1. FINAL TRANSCRIPT CAH - Q1 2009 Cardinal Health, Inc.
Earnings Conference Call Event Date/Time: Oct. 29. 2008 / 8:30AM ET
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2. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call CORPORATE
PARTICIPANTS Sally Curley Cardinal Health, Inc. - SVP of IR Kerry
Clark Cardinal Health, Inc. - Chairman, CEO Jeff Henderson Cardinal
Health, Inc. - CFO, EVP George Barrett Cardinal Health, Inc. - CEO
Healthcare Supply Chain Services Dave Schlotterbeck Cardinal
Health, Inc. - CEO Clinical and Medical Products Services
CONFERENCE CALL PARTICIPANTS Tom Gallucci Merrill Lynch - Analyst
Ross Muken Deutsche Bank - Analyst Lisa Gill JPMorgan - Analyst
Charles Rhyee Oppenheimer - Analyst Glen Santangelo Credit Suisse -
Analyst John Ransom Raymond James - Analyst Ricky Goldwasser UBS -
Analyst John Kreger William Blair - Analyst Bob Willoughby Banc of
America Securities - Analyst Leo Caprio Harris & Co. - Analyst
Randall Stanicky Goldman Sachs - Analyst Larry Marsh Barclays
Capital - Analyst Eric Coldwell Robert W. Baird - Analyst
PRESENTATION Operator www.streetevents.com Contact Us 1 2008
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3. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Good day, ladies and
gentlemen and welcome to the 2009 first-quarter Cardinal Health
Incorporated earnings conference call. My name is Ann and I will be
your coordinator for today's call. (OPERATOR INSTRUCTIONS) As a
reminder, this conference is being recorded for replay purposes. At
this time all participants are in a listen-only mode. We will be
facilitating a question and answer session towards the ends of the
presentation. I would now like to turn the presentation over to
Sally Curley, Senior VP of Investor Relations. Please proceed.
Sally Curley - Cardinal Health, Inc. - SVP of IR Thank you, Ann.
Welcome to Cardinal Health's first-quarter 2009 conference call.
Today we will be making forward-looking statements. The matters
addressed in these statements are subject to risks and
uncertainties that could cause actual results to differ materially
from those projected or implied. Please refer to our SEC filings in
the forward-looking statements slide at the beginning of our
presentation, which can be found on the Investor Relations page of
our website for a description of those risks and uncertainties. In
addition, we will reference nonGAAP financial measures. Information
about nonGAAP financial measures is included at the end of the
slide. A transcript of today's call is also posted on our investor
web page at www.cardinalhealth.com. With that out of the way, now I
would like to turn the call over to Cardinal Health's Chairman and
Chief Executive Officer, Kerry Clark. Kerry Clark - Cardinal
Health, Inc. - Chairman, CEO Good morning and welcome everybody.
I'm very pleased to report progress this quarter on a number of
fronts. The Company performed as we expected with double-digit
revenue growth in HSCS and another solid quarter in Clinical and
Medical Products with overall double-digit revenue and profit
growth. While successfully spinning off our CMP business as a top
priority, we also remain very focused on delivering this year's
numbers. As I mentioned on the Q4, in late September conference
calls that means focusing on excellent execution. For Health Care
Supply Chain, it means focusing on the right programs in the right
channels at the right profitability and making the right
investments for the future. We are making progress here. For
Clinical and Medical Products, it means delivering clinically
differentiated products that win in the marketplace. We are pleased
with the continued strength of this business. The core business
continues to enjoy industry leading positions and we have recently
seen good signs from some of our investments. We are making good
progress towards the spin-off and still anticipate an effective
date around the middle of calendar 2009. We will likely file the
private letter ruling request on the tax-free nature of the
transaction by the end of the calendar year and still anticipate
filing the Form 10 registration statement with the SEC during our
Q3. As a reminder, the Form 10 will include the spin-off companies
financials. Cardinal Health's pro forma historical financials
reflecting the spin-off will be available separately, closer to the
effective date of the spin. We remain optimistic about the future
of both of these businesses and continue to refresh their business
models to be well positioned for growth. Both organizations are
truly energized about the spin-off and enthusiastic about the
respective prospects. Finally, we continue to be very sensitive to
these extraordinary times we are now operating in and the impact
they have had and could have on our retail and hospital customers.
For now, we believe that it is too early to the make financial
adjustments but we are monitoring the situation very closely and
are taking the necessary operational steps to be sure we are on
solid footing for the balance of the year. www.streetevents.com
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4. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Now, I'll turn it
over to Jeff to provide you with an overview of our Q1 fiscal 2009
performance and more commentary around the credit markets. Jeff?
Jeff Henderson - Cardinal Health, Inc. - CFO, EVP Thanks, Kerry.
Good morning, everyone and thanks for joining us. This morning, I'm
pleased to be reporting first-quarter consolidated results, at or
above our expectations, despite the current challenging environment
and the macro economy. Truly, we are not declaring victory by any
means but are making solid progress on our key initiatives. As
Kerry mentioned, Dave and George will discuss this in more detail
in a few minutes. Later, I will also update you for the outlook on
the remainder of our fiscal year. But first, given the credit
markets issues we are all familiar with, I want to take a few
minutes to propriety provide you with an update on our liquidity
position. We thought this might be top of line for all of you, so
we would address it up front. We finished Q1 with just under $700
million of cash on our balance sheet, of which approximately 400
million was overseas. Cash was down from our FY '08 year-end
balance due to some debt repayments made in Q1, as well as some
normal variance in our quarterly operating cash flow, which I'll
touch on later. Outside of our US cash we have three primary
sources to meet our short-term funding needs. First, we have a $1.5
billion commercial-paper program, which is fully back stopped by a
committee-credit facility led by Bank of America, JP Morgan, Chase
and Barclays. We have been able to issue commercial paper during
the past several weeks albeit at higher rates. Right now, we
believe that about $200 million of available liquidity for us in
this market, which we monitor and test frequently. Second, is our
$850 million committed accounts receivable sales facility. We are
in the process of renewing that facility, which expires in
November. We recently tested it with a short-term $300 million
drawdown without issues. Third, we can also utilize international
cash on a temporary basis. The government recently expanded a Safe
Harbor for temporary loans of international funds to the U.S. for
180 days without creating a tax liability. So we can access those
loans if the short term need arises without a significant tax cost.
From a usage standpoint, we do not have any significant debt
maturities until the Fall of 2009. As you know, we have downsized
our share repo program in advance of the planned spin-off next
year. The bottomline, we have a strong balance sheet, good
liquidity and continued access to capital. Let's now discuss the
consolidated results for the first quarter. Please note that my
comments will reflect the financial results from continuing
operations on a nonGAAP basis. Consolidated revenues were up 11% to
24.3 billion. Operating earnings were down 6% to 482 million, which
reflects the challenging quarter we anticipate from HSCS, partially
offset by the expected growth from the CMP segment. Earnings from
continuing operations were down 16% to 268 million driven by the
segment results a year over year increased in interest and other
and a significantly higher tax rate than last year. Just a few more
details about our net interest expense of $62.5 million at Q1. This
was an increase of almost $20 million versus last year driven by
two primary factors. Lower investment income and a swing in the
impact of foreign exchange. www.streetevents.com Contact Us 3 2008
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5. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call I'm happy to report
that we had zero write-offs in our cash portfolio related to the
credit crisis. Our nonGAAP tax rate for the quarter was a little
over 36%, versus about 32% last year. Which in part reflects the
one-time reserve adjustments related to some ongoing IRS
controversy, as well as some mix changes and some expiring non-U.S.
tax incentives. Diluted EPS was $0.74 for the quarter down 14% from
the prior year. Operating cash flow for the quarter was a use of
350 million, partly driven by an increase in working capital to
service the significant increase in revenue in HSCS and partly due
to normal fluctuations in working capital that arise on a
day-to-day basis making an impact to reported numbers. For example,
Monday and Tuesdays are high-payment days. So there is a negative
impact of ending on a Tuesday, like we did this quarter, versus
ending on a Friday, which is a high collection day. Actually, we
make good progress on our key controllable working capital metrics.
Days inventory on hands improved by one day versus the prior year.
And receivables days also improved almost a day versus the prior
year. We also made good progress in reducing our overall portfolio
of customer delinquencies, which is particularly important during
these times. Now turning to the next slide. During the quarter
special items totaled approximately $35 million, which negatively
impacted GAAP EPS by $0.10. The 35 million was comprised mainly of
severance and other employee costs associated with our July
restructuring. Impairments and other totaled about 17 million in
the quarter and favorably impacted GAAP EPS $0.05 due to the relief
of a tax reserve as a result of divestitures in that period. The
net of all this was a negative $0.05 impact to GAAP EPS. Going
forward, we are going to flush out this chart a little, so you can
see which costs in the period were related to the CMP Spin-off. In
Q1 this number was under $1 million. So we didn't break it out this
time. But going forward in the future you will have complete
transparency to these costs. Now, I'd like to switch to the
performance of the individual business segments on a year over year
basis. Please recall that some of the businesses currently included
as part of the CMP segment such as gloves, converter and fluid
management will remain with Cardinal Health following completion of
the plan spin-off. However, the following segment results reflect
the current operating and reporting structure for the Company,
which is the reporting methodology we plan to use until the
spin-off is executed. Within HSCS, revenue for the first quarter
increased 11% to $23.4 billion, which even with the extra billing
day in the period which contributed a little under two percentage
points of growth represents very strong growth in all core
businesses, including both medical and pharma. Specifically, in the
pharma-business, we are able to achieve very good growth in a
number of areas. Revenue from bulk customers was up 20% on
increased volumes from existing customers and customer wins.
Revenue from nonbulk customers was up 4% driven by growth in retail
chain and hospital markets. More work to do here but we are very
happy with our progress in this area. I should point out that our
current mix of bulk and non-bulk revenue within the pharma-business
is now about 50/50. As expected, segment profit was down 16% to 293
million, primarily driven by the ongoing impact of previously
announced customer repricing in Pharma. The effect on
anti-diversion activities and lower-branded price inflation for a
basket of products in the prior year. www.streetevents.com Contact
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6. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Partially offset by
the strong revenue growth and increased profit dollars in generic
products with the launches of [inaudible]. With regard to branded
price inflation, I know there's been a lot of speculation as to the
year over year change in inflation levels. It is clearly lower for
our basket of products. Although, keep in mind that about 80% of
our business is now fee-for-service. So the most relevant price
increases in any given quarter are the ones that impact the
remaining 20%. We are seeing some benefit versus our budget from
lower fuel prices but as we mentioned before, within HSCS that is a
relatively small part for of our overall cost structure. Finally, I
also did want to mention our Medical Supply Chain, which also had a
strong quarter with revenue up approximately 8%. Then last but not
least and very importantly, we have also begun making the increased
investments in IT and in HSCS, which will be critical to our longer
term success. I will turn to CMP. Revenue was up 12% driven by
installations of Pyxis products, growth in international, and the
acquisition of Enturia which contributed approximately five
percentage points of growth. We have begun the important task of
increasing our investment in R&D. We will see R&D increases
as the fiscal year progresses and expect to spend about 4% of FY
'09 revenue in this area of spend. Segment profit was up 15% on the
revenue growth and the acquisition of Enturia which contributed
approximately nine percentage points. Partially dampened by the
increased cost of raw materials. Now, on the topic of commodities,
I would like to briefly explain how they impact our CMP business.
There has been a lot of volatile in oil prices and some speculation
as to how it impacts us. Now for clarity, there are really three
buckets of exposure to commodities within CMP. Number one is fuel
and on honestly, it's the smallest bucket and doesn't not
immediately impact the P&L in most cases. It's primarily
absorbed into inventory and rolls into cost of goods sold as
inventory turns. Second category of commodity products of oil is
one driver of the cost. These include resins like polypropylene,
polystyrene, polyethylene and PVC. All of the prices of these raw
material sources are generally linked to oil. In most cases, they
lag the movement in oil prices by a few months. And in addition,
our contracts are typically structured to adjust based on an index
on a 30 or 90s day basis, which has a further delay in impact. Then
lastly, these costs are also absorbed into inventory and roll into
COGS as well as inventory turns. The last bucket is made up of
commodity products where oil is not a driver of the cost. An
example of this would be the latex that we use in glove
manufacturing. Any change in these costs would also first be
absorbed into inventory. So all in all, it can take six to nine
months for most commodity cost changes to impact the P&L, which
means we are just now starting to feel the full impact of rising
costs from earlier in the calendar year. So I would caution you not
to look for a dramatic near term benefit from falling prices given
the time it takes to see those prices impact the bottomline.
However, all else being equal, we should start to see some benefit
from current prices in the fourth quarter of this year and beyond.
Dave will obviously touch on CMP later and what he's seeing in the
hospital market in a few moments. Now, turning to slide nine and
guidance. Q1 did play out largely as we expected despite the
various potential pressures created by the ongoing economic and
credit conditions. Looking forward it would be naive for to us
assume our business is totally immune from a continuation of the
overall negative environment. We will see higher interest expense
if credit spreads don't www.streetevents.com Contact Us 5 2008
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7. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call come in. And we are
keeping a close eye on bad debt expenses. Although, I will point
out that our bad debt reserve as a percent of receivables held
pretty steady thus far. On the business side, IMS is reporting
slower scrip growth. Although, we really haven't seen that come
through on our supply chain revenue to date. More importantly, we
are seeing a pause in certain hospital capital spending which will
effect our CMP business in Q2. Specifically, although we expect Q2
segment profit for CMP to still grow significantly year on year
versus Q1, it perhaps will not be at the rate of growth that we
expect for the full year. However, it's not clear how that will
play out for the year so we are not changing full year guidance at
this time but it is something we will be watching closely. With
regard to nonoperating items. let me also provide some additional
color. For the full year tax rate, we still do expect to be on
track to hit our guidance of around 34% but we anticipate the rate
in the second quarter to be closer to the 36% or so realized in the
first quarter. We expect net interest expense to be only slightly
lower in Q2 than Q1 and given our experience in Q1, as well as our
expectation for higher borrowing costs and lower interest rates on
investments, we now anticipate the full year net interest expense
to be north of 200 million. We expect shares outstanding to be
slightly higher in Q2 than Q1 with average diluted shares
outstanding for the full year in the previously indicated range of
361 to 362 million. This reflects our plan to repurchase no more
than the amount required to offset dilution from equity
compensation issuance. So there are some puts and takes but in
summary our full year guidance remains unchanged at this time,
despite fact that Q2 might be lighter than some expect due to CMP
customer issues and certain below the line items. However, Q3 and
Q4 are expected to be stronger due to our usual quarterly
profitability patterns and our previously indicated return to
profitable growth for HSCS in the second half of the year. We will
continue to monitor all the environmental and market issues
closely. And to take the actions necessary to mitigate the impact
as appropriate. Now as we said before, our guidance does not
reflect any incremental costs we will incur associated with the
spin-off and separation of the two companies. As I mentioned
earlier, our plan is to separately identify and call out those
costs on a quarterly basis. With that, I'd like to turn it over to
George to provide a few comments on HSCS. George? George Barrett -
Cardinal Health, Inc. - CEO Healthcare Supply Chain Services
Thanks, Jeff. Good morning everyone. For those following the
presentation, slide seven and eleven in the presentation will refer
to my comments here. I'm happy to report continued progress in our
HSCS business. We still have enormous work in front of us but we do
see some positive signs. Let me start by talking about our Medical
Supply businesses which agree revenues by approximately 8%. We
continue to focus on three things. First, reducing complexity in
order to improve customer service and profitability. Second,
aggressively moving forward on our lien transformation in our
presource kitting business. And third, driving growth in key areas
of opportunity. www.streetevents.com Contact Us 6 2008 Thomson
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8. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call As relates to the
first producing complexity, we have been able to reduce our medical
surgical product line by nearly 2000 SKUs without a reduction in
value to our customers. Although this does not translate to an
immediate financial benefit, this SKU rationalization process will
simplify our business and create value as we go forward. Our lean
transformation and our presource kitting business is progressing
well as we push to reduce inventory, shorten cycle times, eliminate
waste and improve the customer experience. Finally, our efforts to
target growth areas are bearing fruit. As our Ambulatory business
grew at double-digit rates and our Scientific Products business has
recovered from last year's loss, of its largest customer and it's
actually turned to profitable growth, this is a great
accomplishment. Our Nuclear Pharmacy business continues to lead the
market in serving cardiac imaging and we were able to take
advantage of the first launch of a generic Cardiolite through an
improved cost position with our existing suppliers. I'd like to
turn to our Pharma Supply Chain business, our largest business. Our
year over year revenues increased 11% driven largely by the growth
in our bulk customers. Good news in what IMS is reporting as a
particularly slow growth script environment. We did see an uptick
to our DSD business, our direct store business of 4%, a relatively
modest number in absolute terms but encouraging given the fact that
we grew in the face of the anti-diversion negative impact and
reclassification of some [Walgreen] business from nonbulk to bulk,
which we discussed last quarter. In addition, although independent
retail business was flat year over year, our performance looks more
promising when you remember that our control drug issues resulted
in lost business of roughly 1 billion on an annualized basis
starting in Q3 of last year, most which have came from independent
retailers. As we announced a few weeks back, we did come to a
settlement with CEA with regard to our distribution of controlled
drugs and expect that our New Jersey, Florida, Washington and Texas
facilities will be back on line by the end of November. This is an
important threshold for our customers and is a critical milestone
in our effort to return our business to a positive trajectory. Our
Generic Programs also showed signs of progress. Our source Generic
Programs grew at about 10%. Although, we saw modest growth in our
overall retail generics, we experienced more dramatic double-digit
growth in other segments, as we continue to tailor our offerings to
specific customer needs and is included some effective use of
telemarketing for our pharma operations. Given the complexity of
the generic environment, the heightened awareness of the important
of access to low-cost pharmaceuticals and ongoing flow of drugs,
which will lose patent protection in the coming years. We will
continue to focus on building our generic capabilities. Our drive
to achieve best -in-class speed and execution of generic launches
was put to the test with the launch of lamotragine and the full
roll-out of Respiradone which began at the end of last quarter.
Both of which were executed extremely well. This is crucially
important to our customers who gain from our ability to source
efficiently and to our generic manufacturing partners who benefit
from our ability to aggregate share. In summary, we feel good about
our progress and are well aligned around our priorities. We have a
strong focus on execution and are mobilized towards improving the
customer experience, while maintaining a very disciplined approach
to management in this extraordinary environment. Getting the DEA
settlement behind us is a big step for us and our team is energized
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9. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call excited about the
challenges and the opportunities in front of us, as we move toward
the spinoff. With that, I would like to turn the call over Dave.
Dave Schlotterbeck - Cardinal Health, Inc. - CEO Clinical and
Medical Products Services Thanks, George. As CMP delivered solid
results in the quarter, we continue to set the standard in
medication management and make progress on our goal to set the same
standard in prevention. The changes that CMS has made in its
reimbursement for never events, including those related to hospital
acquired in growing challenges for our customers, while we bring
the industry leading expertise to health. We continue to maintain
or expand our market positions in infusion, respiratory and
dispensing equipment. While the landscape remains competitive, we
continue to win with our products and Alaris continues to displace
competitors and gain share. We won more than 60% of deals in
infusion where a competitor was the incumbent. Some of our
strategic investments are also making excellent progress. For
example, we closed more deals for our MedMined infection, detection
and prevention service this quarter alone than we did in all the FY
'08 and we gained more customers in Pyxis Supply in the quarter
than we did in all of FY '08. In addition, our Enturia acquisition
performed very well. Confirming our belief that ChloraPrep will
continue to gain share as the preferred antimicrobial skin-prep
solution. Now as Jeff said earlier, we are seeing hospitals delay
some purchase decisions. It's not been a dramatic slow down at this
point but we are seeing it have an impact on Q2. Our committed
contract run rate slowed at the very end of the first quarter and
we are being somewhat cautious in looking forward. The outlook is
more difficult to determine in our business, since it's not obvious
that purchases of our capital equipment products would be deferred
over an extended period of time. Let me highlight that our
offerings such as ventilators and IV pumps are critical to
providing care and that we do provide a leasing structure for
dispensing equipment. Our leasing provision is a key competitive
differentiator for us. In addition, many of our disposable products
serve as an annuity stream for our business. Not only do we have
lines of disposable products in infection prevention like gloves,
more than 50% of our infusion revenue comes from disposables and
more than 35% of our respiratory revenue is from disposables. So
there are some revenue streams that should be relatively insulated
from any slow down in capital spend. We are also making great
progress on product remediation and infusion. We completed the
recall work on the signature edition pump in the quarter as
expected and currently anticipated we will be back in the market in
the spring. This is already factored but completing this
remediation is a significant milestone for the business and for our
customers. We are also on track to complete the remediation on our
flag ship product, the Alaris system by the end of the calendar
year and I am pleased with the great progress we made on our
overall quality system and will continue to work through the
process with the FDA to resolve the consent decree. Despite the
challenges of the current economic landscape, we have a great
business with industry leading products that make a clinical
difference for patients. We are increasing our investment in
R&D. www.streetevents.com Contact Us 8 2008 Thomson Financial.
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10. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call In fact, R&D as
a percent of sales historically has been in the 3% range and we
expect that number to increase to about 4% in FY '09. Our goal is
to move it to the 5% to 6% range over time. This is a blended rate
which means that our investment needs will be lower in disposables
be higher in capital equipment where we lead with innovation. We
continue to invest in an already strong innovation pipeline and to
be well-positioned for the long term. Now, I would like to open up
the call for questions. QUESTIONS AND ANSWERS Operator (OPERATOR
INSTRUCTIONS) The first question comes from the line of Tom
Gallucci from Merrill Lynch. Tom Gallucci - Merrill Lynch - Analyst
Good morning. Thank you very much. I had one each hopefully for
Dave and for George. David, just wondering, you gave some
statistics there on consumables in individual product lines. As you
look at your whole segment, any idea what consumables are as a
percent of revenue and what the margins are in that business? And,
then, for George, it seems like maybe, did you take market share or
are your existing customers just doing very well. Particularly in
that independent business that you noted the DSD is up despite the
loss of the independent? Can you describe where that business is
coming from. Thank you. Dave Schlotterbeck - Cardinal Health, Inc.
- CEO Clinical and Medical Products Services Thanks for your
question, Tom. I will take the first one. To the question of what
percent of revenue for the overall segment disposables represent.
It's over 40%. And as far as margins are concerned, disposables
typically have fairly strong margins particularly where they are
dedicated to the equipment like an infusion. George? George Barrett
- Cardinal Health, Inc. - CEO Healthcare Supply Chain Services Tom,
it's really a couple of components. You asked about the
contribution to growth and what's happening. I think it's a had I
been of three components. One is some improvement in capturing a
higher percentage of our existing customer business. The other is
new business and I think we mentioned this in prior quarters that
we've been picking up a little business along the way in spite of
some of our challenges in the anti-diversion environment for us.
And then finally, we actually had some more unusual growth in
certain segments in the health systems part of our business and
ambulatory. So it's really several components that are contributing
to this and feeling like we are on the right path here.
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11. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Tom Gallucci -
Merrill Lynch - Analyst George, have you had any major discussions
with clients that were affected by the DEA issues and now that you
are going to be out by the end of November, you think any
visibility which have of those customers you may win back or not?
George Barrett - Cardinal Health, Inc. - CEO Healthcare Supply
Chain Services We've had plenty of conversations. Probably,
actually now for months about the future. It is very difficult to
give you a quantitative analysis on what's going to come back to
us. I think as I've said before, we are probably going to work out
slowly but I'm optimistic that the things that we've been doing in
recent months are a signal to them of our commitment and I think
will take time but I think we are on the right path with them. Tom
Gallucci - Merrill Lynch - Analyst Thank you. Operator Next
question, Ross Muken from Deutsche Bank. Ross Muken - Deutsche Bank
- Analyst I also have one question each. As we look at sort of the
commentary around hospital based spending, is there certain price
points where you are seeing a bit of softness? It certainly seemed
on some of the CapEx side that you are, you saw a bit of softness
at the end of the quarter. Is there a certain price point that it's
a break point for purchasing departments? And then in turn, have
you we seen sort of any sort of normalized reassumption of demand
patterns in the early weeks of this quarter that maybe made you a
little less cautious or potentially held you off from doing any
sort of change to guidance? Dave Schlotterbeck - Cardinal Health,
Inc. - CEO Clinical and Medical Products Services Ross, I think the
answer to your question is that I don't detect any particular price
points that are driving hospital behaviors. I think it's much more
a function of the behavior of the individual Chief Financial
Officer. So the answer, the short answer to that question is no.
And we've continued here in the early weeks of our second quarter
to see hospitals continue their cautious [inaudible] and I'm hoping
that obviously that that turns around as governments around the
world intervene in the credit markets. Ross Muken - Deutsche Bank -
Analyst Right. And, George, how would you sort of characterize the
morale of the sales force at this point? There's been so much
change in cardinal in the last few years but certainly even more
recently, a lot of things put in place and certainly with the split
off and now obviously with some of the DEA issues getting towards
resolution. Is there sort of any kind of change in the overall sort
of behavior pattern of the sales force? Do they feel a bit like the
opportunities ahead of them now as you've been somewhat of a share
loser the last few years? www.streetevents.com Contact Us 10 2008
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12. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call George Barrett -
Cardinal Health, Inc. - CEO Healthcare Supply Chain Services That's
a great question and it's delicate to speak for other people but
the energy I see from the group at the moment is really high. It's
been interesting as we have announced the spin-off of another area
in a sense of uncertainty and yet for individuals and yet people
are extremely excited about it. And I think the resolution of our
agreement with the DEA., I think for some lifted a cloud. We know
that we've got a lot of work around that area to continued to do,
but I think the sense of optimism has shown a significant uptick.
I'm excited about the way people seem to look and talk and feel
about our business and where we are going today. Ross Muken -
Deutsche Bank - Analyst Great, guys. Thank you very much. Operator
The next question comes from the line of Lisa Gill from JP Morgan.
Please proceed. Lisa Gill - JPMorgan - Analyst Good morning.
George, as we look at the fact that IMS is now lowering the global
forecast and the U.S. forecast for pharmaceuticals. How much of
that do you think that -- clearly, it's a sales number that they
are talking about but how much do you think is utilization towards
the push towards generics? You are talking about you pushing more
generics into the channel or looking at a price point difference
between a branded and a generic. Are you seeing big shifts in
actual utilization of pharmaceuticals or the actual buying patterns
of your customer overall or do you think it's more of a shift from
a brand to a generic? And then secondly, Dave, I know that you
talked about the fact that it's not a specific price point for the
product but are there certain products that they are holding off on
buying or is this just more of a credit crunch? The CFO is
concerned about borrowing to buy the product and therefore, we
think that this will come back when things start to ease, perhaps
in the early parts of 2009? Thank you. George Barrett - Cardinal
Health, Inc. - CEO Healthcare Supply Chain Services Yes, Lisa. Let
me comment a little bit about your question on the IMS. That's a
real good one. I think right now there is no question that the
shift from branded pharmaceuticals to generics continues. Now, this
is not a new trend. Obviously it's getting a lot of play right now.
This is a trend that's been pretty heavily in motion for years. So
I can't say that we are suddenly seeing a dramatic swing but the
trend is clear. Generic utilization is going up .The conditions
that we find ourselves in as a health system probably will continue
to promote that. So that does have some dynamics for the overall
script data or the overall market data. As relates to script, there
is some data that suggests a slowing of utilization a bit and the
way I say this to folks internally is that fundamentally the
demands for what we do will not go down. The population is aging.
We know that pharmaceutical treatment is an incredibly cost
efficient treatment. www.streetevents.com Contact Us 11 2008
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13. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call So whether there may
be some delaying of doctor visits or other things. There's been a
lot of anecdotal reports about this. We are seeing at least in the
public data little bit of utilization is slowing but I think the
interest that you raise which is the shift from the branded
pharmaceuticals to generic is clear. Lisa Gill - JPMorgan - Analyst
Are you hearing from your customers? When you talk to your
retail-based customers, you are saying, quot;You know, our volumes
are down. Utilization is down.quot; Or we are not quite seeing that
yet? George Barrett - Cardinal Health, Inc. - CEO Healthcare Supply
Chain Services Not particularly. I don't think I would say that
sort of a loud voice coming from our customer base right now. I
think they are more aware of the economic climate as a driver of
concern for them than particular script utilization. Lisa Gill -
JPMorgan - Analyst Okay. Great. And then, Dave, any comments as to
how you think this will rebound and if there are specific products
and services that they are looking at? Dave Schlotterbeck -
Cardinal Health, Inc. - CEO Clinical and Medical Products Services
Actually, I don't see this apply to any specific capital equipment
purchase. As you know, we have three lines of capital equipment.
The infusion line, the dispensing line and the ventilator line. In
dispensing, as I mentioned in my earlier comments, we do offer our
own leasing option and so the decision that the customer would make
is a decision to extend a capital lease, which would typically be
five years. And doesn't mean that they are not continuing to use
the equipment that they already have and continuing to make lease
payments on that -- on a monthly basis. The size of the deals I
think is more what drives the decision from the standpoint of the
CFO and if you look at the size of the purchase decision that
they'd be making across all three of these product lines, depending
upon the size of the institution, it will range from roughly $0.5
million at the time of a purchase decision up to as much as $15
million. And so these are numbers, obviously, that get the
attention of the CFO and I think that they are simply wary about
the availability of capital and I think that once we see the
availability of capital clearly begin to free up that they are
going to be in a different frame of mind. Lisa Gill - JPMorgan -
Analyst Great. That's very helpful. Thank you. Operator The next
question comes from the line of Charles Rhyee from Oppenheimer.
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14. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Charles Rhyee -
Oppenheimer - Analyst Hi , a couple of questions for Jeff here
regarding the guidance. I think last quarter you guys mentioned
that as part of the first quarter you were expecting a hefty amount
of investment spending and I think it was roughly about 50 million
for HCSC and also for the CMP division. Looking at the results can
you give us a sense on did you spend all that money in the current
quarter? Is there a little bit more of than investment spending,
which we should see in the next quarter? And also in regards to
your interest expense guidance you expect over 200 million.
Clearly, you got hit a little bit in this quarter by the FX? Can
you give us a sense on what you are seeing currently in regard to
FX and how you are accounting Jeff Henderson - Cardinal Health,
Inc. - CFO, EVP Sure. Thanks, Charles. Good questions. First of
all, in terms of the incremental investment spend for FY '09. What
we said in the prior call was we expected it to be about 100
million in total for both segments, divided approximately equally
between $50 million of expense for HSCS, mostly for IT related
spend and about $50 million for CMP primarily related to product
research and development. Obviously, we are off to a good start in
terms of the spend so far this year. Despite the fact that we are
scrutinizing every expense in the Company right now given the
current macro environment. There are certain expenses that we
recognize -- investments that we recognize that we are going to
need to make for the long-term future of this Company and those are
two of them, Continuing to improve our IT investments in HSCS and
building our product pipeline for the future in CMP. I would say in
Q1 we are pretty much on track with those investments and we still
have every reason to believe that we will spend close to the $100
million for the full year. Charles Rhyee - Oppenheimer - Analyst It
doesn't necessarily expect to come in the first quarter, all of it.
Is that correct? Jeff Henderson - Cardinal Health, Inc. - CFO, EVP
No, it was not supposed to be in the first quarter. That $100
million was spread over the year. We said it would generally be
front end loaded and I would say generally that in terms of the
activity that's true. Whether all the expenses themselves will be
recognized in Q1 or Q2 or later remains to be seen. It depends on
the pace of some of the activity, particularly in the IT area,
where it takes time to ramp up projects but those projects are all
fully underway, including some very important customer facing
projects that we commit to do that we are doing. Jeff Henderson -
Cardinal Health, Inc. - CFO, EVP On the FX front, the net/net
impact, if you look at the operating impact and the impact below
the line for Q1. It was a little over $10 million of negative
impact for Q1. Most of that actually was below the line related to
some revaluation of inter-company receivables, et cetera, in light
of the strengthening U.S. dollar. Overall for the year though I
would say generally, Charles, FX isn't a big driver of our results.
We have a global Company but it's perhaps not as international as
other companies you may cover. www.streetevents.com Contact Us 13
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15. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call And we are pretty
well hedged both operationally and financially where appropriate.
So I don't expect FX to have a huge impact on the bottomline. On
balance right now, it's probably more negative than positive given
the strength of the U.S. dollar. But we'll continue to put in place
the appropriate hedges. Again for Q1, it's about a $10 million
negative impact. Charles Rhyee - Oppenheimer - Analyst Thanks. If I
could just ask one more here. Obviously, had you a strong quarter
in distribution on the topline, even if we back out the extra day
in the quarter, but the full year guidance remains sort of greater
than 6% topline. Kind of implies that the growth rate slows a
little bit. Can you just give a sense on what are the dynamics that
we should be thinking of as we move to the course of the year.
George Barrett - Cardinal Health, Inc. - CEO Healthcare Supply
Chain Services Well, I could touch a piece of it. We got some
particularly note worthy growth, some business that we had picked
up on the bulk side from Walgreens that we talked about in the
past. That was one component of it. Generally, I think that we feel
comfortable with the kind of revenue guidance we provided.
Obviously, our hope is always as we start to build momentum coming
out of our anti-diversion issues that we will start to see some
noteworthy progress but I think we are comfortable with the kind of
revenue forecast we provided. Charles Rhyee - Oppenheimer - Analyst
Thanks a lot, George. Thanks, everyone. Operator The next question
comes from the line of Glen Santangelo from Credit Suisse. Please
proceed. Glen Santangelo - Credit Suisse - Analyst Yes, thanks.
George, I just want to do talk a little bit more specifically about
your distribution margin. You talked in your remarks pretty
generally about the progress you're making and the fact that you're
on the right path. And clearly settling with the DEA was a major
part of that. Could you maybe talk a little bit more specifically
about what ultimate the turns the margins in this division because
the operating margins are down year over year, then down again
sequentially but yet it sound like you're making progress. I'm
trying to understand is the DEA settling that issue going to be
enough to turn the margins or is there something more specifically
that we should be focused on? And then, I just had a follow-up
question on the nuclear pharmacy business. George Barrett -
Cardinal Health, Inc. - CEO Healthcare Supply Chain Services Let me
just give you a quick observation, a little bit comes back to some
math exercise we did actually in the last earnings call and this is
again sort of an interesting dynamic. I mentioned in that call that
because our bulk business and those customers are growing
disproportionately fast, our margins are influenced by this mass
exercise, which essentially is that the lower margin component is
simply growing faster than what can happen realistically on the
direct store side. www.streetevents.com Contact Us 14 2008 Thomson
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16. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call So part what have
you're seeing is completely expected and in fact, I don't think
it's unhealthy. We are very happy to grow that bulk business.
What's really important to us though is to -- around that is to
grow our direct store business, shifting that mix so we start to
see some favorable direction in our margins. But again, very
important, this components of math is one that we just need to
realistically understand. So again, biggest issue is mix. I would
say first customer mix and second is actually product mix and
again, that has to do with what we are doing in our category
management and medical businesses, as well as, driving our generic
programs. So those to me are the single largest drivers of margin.
Coming out of the anti-diversion issues, no question that this will
give us a better shot at capturing some of the business that we
really believe can help get some margin to stick to the bones. Glen
Santangelo - Credit Suisse - Analyst Hey, George, could you maybe
just comment a little bit on the nuclear pharmacy business? How big
is that as part of your total business? And now that there's a
version of generic Cardiolite out there, can you give us a sense of
the pricing and profitability on that product? Where you thought a
little better, a little worse than you thought? Could that be
something ultimately that can move the margins as well? George
Barrett - Cardinal Health, Inc. - CEO Healthcare Supply Chain
Services I think so in a very broad sense the nuclear business
contributes about 100 million to our profitability. Here's where I
see this playing out. I think at the moment for us the good news is
that the generic launch that did occur, which triggered a provision
of our existing suppliers which allowed us a better cost of goods
going into the market. Of course, there was a corresponding drop in
price in the nuclear pharmacy business. . I would say that has
played out. Although, we won't provide exact margin direction to
you. I would say that has played out about as we expected in
relation to pricing and we knew exactly what our acquisition cost
was going to be in that events. That's sort of a key components.
The other thing that's worth reminding you, we said probably going
back a call or two, that we did not model in for this year access
to our own manufactured generic Cardiolite. So that is an
assumption that we continue to stick by. I hope, love to be wrong
but at this point I think that's the appropriate Glen Santangelo -
Credit Suisse - Analyst Okay. Thank you. Sally Curley - Cardinal
Health, Inc. - SVP of IR Operator, can I just ask we have actually
quite a few folks in queue that we are going to get to this
morning. So if people could limit their question maybe to one
question and one follow up that would be helpful. Thank you.
Operator Okay. The next question comes from the line of John Ransom
from Raymond James. Please proceed. www.streetevents.com Contact Us
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17. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call John Ransom -
Raymond James - Analyst Good morning. Looking at your initial
guidance for fiscal '09. Part of the issue was additional
investment, particularly for the September quarter. It didn't --how
much of that investment was actually in the September quarter,
versus how much is going to be for the rest of the year? Thanks.
Jeff Henderson - Cardinal Health, Inc. - CFO, EVP Hello, John, this
is Jeff. I would say in Q1 of the total, it was probably less than
20% of the expense that showed up on the income statement. Now,
that doesn't mean there wasn't a lot of activity and some capital
investment, et cetera, but in terms of the actual expense, I would
say it was less than 20% of the full year amount. Now, I do expect
that will ramp up in Q2 and particularly in some IT areas, where it
will begin to recognize some expense, et cetera. So I think will
you see more of a bullous of it in Q2. John Ransom - Raymond James
- Analyst So less than 20% and what was the EPS impact of the 1Q
investment approximately. Jeff Henderson - Cardinal Health, Inc. -
CFO, EVP Let's say $0.03 to $0.04. John Ransom - Raymond James -
Analyst Okay. Thank you. Operator The next question comes from the
line of Ricky Goldwasser from UBS. Please proceed. Ricky Goldwasser
- UBS - Analyst Good morning. Two questions and no follow up. First
of all for George. What was the growth rate for your -- that you
experienced this quarter -- for your generic program? And then,
David, if you could just elaborate further on what type of action
are you entertaining on to mitigate the impact that you are seeing
on the hospital side? George Barrett - Cardinal Health, Inc. - CEO
Healthcare Supply Chain Services Ricky, our generic program grew
about 10% for the period. www.streetevents.com Contact Us 16 2008
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18. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Ricky Goldwasser -
UBS - Analyst Thank you. Dave Schlotterbeck - Cardinal Health, Inc.
- CEO Clinical and Medical Products Services And to your question
about actions on the hospital side .Well, obviously, we have
already started our belt tightening when it comes to things like
[inaudible]. It's primarily a focus on holding down SG&A and
making sure that money that goes into investments would likely give
us a faster return to help moving the business overtime. Operator
The next question comes from the line of John Kreger from William
Blair. John Kreger - William Blair - Analyst Thank you very much. A
question for George. George, can you give us an update on the buy
side part of the drug distribution business? How are the -- your
various fee contracts renewing? Are you seeing any changing
economics there? And on the non-fee, I think you said 20% part of
the business, are you seeing the forward buy opportunities go up or
go down as you look out into the future? George Barrett - Cardinal
Health, Inc. - CEO Healthcare Supply Chain Services I'd say the
dynamic between us and our branded manufacturing partners is
relatively stable at the moment. As you know, we have the part of
our business that is more inflation sensitive has been shrinking in
recent years. I think that direction, that trends will probably
continue. We do have some lumpiness throughout the year for this
period, was probably a period just based on the timing of how we
are compensated through brand manufacturers. Probably , a little
bit lower this period but I would say that would have been as we
have modeled it based on the nature of price increases when that
occurs and that's the mechanism that John Kreger - William Blair -
Analyst And how would you say, you said relatively stable in terms
of the fee portion. Does that mean you are kind of hitting your
general performance targets across the board? George Barrett -
Cardinal Health, Inc. - CEO Healthcare Supply Chain Services Yes,
at the moment I would say that's right. John Kreger - William Blair
- Analyst Thanks. George Barrett - Cardinal Health, Inc. - CEO
Healthcare Supply Chain Services Yes. www.streetevents.com Contact
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19. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Operator The next
question comes from the line of Bob Willoughby from Banc of America
Securities. Bob Willoughby - Banc of America Securities - Analyst
Jeff or George, does the guidance contemplate any change in
Walgreens store openings and secondarily, is there any indication
that Cardinal has provided yet the CMP dividend that it will pay to
cardinal with the spin? George Barrett - Cardinal Health, Inc. -
CEO Healthcare Supply Chain Services Good morning, Bob. No, there's
nothing specifically contemplated for store opening. We obviously
have some expected shift in the Walgreens business, which we knew
when we renegotiated our contract but nothing specific. Jeff
Henderson - Cardinal Health, Inc. - CFO, EVP Your second question.
I didn't quite get it. Bob Willoughby - Banc of America Securities
- Analyst I assume CMP will pay some sort of dividend to cardinal
with the spin that they will lever up to some extend and they will
pay a dividend to Cardinal. Is that not the case? Jeff Henderson -
Cardinal Health, Inc. - CFO, EVP Let me explain the way these sorts
of transactions were typically structured. The exact mechanics we
are still working through and obviously, we want to make sure that
it happens in the most tax efficient and cost-effective manner
possible. But typically what would happen is at the time of the
spin, CMP would take out some sort of loan and then use the
proceeds from that loan to transfer money to Cardinal Health. And
then, if that was a bridge loan for example, they would then
replace it with bonds over time. The net effect is CMP would borrow
in order to transfer cash to Cardinal Health and that's effectively
the way it would happen. As we said before, we expect the debt that
CMP will have on its balance sheet to be somewhere in the 35 to 45%
range of what have Cardinal Health currently has on its balance
sheet. Bob Willoughby - Banc of America Securities - Analyst And
that includes that loan, then? Jeff Henderson - Cardinal Health,
Inc. - CFO, EVP Yes, that effectively, that loan would represent
the debt it would take on. www.streetevents.com Contact Us 18 2008
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20. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Bob Willoughby -
Banc of America Securities - Analyst That's great. Thank you. Jeff
Henderson - Cardinal Health, Inc. - CFO, EVP You're welcome.
Operator The next question comes from the line of Leo Caprio from
Harris and Company. Please proceed. Leo Caprio - Harris & Co. -
Analyst Good morning, gentlemen. Just a question on the hospital
purchasing slow down. Regarding the slow down, is this something
that could be confined to particular specific market segments or is
it an across the board phenomenon. And the follow up question is,
are [Pyxis cabinets being deferred, higher price points or lower
price points items? Thanks. George Barrett - Cardinal Health, Inc.
- CEO Healthcare Supply Chain Services Generally speaking, I think
as you listen to the earnings calls from other companies that are
in the capital equipment business and selling to hospitals, it
seems to be more across the board than anything else and the -- as
a result, at least in the, there is a short term impact. As far as
and what was the second part of your question? Leo Caprio - Harris
& Co. - Analyst The second part of the question was regarding
the Pyxis cabinet. When your salespeople speak with the hospital
CFO's, are they being -- are they telling them in terms of the list
of priorities that they are looking out for CapEx spending or
deferring them in favor of other more bigger ticket items or
looking at smaller items in terms of where it falls in that
hierarchy? George Barrett - Cardinal Health, Inc. - CEO Healthcare
Supply Chain Services In terms of Pyxis cabinets, it really would
not categorize the decision making of the hospitals as focusing on
other items of those cabinets, whether it's higher priced. Just not
seeing that. Leo Caprio - Harris & Co. - Analyst Okay. Thank
you. Operator The next question comes from the line of Randall
Stanicky from Goldman Sachs. www.streetevents.com Contact Us 19
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21. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Randall Stanicky -
Goldman Sachs - Analyst Great. Thanks for taking the questions.
Just two relatively quick ones.Jeff, firstly, we talked about this
before but of the $100 million in investment spend that you guys
talked about thus far on the call, how much of that continues post
fiscal 2009? And then secondly, to the extend that you can will or
you want to comment on, can you give us a sense of quarterly
distribution or some sort of way that you're thinking about
quarterly distribution from the EPS perspective going forward? Jeff
Henderson - Cardinal Health, Inc. - CFO, EVP Thanks, Randall. Let
me answer the first question and then I will need some
clarification from you on the second one. With respect to the first
let me divide into two pieces. For CMP, the R&D investment, as
we said before, I view that as a permanent increase in the rate of
R&D spend required to continue to replenish the pipeline and
remain competitive. So I would say it's a permanent edition. And as
Dave said, the goal here is to get to 4% of sales this year and
then increase that towards the five or 6% so the bottomline is it's
a permanent add. With respect to HSCS, I would say there's going to
be a particularly bolus in this year and FY '10. There may be some
diminishing of that amount in years to go forward once we get some
of the major investments made. But I don't actually believe that's
going to go to zero. I think we will be continuing to invest into
IT really is the life blood of HSCS. So we will continue to make
sure that we spend an appropriate amount. So I would say it's
probably more of a bolus in this year and next. Can you repeat your
second question? Randall Stanicky - Goldman Sachs - Analyst Just
trying o get a sense if there's anything we should thinking about
in terms of quarterly distribution that is abnormal relative to the
distribution historically. I know you guys have talked about a
number of swing factors in that guidance and specifically that
$0.15 range. I think today you have probably better visibility
around some of the commodity prices tax rate. It sounds like,
George, you have a better sense of where generic Cardiolite is. So
as you think about the other swing factors that are left. I guess
what are the major swing factors and how do we think about EPS
distribution or is there anything that we should be thinking about?
Jeff Henderson - Cardinal Health, Inc. - CFO, EVP Let me repeat
some of the comments I made during my prepared remarks,
specifically as it relates to Q2. I do think Q2 will have a little
bit of pressure due to the CMP hospital buying patterns that Dave
alluded to. And also, there's some below the line activity going
on, particularly in the tax rate, where I indicated we expect it to
be relatively high in Q2 as well. And as we discussed before the
entire first half for HSCS will still suffer the effects of the
WAGs repricing that we did last year and the anti-diversion impact
as we crawl back out of that hole. So I think the first half of the
year we have consistently indicated that there will be some
pressure on our EPS and I think that holds and some of the unique
factors that I mentioned for Q2 as well. As we look to the second
half of the year, a couple things happening, we have said before
they were expect HSCS to get to profitable growth in the second
half of the year and we continue to stand by that. I think for CMP
we continue to be optimistic but cautiously so because of the
reasons that Dave cited and it's a little hard to have that much
visibility into Q3 and Q4 just given the uncertainty of the credit
markets. I would say those are some of the major factors.
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22. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Operator The next
question comes from the line of Larry Marsh from Barclays Capital.
Larry Marsh - Barclays Capital - Analyst Thanks and good morning.
Just a clarification around that and I appreciate the discussions
Jeff on the comments but CMP directionally is usually up a good bit
second quarter to first quarter. You did 167 in the first quarter.
Just broadly speaking, you are saying it's going to be flatter? You
think it's going to be flatter in the December quarter and you are
going to make that up in the second half or is that not what you're
saying? Jeff Henderson - Cardinal Health, Inc. - CFO, EVP No,
that's not what I'm saying. CMP will show good growth both versus
last year and versus Q1 in Q2. It might not be growth at the
overall rates we expected a full year because of some of the issues
that Dave mentioned but we still do expect to see good bottomline
growth. And we also expect to see the continued ramp up in the
second half of the year, as we typically do with CMP where they
generally have strong third and fourth quarter. I would say the
overall patterns for CMP generally looks as it has looked in the
past with some slight dampening from prior expectations in Q2.
Larry Marsh - Barclays Capital - Analyst You said FX below the line
10 million? Do you mean below the interest line or is that included
in interest and other? And as you think about it, it sounds like
you are saying you anticipate a decent reduction second half versus
first half on net interest expense? Is that just a pattern of your
cash flows or do you thinking that credit spreads will tighten or
both? Jeff Henderson - Cardinal Health, Inc. - CFO, EVP First of
all, the 9 million or $10 million or so that I mentioned that below
the line, actually I meant that to be in interest and other. I
meant below the operating line. In terms of the rest of the year,
we do expect that Q1 and Q2 will be the heaviest in terms of net
interest expense for the year. We will see some lightning of that
as the year progresses and that's due in part to the factor that
we'll have higher cash balances as we build up operating cash flow
in the course of the year and the fact that we don't have any major
plans for that cash at this point. Larry Marsh - Barclays Capital -
Analyst Okay. And a quick question for George. Your largest
customer you talked about is up for renewal in fiscal, middle of
calendar '09, CVS. Is there any updated timing, do we still
anticipate that to be announced close to June of '09? Do you still
anticipate pricing that you already have is about in line and is
there any difference in how you're thinking about it given now that
Longs is in the mix and their commitment there?
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23. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call George Barrett -
Cardinal Health, Inc. - CEO Healthcare Supply Chain Services I
probably would say we don't have any update nor really change in
expectations. We again expect a renewal as we come towards the
summer and again, I think, we continue to feel that as a newer
contract it is a tighter fit to market conditions. So we remain
hopeful that it's going to be a relatively smooth transition but
nothing really knew to update. Larry Marsh - Barclays Capital -
Analyst Okay. Very good. Thanks. Operator The next question comes
from the line of Eric Coldwell from Robert W Baird. Eric Coldwell -
Robert W. Baird - Analyst Thanks. Good morning. Typically
distributors at least historically have built inventory in the
December quarter for a number of reasons. In front of the holidays,
safety stocks with the weather, pricing inflation opportunities,
what have you. At the same time, we have in an environment where
customers might be a little more willing to let inventories decline
and not work a little closer to a just in time model given the
spike in interest rates and the credit crisis. I'm just curious
whether you see any -- maybe Jeff if you can answer this -- if you
see any potential in the quarter where perhaps your inventory days
on hand would jump and we might see cash flow delayed until the
March quarter or any themes on that front would be helpful? Jeff
Henderson - Cardinal Health, Inc. - CFO, EVP Eric, a good question
but at this point we really don't see any significant trends that
would indicate that our inventory patterns in the December quarter
will be much different that what we've seen in the past. So I
wouldn't expect a major change there in terms of days of inventory,
et cetera. Eric Coldwell - Robert W. Baird - Analyst And as a
follow on, you've shown some continued improvement year on year in
your days on hands specifically that's been the theme across the
board .Do you still target showing a few days of additional
improvement over time? Is that still something that's on the
horizon for you? Jeff Henderson - Cardinal Health, Inc. - CFO, EVP
Yes. What we've said in the past is we are not going to see the
huge improvements that we saw back over the last three years where
we were making a transition from the buy and hold model to fee for
service. That all said, we still do see opportunities to take a day
or two out of inventory each year. Really just do the hard work of
operational excellence and getting much better about demands
calibration and minimizing the amount that we need to carry. So,
yes. I do think a day or two a year is a reasonable objective and
one that we are very much driving for in our distribution center.
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24. FINAL TRANSCRIPT Oct. 29. 2008 / 8:30AM, CAH - Q1 2009
Cardinal Health, Inc. Earnings Conference Call Sally Curley -
Cardinal Health, Inc. - SVP of IR Operator, I think we've run over
time. I am going to ask that we actually conclude the call and turn
the call back over to Mr. Kerry Clark for some concluding comments.
And then, we are happy to take any comments or questions from folks
a little bit later. Kerry Clark - Cardinal Health, Inc. - Chairman,
CEO Thanks everybody for being with us today. We look forward to
seeing you at investor meetings in November and December and as
Sally said, if any questions, please feel free to given the
Cardinal Health Investor Relations team a call. Operator, that
concludes our call. Thanks again, everybody. Operator Thank you,
ladies and gentlemen. And thank you for your participation in
today's conference. This concludes the presentation and you may now
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