Cardinal Health Inc CAH
Q1 2011 Earnings Call Transcript
Transcript Call Date 10/28/2010

Operator: Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Cardinal Health Incorporated Earnings Conference Call. My name is Janeda, and I will be your operator for today. (Operator Instructions). As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the conference over to your host for today, Mr. John Frank, Director of Investor Relations. Please proceed.

John Frank - Director, IR: Thank you, Janeda, and welcome to Cardinal Health's first quarter fiscal 2011 conference call. Sally couldn't be with us today due to a death in her family, which is why I'm providing the introduction to today's call.

Today, we will be looking at 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 and the forward-looking statement slide at the beginning of the presentation found on the Investor page of our website for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about non-GAAP financial measures is included at the end of the slides.

Before I turn the call over to Chairman and CEO, George Barrett, I would like to remind you of few upcoming investment conferences and events in which we will be participating and webcasting. Notably, the Annual Meeting of Cardinal Health shareholders on November 3 at the Cardinal Health headquarters in Dublin, Ohio; 2010 Credit Suisse Healthcare Conference on November 10 at the Arizona Biltmore in Phoenix; Lazzard Healthcare Conference on November 16 at the St. Regis Hotel in New York; Cardinal Health Investor Day and Analyst Day on December 7 at the Hudson Theatre in New York. The details of these events are or will be posted on the Investor Relations Events section of our website at So please make sure to visit the site often for updated information. We look forward to seeing you at the upcoming events.

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

George S. Barrett - Chairman and CEO: Thanks, John, and our thoughts go out to Sally and her family during this difficult time.

Good morning, everyone, and thank you for joining us on our first quarter call. Our fiscal 2011, or Q1 fiscal 2011, is up to a very good start. We reported revenues for the first quarter of $24.4 billion and a non-GAAP EPS number of $0.64, up 19% over the prior year period.

While we had a slight decline in overall revenues on a year-over-year basis, we generated a healthy expansion in gross margins and held SG&A essentially flat to the prior year. Our strong operating performance in the quarter was driven by excellent results in our Pharmaceutical Segment, offsetting an expected difficult year-over-year comparison in our Medical Segment.

Overall, we continued our momentum coming out of fiscal 2010, strengthening the core of our business so we've a strong foundation from which to grow, with particular emphasis on margin expansion, disciplined management of working capital, growing generics at an accelerated rate and enhancing the customer experience.

Our customer work is beginning to produce results as we look at our record of contract wins and renewals in the Medical Segment and a continued strength with our retail independent customer base. We have a very strong balance sheet and continue to manage it carefully.

During the quarter, we demonstrated our commitment to a balanced capital deployment strategy. We increased our quarterly dividend payment, we completed the acquisition of Healthcare Solutions, and we repurchased $250 million in shares.

Our operating initiatives are on track, and we continue our progress in positioning our company to deliver sustained growth.

Now let me provide some additional color on each segment separately. Performance in our Pharmaceutical Segment, and in particular, our Pharma Distribution business, really drove the Company's overall operating performance in the quarter. Segment sales were down 1% versus the prior year period due to a drop in sales to existing bulk customers and the impact from the previously disclosed loss of two large-revenue customers last year.

We will begin to lap those losses in the second half of fiscal 2011. Despite the slight decline in revenue, segment profit was outstanding, up 42% versus the first quarter of last year and our segment profit rate increased by a robust 41 basis points.

Our improved profitability was driven primarily by outstanding performance in our Generics business, various initiatives focused on improving margins and solid performance in our branded manufacturer agreements. We continue to build our capabilities and services to support our branded pharma partners. As a result, these relationships are strong.

As I mentioned, we had an excellent performance across our generic activities, both on the sales and sourcing side. Let me take a moment to provide a little more color on our progress in these areas.

Our Generic penetration continues to be a focus, and the team is executing exceptionally well in our SOURCE program across our retail independent customers and with our retail buying groups. The SOURCE program is our most comprehensive Generics offering and includes nearly 4,000 Generic drugs that make up essentially all other retail pharmacies' product needs.

SOURCE revenues was up a robust 34% in the quarter versus the first quarter of last year. We've improved our execution on generic launches and have continued to enlist customers in our First Script auto shipment program. Success with these generic programs is resulting in value for our customers, for our suppliers and for us.

We also continue to make progress in our efforts to rebalance our business mix. Growth in our Retail Independent business continues to track ahead of the market, reflecting the emphasis we've placed in this channel in the past 18 months. Our churn rate at the end of the first quarter, which captures both controllable and non-controllable account losses, was the lowest it's been since we began measuring churn many years ago.

Turning to Nuclear. The raw material shortages we experienced through most of last year did resolve in the first quarter, and supply began to return to more normal levels after a long and difficult period of time.

Both the Chalk River reactor in Canada and the Petten reactor in the Netherlands were at full production by late September. Demand has not yet returned to pre-shortage levels, but we do expect to see this build over time. We have plans in place to help facilitate this ship with our customers in the coming months. In many ways, our relationship with our customers strengthened during the material shortages as we worked closely with them to ensure that the needs of the most critical patients were met first.

We continued to expand our position in molecular imaging. In our positron emission tomography, or PET unit, we are now working on clinical trials for 17 new compounds. We've made excellent progress in the three quarters since we launched this initiative, and we are well positioned to support this PET bio tracers through post commercialization. We will plan to give you a more complete view of our nuclear strategy at our Analyst Day in December.

We've made substantial progress on launching our new specialty division called Cardinal Health Specialty Solutions, which brings together all of our specialty capabilities within the Pharma Segment, including specialty distribution, third-party logistics and cold-chain management, drug development consulting and program management, regulatory and compliance services, risk mitigation strategies, medical billing and claims processing, sourcing and purchasing services and clinical pathways and treatment protocols.

We achieved an important milestone this quarter closing on the acquisition of Healthcare Solutions, or P4, as it is known in the oncology community. Our P4 integration is on schedule, and as indicated previously, we expect it to be substantially complete by the end of the next quarter.

We are building a world-class management team in our new specialty division, in addition to retaining the leadership of P4, including founders – Raj Mantena and Dr. Jeffrey Scott. We've attracted a great leader to run the overall Cardinal Health Specialty Solutions division.

Meghan FitzGerald, our new President, has extensive healthcare industry experience focusing on specialty products. Her background includes senior roles in corporate development, strategy and international operations with companies including Medco, Pfizer and Merck. Also joining us is Dr. Bruce Feinberg. Most recently, Bruce was President and CEO of Georgia Cancer Specialists, a Top 10 private cancer practice and leader in advanced cancer treatment and research.

The work we've done over the past months to build out our specialty physical infrastructure is largely complete. We've also been working close with all stakeholders to solidify our partnerships and introduce Cardinal Health expanded specialty capabilities. Our value proposition connects patients, physicians, payors and pharmaceutical manufactures with the goal to improve access to efficient high quality care.

A key component of our value proposition is P4 pathways, which brings together payors and practices. We believe this capability, in conjunction with the pharmacy management core competency we have within our Pharmacy Solutions unit, will give us a competitive advantage.

The timing is right for this important focus on integrated care. We continue to be very excited about our specialty strategy and our P4 acquisition, and we plan to show more details on our model in progress at our Analyst and Investor Day in December.

Now let me discuss our Medical segment. The quarter came in about as expected. Segment sales were down 3% and segment profit was down 28% versus the prior year. Given the unusual comparisons in the quarter, I'll let Jeff walk you through the details, but let me give you an overall perspective on our progress.

We completed the rollout of our segment strategy around channel and category management during the quarter. This was an important change management staff to align the entire segment around the common goals for our customers and leverage our own strengths.

We continue to build out our preferred product portfolio and feel very good about our expanded global sourcing capabilities and our presence in Asia to drive this strategy. Our medical transformation initiative continues to progress and has moved into the build and test phase for the distribution solution. Our Ambulatory business, where we have made investments to grow our footprint, grew well ahead of the market. The cross-selling effort with the Pharma Segment continues to pick up speed.

I'd like to take just a moment to give you my observations on the demand side in our medical markets. Demand in the first quarter of fiscal 2011 was very similar to demand in the fourth quarter fiscal 2010. We have continued to see some sluggishness in elective procedures and doctor visits, both of which have an impact on the demand for our products and some of our medical businesses.

Having said this, I've spent a fair amount of time in recent weeks in the field, speaking to hospital executives. I'm guardedly optimistic that procedural volumes will gradually recover. Granted, this is by no means a scientific example. We'll be following the situation closely and we'll provide updates during our scheduled calls. We are taking a cautious approach and will continue to model a relatively soft market until we see these anecdotal observations begin to show up in the data.

Our recent account wins are giving us greater confidence that the actions we've taken over the last year to enhance the value we deliver to our customer are bearing fruit, and validate our channel and category strategy as well as our ability to execute.

We recently won a major multi-year product agreement with HPG, a group purchasing organization that supports nearly 1,400 acute care facilities.

In addition to a number of recent renewals and new account wins, we signed large multiyear contracts with Baylor Health Care System and another renowned academic medical center that draws on the depth and breadth of our supply chain offerings across our medical businesses. We are competing effectively in the Medical segment. We are positioned well and we will continue to invest where we see opportunities for growth.

In summary, we're continuing the momentum we felt during the course of fiscal 2010. This was a strong quarter and a very good start to fiscal 2011 and I'm confident in our strategy and in our ability to perform. 15 reporting weeks into the year, there's plenty of games still to be played. Based on our performance in the first quarter and our progress on key initiatives in both segments, we've become more confident in achieving the higher end of the guidance range we provided in August.

Now, let me hand the call over to Jeff to provide more financial details.

Jeff Henderson - CFO: Good morning, everyone, and thanks for joining our call today. Like George, I am very pleased with the results of the quarter and the momentum we have carried over from fiscal 2010. Q1 is an excellent start to our year. Let me add to George's remarks by expanding on some financial trends and drivers in the first quarter. I'll also provide some color to the full fiscal year outlook, including some of our key expectations from a corporate and segment standpoint.

Let's start with the consolidated results for the first quarter summarized on Slide 4. Despite a slight revenue decline, we delivered 6% gross margin growth, and with the benefit of relatively flat expenses, leveraged that into 15% non-GAAP operating earnings growth.

Non-GAAP operating expenses were up less than 1% as expense efficiencies largely offset the business expenses added to the net impact of acquisitions and divestitures. The non-GAAP tax rate was 37.1%, largely in line with our expectations for the full year, but above last year's rate of 35.4%.

We benefited from the $450 million in share repurchases we have executed over the past two quarters, including $250 million in Q1, resulting in a significant reduction in share count to just under 352 million diluted shares outstanding.

Importantly, we continue to make real progress on our two key financial metrics; margin expansion and net working capital optimization. At the consolidated level, the gross margin rate increased to 3.94%, which is an improvement of 27 basis points versus Q1 of FY '10 and 24 basis points sequentially versus Q4, driven by gains in our Pharmaceutical Segment. The non-GAAP operating margin rate improved 22 basis points versus last year's Q1 to 1.52%.

We also saw further improvement in our net working capital days. Although inventory days did not come down this quarter, we reduced our day sales outstanding and realized a marked improvement in days payable, driven by changes in one of our large vendor agreements. We continue to build on our lean operational excellence initiatives to optimize working capital levels in fiscal '11 with a goal of sustaining and improving upon the gains achieved last year.

To summarize, we are making great progress with our performance initiatives and it's beginning to consistently show in our key metrics. Although we'll always see some quarterly fluctuations in margin rate trends and working capital levels, due to the nature of our business and external factors, we feel we have the actions in place to continue to move these in the right direction.

Let me now provide a few other comments on segment performance in Q1, referring primarily to Slide 5 and 6, and starting with the Pharma Segment. Revenue in the segment declined 1%. This primarily reflects three major items. First, bulk sales for existing customers were down, driven by changes in ordering patterns in some of our large bulk customers, including the year-on-year impact of some large Tamiflu orders which occurred in fiscal '10.

Second, as disclosed previously, we continue to feel the impact of ending our relationship with two large revenue customers in the mail order and grocery chain pharmacy segments, which dampened sales growth by approximately 1.2 percentage points in Q1. We will begin to lap these revenue losses by mid fiscal 2011.

Third, we also had a dilutive effect on revenue mix from the conversion of certain brands to generics.

In addition to driving down overall sales, these three items had a disproportionate impact on sales to bulk customers, which were down 8% for the quarter. However, I'm pleased to report that sales to non-bulk customers were up 6% for the period.

Within this customer category, revenues from retail independents grew 3%, continuing to grow at a rate above the market in this important class of trade. Our overall generics revenue growth was nearly 20%, driven by an impressive 34% growth in our generics preferred SOURCE program.

The Pharma Segment profit margin rate increased by 41 basis points compared to prior year's Q1. In addition to the continued success of our generic sales and sourcing programs, we also saw more than expected benefit from new item generic launches during the quarter. Solid performance under our branded manufacturing agreements and brand inflation from our remaining price contingent vendors were also positive drivers.

Please keep in mind that we benefited year-on-year from the impact of certain large pharma vendors, which transitioned to DFA agreements. Finally, I should point out that we had a change in estimated reserves related to DFA fees receivable from certain manufacturers, which contributed $9 million for the quarter.

We realized margin expansion in both our bulk and non-bulk customer segments. For the quarter, the bulk segment profit margin rate was 37 basis points and our non-bulk rate was 2.17%. Both of these rates are significantly above last year's first quarter rates and the annual average for fiscal 2010. A reminder that we are not planning to provide a detailed bulk, non-bulk margin quarterly breakdown in our 10-Qs going forward, but we do want to make you aware of our fairly significant changing trend during this call. Bottom line, the segment had exceptional performance throughout and drove an increase in segment profit of 42% to $296 million.

Now, turning to our Medical Segment. As George mentioned, the first quarter had a bit of noise around it, but overall, we're pleased with where the business is heading. Revenue for the segment declined by 3% to $2.17 billion, primarily as a result of our prior year revenue recognition event that was triggered by the spin-off of CareFusion in the amount of $51 million as well as a tough compare against an early and strong flu season in the first half of fiscal 2010, worth $28 million in the quarter. Excluding these two unique events, the segment would have experienced positive revenue growth. Importantly, our ambulatory business grew at a rate of over 5%, which is significantly above market over the same time period.

Medical Segment profit declined 28% to $83 million, mainly due to the combined effect of last year's unique items; namely, the CareFusion revenue recognition issue, which was worth about $14 million of profit and a flu impact of approximately $5 million. Increasing commodity prices also created a year-on-year headwind in our current period cost of goods sold of about $15 million. All told, these items totaled reduction in segment profit growth of 30 percentage points. Net-net, despite the current short-term sluggishness we are seeing in the procedure market, our Medical business is gaining momentum and we are continuing to invest in systems and strategy to drive longer term growth and margin expansion.

Now let me turn to Slide 7 and take a moment to walk you through the items that accounted for the difference in our GAAP to non-GAAP EPS numbers. All these figures that I'll review are on an after-tax basis.

The biggest item in this category is a $75 million gain from the sale of 30.5 million shares of CareFusion stock in the quarter. This generated proceeds of $706 million and accounted for approximately $0.21 of GAAP EPS. Please note that there is no tax impact associated with the sale due to the release of our previously established deferred tax valuation allowance. The sale of these shares completes the liquidation of our CareFusion stake. The remaining items on this page, such as restructuring and severance, acquisition-related costs and other spin-off costs, netted to approximately $0.01 reduction. The net of all these items result in a GAAP EPS of $0.84 versus non-GAAP of $0.64.

Let's briefly shift our discussion to the balance sheet. Several significant items which impacted it are listed on Slide 8. We ended the quarter with $2.7 billion in cash of which about $313 million is held overseas. We maintained a strong liquidity position in spite of over $750 million in total outflows related to share repurchases and our acquisition of Healthcare Solutions. Our cash position was bolstered by the sale of our remaining CareFusion stake and $217 million in operating cash flow.

One item of note. As you compare this year's operating cash flow to last year's figure, keep in mind that we had $144 million of benefit in last year's number related to CareFusion ongoing operations for the two months that it was still part of Cardinal Health.

Now to answer a question that I suspect is on many of your minds. Let me reiterate our position regarding our capital deployment. Our first priorities are to maintain our differentiated dividend and ensure we are investing appropriately in our organic capital expenditures. In the latter regard, we expect to invest in the range of $260 million this year, about the same as last, but the majority of that in IT-related processes and systems. Beyond that, we don't have a fixed formula. Our goal is to ensure that we are positioning for sustainable competitive advantage and to create shareholder value. Towards those ends, we will continue to evaluate both acquisitions in select and strategic areas and share repurchases. We don't envision the paydown of our existing long-term debt balance in our current plans.

Now let's turn our discussion to fiscal '11 guidance. As George mentioned, we do only have one quarter behind us at this point, so there's still plenty of year left. However, given our performance and our progress on key initiatives, we've become more confident in achieving the higher end of our previously announced non-GAAP EPS guidance range of $2.38 to $2.48. Our overall revenue guidance remains unchanged at low single-digit growth despite a slightly more cautious view of med/surg market volumes.

Slide 10 outlines some of our key corporate expectations for the year. Let me focus on the items in red, which represent changes from our previous assumptions shared in our August call. Our diluted weighted average shares outstanding are now projected to be approximately $352 million, reflecting the timing and per share acquisition cost of the $250 million of repurchases that were completed in Q1. Interest expense and other should be $110 million or so. Our Q1 number is abnormally low due to the impact of interest rate swaps, FX and deferred compensation gains realized in the quarter.

Now I'll spend a few minutes going through some of the segment specific assumptions in more detail, starting with a few items related to the Pharma business on Slide 11. Given a relatively strong start to the year from a generic launch standpoint, we now expect a neutral to slightly positive earnings effect from generic launches versus fiscal '10. Within nuclear pharmacy, the resumption of normal supply was consistent with our original expectations. We expected to be relatively stable for the remainder of the year. The integration of our Healthcare Solutions acquisition is on track and we continue to expect it to have a neutral to slightly accretive EPS impact on fiscal 2011.

Finally, turning to Slide 12 in the Medical Segment. As George mentioned we're now being slightly more cautious on our volume outlook for the year, which is reflected in our flat market growth expectation.

The rest of our assumptions remained pretty much intact. Commodity prices had remained largely in line with our original projections as oil prices have stayed in a fairly tight range around $8 per barrel level that we budgeted for. We continue to focus resources and investment on the Medical Transformation project, which remains on track for the majority of implementation to occur in fiscal 2012.

With that let me turn over to operator to begin the Q&A session. Operator?

Transcript Call Date 10/28/2010

Operator: Tom Gallucci, Lazard Capital.

Thomas Gallucci - Lazard Capital: Two questions, I guess one, you said med/surg was in line with your expectations, to the extent the drug side was better than you were expecting. Can you pinpoint some of the areas that exceeded? Then, Jeff, just following up on your comments towards the end there in terms of uses of cash, can you maybe comment on the acquisition landscape at this point both in terms of availability and activity out there?

George S. Barrett - Chairman and CEO: I'll start and then I'll turn it over to Jeff. On the pharmaceutical side, I'm not sure that demand was altogether different than we modeled, so from that standpoint, that's sort of net no change. I like largely differences were in execution against some key initiatives. There were a few generic launches by the way that, as you know, we risk adjust our models for generic launch and so there were a few that were not fully valued in our modeling, so that's always a positive for us. We're executing very well on generics literally pretty much of 100% any generic launches is next day out. Our penetration rates are high. We continue to expand our business in the Retail Independent Segment. So, generally speaking, it was about mix, it is about execution against initiatives. But all told I would say the performance of the unit was really strong and Mike and his team did a great job.

Thomas Gallucci - Lazard Capital: Was inflation better than expected or any fee-for-service triggers?

George S. Barrett - Chairman and CEO: I would say the inflation is largely as we modeled it for the beginning of the year.

Jeff Henderson - CFO: Tom, the other thing I would add to the inflation comment is, there was one vendor that pulled the trigger on a price increase in Q1 that we had originally expected in Q3 and that was probably worth about $10 million of profit that was an bit of a pull ahead from later in the year, but other than that I would say brand inflation was pretty much on spot with what we expected.

Thomas Gallucci - Lazard Capital: And then just the acquisition environment?

Jeff Henderson - CFO: I think that's a tough one to comment on Tom. I think we've been pretty clear in the past regarding the strategic areas that we continued to look for attractive opportunities. It's probably tough to comment on the overall landscape.

Operator: Glen Santangelo, Credit Suisse.

Glen Santangelo - Credit Suisse: George, just a couple of quick questions. Just to kind of follow-up on the generic questions. Obviously, you had big growth in the quarter. Did all that growth come just from the launches or was there some increase in wallet share with your customer base?

George S. Barrett - Chairman and CEO: No, actually some of it came from launches, which we're delighted to have. Actually, we really had excellent performance across all the dimensions, so that is both how we execute on new launches, it has to do with our share of wallet and whether or not we continue to make progress there which we do. It has to do with the expansion of our business into the community pharmacy which tend to be buyers of generic and our sourcing models, as you know, have been strengthened over the past year. So I would say, across the board, on generic, we're executing better. It's probably worth also mentioning that part of the model on generic is always, is about how do you model deflation. That can be both the base of – as you know, 3,000 to 4,000 products but also individual key products. I would say on some of the key products, there were slightly less deflation than we modeled and that was beneficial to us as well.

Glen Santangelo - Credit Suisse: So that was going to be my follow-up question, so your comments in the press release regarding price inflation were specifically tailored to branded price increases, but what you're saying is there is less generic deflation than what you've modeled so...

George S. Barrett - Chairman and CEO: Yes, that's fair, although I'd be cautious about what that means actually so imagine the line of 4,000 products. It's not necessarily that the whole 4,000 basket looks like it shifted trajectory. What typically happens is there maybe 5 to 15 products that are in a more volatile stage and so you have to try to model the deflation of those key products, and if those are a little bit less striking deflation than that's beneficial to us. To great extent that's what happened.

Glen Santangelo - Credit Suisse: Maybe if I could just add one other quick follow-up on the Medical side. Clearly, you're struggling there a little bit and I just want to understand the competitive environment there with Owens & Minor, because there is a lot of big GPO contracts up for renewal. Do you see that as an opportunity to kind of reinvigorate top line growth or is that not the right way to look at it?

George S. Barrett - Chairman and CEO: First, Glen, we're not struggling at all. Actually, our business is performing really well. I think the dynamic we're dealing with, there are two parts. One is sort of mechanical year-over-year comp that Jeff articulated and the other is just what's happening in the demand side in the market. I'm very pleased with the way we're competing. We've got strong competitors and we respect them, but I feel very good about the way our team is positioned. Our net wins/losses looks good. We've got momentum. So I'm feeling actually quite good about where we are from a competitive landscape standpoint. In terms of GPOs, this is sort of a constant replenishment. I think we've got two GPO contract that comes due, one of the majors is August, one of the next major is the following December. This is fairly routine, Glen, so I would not point to anything particularly noteworthy here.

Operator: Ricky Goldwasser, Morgan Stanley.

Claire Diesen - Morgan Stanley: This is Claire Diesen filling in for Ricky. On the topic of generics, as you look ahead to calendar year '11, do you think the momentum you are seeing in your SOURCE program can offset the softer generic launch pipeline?

George S. Barrett - Chairman and CEO: First of all, we are pleased at this point to have this momentum. We're moving in the right direction along all dimensions. There has been a lot of discussion about the evolution of this wave in generics. There is no question that we're at the beginning of wave. I have a couple of times alerted people that the nature of that wave is sometimes different that it appears, and because of the reality of Paragraph IVs and litigation, it tends to be a little bit different than the charts modeling. So what typically happens is that the highs look a little less high, the peaks look less high and the valleys tend to be a little less dramatic that we've seen. History tells us that we've seen that phenomenon consistently. Having said this, I think we still would argue that we are at the early stages of a wave. We hope to benefit and expect to benefit from that and to compete very effectively, but we also know that we've built a balanced business model with multiple growth drivers. We have an emerging specialty business. We've got opportunities in nuclear and molecular imaging, and really significant opportunities throughout the businesses in our Medical Segment. So, all told, we will be very happy to do our part in supplying the system with generics as we move forward. We do that with momentum, but we also know we've got growth drivers that will help balance the business model as we see the ups and downs in generic.

Claire Diesen - Morgan Stanley: Are you factoring into guidance that the vendor that had the price increase in the first quarter will have an additional increase in the third quarter?

George S. Barrett - Chairman and CEO: We have assumed that that was once a year price increase that was a pull ahead from Q3 to Q1.

Operator: Robert Jones, Goldman Sachs.

Robert Jones - Goldman Sachs: I just want to follow-up on the generic question. Obviously, you saw some strength there, both on overall generics with the 19% growth, and then from the SOURCE program. You touched on this a little bit, but I was wondering if you could just give a little bit more clarity between the drivers there, you know, if we think about new customers and maybe compare it to new launches, and then your comments around pricing, maybe just order of magnitude even around what really drove that strength this quarter, it would be helpful.

George S. Barrett - Chairman and CEO: I probably will not completely disaggregate these numbers for certain reasons. We try to be careful about giving specific product detail, but I'll give just some general directions. I think probably what's happened with our program is – you know that we've been focusing heavily on driving compliance, on rebuilding our programs to create a more simple and flexible program that meets the unique needs of each of the customer, we've done that. That is helping us penetrate each customer more effectively. We're getting more of their share of wallet, and that is certainly benefiting us. New products are always part of the mix, Robert. During this period I think we had EFFEXOR and LOVENOX both launched during this period. So those were beneficial to us, but largely we've done the work of expanding into new markets, into hospitals and clinics. We've expanded our share of wallet with our customer. We've reorganized our selling organization. We've put all of our folks through our retail sales college. They've had special training on selling generics. We've altered our incentive programs. So we're not just rewarding growth or sales, but also rewarding compliance. So I think we've done the heavy lifting to just make it a more robust program all around.

Robert Jones - Goldman Sachs: It sounds like more internally driven than external factors on that. Moving over to the Medical business, I just wanted to ask a quick question on flu. Understanding that obviously it's a tough comp versus last year, can you talk a little bit about what the flu expectations are for this year, and more specifically, have you seen any flu-related sales come in ahead of what you were anticipating internally?

Jeff Henderson - CFO: I would say we're expecting a fairly typical flu season, which means it starts to ramp up towards the end of Q2 and peaks in Q3. We really haven't seen any strong demand to-date. I know some companies are seeing some vaccine demand, but in terms of the product that drive most of the profit for us, which tend to be in the lab or med/surg base. We aren't seeing any meaningful demand at this point and if anything because of a build-up last year particularly in Canada, there was a pretty significant build-up given the fears of pandemic last year, if anything our orders have dried up because people are still working away through inventory from last year.

Operator: Lisa Gill, JPMorgan.

Lisa Gill - JPMorgan: Jeff, as we think about the first quarter, you beat the Street by $0.11. Were there any things that happened in the first quarter that you pulled through from quarters going forward? I understand that it is the first quarter and you are apprehensive to maybe raise guidance at this point, but can you maybe just help us to understand how we should be thinking about the progression from here? Then secondly, George, I can't let you off the hook, you're sitting on $2.7 billion of cash. Can you help investors understand what you think you're going to do with that cash over time?

Jeff Henderson - CFO: First of all, I'll echo what George said that we're only a quarter into the year, so it's probably a little bit premature to making dramatic changes for the full year. But in terms of items in the first quarter which maybe more or one-timeish in nature. First of all, there were probably $0.04 of one-time type items in the first quarter, non-operating items. For example, we had that accounting estimate change within Pharma related to the recognition of the DSA fees that was worth about $0.02 and that was a very unique item that won't replicate itself again. Secondly within interest and other, we had about $0.02 of benefit from interest rates swap income and deferred compensation gains and again, we don't forecast those happening in future quarters, so you could say that's another $0.02 of somewhat unique items. I referenced earlier that contingent price increase that we had in Q1 which was a pull ahead from Q3 and that's another $0.02. So I would say those are the three unique items that I would point out. As we go forward in the year, I don't want to get into specific quarterly guidance, but clearly this was a unusual year or usual quarter for Medical. There were just a lot of year-on-year headwinds that we had overcome, so I would say it was an extraordinary negative growth rate for Medical which we don't anticipate repeating for the rest of the year. So as we look forward to the rest of the year, I'll repeat what we said earlier, that we're continuing to be relatively cautious about overall demand, particularly procedural demand within med/surg. Hopefully, it does better than we're expecting, but I think it is pointed probably prudent to be appropriately conservative on that and we continue to risk adjust our generic launches. We had some good launches in Q1 including a couple that weren't expected but as we know, as we look forward, we generally risk adjust all the uncertain launches and we continue to do that for the rest of this year and we could be possibly surprised but I think risk adjustment in this as a methodology has service well and we'll continue to do that.

Lisa Gill - JPMorgan: George, any thought on sitting on all this cash?

George S. Barrett - Chairman and CEO: Yes, Lisa, I know that you will never let me off the hook, but I'll probably disappoint you with this answer which is again, you know that we've said repeatedly that it's really for us a balancing act and we're thrilled that the balance sheet is strong. We have to continue to generate cash in a very positive way. We have stake in the ground with the dividend and our commitment to our internal growth. Beyond that, it's really about looking for opportunities to create value for all of our shareholders and we'll certainly continue to look at ways to reposition. If there is the right opportunity to do that, that we think can create for us the competitive advantage and opportunity to generate value of for our shareholders, we'll pursue those opportunities, but we'll also have to look opportunistically at where we are in cash position and as Jeff said, to the extent that we're not seeing the right opportunity at the right price with the right strategic interest then we're not interested in trapping cash and to the extent that we want to do something different with the repurchase, then certainly we'll consider that.

Operator: John Kreger, William Blair.

John Kreger - William Blair: George, could you maybe elaborate a bit more on your key next steps with building your specialty business into a larger presence? Should we be thinking more about expanding beyond oncology or perhaps pushing more aggressively the cross-sell between distribution and the key P4 strengths? Just where are you going to head next?

George S. Barrett - Chairman and CEO: Well, that's a little bit of all the above. We, certainly, would like to grow better our specialty distribution business. We're at the very early stage at literally just landing our first customer. So we'd like to be able to take advantage of the strength of Cardinal's overall business and tie it to the work that we're doing in specialty and certainly distribution is one thing we'd like to see grow. Beyond that, we're really working right now across the spectrum. A lot of work with the providers and some unique opportunities with payors working on the Pathways program between the physicians and the providers. So I would say the first task will be driving our oncology physicians. Not a horizontal move, John. I would say first its more vertical, driving the strength there, trying to create value across our specialty businesses. We have a lot of assets and tools to deploy here. Then, next stage will be a more broad look as we move horizontally into some other therapeutic group.

John Kreger - William Blair: Maybe just elaborate, if you are willing, slightly on that comment earlier that as you reach out and talk to some of your clients, there's at least some reason for cautious optimism about procedure volumes. Can you elaborate on where you are seeing some signs of hope?

George S. Barrett - Chairman and CEO: It's interesting, and that's why, again, I'll describe this as anecdotal, not very scientific. I've talked to a number of executive who are identifying what they see as late year increase in procedures in their institution. The dilemma is that I can talk with other folks who are not seeing it, and so it tends to be spotty. To some extent it may be regional, and to some extent it's a – you'd find some diverging views among the major IDMs versus the smaller hospital and hospital systems. So it's early to declare any upswing, but I've certainly had a few conversations that are encouraging, but again, in terms of their balance, there are still plenty who are not yet seeing that. I think what we need to do is to stay very, very close to it and make sure that we're there to support however this market turns. We'll keep updating you as we meet on these regular calls.

Operator: Steven Valiquette, UBS.

Steven Valiquette - UBS: A couple of questions here. First, do you think you are increasing your market share within the independent retailer customer segment or is that relatively unchanged over the past six months or so? Just trying to get a feel for that.

George S. Barrett - Chairman and CEO: I think the data would suggest we are, if you look at our growth rate versus the rate of the market. Again, this is a very difficult answer. As you probably know, independent retail is a large group of customers. There is a fair amount of natural churn in this. So I'm always reluctant to give a clear, validated market share comment because I'm not sure that I can validate it. What I can say is our growth rate is exceeding the overall rate of growth of the market.

Steven Valiquette - UBS: Next question here, I guess not to make you say any numbers or anything, but maybe just to use a baseball analogy, what inning do you think we're in right now in terms of – you've talked about increasing your generic compliance rates within your existing customer base, would you say there's still a lot of runway ahead of you in relation to that or are we halfway through what you think you can do there? Just trying to get a sense for how far you've come along…

George S. Barrett - Chairman and CEO: We've made a lot of progress there, Steve. I will say that we set out some targets and goals for fiscal 2011 that were quite similar to last year's growth rate. So we are still hoping and expecting that will continue to improve. I think right now we are on track to do that. So there is some runway left.

Operator: Robert Willoughby, Bank of America.

Robert Willoughby - Bank of America: George, for the Medical business, one of my favorites, as you know, you saw the CareFusion relationship with Owens & Minor. I thought that was an interesting development, particularly given your guys relationship with CareFusion so long. Are you guys leaving money on the table here, not really offering the same third-party logistics service to those…

George S. Barrett - Chairman and CEO: Bob, let me start by saying we actually had a significant third-party logistics business, which is a very important piece here. Just a very quick perspective, and I won't say too much, this is a relatively small piece of business in the overall mix. As I mentioned, we have a strong, existing 3PL business capability and infrastructure to support it. We were not looking to build the platform, we didn't need to do that. This opportunity may have had more value to others than it did for us. So we're in that business, we're pleased to have it, it's a necessary part of the offering that we provide, and I guess that's the perspective I'll give here.

Robert Willoughby - Bank of America: Why isn't it inevitable that all manufacturers would go down this path, put the costs on you to manage the function entirely going forward, getting them out of the distribution business all together? Do you see that as a meaningful trend?

George S. Barrett - Chairman and CEO: I think that the complexity of an institution receiving thousands of deliveries a day is incomprehensible. You literally could imagine an institution shutting down, spending all of its day doing receiving and management of incoming inventory. We think it's very, very necessary to have an efficient bridge between the manufacturing community and the provider. We are incredibly efficient at doing that. We believe our relationships with our manufacturing partners are very, very strong. It's not unusual in the medical surgical business for companies to have different components to their business, part of which they sell more directly and part that needs to run through a very efficient distribution channel. We're feeling very good about our ability to do it well and we feel good about our relationships with our suppliers.

Operator: Helene Wolk, Sanford Bernstein.

Helene Wolk - Sanford Bernstein: A quick question on nuclear. You mentioned that your expectations for the balance of the year are supplies returning to normal, but you spoke a little bit about the demand profile. Can you give us a sense both of what you are expecting in terms of whether demand returns to normal and/or what initiatives are underway to address that?

George S. Barrett - Chairman and CEO: I would say at this point the supply looks like it is largely feeling back to normal. The demand side is just about getting these imaging centers moving back into the normal patterns or the way they do business prior to the shortage. It's quite disruptive to them over this past year. Probably, we're just working with them to remind them that their supplies are here and getting people back in the routine. We do expect during the course of this year that will probably return to back to normal levels, but I don't think you turn the switch and it happens overnight. We just wanted to caution people that just because the supplies are available back at normal rate, I think the routines of managing the flow to the system are probably going to happen more gradually.

Helene Wolk - Sanford Bernstein: I know you spoke about that previously, there was some potential here that the actual clinical pattern has changed based on the supply disruption, if that were to be more persistent, how material is this in terms of potential impact?

George S. Barrett - Chairman and CEO: Well, just to remind you that our Nuclear business is doing very well because there are a number of products that are used in cardiac imaging. So it's not just about the moly based product, so we are able to supply any of the needs and compound any of the products that are used in the imaging. So we do expect that the shift will return largely because of the nature of the imaging itself as one physician described the difference between high-def and regular TV. So I think we're likely to see the return based on the quality of the imaging as a gold standard, but to the extent that it happens more slowly, we're compounding this as a products and radium and enabled to provide this to the centers.

Operator: Blake Goodner, Bridger.

Blake Goodner - Bridger: George, when you came to the Company, you talked a lot about the fact that you saw a great opportunity in the Medical side, where the operating margin opportunity could be greater than even on the Pharma side and so it's easy to get lost in the strong Pharma performance. I guess just coming back to the Medical side, I mean if I look at the first quarter, the operating margin was down pretty significantly but it adjusted for the flu and for the CareFusion revenue recognition issue last year. Then commodity cost, it looks like it actually might have been up a little bit operating margin and I think the EBIT, in a pretty tough environment. Are your expectation is still that a significant operating margin opportunity exists or are there other things going on there outside just in the market backdrop that approving that opportunity to maybe – be taken a little longer time to achieve your vision?

George S. Barrett - Chairman and CEO: Yeah, we continue to be really bullish on the Medical business and we know that this is a bit of a unique environment out there and you can decide your own answer on the causes whether it's purely the economy or the shifting nature of a benefit design. I think that the opportunities with Medical business for us continue to be exciting. We're really the unique set of assets to deploy here. We think that the community of providers and customers that join us really could use our help and frankly that's important. We're very committed to doing it and we feel good about that. Your comment about our performance stripping away some of those issues is quite a remark. We actually performed relatively well. That's why I said earlier in call in relation to a question. I don't feel like we're struggling, actually feel like we're doing very well and I like our competitive positioning. So we continue to believe in that business, we continue to invest in it and we feel optimistic about it. We're going to have to weather through the demand phenomenon as it is today.

Blake Goodner - Bridger: Then just one other follow-up. In fiscal '10, it looks like, I think you disclosed, you lost like about $1.2 on the Pharma side in terms of customers, I think net customers and then you lost about $200 million in Medical supplies and I'm just wondering as I think about '11, you've talked a lot about positive momentum you have in both businesses from a customer standpoint. Are we in a position to get net new business wins from customers in both those divisions in fiscal '11?

George S. Barrett - Chairman and CEO: We are getting net new wins in both those businesses.

Operator: Richard Close, Jefferies.

Dana Hambly - Jefferies: This is Dana Hambly for Richard. A couple of questions, Jeff, could you bore us with the details for a second on the DSA, the change in the reserve there, how that works?

Jeff Henderson - CFO: Without going into a huge amount of detail. We had certain smaller manufacturers. When we initially put them on DSA type agreements, we had been relatively conservative about how we recognize the receivable from them. Just given the newness of the contracts and the size of the vendor, et cetera, similar to how we're relatively conservative when we set up new customers in terms of setting up reserves for the receivable or likewise we did on the vendor side. That was three or four years and we said at the time internally that we'll monitor the collection rate and the collection history and once we have a pattern of collectability on those, that we would change the timing of recognizing the income from those vendors and that's exactly what happened. As we started a New Year, we looked at the history; we decide it was appropriate to change our estimation methodology. It is a relatively technical issue, but best I can equate it to is what we do on the receivable side with small customers.

Dana Hambly - Jefferies: On the share repurchase, what's the remaining authorization at this point?

Jeff Henderson - CFO: Actually, we have no remaining authorization. We had $500 million program which was used up with the latest $250 million repurchase. So there's nothing remaining under the authorization.

Operator: John Ransom, Raymond James.

John Ransom - Raymond James: Three quick ones. Just picking up on the share repo authorization, what's the earliest that the Company and the Board could look to establish a new authorization?

George S. Barrett - Chairman and CEO: I don't want to speak for the Board at this point, but we have regular meetings, as you know, and we have one upcoming. To the extent that this is a subject of conversation, we'll certainly be back to you, but again, it would be inappropriate for me to jump ahead of the Board on this.

John Ransom - Raymond James: Is it fair to say that it's probably on the agenda – not predicting what the Board does, but is this something that should be on the agenda for the next Board meeting, I assume?

George S. Barrett - Chairman and CEO: I would say we talk about capital deployment policy at every Board meeting. So this would be part of the entire discussion on capital deployment that we have at every meeting.

John Ransom - Raymond James: Second question, just going back to when you spun off CareFusion and the numbers that you gave at that time and looking at the numbers now, you're obviously running a lot higher on the earnings number. What do you think are the two biggest changes – two or three biggest changes to where you were at the trough of the gloom and doom phase when you spun this out?

George S. Barrett - Chairman and CEO: It's hard to answer. I think the entire organization has demonstrated a tremendous focus over these past 12 months or 15 months our willingness to really attack the priorities with vigor and with discipline and to compete very effectively. So I think we try to lay out a pathway as a leadership team for the organization. I think the organization has embraced it. I think that has been enabled by our reminding everybody on a daily basis about what it's all about, which is our customers. So I think our ability to focus on customer needs helps mobilize the organization effectively. Actually our leadership team is just doing a tremendous job of charting a course, laying out a strategy of defining the deliverables, and then going after them. So, I will give credit to Mike and Mike who run the segments and our team that's doing a good job with it. I think that's certainly number one. Second probably is just – again, I think we've been able to articulate the levers that are most important to pull. I think one of the challenges anytime you are trying to shift the course for business, there are so many things you want to do, and it's about identifying those things that you think will have the most impact. I can certainly tell you when I arrived at Cardinal, you know, it takes three to six months to even know which levers that you want to pull. I think for us pulling those ones that we know would be influencing margin and the whole notion of margin expansion were important, and those levers that were related to working capital management were also very important. That's the general answer I will give you.

Operator: Larry Marsh, Barclays Capital.

Larry Marsh - Barclays Capital: Two quick follow-ups. One is just to confirm all the guidance, I think you were very clear about some of the one timers and such. Jeff, I guess, what are you assuming your return is for that cash in your current number because, obviously, you are not assuming any more buybacks that you don't have the authorization? What numbers are you using?

Jeff Henderson - CFO: Larry, we're assuming really the return we are getting on our money market fund and investments, which is much closer to zero than I would like. That's the reality of that market. So, very minimal return is the honest answer to that.

Larry Marsh - Barclays Capital: Two other things. You had mentioned like a change in buying patterns from some of your bulk customers down 8% with Tamiflu. I just wanted to make sure I'm hearing that correctly. Are you saying you are continuing to see a change in pattern or is this just a situation that took place in the quarter and that we shouldn't necessarily expect this to continue?

George S. Barrett - Chairman and CEO: I would not say it's a forward looking patterns; it's just more description of what happened as opposed to what will be.

Larry Marsh - Barclays Capital: Finally, I noticed your charge-back billings were up a good bit in the quarter versus last year. I've always thought of this as a non-fee service of yours. I just wanted to make sure I'm clear on that. Is there any profit opportunity in charge-backs or is it just complete pass-through?

George S. Barrett - Chairman and CEO: Charge-backs, Larry, is really – I wouldn't describe it as an opportunity. It's primarily a mechanical phenomenon that one deal with when you deal with a prime vendor system. So I would probably not point to this as a significant lever going forward.

Operator: At this time, we have no further questions. I would now like to turn the call back to George Barrett for any closing remarks.

George S. Barrett - Chairman and CEO: I would, first, just thank everyone for being on the call this morning. I know it's a busy time out there. I'll finish simply by saying we're really excited about our start to the year. We look forward to seeing many of you in December at our Investor Day. Have a good day.

Operator: Ladies and gentlemen, that concludes today's conference. Thank you for your participation.