further opportunities for share repurchases as the year progresses, keeping in mind our cash balances, possible strategic investments, and market conditions.

We expect net interest and other expense of $145 million to $155 million, which approximates our current run rate and reflects the AssuraMed financing.

For fiscal '14 we expect capital expenditures in the range of $245 million to $265 million, with the bulk of that spending on our strategic priorities and IT investments.

We also expect amortization of intangible related assets from prior acquisitions to be approximately $180 million, or $0.33 per share.

AssuraMed is the primary driver of the increase versus last year.

We're projecting an overall non-GAAP tax rate in the range of 34.5% to 36%.

This tax range reflects our expectations of further discussion and potential settlements of outstanding audit periods as well as the benefit of our tax planning efforts.

The range is wider than our typical assumption in order to capture the range of outcomes for a few large moving pieces this coming year.

We expect the discrete nature of resolving or clarifying certain items to result in quarterly variability in our tax rate.

Finally, although we do not provide specific cash flow guidance, I will remind you of my comments regarding the expiration of the Walgreens contract.

We anticipate a net after-tax benefit to cash flow from operating activities in fiscal 2014 of more than $500 million, based it on the expected working capital decrease, lost after-tax earnings, and other cash tax impacts.

Finally, let me comment on a few segment-specific assumptions beyond those which George or I may have already mentioned.

In Pharma, we're planning for the brand inflation rate to be similar to fiscal '13.

Generic programs are projected to grow in profit contribution despite an expectation of lower year-on-year contribution from new generic launches and we do not expect a LIFO impact during the year.

For Medical, clearly we plan for a strong contribution from AssuraMed.

We'll also be continuing to invest aggressively in the development and roll-out of our preferred product portfolio.

We expect a flat utilization environment and approximately $10 million of incremental expense related to the Medical Device Tax.

In addition, since I often get asked about the impact of commodities, based on our current forecast, we anticipate a year-over-year cost of goods increase in the range of $10 million to $20 million.

Finally, a word to any anticipated growth from the Affordable Care Act.

This is very difficult to project for either segment.

Therefore, in our assumptions, we have not included any associated change in demand for fiscal 2014 at this stage.

We plan to keep our operations lean and utilize our flexible model to capture any upside as it materializes.

In closing, I feel very optimistic as we head into fiscal '14.

We are excited about our customer and product portfolio and the potential of our strategic priorities.

And we will continue to focus on actions that lead to margin expansion and earnings growth.

With that, let's begin Q&A.

Operator, please take our first questions.

(Operator Instructions)

Robert Jones, Goldman Sachs.

It's actually Stephan calling in for Bob.

Maybe you can touch on how your customer conversations have been, it's been a couple months since losing WAG, anything changed there, particularly with the independents?

Yes, good morning, Stephan, it's George.

As you know, we've been devoting a lot of energy over the last years to strengthening our position in the independent market.

That continues to be an area of focus for us.

Our conversations are very good.

We devote most of our energy to what we can do to make them a more competitive and thrive in their marketplace, a lot of energy to that particular change.

I would say right now many of these customers are wait-and-see mode to see what the implications of various industry transactions mean, but we are really feeling good about our position with our independent customers, very committed to their growth and devote considerable energy to them.

Great, lastly on the share count, it's a bit higher than we were expecting for 2014 if we were to assume a normal course of buybacks.

You did note a small amount of buybacks in the expectations.

Any reason to think that they could be lower than a normal course, normal year, from course of buybacks?

This is Jeff.

Thanks for the question and good morning.

So we finished the end of Q4 with about 343 million-ish shares outstanding on a diluted basis.

That reflects the $250 million of shares we bought back in Q4, which was really a pull-ahead of some of the shares that we expected to buy back in '14.

As I said, we expect the average rate over the course of '14 to be about that same 343 million, which really means that the additional repo that we'll do in '14 will largely be allocated towards offsetting any dilution from the issuance of shares over the course of the year.

And that's what's reflected in our guidance.

That all said, as I said in my prepared remarks, we have a strong balance sheet.

We're going to continue to generate good cash in fiscal '14 and as opportunities permit, based on our cash balances, based on the attractiveness of other strategic opportunities, there's nothing to say that we wouldn't pursue additional repo over the year and I would view that as an upside.

Steven Valiquette, UBS.

So couple of quick questions here.

First, you mentioned you expect continued softness in Nuclear in fiscal '14.

But for us, we're just trying to figure out if there's any ballpark approximation of the EPS impact year-over-year of the softness in that unit.

Are we talking about just a $0.05 of EPS or something greater than that?

Just trying to frame how much that hurts you year-over-year and that's obviously excluding the impairment charge when thinking about that?

Yes.

Thanks for the question, Steve.

Yes, as we've said, we have seen a continued decline in the Nuclear business to an extent greater than what we had been expecting perhaps earlier in the year and at this point our forecast assumes decline to continue both in terms of the overall market demand and some of the pricing impacts we're seeing related to that.

It is a negative impact next year again versus FY '13.

Quantifying it in the $0.05 range is probably a reasonable approximation at this point.

And that's net of some of the cost reduction actions that we've taken to attempt to offset some of the impact but it doesn't totally offset it.

So your approximation is reasonable.

Okay and then just a quick big picture question for George, since this topic came up on a few of your competitor calls.

Just curious on any thoughts you have big picture around your appetite for global generic procurement collaborations.

They seem to be coming up in the press, et cetera.

Just curious to get your big picture thoughts and anything you could say about that?

Yes.

Good morning, Steve.

Yes.

Lots in the press.

As I said, we really -- we like our positioning, our generics business is very strong, has great scale, we're growing.

We are already very globalized in our procurement systems and the way we work.

What I'd say, we never dismiss any opportunity to continue to improve our Business but as I said, we're in a good position right now.

We'll continue to compete aggressively and effectively and always keep our minds open to ways to improve our Business.

But nothing I could say more than that.

Ross Muken, ICS Group.

So obviously, now George, you talked about on the call, it's been an eventful year.

You've had some time to reflect post the WAG loss and obviously you've been dealing with Express for some time and now we've had AssuraMed on board for over a quarter.

So as you think about what's transpired in the Business, you sounded pretty resilient on your remarks.

But I'm curious just in general, where are you most focused in terms of where you want to drive this Business?

What are your key take-aways from what you've learned as CEO from all this trials and tribulations the last 12, 18 months, and how do you wrap that all together in terms of the forward plan?

Yes, thanks, Ross.

How much time do we have?

It's a great question, and I'll try to give a concise answer as much as I can because there's a lot in there.

Let's start with -- it's been a hell of a year obviously.

And I would say a really great year.

But putting it all into context, which is what you've asked me to do here, if we go back even just three, four years ago, it would have been hard for us to imagine that we could have done enough repositioning to be able to absorb the ending of a major contract like Walgreens.

Our Organization has done a fantastic job and really disciplined work to add strength and balance to our Business and to our portfolio.

We've had consistent growth even with some turbulence around the system like what we've experienced this year in nuclear imaging, and honestly we're forecasting a pretty strong fiscal 2014 while absorbing that non-renewal.

So in context, I feel really good about we are stronger, better balanced, better equipped from a talent perspective, and better-positioned given some of the changes in healthcare and some of which I described in my prepared remarks.

We know that care is going to be changing.

We know that some of the payment systems are going to reform.

We know that there's going to have to be both innovation and competitive alternative products and so I'm really proud of our Group and the work that's been done over the past years to reposition us for growth and we know what we want to do.

We're going to have to continue, as Jeff described earlier, to be really flexible and nimble and quick, because the world is changing rapidly in healthcare.

But hopefully that gives a little perspective.

Thanks, George.

Glen Santangelo, Credit Suisse.

This is actually Jeff Bailin in for Glen.

If we could just talk for a moment on the Medical segment about the medical business transformation.

We haven't talked about that in a little while.

Can you guys comment on if you're realizing some of the hoped for benefits and maybe how the underlying legacy Cardinal Medical segment performed in the quarter?

Why don't I start, Jeff, in answering that a little bit generally on the business transformation and then I'm going to turn it to Jeff who can probably walk through a little more of the detail.

But let me start with this.

I would say medical system is now fully integrated into our Medical business, which is great and will continue to drive the effectiveness of this program and helping us serve our customers.

We, as you know, got off to a little bit of a slow start in the year with some changed Management issues.

But as we worked our way through the year, we finished with most of our metrics, particularly the important one of service levels, exceeding our pre-transformation, pre-implementation levels.

So from that standpoint, we're where we need to be.

Jeff, if you want to add to that at all.

Yes.

For the quarter, the medical business transformation was a net add to the profitability of the Medical segment.

For the full year, it was essentially a wash.

As George mentioned, we started off the year with some negative impact from it really as we were cleaning up the remaining changed Management issues and getting the system fine-tuned.

As we got in the second half of the year we've been focused on finishing up any remaining clean-up items, but really, more importantly, driving the benefits of the system not only in terms of some of the costs and inventory benefits that were expected early on as a result of the implementation but much more importantly by driving the use of the system through our sales teams, through our operating teams, so that we can drive the longer-term strategic benefits with our customers, which is really why the system was [upman] to begin with and we're beginning to see some of those benefits in the way that we can sell our preferred products, for example, to customers.

Those benefits will continue to materialize in FY '14 and beyond and at this point we feel very good about the positioning of the system in terms of our ability to use it to drive those benefits.

With regards to your second question about the underlying performance of the Medical business.

If you strip out the AssuraMed benefit, I would say it was a mixed story, very happy to see increased contribution from the preferred products priority, which will continue to be a very, very key strategic initiative for us this year and beyond.

Offsetting that was the continued procedural softness that both George and I referenced.

And that's become a reality at least for the near term that we're dealing with and we feel we have lots of tools to deal with that and continue to grow earnings in a flat utilization environment.

Then I also mentioned and this is more of a technical accounting issue, but as we trued up our incentive comp for the year, which is largely driven by consolidated performance, particularly as it relates to our 401-K contribution, those true-ups got pushed down to the Medical segment and that tended to have a dampening impact on segment profit as well.

But all things considered, actually, we feel pretty well about how Medical ended the year and how they're positioned heading into FY '14.

Great.

Thanks a lot, guys.

Ricky Goldwasser, Morgan Stanley.

George and Jeff, when you think about Nuclear, does strategically it make sense to continue to have it in your portfolio, given just the grimmer reimbursement outlook and the declining profitability?

So Ricky, I'll start and then if Jeff wants to jump in on the financial side.

We are still serving a great number of important customers and so as we think about the basket of services that we might for example provide a large integrated academic medical center, our ability to support them is multi-factorial.

So we have many dimensions of how we serve them.

And so for us, this is an area where we continue to serve and it's still a contributor to our Business.

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

Yes.

First of all, Ricky, I'd say this is still a margin-accretive business to the overall consolidated results.

We continue to believe that there are scenarios in the future where particularly in the PET technology space, there are opportunities for the cash flow forecast to improve from our current scenario.

But I'd also say like all parts of our Business, and this isn't unique to Nuclear or anything else in our portfolio, we continually assess the value-add from keeping the business in our portfolio versus other arrangements and at this point we believe keeping it in the portfolio is best for the Company and shareholders.

Okay.

And then in the prepared remarks you said that AssuraMed in the quarter was -- came in ahead from your initial expectation.

So when you think about the fiscal year '14 guidance, do you assume higher accretion from AssuraMed than what you communicated earlier on?

So we -- at the time that we announced the deal, we said that we expected AssuraMed to be at least $0.18 accretive in FY '14 net of financing costs.

As we've gone through our budgeting process and had four months now of actual results, we are very confident that the accretion impact in FY '14 will be at or above that $0.18.

Okay.

Thank you.

Tom Gallucci, Lazard Capital.

Jeff, two questions on the numbers if I could.

First, you mentioned the incentive comp and I was just trying to get an understanding of the underlying growth within the Medical Surgical segment.

Can you quantify that incentive number that had dropped down into that area?

Yes.

It was close to about $10 million of negative year-on-year impact from the incremental incentive comp.

Okay.

Thanks.

And then obviously lots of moving parts to next year.

You gave us your big picture views.

Would you care to do one of two things with respect to the drug segment, lots of even more moving parts.

Can you give us any idea of what margin ranges maybe you're expecting there or with the ramp-down of Walgreens and then I assume some cost cutting in relation to that, how should we think about maybe the cadence of the quarters in the drug segment versus what maybe we've seen historically?

Sure.

Well let me handle those in reverse order, if I could, Tom.

First of all, keep in mind that we still have Walgreens for the first two months of fiscal '14.

So obviously two-thirds of Q1 has the benefit of continuing to support Walgreens.

It gives you a bit of an idea of quarterly cadence.

Beyond that, I wouldn't get too specific.

With regards to margin expansion, this is clearly focus number one, two, and three for us as we go through '14 and it has been for the past three years to make sure that we have the strategic portfolio and the operating focus on both the products, customers, and the internal part of the Business to ensure that we're driving margin expansion.

We've had great success there for the past three plus years.

I expect us to continue to drive that in FY '14 and beyond.

I don't want to get too specific about segment profit margins but almost implicit in the guidance that we've given is a continued margin expansion overall for the Company in FY '14.

Okay.

Thank you.

John Kreger, William Blair.

[Robbie] Fatta in for John today.

If I could stick with AssuraMed, can you give us any updated thoughts on the competitive bidding front and how you think that might impact results in fiscal '14 and beyond?

Yes, good morning.

It's George.

We've built this in, as you know, when we announced the acquisition, we did talk about the dynamics around competitive bidding and that we had made some assumptions associated with that.

We feel pretty good about those assumptions.

One of the things we might see around the market and we are seeing some signs, if you look at some of the customer base in the DME area, we might see somewhat of a shake-up there and some consolidation among those customers who are doing DME.

And that's to some extent attributable to competitive bidding and the dynamics around the market.

But we had done a fairly good job of anticipating this and feel good about how we're beginning 2014.

Great.

That's helpful.

And then maybe longer term, it certainly sounds like the medical business is becoming a much more important part of the mix.

As you look maybe three years out, how big of a percentage of operating income would you envision the Medical segment contributing?

Robbie, I don't think at this point we're comfortable giving a three-year forecast on segment distribution at this point.

It's safe to say, we really feel good about both of our segments.

We'll continue to invest in both of them.

The Medical area around healthcare is obviously -- in our national spend obviously a much bigger component.

And while that presents some challenges, it also means there's more opportunities in some ways because there's just such enormous activity in that area.

So we're trying to stay very thoughtful about those changes, make sure our portfolio is diversified so that we can take a punch if one component of the portfolio is getting affected and so we feel good about that.

But I do not want to diminish in any way our commitment to our Pharmaceutical work.

It is a huge part of what we do.

We do it extremely well.

We've got a great team and we're building I would say increasing know-how particularly around clinical activity in the Pharmaceutical side.

Lisa Gill, JPMorgan.

George, I had a couple questions around generics.

My first question would be that clearly in the quarter you call out generics as being better than expected although there were less new generics in the market.

Can you talk about penetration within your customer base and where you are today and where you see it going and then also along those lines have you changed your contracting at all with manufacturers that they're driving this increase in profit and should we expect that to continue into '14?

Good morning, Lisa.

So there are a couple questions built into that.

It has been a strong period for us in generics and you're correct, it hasn't necessarily been all about new launches.

We have to be able to thrive in an environment where those come and go.

We have continued to grow our general penetration but I'd say at this point it's pretty stable.

We are at a very competitive position to anybody in the market.

We will continue to try to inch that up.

Some of it is also about penetration in the overall system.

But I would say from the standpoint of you how we deal with each of customers, we've probably done a good job over the last three years of really getting to market-leading competitive positioning and feel good about that and feel good about it going forward.

More on generics, I would say, as you know, the environment and pricing tends to be in the overall, when you aggregate it, tends to be affected by one or two big products that inflate or deflate and that's certainly still true.

But I would say in the overall mix of products, as we look at the broad basket, several thousand products, that environment is as it was last time we spoke, which is a pretty good environment for us and so that's probably a little bit of characterization on the pricing side.

But as it relates to our work with manufacturers, we're trying to be very strategic about it, very thoughtful about not just where our customers are going and what they need in this marketplace but also where the generic manufacturers are going and what they say, whether they're vertically integrated, non-vertically integrated, what's strategically relevant to them.

So we try to build our strategy with each of them around the things that we understand about their businesses and we've tried to take a very thoughtful strategic approach to thinking about the upstream and how we work with our partners.

And then George, my second question would just be that people are all focused around this generic global purchasing but my question has to do with really thinking about drug distribution globally.

Clearly China was up 45% this year.

You've done really well in China.

How do you think about the global market and are there other areas that you think are similar to China and you think Cardinal will go in that direction internationally in the next few years?

How should we think about that?

Look, it's a fair question.

Obviously China has been a high priority for us and we've done a really good job there.

But it's really hard to look at this as a global distribution market.

I would say it's a global procurement market in many ways.

But global distribution is a different notion.

Markets have very distinct characteristics.

Some are very mature and completed saturated.

Some are government-controlled in terms of pricing.

Some are still in their early nascent period and growing.

But with financing dynamics.

So we will be very disciplined.

Thankfully we've got a team with good knowledge of the global pharmaceutical and medical device world and we're going to be very disciplined about how we look at international opportunities.

If one has the characteristics of a market like China of course it will have some attraction to us.

But there are others that we've looked at and see and just do not seem attractive and would not serve our shareholders well.

Thank you.

I'd now like to turn the call over to George Barrett for closing comments.

Well, listen, I just want to thank everyone for joining us on the call.

As I said, it's been an exciting year.

We feel good about where we are.

We look forward to seeing many of you in the coming weeks.

We will.

And with that we will sign off, saying, thanks everyone.

Ladies and gentlemen, this does conclude today's conference.

You may now disconnect.

Everyone have a great day.