卡地納健康 (CAH) 2015 Q4 法說會逐字稿

Good day everyone, and welcome to the Cardinal Health fourth-quarter FY15 earnings conference call.

Today's call is being recorded.

And now, your host for today's call, Ms. Sally Curley.

Ms. Curley, please go ahead, ma'am.

Thank you Rufus, and welcome to Cardinal Health's fourth quarter FY15 earnings and FY16 guidance call.

Today, we will be making forward-looking statements.

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

Please refer to 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 risks and uncertainties.

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

Information about these measures and reconciliations to GAAP are included at the end of the slide.

I'd also like to remind you of a few upcoming investment conferences and events.

We will be webcasting our presentation at the FBR second annual healthcare conference on September 9 at 12:00 PM noon in Boston; Baird's 2015 healthcare conference on September 10 at 7:50 AM Eastern in New York; and at the Morgan Stanley global healthcare conference on September 16 at 8:45 AM Eastern in New York.

Today's press release and details for any webcasted events are or will be posted in the IR section of our website at CardinalHealth.com, so please make sure to visit the site often for updated information.

We hope to see many of you at an upcoming event.

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

George?

Thanks, Sally.

Good morning everyone, and thanks to all of you for joining us for this morning's call.

I know it's an incredibly busy morning for all of you, so please allow me to start by being direct.

Cardinal Health had a hell of a year in FY15.

Here are the facts.

First, revenues climbed back over the $100 billion mark, growing 13% year over year.

Second, we delivered the largest non-GAAP operating earnings in the 44-year history of Cardinal Health, growing 16% year over year.

Third, we generated $2.5 billion in operating cash flow.

And fourth, we returned $1.5 billion to shareholders, through expanded dividends and share repurchases.

And I'm proud that our organization was able to generate this financial performance while making sound and strategic moves in drug distribution, generics, specialty, small office practices, consumables, and physician preference items -- all putting us in a forward position to sustain meaningful and measurable growth into the future.

So again, a hell of a year.

Of course, the year was not without its challenges.

Year over year, our medical segment was essentially flat, adjusting for some nonoperating compensation push-downs.

But we've been disciplined and determined in modernizing the portfolio of drivers in our medical segment, building off our expansive footprint, our deep customer relationships, our global manufacturing and sourcing experience, and the extensive cross-learnings from our work in pharmaceuticals.

To be clear, every component of this new portfolio drives growth, while leveraging the strong legacy and platform of our medical-surgical distribution.

This has been a multi-year process, but we expect to largely come through this transition as we exit FY16.

We've crafted a strategy which allows us to serve the needs of the market today, but positions us to address the ongoing needs of patients, medical providers, hospitals, retail outlets, and all of our partners in a system undergoing change.

Long-term value creation is our true North.

Our healthcare system is at a key inflection point.

And with the ongoing convergence of historically disconnected players, customers increasingly see Cardinal Health as an integrated and effective healthcare organization, not a collection of individual business units.

The strong performance of the enterprise wasn't the product of a single business unit or function.

It was rather the collective energy and dedication of 35,000 people who are extraordinarily committed to their customers, to patients, to our business partners, and to the performance on which they know investors have come to depend.

We will not rest in our progress.

As we begin our FY16, we expect to continue our track record of growth and value creation.

So let me make a couple of quick comments about the fourth quarter, which Mike will cover in more detail, and describe specifically how we see our positioning in the market, and why we expect to continue our growth trajectory.

We finished FY15 with a very strong fourth quarter.

Revenues increased 20%, non-GAAP operating earnings increased 33%, and we reported non-GAAP earnings per share of $1, an increase of 20% over the prior year.

Also during the quarter, we entered into an agreement to acquire Harvard Drug, which strengthens our capabilities in generics, broadens our telemarketing reach, and of course, adds scale to our Red Oak joint venture with CVS Health.

Of particular note, our pharmaceutical segment had an exceptional quarter, which you've seen in our press release, and which Mike will cover in a few minutes.

This is truly a remarkable time in healthcare, and Cardinal Health is poised to excel while the industry evolves.

We're now beginning to see a clearer picture of how our newer industry dynamics might affect the future.

Let me describe some of these forces, and link them directly to the work that we're doing, and how we position our business portfolio, our product lines, and our capabilities to grow in alignment with these dynamics.

First, there is a noteworthy and increasing bifurcation in the pharmaceutical world.

We see continued growth in the utilization of generic drugs, and a new era of innovation in specialty pharmaceuticals, addressing the needs of unique patient populations that require a very integrated approach to patient management.

Recognizing this, we expanded, and continue to grow and diversify, our customer base.

In particular, we are broadening the number of customers who source generics from us.

And of course we established Red Oak Sourcing, our joint venture with CVS Health, which was fully operationalized this fiscal year.

This is an effective, productive, and profitable partnership, and we see this as a long-term driver of value for us, CVS Health, our manufacturing partners, and of course our customers.

We've significantly grown our specialty business, and completed the acquisition of Metro Medical, enhancing our reach and expanding the therapeutic areas we serve.

And we continue to deepen our relationship with biopharmaceutical manufacturers with valuable offerings and regulatory sciences, patient access and support, and health economics outcomes research.

Second, we are seeing retailers, big and small, continue to expand their offerings and enhance their role in healthcare.

Increasingly, they have become places where care is actually delivered, and where healthcare counsel is provided.

These retail pharmacies need to operate at significant scale, or leverage the scale of a partner to ensure efficiency and access.

With the proven strength of our brand and generic programs, Cardinal Health offers the opportunity to aggregate demand for our customers.

We provide access to innovative tools, technologies, specialized services and solutions, including network inclusion.

We now have nearly 6,000 customers in our pharmacy services administrative organization -- we call that a PSAO -- where we contract on their behalf for network inclusion.

Without question, Red Oak Sourcing provides tremendous support, enabling a world class generics program for our customers.

Third, we are seeing hospitals and health systems become increasingly complex, multi-site, and multi-provider.

This creates new challenges for them, and puts a priority on coordination, efficiency and standardization around various needs, including pharmaceuticals, consumables, physician preference items, and the accompanying services around these products.

This creates unique opportunities for us.

Partners like Cardinal Health, who can serve these needs across a highly distributed system, and who can help ensure the right care in the right part of the system, will be highly valuable to our manufacturer partners and providers alike.

Integrated delivery solutions group works across health systems, to build formulary capabilities and offer medication therapy management, to ensure that each patient starts and stays on the right medicine.

Our consumables portfolio addresses the need for efficiency and standardization, and our Cardinal Health branded products continue to grow.

Our acquisitions of AccessClosure, Innovative Therapies, and of course, the planned acquisition of Cordis, offer real solutions around efficiency and standardization, combining products and innovative services and technologies.

Simply put, we can eliminate waste and improve outcomes in the physician preference item area.

And we're very excited to have joined forces with Henry Schein to more efficiently and effectively serve small physician practices, many of whom are now affiliated with IDN.

Combining our tools with Schein's world class capabilities and servicing office space practices makes us a stronger partner for integrated system, and allows us to move more of our Cardinal Health-branded products through more channels.

Fourth, as the baby boom population moves into their 60s and now their 70s, many are living with multiple chronic diseases, and therefore need new and different forms of care.

These patients are being treated in different, and what we internally refer to as peri-acute, settings.

The moment of discharge is a unique moment in our healthcare system, and transitions to post-acute settings are extremely important.

We know that many of these patients are best cared for in their own homes, where they can have the dignity and support they deserve.

The strength of our Cardinal Health at Home platform continues to grow, bolstered by increased penetration of Cardinal Health-branded products.

And we're in the process of launching our hospital quality at home initiative, which allows consumers the opportunity to purchase the products they've used in clinical settings from retail outlets.

And finally, we're seeing payment models changing, shifting the focus to outcomes rather than activity.

Results, not effort.

In January, the Department of Health and Human Services set clear goals and timelines to shift Medicare to value-based models.

And in recent weeks, CMS announced their first mandatory targets for bundled payments, starting with lower extremity procedures.

The move to expand our position in cardiology with products offered by Cordis and AccessClosure, and wound management with Innovative Therapies, and in trauma with Emerge, all align perfectly with these developments.

Our ability to serve these bundles with products and innovative services, now across multiple therapeutic areas, is a key differentiator, highly valuable to our provider partners, and will be a key driver of growth for us.

With a strategic eye on the future, identifying and embracing evolving industry dynamics, Cardinal Health is uniquely positioned to create value in this new environment.

We are an integrated healthcare company, delivering solutions to our customers across the entire continuum of care, addressing critical challenges around efficiency, cost, quality, access, and outcomes.

So what do we expect going forward?

This morning, we provided FY16 guidance of $4.85 to $5.05, which represents an 11% to 15% growth rate.

We expect to see growth along multiple dimensions.

Without question, generics remain an important strategic focus for us, and we expect that Red Oak will continue to generate meaningful value for us and for our customers.

As I mentioned before, we closed the acquisition of Harvard Drug in early July.

This will further fuel our growth in generics.

Our specialty business continues its strong growth, and we expect that specialty solutions will finish FY16 with revenues in excess of $8 billion.

We expect our medical segment to grow at mid single digit rates, and finish the year with momentum.

Of note, the medical segment will have a challenging first quarter as a result of some discrete items, the largest being the wind-down of a post-spin CareFusion contract in Canada, which Mike will cover.

Nevertheless, we continue to expect higher than market growth in our strategic accounts, and double-digit growth in our Cardinal Health-branded medical products.

We anticipate outgrowing the market in Cardinal Health at Home, and look with enthusiasm to closing the acquisition of Cordis, likely in our fiscal Q2.

China continues to represent a significant opportunity.

The healthcare market in China is still in its early phases of growth, and our large and expanding footprint will be increasingly valuable to us and our global pharma and med-tech partners.

Finally, having made some important moves in these last 18 to 24 months, we will prioritize and focus on execution and performance management around these strategic priorities.

And because of this, expect that our capital deployment approach in the near term will be weighted toward reinvesting in our existing businesses and enhancing enterprise capabilities, to ensure that we maintain the kind of impressive earnings growth we have experienced over the last one, two, and five years.

We've come out of FY15 with a strong track record of financial performance, and a balanced, well-positioned portfolio.

We have high expectations, and I am confident in our ability to continue to deliver robust growth, demonstrated by real and measurable results.

Let me finish by thanking all of you for your support, all of our customers and business partners for their trust, and all of our employees, who work incredibly hard, day in and day out, to set the industry standard of excellence.

Great people make for great companies, and great companies make for great communities.

And in that regard, our people set a high standard.

With that, I'll turn the call over to Mike for a detailed review of the financials.

Mike?

Thanks, George.

I am extremely pleased to report such an outstanding quarter and a terrific FY15.

The financial performance of the enterprise along multiple dimensions -- revenue, operating earnings, cost control, and EPS growth -- all point to tremendous attention to high performance by our team.

At the same time, we continued a disciplined and balanced approach to capital deployment, which served us well this year, and in the years to come.

Now let me review our strong FY15 results.

I'll focus on our Q4 performance and provide select full-year highlights.

Then I will offer our FY16 outlook, including some of the underlying assumptions.

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

Starting with the consolidated company financials, Cardinal Health had a strong finish to an excellent year.

For the fourth quarter, non-GAAP diluted earnings per share from continuing operations were $1, a 20% growth versus the prior-year quarter.

This contributed to full-year non-GAAP EPS of $4.38, a year-over-year growth of 14%.

Fourth-quarter revenues came in at $27.5 billion, or a growth of 20%, and full-year revenue grew 13%, to $102.5 billion.

Gross margin dollars were up over 16% in the fourth quarter, and increased 11% versus the prior full year.

Gross margin rate in the quarter compressed slightly, due to the pharmaceutical segment growing at a faster rate than the medical segment.

SG&A expenses in the quarter and year increased, largely as a result of acquisitions.

We drove strong growth in consolidated non-GAAP operating earnings, up 33% in the quarter and 16% during the year.

Non-GAAP operating margin rates expanded 20 basis points in the quarter and 7 basis points for the full year.

Net interest and other expense increased, as anticipated, versus the prior year's quarter, primarily due to the new debt issuance to fund the Cordis and Harvard Drug acquisitions.

As we expected, the non-GAAP effective tax rate for the quarter was unusually high, at 42.2%, due to certain federal and state tax matters.

The full-year rate was 37.2%.

Our fourth-quarter diluted weighted average shares outstanding were $333 million.

Full-year diluted weighted average shares were $335 million, nearly $10 million lower than the last year.

During the fourth quarter, we took the opportunity to pull forward FY16 share repurchases, and bought $350 million worth of shares.

This brought our FY15 share repurchases to over $1 billion.

At FY15 year end, we had about $700 million remaining on our Board-authorized share repurchase program.

Moving on to consolidated cash flows, we generated $868 million in operating cash flow during the quarter.

This brought the full-year cash from operations to over $2.5 billion, a result of strong contributions from both segments.

Overall, we ended June 30 with a strong balance sheet, including a cash balance of $4.6 billion, of which $423 million were held internationally.

As a reminder, our cash balance included $1.5 billion in proceeds from our recent debt issuance, which, in combination with an additional $1.5 billion of cash on hand, will be used to fund Cordis, and has been used to fund the Harvard acquisition, which closed in early July.

In addition, remember that we like to keep $1 billion to $1.5 billion of cash on hand, as the scale of our business can require large daily fluctuations in cash needs.

Now let's move to the pharmaceutical segment performance for the fourth quarter and fiscal year.

This segment had outstanding performance in the quarter and the year.

Revenue in the fourth quarter grew 23%, to $24.7 billion, driven by growth in our existing and new customers.

Full-year pharmaceutical segment revenues were $91.1 billion, an increase of nearly 14% versus the prior year.

Segment profit increased by 42% in the fourth quarter, to $535 million.

This performance was driven by our generics program, which included volume growth in our customer base, as well as excellent execution by our colleagues at Red Oak.

On the year, segment profit rates expanded 12 basis points to 2.3%, driven by our generics program and continued focus on expense management.

Moving to our medical segment, this quarter revenues grew 2%, to $2.9 billion, due to contributions from acquisitions and growth in our Cardinal Health at Home platform.

This was partially offset by declines experienced in Canada.

For the year, revenues grew 4%, to $11.4 billion.

Fourth-quarter medical segment profit increased 7%, to $103 million.

This growth came from the expansion of our Cardinal Health brand products and services, through a combination of acquisitions and organic efforts, coupled with targeted cost reductions.

For the year, segment profit dollars decreased 2.6%, and the rate compressed to 3.8%, due to the portfolio mix George discussed earlier, as well as the impact of the Canada business.

Let me share a quick note on Cardinal Health China, which spans both of our reporting segments.

Our business in China generated over $3 billion in revenue for the year, resulting in strong double-digit top and bottom line growth.

The team there continues to execute well, through a combination of organic and inorganic moves, and we continue to gain share in our ranking among the top 10 healthcare distributors in China.

If you review the GAAP to non-GAAP reconciliations on slide 8, you will see our consolidated GAAP results for the quarter.

The $0.12 variance to non-GAAP results was primarily driven by amortization and other acquisition-related costs, which reduced our GAAP results by $0.18 per share.

We also had proceeds of $56 million in pre-tax antitrust settlements that are included in the $0.08 net litigation recoveries line.

These were excluded from non-GAAP results.

With a strong FY15 behind us, let's turn to our FY16 outlook.

In early June, we provided you with our preliminary FY16 guidance range.

I will now go through our refined outlook, including our current expectations and relevant underlying assumptions.

We expect consolidated Company revenues to grow in the low double digits.

And as George stated, we expect our non-GAAP EPS to be in the range of $4.85 to $5.05.

While we don't provide quarterly guidance, we do expect our earnings to be more back-half weighted in FY16.

This will become clearer as I walk through the segments.

Let me first start by providing pharmaceutical segment-specific expectations and assumptions.

We expect robust revenue growth in the low double digits versus the prior year.

The anticipated drivers of revenue include branded manufacturer drug price increases, similar to what we experienced in FY15; the incremental increase related to new customer wins; and healthy growth from both specialty and the China pharmaceutical business.

For our generics program, overall, we expect a positive year-over-year earnings contribution.

This growth will be driven by several factors, such as current customer penetration, new customer wins, execution of new launches, the manufacturing pricing environment, and of course, execution at Red Oak.

Speaking of Red Oak, it has been a great success.

As we've mentioned, the achievement of certain milestones would trigger predetermined payments beginning in FY16.

Because of excellent performance, Red Oak achieved these milestones, and we will be making our first $10 million additional payment to CVS Health in this first quarter of FY16, for a new total quarterly payment of $35.6 million.

Our FY16 outlook also assumes overall generic unit growth versus the prior year, as a result of growth in existing customers, as well as the incremental impact of the new customers that we on-boarded in FY15.

In addition, we are assuming a lower year-over-year contribution from new item launches, as well as some moderating generic manufacturer drug pricing, from what we observed in FY15.

Again, we feel very positive about our outlook for our generics program, and expect the second half to be stronger, based on the way we see the various components of our program shaping up.

FY16 will also include a full year of the Harvard acquisition, which closed in early July.

We expect this to ramp through FY16, resulting in non-GAAP EPS accretion of greater than $0.15 per share, net of the $0.03 to $0.04 of interest expense for the related debt financing.

As I just mentioned, we expect Cardinal Health specialty solutions to be a solid contributor to performance in FY16.

Last year, we told you that specialty was on a trajectory to exceed $5 billion in revenues in FY15.

The business surpassed that goal, and we continue to expect robust organic growth.

Along with the acquisition of Metro Medical, we now expect to end FY16 well in excess of $8 billion in revenues.

Rounding out our pharmaceutical segment assumptions, we're also planning for double-digit growth in our China business.

Now, let's talk about our expectations and assumptions around our medical segment for FY16.

We expect revenues to grow mid to high single digits, driven by Cardinal Health brand product growth, which includes Cordis, our China medical business, and Cardinal Health at Home.

For the full year, we expect mid-single-digit segment profit growth, due to the same drivers.

Now, let me give you some additional insight into the cadence of the medical segment performance as we work through a year with multiple moving parts.

The segment profit growth I just mentioned is significantly back-half weighted, due to the anticipated timing of the close of Cordis, lapping of the previously mentioned contract losses in Canada, and the timing of the continued ramp of Cardinal Health brand products, which includes the launch of both new products and expansion of existing product lines, midway through our fiscal year.

Let me expand a little bit on these items.

First, regarding Canada, for the first quarter, we expect a $10 million discrete year-over-year headwind, related to the winding down of the CareFusion contract that George mentioned earlier.

Also, there are other smaller puts and takes that, combined with the wind-down, will result in a first-quarter year-over-year decline in the high teens for the segment.

Even with these factors, the medical segment will grow segment profit by mid single digits.

So while the first quarter and half will be down, our strong second half will result in full-year growth.

Since Cordis is a important contributor to our stronger second half, I will provide the assumptions included in our FY16 guidance.

We expect to close the Cordis acquisition before the end of the first half of FY16.

And we expect an inventory fair-value step up of $0.13 to $0.15 that will reduce non-GAAP EPS in the second and third quarter of FY16, and be substantially complete by the fourth quarter.

Based on this timing, we would expect meaningful contribution from Cordis in the fourth quarter.

Let me finish by highlighting a few key corporate assumptions for the year.

We expect net interest and other expense of $195 million to $210 million, which reflects the mid-June debt issuance related to the funding of the Cordis and Harvard acquisitions.

We are projecting an overall non-GAAP tax rate in the range of 35.5% to 37%.

As a reminder, we only provide full-year guidance on tax rates, as they can have natural quarter-to-quarter fluctuations resulting from discussions with state, federal and international authorities.

We also expect amortization of intangible related assets from acquisitions closed as of June 30, 2015 to be approximately $194 million, or about $0.36 per share.

This does not include amortization for Harvard or Cordis.

We will update this assumption throughout the year, as that information becomes available.

Moving on to capital deployment, for FY16, our strategy remains consistent with recent years.

As we have stated, we view reinvestment in the business as a priority.

During the year, we expect capital investment to increase to the range of $510 million to 540 million.

This is higher than our historical run rate, as this year we have identified opportunities to invest in strategic priorities, refresh our information systems in our pharmaceutical segment, and support our recent acquisitions.

While we regularly evaluate opportunities to redeploy capital into the business, longer-term, we expect capital expenditures to return to historical levels.

We also remain committed to growing our differentiated dividend in line with our long-term non-GAAP EPS growth rate.

We will also continue to explore opportunities to pursue strategic M&A, with a bias towards executing on the integration of the recent acquisitions.

And as always, we will continually evaluate opportunistic share repurchases, as part of our balanced capital deployment approach.

For FY16, we are assuming diluted weighted average shares outstanding between $334 million and $336 million.

As I mentioned, this reflects a pull-forward of approximately $350 million of share repurchases that were just completed during the fourth quarter of FY15.

I know we just provided a lot of information for you around our assumptions, so please feel free to ask any clarifying questions.

In sum, FY15 was an excellent year for Cardinal Health and I would like to acknowledge our team for the work they have done, and continue to do, to make us successful.

I feel confident with our plan for FY16, and look forward to the year ahead.

I will now turn it over to the operator to start Q&A.

(Operator Instructions)

Bob Jones, Goldman Sachs.

I'll start with the obligatory generic inflation question.

(laughter) I know your directional assumption around generic drug manufacturer pricing to moderate versus FY15 is in line with what you have been saying.

But I am curious, just around order of magnitude, have you seen anything change in the marketplace more recently, that would have made you think of this as less of a tailwind for your FY16 than what you had been signaling to us over the last couple of quarters?

Good morning, Bob, it is George.

I think -- why don't I let Mike start with that, and then maybe I will follow up with a little bit of color.

But Mike, you want to just start with it?

Yes, absolutely.

As we've said in the past, these are -- generic inflation can be incredibly lumpy.

It's not very consistent month to month, or quarter to quarter.

So while we are telling you that we believe that it will moderate for our FY16 versus FY15, we're not really seeing anything -- large changes in the environment.

All the things that we have seen in the past, such as the launch schedule not being where it was in the later 2000s, delays for product introductions, we're not seeing lots of new competitors, necessarily, in the marketplace.

All of those types of things that we have talked about in the past, we're not really seeing any changes.

We're just trying to probably be a little bit conservative, and let folks know that we do expect it to moderate a little bit over the next year.

Yes, let me echo a little bit of this.

I don't know that I'd be able to describe, Bob, a meaningful change since we last reported, other than, of course, some very large announcements of transactions among the manufacturers.

So just -- I'm always reminding people, on this question, that you have to remember each product is its own market, with its own characteristics.

How complex is the drug that is being manufacture, is there plenty of raw material?

Where is the drug used, how many players?

What is happening for their overall business?

So there are a lot of moving parts in this.

But I think our general perspective is -- and I think we said this last quarter -- was just to moderate our assumption, going forward, a bit.

No, I think that's fair.

My follow up, on the cash balance, Mike, I appreciate the breakdown you gave of where you guys are, and what is earmarked for what.

But if I go through some of the adjustments, and then factor in the CapEx guidance you gave, it does not really look like you have too much flexibility for deployment.

Anything you can share on cash flow generation expectations?

And if my math is right, when do you feel like you'll be back in a position to either pursue meaningful deals again or meaningful buybacks?

Yes, really fair question.

As we take a look at it, a couple of things.

I would say that I am very comfortable with our ability to continue to do acquisitions, even today, if we needed to.

We have access to a lot of different sources of funding.

I wouldn't be uncomfortable with putting more debt on the balance sheet, if we needed to, if we found the right strategic opportunity.

Again, that all being said, we're going to be really be focused on execution this year.

We really set the table well, I believe, this past year, with some really key acquisitions, particularly Harvard already and Cordis to close.

We are going to focus on that execution, and we're going to be really balanced, again, in our approach with capital.

And so I know, George, you'd probably like to say couple of things.

Yes, just real quickly.

Bob, I think we have done generally, over the last years, pretty well, in terms of our ability to generate cash, and our team is incredibly good at managing working capital.

So I think we feel confident about the way that we will generate cash.

And of course, we will think carefully and opportunistically about ways of deploying that capital, should that occur.

I also just want to finish the last part, just to remind you that we recognize how hard it is for you all to model generics.

And so I know it's frustrating; we try to do the best we can to give some general color.

But I just want to acknowledge that.

But again, I feel our general strategy around capital deployment has not changed.

We feel very good about the way we will be able to generate cash, and to the extent that we are generating more cash, we will be thoughtful and creative, and certainly opportunistic.

Appreciate all the comments, thanks.

Glen Santangelo, Credit Suisse.

George, I just wanted to follow up on some comments you made in your prepared remarks.

I think you seemed to suggest that your capital deployment would be weighted towards your existing businesses, and I just want to be clear on exactly what you are saying.

Do you believe it's just going to be CapEx, internal CapEx, towards the businesses that you have already bought?

Or are you somewhat suggesting that you will also consider doing acquisitions that may complement some of the existing businesses that you have internally?

Yes, so a couple of things.

One is, we want to make sure that you all know that we have got a very high priority on executing the business, particularly some of the moves that we have made.

So we want to make sure that we are all over those, and that we're doing the things that we need to do to make sure that those things happen the way we want.

We will, of course, continue to look for opportunities that we think drive strength in the businesses that we have.

So that is largely what we're saying.

Again, number one, a high priority on execution.

We've deployed some capital, we want to make sure that we do that very efficiently.

And second, of course, we are always looking for those opportunities to double down and get stronger in areas.

But I hope that answers the question.

Okay, maybe if I just follow up with a question for Mike on the guidance.

Mike, it sounds like, listening to the way you characterize it, there is no capital deployment, really, built into your new guidance assumptions, if we're not going to model acquisitions.

And it seems like, based on the share count that you are providing, you are assuming no share repurchase, as well.

Is it a fair characterization to assume that the guidance includes no capital deployment?

Yes, fair question.

When you take a look at the assumptions, obviously, you can take a look at the fact that I mentioned that we were planning to do about $350 million of capital deployment this year in FY16.

But we decided to go ahead and pull that forward opportunistically into the fourth quarter.

So it is a fair assumption, as you take a look at the metrics that we put out in assumptions, that we would have, obviously, a limited amount of capital or stock buyback this year.

But again, you have to remember, that is very early in the year.

We have got -- we are going to generate strong cash flows this year, and we're going to take a look at all of our capital deployment policies.

And if there is opportunities in the year to buy back stock opportunistically, we won't hesitate to do that.

Ricky Goldwasser, Morgan Stanley.

So my first question is around generic programs.

In the prepared remarks, you emphasize the growth and momentum that you were seeing there.

So can you quantify for us, how fast is your generic program growing?

And how it compares to what you think the market growth is?

And how does Harvard fit in?

So when you think about FY16, do you separate the -- is the Harvard accretion includes, also, the contribution to generic?

Or do you think about it as supporting your growth of your generic program separately?

Yes, Ricky, I would say Harvard is really both.

Harvard brings to us generic scale, which is always important, particularly with the excellent performance we're seeing from the Red Oak team.

It also brings to us Ricky, I would say Harvard is really both.

Harvard brings to us generic scale which is always important particularly with the excellent performance we're seeing from the Red Oak team.

It also brings to us new telemarketing skills and teammates.

It also has some private label brands, that we are going to take a look at how we can continue to leverage those in the acute space.

So Harvard bring several different capabilities to us that we are excited about.

And we've had an excellent team in the telemarketing -- in that packaging area, over the last couple years, that have executed incredibly well.

So I would say it brings both capabilities, as well as generic scale, to us.

Yes, broadly, Ricky -- good morning, it is George.

Our generic program is doing very well.

And I think we can safely say we're outgrowing the market.

There are a lot of components to that.

I think we have gotten a broader base of customers who see us as a primary source for generics.

And I think we're doing well with them, getting better share of wallet.

Meaning I think we're creating value for a very, very broad percentage of their overall mix.

We've had a little bit of customer growth.

The overall picture has been very encouraging, and as Mike said, I think Harvard will just add to that.

One other thing to add on Harvard, we do really have some interesting synergies.

Because we're very, very good at this today, and so this goes right into our sweet spot, where we can leverage capabilities that we have been telephony and sales force productivity, and in our telemarketing group.

So we're really excited to bolt that into the system.

But it will very much fold in.

But we are calling out the specific accretion that we see from that acquisition.

Okay.

And then my follow-up will be on the specialty side.

Again, it seems a pretty impressive step-up in revenue contribution, from [$5 billion] to [$8 billion].

So can you maybe share some more detail on what you're doing?

What is the revenue model, how are you working with manufacturers?

Are you also earning fees from manufactures for the support services?

Or is it just for the distribution?

So as much color as possible would be great, given that significant step-up that we have seen in the contribution.

Sure.

Ricky, let me start, and -- with more general comments, but I'll let Mike give a little more detail.

Specialty has been a really good growth story, and much of that organically.

Now, Metro Medical, as Mike said, will contribute a lot to those increased revenue numbers, as we go from $5 billion to $8 billion.

But a lot of this has been organic.

Most of the revenue growth has come from the provider side, just growing the number of customers that we supply across therapeutic areas.

That has been the primary driver over these last couple of years.

I do think that we have increased the capabilities that we have to serve pharma and biotech, and those tend to be less impactful on the top line, but more impactful in terms of margin rates.

They're different kinds of services, and more consulting kind of revenues.

So I think it has been a good mix of components.

But I would say a lot of the revenue has come from expanding our provider base.

Mike, what else --

I would absolutely agree with that.

And I think that's really coming from our service offerings in that space.

I think that the team, over the last several years, has done an excellent job of creating offers that we think are best in class for either the oncologist, rheumatologist, nephrologist that we're serving.

And we have a lot of participation with them, where they come here often to Columbus, work with us to help us develop our products and services.

I think we're doing an excellent job of listening to what they need, and delivering the types of services that they need to get them comfortable to turn over their distribution to us.

Charles Rhyee, Cowen and Company.

First, just had a quick clarification.

I know you said that, in the reconciliation to non-GAAP, you backed out the litigation recovery.

Is that the same, when I look at the presentation, for the pharma segment that excludes, also, the gain there, as well?

And then my follow-up question is really more about China, actually.

You talk about the China medical.

Just curious, what is in that part of your business?

What do you do on the medical side in China?

Mostly, we've talked about the pharma distribution there.

Just curious -- and the specialty in China.

Just interested in what is there, and what percent of the mix in China that represents?

Yes, great.

I'll start on the settlements, and then turn it over to George for a little discussion on China.

Yes, that $56 million of funds that we received in the antitrust settlements have been excluded throughout all of the numbers that I talked about.

They're not in our overall non-GAAP numbers, nor are they in any of the results of the pharmaceutical segment.

We see these as generally nonrecurring, hard to predict type of items, and we have carved these out for years.

They have always been carved out of our numbers historically, and it is just a consistent pattern that we have had over the past.

Charles, did that get what you needed from --

Yes, that helped.

On China, just a couple of quick observations.

We started in China acquiring a business that was roughly $1 billion, and growing to nearly $3 billion at the end of FY15.

It has really been growth along multiple dimensions.

Certainly, our pharmaceutical distribution is the biggest generator of revenue for us in China.

We are doing increasing med-tech work, and sometimes, just as a 3PL player for medical device companies.

I think increasingly, people see us as a broad-based healthcare partner in China.

And you've seen that in specialty, where we've set up some pharmacies to actually deliver specialty products direct to patients.

We now have 30 of those direct to patient pharmacies in China.

So the growth has been along multiple dimensions.

But again, I would say probably, in terms of revenue, the primary revenue growth driver is still on the pharma segment.

Garen Sarafian, Citigroup.

George, a high level question for you.

In the past, you have not been too enthusiastic about entering the distribution space in some parts of the world as others.

But how does the ongoing consolidation among pharma manufactures impact your view?

And if it's not in M&A, how does the manufacturer consolidation influence your thinking in any other meaningful way?

Obviously, manufacturer consolidation is not really a new story.

It's certainly accelerated a lot in the last couple of years, both on the branded side and on the generic side.

It probably has not changed our view about the opportunities that we have to grow our business, both in the US and globally.

We look very carefully, and I think we have got pretty good experience, line of sight and discipline around how we see the opportunities for markets.

And our relationships with our pharma and biotech partners are very deep, like we're talking regularly about opportunities.

So we will continue to look at opportunities around the world, but we will do it with a very disciplined eye, to make sure that we really believe that there is value creation there, that we bring something to the table, and that it is necessary -- a growth driver for us.

China has been a great opportunity.

We now have a platform with Cordis to grow, certainly, on the medical side in a number of markets.

And we will continue to look to see whether or not there are opportunities, ex-US, that are attractive to us.

But I do think, when we look at service businesses in multiple markets, you need to do that with a very, very disciplined eye.

For example.

Europe is not Europe.

It's probably got four different kinds of markets inside that broad economy.

And so we will look very carefully at those, and with, I think, a very experienced set of eyes.

Got it.

So it sounds like it's more of a status quo.

And then secondly, if you could elaborate a little bit on the Red Oak milestone payment, the $10 million that you mentioned.

You guys, too, had mentioned that, based on the savings, that there would be additional milestone payments.

But is this something that is a quarterly payment?

And is it more of an automatic payment for this amount, once savings have been -- once the savings have been captured?

Or is it as a percent of savings, where this amount could fluctuate from quarter to quarter?

Yes, that is a great question.

Let me give you some more color and transparency on this arrangement with CVS Health.

So the way the deal is structured so that beginning -- at the beginning of FY16, there was a milestone where we would do a measurement.

If we were able to exceed that milestone, then a $10 million per quarter payment would kick into CVS.

It's a very binary event.

It's either pass the milestone, pay $10 million, or you don't and you pay zero.

So it's -- there's no proration or anything about it.

It's just, you either pay the $10 million or you don't.

This milestone is tracked each quarter, it's run every quarter.

And it -- so it could -- theoretically, we could pay one quarter and not pay the next.

But our anticipation is that we will pay the $10 million per quarter each quarter this year.

So our payments, to be very clear, are $35.6 million per quarter for FY16.

For FY17, then our -- we do -- there's another calculation at the beginning of FY17.

It is also another binary event.

If we pass that additional milestone, we would pay another $10 million per quarter.

And so -- now, it is too early to talk about that milestone; we will wait until beginning of 2017, we will measure it at that time.

But if it surpassed -- again, it is a binary event -- it would either be zero or $10 million per quarter, for additional, for 2017.

So our payment could go as high as $45.6 million per quarter, starting in FY17.

And then that would be the maximum for the life of the deal.

There's no other milestones, there's no other additional payments.

And just also to emphasize, there is no adjustments for volume up or down, whether CVS wins or brings in more business, or Cardinal wins or loses business, it is a fixed payment for the rest of the life of the deal.

I'd probably just add to that, the good news is that both of us have been actually contributing nicely to the capacity and the volume going through Red Oak.

So it has been, hopefully, a rewarding deal for both of us, and of course for our customers.

Got it.

And a quick follow up on that milestone, though.

Does that milestone -- is it -- does it become a more difficult milestone per year?

Or does it become an easier bogey to hit, just because maybe the low hanging fruit was captured first, so the milestone just becomes easier overall?

Yes, just think about it this way.

It is just, again, a level of savings.

And we built it such that you would want us to pay the additional $10 million milestone next year.

And we are, again, very confident in the execution of Red Oak.

And we will get back to you in 2017, as we do the calculation.

And when set guidance for 2017 and discuss it, we will let you know whether that milestone was achieved.

Lisa Gill, JPMorgan.

I just had a couple of follow-up questions, Mike, on the guidance, as we think about the two different components.

First, on the distribution side of the business, can you talk about what your assumptions are around the underlying organic growth?

And then secondly, I didn't hear you discuss at all margins, and how to think about margins in that business, as we move towards 2016?

So are you talking specifically about the pharma segment, the medical segment?

Let's start with the pharma.

Like I just want to understand the organic component on each.

So what are your assumptions for each of them for the underlying organic?

And then more specifically to the pharma, do you have anything built into your anticipation, based on some of the announcements that CVS has made around acquisitions that their contemplating in your guidance for 2016?

Yes, I guess (multiple speakers).

So I guess first of all, we would not comment on any acquisitions related to CVS, other than what comments they have made.

Which is that they fully expect the acquisitions that they do, the generics there, to be sourced through Red Oak in the future.

But other than that, I cannot speak to that component of it.

As far as revenue assumptions for the segments, on the pharma side, we did talk about really, first of all, we expect branded inflation, which is a key driver of revenue in the pharma segment, to continue to be similar to what we saw in FY15.

We expect to see double-digit growth from China and specialty in the pharmaceutical segments.

And we expect to see growth from our existing customers, as well as we will have full-year on-boarding of some of the new customers that we won last year.

So those will be the big drivers on the revenue side, and we don't guide to margin or margin, necessarily, rates on the pharma side.

But from a revenue perspective, those will be the key drivers for pharma.

On medical, we're also, as we mentioned, we're going to see mid to high single digit percentage revenue growth versus the prior year.

And that is going to be driven by growth created from the Cordis acquisition, as well as growth in our branded products, through some of the internal efforts that we have had to grow those lines, launch new products, as well as some of the efforts we've had around acquisitions.

Sorry (technical difficulty).

What I'm really trying to get at is, so first on the pharma side, what is your expectation in your existing book of business, maybe around utilization?

So I understand how the components that you talked about, with brand and new win, specialty, et cetera.

But I'm just trying to understand the core underlying business, what is your expectations, as to where that is growing right now?

Lisa, let me start, because -- first of all, good morning.

It's hard to break out underlying business.

Let me give you some general, broad perspectives on what we see in the market.

Pharmaceutical utilization continues to go up, so prescriptions are going up.

At the moment, it appears that we are -- have been outgrowing the market a bit.

That is probably a little bit of increased customer, it has to do with the way our existing customers are doing in the markets.

So the underlying health of that actually looks quite positive.

On the medical side, we're continuing to see a little bit of the trend of movement of care from acute care to ambulatory settings.

So we are not projecting a lot of increased utilization in the acute care settings.

Although actually, if you talk to some hospital systems versus other, they are seeing it.

So again, it is choppy, and it varies from system to system, but we are seeing a general movement of care into the more ambulatory settings.

So our general position, our strategic accounts, for example, are -- we continue to do very well.

We did well this past year.

Our expectations for the year, going forward, are positive on that.

So the underlying characteristics of how we're doing in our market, to me, all go green; they look pretty good.

Okay.

And then, I think that -- the reason I was asking about that, the margin expectation, George, is there anything unusual or anything we should be thinking about differently between the two segments, because you're not giving guidance around it?

Just as we're modeling, going into 2016?

So, if there's anything you want to call out, great.

If it is just what we have seen historically, that is fine, too.

Let me let Mike start, and then --

Yes, please.

A couple of things.

I think first of all, we will continue to see growth in the specialty space, like the hep C drugs, which we said have been margin dilutive.

So we would expect to see some continued growth there.

Most of the customer wins that we talked about last year that were margin dilutive are generally being lapped this year.

So we don't have as many of those types of wins, like the Catamaran and some of the other business we mentioned last year.

So I wouldn't say there is anything generally different on the pharma side, for the environment.

And then obviously, on the medical side, Cordis will have a very positive impact on our margin rates.

After we get through the $0.13 to $0.15 inventory fair value step-up, Cordis is going to have a significant impact on our margin rates.

But again, you're not going to see that until fourth quarter, because it will be masked by the step-up.

Exactly.

Let me just -- again, I want to be very specific.

The second part, I think, that Mike said, obviously, Cordis has this -- once you get through the step-up, this impact.

I wanted to just make sure, on the first part of what Mike said, what is happening is, the revenue growth that is coming from certain kinds of branded products tend to be margin-dilutive, on a rate basis.

So I just want to make sure -- that is the dynamic that I think all of us are dealing with.

Which is when you see the revenue growth from some of these products, they can be dilutive to overall segment margins.

And because of the size of them, to total margin rate.

But that -- it's just a byproduct of mix.

Yes.

And remember, this growth is very capital-efficient for us, too.

And while it might be low margin rates, it does produce dollars very capital-efficiently for us.

(Operator Instructions)

George Hill, Deutsche Bank.

Mike, I just want to follow up on Lisa's question pretty succinctly.

Just to be clear, for FY16, there is no inclusion from servicing Target or servicing Omnicare in the guidance?

Right.

There is no assumptions for that, no distribution assumptions for us in our guidance.

Okay.

And then George, a crystal ball question for you.

In the last 90 days, we have seen a ton of moves on manufacturer consolidation and payer consolidation in the drug supply chain.

If you look forward, what do you see around retailer consolidation.

You're obviously well-positioned with your partnership with CVS.

Maybe outside of CVS, tell us, what do you think happened?

And how do you see Cardinal positioned?

That's a great question.

Obviously, we're seeing extraordinary consolidation in multiple segments across healthcare.

Retail is pretty consolidated today.

Now again, they are going to be areas -- and again, there are others that are probably far more qualified retailers to comment on this.

So there are probably some areas where you could see some.

You might see some, for example, among mass merchants or grocery combo, grocery pharmacy companies.

So I think it is an environment we should expect we will continue to see some movement here.

Again, regulatory constraints are always ones that everybody needs to consider, in terms of what can and can't be done here.

But I think we're really well positioned.

Our value proposition to small customers is really strong, but our value proposition to these big customers is also actually really good.

And so we feel pretty well positioned.

David Larsen, Leerink.

Congratulations on showing growth in the medical division's operating income on a year-over-year basis.

Can you maybe just talk about Cordis?

Like maybe the types of products that Cordis sells?

And how you expect to continue to grow medical's operating income, really in 2-H 2016, and then into 2017.

And what is most exciting about that asset, as it rolls onto your books?

The exciting part about this is really thinking about the evolution of the system.

We've seen, and as I highlighted in my comments, some really shifting sand in the way procedures are done, the way they are compensated, the way the reimbursement systems work.

We believe that, in a couple of areas, cardiovascular being one, orthopedics being one, wound management being one, that there is real efficiency that can be brought to the system.

And that is not just about the products, although obviously, the acquisition of Cordis really enhances the strength of our product line.

But it is also around the service components that are combined with this.

And so if I'm a provider, and I'm now being compensated at a set price for a given procedure, I am very -- and I'm going to be penalized, for example, for someone returning to the hospital with a complication.

I'm going to be very conscious of the most efficient way to do that.

How do I bring value?

How do I make sure that the entire procedure is done in the most efficient way, in the way with the best outcome, with the least likelihood of a return visit?

So I think for us, Cordis represents a really unique opportunity, and has represented a real opportunity to take a major step forward in this.

I will just add a couple of pieces.

The integration work thus far is going really well.

And we're recognizing that we're two separate companies still, and there are certain guard rails that are required, we have got very strong, dedicated integration teams.

They've been fully deployed, and the preparation work that we are doing is great.

I would also highlight a really critical factor.

Which is at this point, we feel that we basically have the entire management team filled on a global basis.

And this is a group with extremely deep immersion in med-tech, around specific procedures, and really great knowledge of their local markets.

So I think strategically, it is a very good fit, particularly given some of the trends.

I think our integration work is going well.

And just a reminder, which we often have to tell people: remember, we have been a player in medical activity in global manufacturing for many years.

And so we have some natural capabilities in the space that I think we will be able to bring to bear.

Great.

And then just one quick follow-up.

With your relationship with CVS, is there any ability to growth there, especially with Cardinal Home Health, now that Walgreens is obviously being serviced by a competitor of yours?

So I have to do this carefully.

Our relationship with CVS is great.

We really do believe that we are creating value for one another, and we will continue to look for ways to do that.

And beyond that, it would be hard to give any more information.

Eric Percher, Barclays.

So maybe just two quick mechanics, relative to Cordis and the medical strategy.

One of those is, we had some view that you would look to launch some new areas in ortho and cardio prior to Cordis, later this year.

Now with Cordis expected to close in the first quarter, do you expect that there will be a joint launch of a more full bag?

Do you wait until Cordis is online for that?

I'm not sure what you mean, during launch.

I'm sorry.

So as you think about bring in more products to market, you talked about having 70% of the ortho bag, I believe, by the end of the year.

Do you now launch toward the end of the year?

Do you wait until Cordis has closed?

And do these become Cordis branded products in the future?

Yes, no, we are moving forward -- again, think of these a little bit as two separate things.

We have been moving forward on the ortho line.

And I would say in the fall, in the trauma specifically, we're going to be starting to roll out more effectively.

Cordis, we expect to close in Q2, and then that will -- again, that will be its own line of activity.

So I think you can think of them as conceptually, they are in the same idea around helping our healthcare partners do this more effectively.

But they really are two distinct lines, and they have got their own timelines associated with that.

The only thing I would add to that is, you mentioned about the bag and the full bag, is that the team has done such an excellent job of launching products organically where we are -- have teams that are launching products.

As I mentioned, it is going to be a growth factor for us in the medical segment.

So we have a very complete bag as it is, and continue to grow that bag outside of just the Cordis acquisition, with all the efforts we have going on internally.

All right.

And then the follow-up is, relative to getting Cordis stood up outside the US, how much of that will be as an independent Cardinal entity?

Will there be much support ongoing from J&J?

Good question, Eric.

So some of this -- it's going to vary by market.

So in some markets, we will have transition services agreement that facilitates the handoff from one to the other.

In other markets, we've got some capabilities already, and we will actually be able to fold it in.

And then in some markets, we're standing up some activity where that part would have been -- J&J needs to keep their existing organizational.

We'll do some essentially standup of, let's say, in order to cash capability in certain markets.

So think of it in three kinds of buckets.

One where we just have transition activities, one where we stand up some activities when we have existing operations.

The good news is that we have shared goals, which is that we want to make sure that we have a common customers who is well served.

So I think we're well aligned, I think, with J&J on this.

Dave Francis, RBC Capital Markets.

Just one real quick one.

George, as it relates to China, and some of the turmoil that we have seen over there, both capital markets and liquidity-wise.

Do they see any specific risks to the business, given some of the economic activity over there in the short term?

And conversely, does the turmoil create, potentially, some opportunities that you might not have had otherwise, to grow the business through capital deployment?

Yes, it's an interesting question.

And I know we're running late, so I'm going to go as quickly as I can.

We really don't see much change in the healthcare market as a result of this.

Remember, the Chinese government is really committed to getting more of its people access to healthcare.

And I think that drive continues to be there.

So we continue to feel very optimistic.

As to whether or not this creates new opportunities, it's an interesting question, and it's certainly one we're thinking a lot about.

I think we're well positioned there.

And healthcare is in a little bit of a different place than what people are seeing in the overall industrial economic conditions.

John Ransom, Raymond James.

It looks, at this point, like specialty is about, what, 8% of your revenue.

I know that was a big focus of yours, George, when you started with the Company a few years ago.

Is that number in line with your goals?

Do you think there's a capital-efficient way to move the needle up?

And I would just appreciate any other thoughts on that topic?

John, I would say this.

We are really encouraged by the rate of growth.

Particularly in the last two years, I would say, that the first year or two were a little slower than, as we told you, than we would like.

But it has begun to ramp pretty nicely.

We will always look for opportunities to strengthen our positions in activities where we think we have a real right to win -- apply and win.

Again, that does not mean you always find those right opportunities, but we're growing organically.

We certainly will be open to opportunities that exist in the market to strengthen our position, but nothing specific to point to.

Bob Willoughby, Bank of America.

Quick one.

What is left on the payables and receivables front?

You've had some success managing those line items.

And what can you get out of Harvard, from a working capital standpoint?

I tell you, it was an excellent year on working capital across all of them.

We actually performed well on essentially, really, every lever: DSO, counts payable, receivables, inventory, et cetera, and delivered well on all of those.

And -- now, having said that, I still think there is always opportunity in the future for us to do that.

So those will continue to be focus areas for us.

You know that we have always been incredibly attentive to working capital, and our balance sheet.

And that is not going to change.

We are going to continue to have a focus in all of those areas.

Can you size the Harvard opportunity, though, inventory wise?

It wouldn't be material, in the sense of inventory dollars, to the overall organization.

So really can't size it.

But it's -- there's nothing there that I would point to that would be a driver.

John Kreger, William Blair.

I had a follow-up question on the medical business.

If you look at your branded products portfolio as it exists now, what sort of organic growth are you getting?

Again, this varies period to period.

We continue to grow this, and I'm not sure that we have given specific rates.

I will share with you that we are outgrowing the market, and I would expect that over this coming years, those numbers are going to continue to increase.

And maybe along the same lines.

So once you get through the noise of the first half of FY16, and Cordis drops in, what sort of normalized growth do you think you can get out of the medical segment on the bottom line, longer term?

What sort of objectives do you have?

Again, we're not providing any new long-term guidance, John.

Here's what I would say.

We've got -- as I told you last quarter, and as we highlighted little bit with this coming first quarter, we've got to get through a couple of lumpy things here.

The general characteristics of the growth drivers in that medical business feel really right.

Like we feel like we have got the talent, we have got very clear goals internally, on how we're going to go after those.

We think we're aligned with trends in the market.

So as we start to come to the year end FY16, I start to feel a more normalized rate of progress there.

And as I've said, I like that portfolio, and how it is shaping up.

And I really do think we can leverage the strength that we have had historically in med/surg by driving these lines of business and products.

Steven Valiquette, UBS.

So just a few quick, rapid-fire questions.

First on the Red Oak, just want to confirm that the JV should be accretive to your earnings every quarter within FY16, relative to the size of the payments.

Hopefully there's no annual resets, or on the mechanics or something, that would cause it to have a big seasonal fluctuation.

Just want to confirm that first.

Yes, there's no issues with that.

And then quickly on medical, not sure if you hit this or not.

But one of your peers, earlier this week, disclosed a meaningfully-sized contract loss for later this year.

Just curious if you were maybe on the winning end of that?

Or if that maybe went to another competitor?

Yes, we -- it's hard for us to comment on someone else's call here.

So yes, hard to comment on this.

Certainly, if we had something that we need to say that is material to us, we will try to make sure that we highlight it.

But again, I probably can't comment beyond that.

Okay, and final real quick one.

For the $0.15 Harvard accretion, can you remind us just roughly how much of that, again, is just financially driven, purely on your financing cost versus the EBITDA you're bringing in the door?

Versus how much is more synergy-driven?

Just a rough approximation of the breakdown of that, for this upcoming fiscal year?

Sure.

So again, the accretion we expect to be at least $0.15.

There is $0.03 to $0.04 of interest expense against that.

And we expect the synergies to not only come from the sourcing side, but also, we think we have some real efficiencies in the way we run the business.

There's some cost synergies between the various telemarketing businesses we have.

We have some incredibly good metrics and analytics around our calls and pricing, and those types of things.

So it comes from several different areas, where we just have a team that has a great history of execution in this area.

Okay, got it.

And with that, ladies and gentlemen, we have no further questions on our roster.

Therefore, I would like to turn the conference over to Mr. George Barrett for closing remarks.

Folks, I know it has been a long call, so we will conclude by thanking all of you for joining us this morning.

We look forward to seeing all of you in the very near future.

Thanks again.

And again, ladies and gentlemen, this will conclude today's conference.

Thank you for your participation.