IMS Health Incorporated Q4 2008 Earnings Call Transcript

IMS Health Incorporated (RX)

Q4 2008 Earnings Call Transcript

February 5, 2009 8:00 am ET

Executives

Darcie Peck – Vice President, Finance & IR

Dave Carlucci – Chairman & CEO

Leslye Katz – SVP & CFO

Gilless Pajot – COO

Analysts

John Kreger – William Blair

Larry Marsh – Barclays Capital

Sandy Draper – Raymond James

Eric Coldwell – Baird

Chitra Sundaram – Cardinal Capital

Presentation

Operator

Ladies and gentlemen, thank you for standing by. Welcome to the IMS Health fourth quarter and full year 2008 earnings conference call. During the presentation, all participants will be in a listen-only mode. Afterwards, we will conduct a question-and-answer session. (Operator instructions) As a reminder, this conference is being recorded Thursday, February 5th, 2009. I would now like to turn the conference over to Darcie Peck, Vice President of Investor Relations. Please go ahead.

Darcie Peck

Thank you. Good morning, and welcome to the IMS fourth quarter 2008 earnings conference call. With me this morning are Dave Carlucci, our Chairman and Chief Executive Officer; Leslye Katz, our Chief Financial Officer; and, Gilless Pajot, our Chief Operating Officer. Dave and Leslye will discuss highlights from our fourth quarter and full year results, our guidance for 2009. And then we’ll open it up for your questions.

As in the past, we posted slides on our Web site. And I would encourage you to view these during our prepared remarks this morning. Certain statements we’ll make are forward-looking within the meaning of the US Federal Securities Laws. These statements include certain projections regarding the trends in our business, future events, and financial performance. We caution you that these statements are just predictions, and the actual events or results may differ. They can be affected by inaccurate assumptions or by known or unknown risks or uncertainties. Consequently, no forward-looking statement can be guaranteed.

I call your attention to our fourth quarter 2008 earnings release, which we issued earlier today, and our 2007 10-K, which described the factors that could cause actual results to differ materially from those contained in our forward-looking statements. Forward-looking statements represent our views only as of the date they’re made, and the company undertakes no obligation to correct or update them, whether as a result of new information, future events, or otherwise.

Certain of the financial measures we’ll talk about today are on an adjusted non-GAAP basis. These may include, for example, operating income, net income, earnings per share, and free cash flow. Detailed reconciliation to result on a US GAAP reported basis is in our press release, and I encourage you to review the notes in our press release further describing adjusted non-GAAP measures.

Now, let me turn the call over to Dave Carlucci. Dave?

Dave Carlucci

Thanks, Darcie, and thanks everyone for joining us today. We delivered a solid performance for the year, driving excellent cash flow and improving our operating margin in the fourth quarter. That speaks to our discipline in cost and expense management and focused execution.

Revenue growth was just under 0.5% constant dollar in the fourth quarter. And that reflected market realities as the economic downturn intensified. So while the quarter was our weakest from a revenue perspective, I’m pleased with our team’s ability to manage our business in this environment and adapt to the market.

For the full year, preliminary free cash flow was $317 million, near the high end of our guidance range. Earnings per share on a comparable basis grew 11% to $1.70 achieving our full year guidance. Our revenue growth was 6% reported and 3% on a constant dollar basis, meeting our revised guidance. And we maintained our operating margin as 22% for the year.

Before we get to the details of our results, let me spend a few minutes talking about some of the factors that drove our performance last year. It’s clear that the aggressive restructuring plans we put in place at the end of 2007 were the right actions. So when the economic downturn hit hard in the fall, we had already positioned ourselves for lower cost and expense structure. That, along with an intense focus on cash flow generation, enabled us to deliver on both our EPS and free cash flow guidance despite our revenue slowdown. These same focus areas put us in a very good position to execute our plans in 2009.

We all know this is an industry that is going through a lot of change. What we saw at the end of 2008 and continuing into this year is that clients are reevaluating their business models and implementing new commercial strategies. They’re choosing growth opportunities more decisively, whether it’s investing in emerging markets, refocusing their portfolios, or looking to accelerate their transformations through mergers and acquisitions. And the strategic investments we have made over the past few years put us right in the center of helping our clients.

As they implement their new commercial models, they have increased their spend on specialty, patient level, and enhanced commercial effectiveness offerings. As they work more closely with government and payers, clients are turning to IMS for managed market insights, and help improve the value of their medicines and gain market access.

As clients implement their growth strategies for emerging markets, our global presence and portfolio management expertise work to our advantage as we drive broader engagements. And we’re driving growth in new client segments, including generics companies, governments, payers, and consumer health audiences.

While clients are being very selective in their overall spend, they’re increasing their investments in these spaces. And we’re benefiting from that. The fact is, we’re the only company that has the global scale, diverse portfolio offerings, and financial flexibility to build leadership positions in these areas. There are unique opportunities out there for us. And we’ve made the changes to our business, adjusting our priorities, and how we allocate resources to capitalize on these market trends and improve our own productivity.

In 2008, we realigned about 20% of our client facing teams, strengthening account management and business development. We’ve consolidated our consulting practices, adjusted our business line structure, and built out new business process outsourcing capabilities. At the same time, we drove cost reductions by integrating our production operations, streamlining administrative functions, and exiting some non-strategic businesses. So we’re investing in the right areas and have made the right adjustments to our business. I’ll talk later about how that translates into our 2009 plans.

But first, Leslye will take you through the details of our results and our financial guidance for this year. Leslye?

Leslye Katz

Thank you, Dave. Let me get right to our fourth quarter results starting with cash. We had an excellent quarter from a cash perspective. Preliminary free cash flow in Q4 was $162 million, bringing the full year to $317 million. This is an outstanding performance for the year, especially in light of the $51 million in cash we spent in 2008 for the restructuring program.

Our DSO in the fourth quarter was a key contributor to this strong cash performance. DSO continued its steady improvement in 2008 coming in at 59 days for the fourth quarter. This is three days better in Q4 2007, and reflects the results of our continuing focus on cash collection.

The other elements of our financial performance were in line with what I laid out on our Q3 call. Revenue was $581 million, up just under 0.5% on a constant dollar basis, and down 4% reported. The strengthening dollar relative to major European currencies had a negative effective on reported revenue growth in the quarter.

Adjusted operating income in the quarter was $136 million, down 2% on a constant dollar basis, and essentially flat reported year-to-year. Adjusted operating income in Q4 excludes a $9 million non-cash charge for the write down of some deferred software assets.

Adjusted operating margin reached 23.4%, up 100 basis points compared with the fourth quarter of 2007, and up 110 basis points sequentially over third quarter 2008. Our operating margin increased every quarter in 2008 to this high point in Q4.

While consulting and services revenue growth flowed to 2% constant dollar in the quarter, we maintained C&S gross profit margins flat with the fourth quarter of 2007. Consulting utilization in Q4 reached 71%, ending the year with the highest level of any quarter, and up from last year. Throughout the year, tight management of consulting and services headcount enabled us to sustain the gross margin of this business within a slower revenue growth environment.

In terms of our restructuring actions, we completed the headcount reductions in line with our plan. And we remained on track to realize the annual savings of $55 million to $60 million in 2009.

On a GAAP basis, net income was $98 million. On a non-GAAP basis, net income was $91 million, an increase of 9% over Q4 2007. GAAP EPS in the fourth quarter was $0.54. Non-GAAP EPS was $0.50, up 16% over last year, and in line with consensus estimates. We have provided the complete line item reconciliation between GAAP and non-GAAP results in the notes section of our press release and outlined the differences in our earnings slides on our Web site this morning.

For the full year, let me start again with cash. As I said, preliminary free cash flow for the year was $317 million. This represents 102% flows here with net income to free cash flow, and clearly shows the strength of our financial model. Free cash flow grew $30 million, up 10% over 2007 despite funding two-thirds of the total cash cost of our restructuring program.

Full year DSO was 59 days, nine days better than full year 2007. The cash generating ability of IMS remains an outstanding attribute of our financial model and a priority for me. I’m very pleased with our receivables management this year. In a recessionary improvement, improved collections and lower DSO are significant accomplishments.

Revenue for 2008 reached $2.3 billion, up 3% constant dollar, in line with our October guidance, and up 6% reported. Consulting and services revenue exceeded the $0.5 billion mark and grew to $543 million, up 8% constant dollar, and 10% reported. Information and analytics revenue grew 2% on a constant dollar basis, and 5% reported.

From a regional perspective, we had good performance in the US, Latin America, and the Asia Pacific region. The Americas region grew 4% constant dollar and reported for the year. The Asia Pacific region grew 5% constant dollar and 12% reported. However, we did see pressure in other large markets, especially in Europe where the economic downturn, along with the payer and regulatory environment, impacted client decisions. As a result, revenue in our EMEA region grew 1% constant dollar and 6% reported. In the emerging markets, we delivered strong double digit gains, and we continue to invest in those markets as clients capitalize on the growth opportunities there.

From a business line view, overall growth and sales force effectiveness slowed to 2% constant dollar as clients reevaluated their commercial models and delayed or cuts some therapeutic class spending. Our performance in portfolio optimization was flat constant dollar, which was about as expected with slower overall growth, but continued demand for our global MIDAS offering. Launch, brand, and other revenue grew 9% constant dollar. Within that business line, managed market services and consumer health continued to grow strongly through the year, while promo and performance management lagged. In consulting and services, we saw clients pull back for more tactical sales force effectiveness engagements as the year played out. But there was good growth in our key consulting methodologies, our pricing and market assets, and portfolio strategy as well as in our implementation services offering.

In terms of the dynamic of our revenue by client, revenue in 2008 from our top 20 clients grew just under 0.5% on a constant dollar basis. However, within this large client base, there was considerable variability. Twelve clients grew their spending with us, of which six grew in double digits. Revenues from the other eight declined. Our top 20 clients represented 53% of our revenue, down 1% point from 2007. Mid size clients grew in the mid single digits. And small clients grew in the high single digits last year, led by strong performance in the US. Revenues from generics and small emerging biotech clients continue to grow at a double digit pace.

Adjusted operating income was $511 million, flat on a constant dollar basis, and up 6% reported. Adjusted operating margins was 22% flat from last year.

In addition to the benefits of our restructuring actions and maintaining consulting and services gross margins, a slower rate of growth in our data costs contributed to this performance. As you may recall, we started the year with a plan to grow our data costs at least a point slower than in 2007. And we were successful in accomplishing that.

Total interest expense net was $34 million, an increase of $5 million, compared to 2007, primarily due to the higher average debt level in ’08 over the prior year. Adjusted other expense was $37 million, year-to-year increase of $23 million due to foreign exchange hedge losses.

On an adjusted basis, the full year tax rate was 29.2%, better than our original expectation due to an accelerated settlement with the IRS. GAAP and adjusted EPS for the full year were $1.70, right in line with the guidance I gave on our third quarter call. This represents a growth of 11% over adjusted EPS $1.53 last year.

Turning to the balance sheet, we continue to have a very strong and flexible balance sheet. We ended the year with $216 million in cash. Total debt was $1.4 billion, flat quarter-to-quarter, and up $211 million over last year. Virtually all of the year-to-year increase in debt is foreign exchange related, the impact of a weakening dollar on our yen denominated debt. And we ended the year with a 2.2x debt to EBITDA ratio, a very comfortable level.

We have no significant refinancing events until the middle of 2011. Our debt maturity table is very well balanced with two and half, four, six, and nine-year maturities out on the horizon. With our yen denominated debt and fixed variable mix within the debt portfolio, we enjoy very attractive interest rates.

In terms of capital deployment, we spent $42 million on five acquisitions in 2008. Our spending on deferred software and capital expenditures was $114 million, down $51 million from 2007. We repurchased $10.5 million shares in 2008 at a cost $238 million. A total of $9.5 million shares remained authorized and available for repurchase under December 2007 Board authorization.

Let me turn now for our guidance for 2009. This year, we expect constant dollar revenue growth ranging from 0% to 3%, EPS ranging from $1.70 to $1.77, and free cash flow at or above the 2008 level.

Let me give you some color on these ranges. On our third quarter call, I mentioned that the factors that were affecting our revenue growth performance in the second half of 2008 were likely to persist into 2009. This continues to be the case. We anticipate another year of variability in our quarter-to-quarter growth considering the overall economic uncertainty and the business transformations our clients are undertaking. Given where FX rates are today, you should expect reported revenue growth to be lower than constant dollar growth in 2009 by one to two points. Revenue growth assumes the level of spending for acquisitions of about $50 million to $100 million.

Similar to prior years, we started the year with slightly over half of our full year revenue already under contract. At this revenue growth changes, we expect to maintain operating margins in 2009. We will see a year-to-year benefit from incremental restructuring savings and a further slowdown in the rate of data costs growth, partially offset by significant increases in pension expense due to lower asset values in our US cash balance pension plan. This plan remains in an over-funded position and requires no cash contribution. Other costs and expense growth will be held at modest levels.

Interest expense in 2009 will be approximately $6 million to $8 million higher than 2008, predominantly the result of the higher starting debt level in ’09. We expect the full year effective tax rate to be approximately 31% in 2009. However, based on our current tax planning, the effective tax rate in the first half of ’09 will likely be closer to 34%, and the second half will be closer to 28%.

As I mentioned, our full year EPS guidance is $1.70 to $1.77. This represents the potential to grow EPS in line with revenue growth even at the low end of our revenue guidance range.

From a cash flow perspective, we expect another strong year. CapEx and deferred software spending will grow modestly over 2008 spending levels. And we are planning for DSO, which is consistent with what we achieved last year. As a result, we expect full year free cash flow to be at or above 2008 levels.

Our EPS guidance does not assume share repurchases in 2009. However, as we move through the year, we will continue to closely monitor our business performance and evaluate share repurchases and other uses of cash on a quarter-to-quarter basis.

Looking back at 2008, we were faced with a considerable amount of uncertainty related to the state of the global economy and our clients’ need to transform their businesses. In a changing environment, we responded extremely well. We tightly managed all the levers available to us, exercising cost and expense controls; successfully executing our restructuring plans; and, using a disciplined approach to capital deployment, debt, and capital structure to deliver strong cash flow.

While revenue growth slowed, we managed a nine-day improvement in DSO, reduced our capital expenditures by over $50 million, and produced a 100-plus percent flow through of net income to free cash flow. We effectively managed our consulting and services resources and cost structure within a slower growth environment, and improved our overall expense to revenue ratio by 70 basis points. We maintained our operating margin at 22%, and delivered 11% growth in adjusted EPS. This financial discipline will remain in place throughout 2009. And this puts us in a good position to execute well on our ’09 plans.

Now let me turn the call back to Dave for a little more perspective on ’09. Dave?

Dave Carlucci

Thanks, Leslye. And let me recap our outlook for 2009 before we get to your questions. We’re planning for a lower growth environment, and Leslye’s gone through the disciplined approach we’ll continue to take to manage costs and expense this year. We have the levers in place to deliver on our EPS and cash flow commitments for 2009.

As I look at our priorities for the year, they’re all focused on adopting our business to continue capturing more market opportunity. We’re rolling out new measurement offerings to help clients better understand specialty markets and payer behaviors. We’ll continue to extend our capabilities in emerging markets and in launch readiness. We’ll differentiate ourselves from competitors by delivering more customized solutions, linking our anonymized patient-level information and consulting methodologies to help clients implement new commercial models. And we’ll continue to build on our momentum in implementation services as clients look to drive greater variability in their cost structures.

Now let me give you some perspective on why we’re planning for flat to 3% top line growth this year. There are a number of dynamics that we factored into our 2009 guidance beyond the continued uncertainty in the global economy.

First, clients are transforming their businesses. They’re making sales force reductions and addressing the loss of patent exclusivity. In coming off a year where there was little growth from launches, they are focusing more on ways to drive greater productivity in their late stage pipelines and new products.

Second, we expect more merger and acquisition activity on the part of our clients. Some of which we’ve seen already performing in the market. They’ll spend more money with us as they adjust their commercial models for expansion opportunities. And there’s another set of the clients who are reevaluating their portfolios and exiting therapy areas. While that can lead to new opportunities for us, we’re planning for lower growth from them.

We know where clients are in their transformations and how that manifests into growth opportunities for us. But we don’t know the pace at which they’ll move forward with their plans. There are a lot of dynamics at play. And when we consider all factors, we believe that flat to 3% growth is where we’ll land.

We’re closely managing our business for that. We continue to broaden our portfolio, capitalizing on new audiences within pharma and the shifts in their spending. At the same time, we’re expanding our client base to other healthcare stakeholders, and doing more business with payers and governments. It’s a good time to be a market leader with healthy financial underpinnings and the flexibility to pursue high value opportunities, and most importantly, a strong team that is executing well.

With that, let’s open it up for questions.

Question-and-Answer Session

Operator

Thank you. (Operator instructions) One moment please for the first question. And our first question comes from the line of John Kreger from William Blair. Please proceed with your question.

John Kreger – William Blair

Hi. Thanks very much. Dave, you mentioned a few times that the strong growth you’re seeing in some of your newer customer segments, like governments and payers. I assume that’s a pretty small percent of your total. But could you quantify that for us? And just how much growth are you seeing over the last year or two?

Dave Carlucci

Yes. Both of those areas, John, are growing at double digits for us. We have made some acquisitions, which we did in ’07 and in ’08 focused on the payer space and opportunities there, mainly to also go after the whole managed market space, the understanding of the ability to contract with governments, and to drive formulary management in terms of contract compliance. Also, as we look at the government space, that business continues to be attractive for us around the world as, obviously, governments are getting more and more aggressive as it relates to healthcare costs, not unlike what we’re seeing in the United States. So your statement is correct. They are smaller businesses, but growing at double digit rates.

John Kreger – William Blair

Okay. Great. And then a second question, can you give us an update on the competitive pricing environment as the – as the environment slows, are you seeing pricing patterns change by your competitors at all?

Dave Carlucci

Yes. We haven’t really seen a significant change mainly because we’ve been under price pressure for several years. And I think we’ve managed that pretty well, and have a good competitive track record. But certainly, our large clients have a groove swing with procurement. There’s a lot of focus on looking at the transition from more prescription based, or I should say, prescriber based information to a broader view of the patient and payer behaviors. So in that, there are a lot of discussion of how do I – how do I fit all this in an envelope that’s tightening.

But we haven’t seen any difference really in the behavior on the part of competitors around the world. We have a tendency to have much more of a value story. And many of them have consistently had more of a price driven kind of a proposition.

John Kreger – William Blair

Okay. Great. And then lastly, can you just refresh our memory about the impact of large pharma consolidation on your business? What have you seen with past big mergers?

David Carlucci

Sure. I mean, obviously, as we look at it, it has been in a fact of life for some time. We haven’t seen one of the magnitude of the Pfizer-Wyeth one announced for a few years. But generally, we see growth activity over time. We’re much better equipped today with a broader portfolio. And we’re still in a position where our largest client has only about 5% of our business. So it’s still a very highly fragmented industry as it relates to the increased activity we’ve seen in the last several months. We’ve factored that into our ’09 guidance. And as we said in the past, if you’re looking at our market research data, our global intelligence, that’s probably after the agreement closes the first area where we see a negative impact because they don’t need two versions of it. But we haven’t seen the negative impact in recent years as it relates to our sales force level of information.

So we’ve managed it to fairly minor impacts, and we’ve seen significant new opportunities as it relates to consulting and services. And I think one dimension that will evolve in this next era of mergers will be a much greater focus on the desire to use more of our implementation services to add variability on the cost structure as I try to take two organizations and perform sales operations, market research, manage markets, type tasks, in a more cost effective manner. So we see still another opportunity for us in this whole business process outsourcing in implementation services space.

John Kreger – William Blair

Great. Thanks very much.

David Carlucci

Thanks, John.

Operator

And our next question comes from the line of Larry Marsh with Barclays Capital. Please proceed with your question.

Larry Marsh – Barclays Capital

Thanks, and good morning, Dave, Leslye. First of all, as I look at your business, I’m stuck by your productivity and your cost side this year. So you’re ahead of the curve there as you talked about – which gave you the ability to drive reasonable margins even in a slowdown in the environment. But obviously, top line or constant dollar growth came down a bunch given changes in the marketplace. So now, you’re communicating a little over 1% constant dollar growth for ’09 at the midpoint, which is certainly the lowest I’ve seen in the last ten years for you guys. I guess my question is, this – do you feel like a – what gives you confidence that given the changes we’ve seen in the market in the last year, that that’s still going to be a little aggressive? Or do you feel like there are couple of things that give you confidence and maybe that’s on the conservative side? And along with that, do you feel like you’re still right sized for that kind of top line growth?

David Carlucci

Yes, we do. I think it’s a very realistic view. Although, Larry, we have – as the second half of the year progressed taken down are outlook and our budget as it relates to ’09. So we’ve been adjusting it downward through that period. The reason I think it’s a very realistic view is, first of all, we enter the year with a little over 50% of our revenue in hand under contract that’s slightly better than last year. We’re seeing our clients spend fairly aggressively in managed markets, on patient level-data assets as well as consulting in the consumer health space. Our services business is growing nicely. And emerging markets and pricing and market assets have been strong.

So in those assumptions, we’re assuming spending growth in those areas and in the other parts, we think they’re going to perform at about equal or slightly better than the second half of ’08. So that puts us comfortable with flat to 3%. And we have been monitoring, obviously, the fact that the fourth quarter was the weakest quarter of the year. But again, as we model it out, we look at our pipelines and we look at the overall factors considered. We think that that’s a very realistic view.

Larry Marsh – Barclays Capital

Okay. And then elaborate there, I was particularly struck by the weakness in EMEA versus the third quarter. You had mentioned that besides the economic downturn, you talked about the payer regulatory framework. Is there something specific that’s evolved here since October? Or is this just more of the same that we’ve been talking about here in ’08?

David Carlucci

Well, I’ll turn it over to Gilles. I just spent a week in EMEA, and then Gilles went the week after I did. Certainly, we’ve got a lot of environmental issues and regulatory and price pressure issues. But I think there’s some execution issues and in parts of EMEA. So Gilles, maybe you can give Larry a perspective on that.

Larry Marsh – Barclays Capital

Hi, Gilles.

Gilles Pajot

Yes. In 2008, we had some challenges in the major markets. So three out of the top five experienced a mix of poor performance, mainly in consulting and services. So what we saw in the second half of the year of that is weakness in out tactical engagement in the commercial effectiveness practice. In those free market, actually, the traditional sales model is unfolding. So what we are actually doing there, we are changing our mix, commercial effectiveness practice.

We are moving more from – basically from, practical to strategic engagements, which is going to result in much broader engagements there. We’re focusing on helping our clients to redesign and implement their new commercial models. For example, we recently won a project to design and implement a new go – a new go-to-market strategy for a major customer for their specialty product in 17 countries. Another situation we have done too is we are at grade, our CNS teams in order to get new capabilities there to be able to deliver on those projects. So we see a lot of change in there, but I think we have been able to respond.

Larry Marsh – Barclays Capital

Okay. I’ll follow up. Two other quick things, David talked about New Hampshire, can you give us an update and timing on your quest for rehearing their – are there any other state initiatives that have popped up here in the last several weeks? And then, part of your guidance you mentioned cost associated with legislative issues. How are you sizing that for ’09?

David Carlucci

Sure. Well let me give you a kind of an overall update since we haven’t talked about this since the end of the third quarter. As you know, Larry, three states have passed aid of restriction legislation, New Hampshire, Maine, Vermont. And I’ll give you the status on each of those. All together, they represent about 1% of all prescriptions in the United States. And in November, the First Circuit Court of Appeals overturned the ’07 decision finding that New Hampshire’s Prescription Restraint Law violated the First Amendment and could compromise patient safety.

We’ve already made the systems modifications necessary to comply with this law. And as I mentioned in out remarks this morning, we’ve taken account in ’09 any risk associated with position data restrictions contained within our guidance. So we intend to file a petition by mid April to seek review of the First Circuit position by the US Supreme Court.

In Maine, a US District court decided in our favor and pointed out that prescriber identifiable data was not simply useful, but valuable in advancing public health. However, Maine is in the First Circuit. So we’re awaiting the next move there. In Vermont, the challenge to Vermont’s law was heard last summer in the US district court. We’re still waiting for a decision, and are hopeful for favorable decision as we presented a very compelling case during the trial. And Vermont, as you may recall, is in the Second Circuit.

So despite the one setback we face in the First Circuit, we believe we still will ultimately prevail in the courts. In addition to the three states that have passed laws, we’ve seen legislation introduced in over ten states over the last couple of months. And I’ll just remind everybody that in the past few years, we’ve seen it introduced in 20 states that have considered similar laws and have decided against moving forward. But clearly, we’re watching it very carefully. Clearly, the First Circuit decision opened up more activity in other states. But it’s something that we continue to deal with. And it’s also important to remember that we’ve dealt with this types of issues around the world for some time. And we’re still able to determine a way within law to help our clients get insights into position patient and payer behavior.

Larry Marsh – Barclays Capital

Okay. Thanks for the detail. And finally, quickly, for Leslye, can you size the magnitude of increase in pension expense you’re expecting in ‘09 versus ’08? And then just why specifically the big switch in the first half, second half tax rate?

Leslye Katz

Yes. Just to comment on the tax rate first, our tax planning varies year-on-year, and includes a combination of discreet events that may include things like expirations of the statue of limitations and certain jurisdictions with respect to particular tax positions. So that’s really the factor as it relates to the tax rate and why we’re going to get those benefits we believe in the latter part of 2009. Thus, a lower rate in the second half, a higher rate in the first half.

With respect to the pension expense, there’s really a whole number of factors that are going into our guidance here and our overall EPS growth, assumption, and our hold margin. So we’ve got incremental benefits from the restructuring plan. But some of those we’re going to lose, frankly, in this increased pension expense. I think many companies are experiencing a similar situation with respect to pension expense because of what happened in the markets. The good news for us is our US pension plan remains in an over funded position. And therefore, we have no cash obligation or requirement with respect to that plan.

And overall, I think as I’ve mentioned, the rest of our cost expense growth, I think, will be modest. It’s that combination of factors that are going to lead. One last piece there, I talked about this I think as well, we did see data cost growth rate lower in 2008 than in 2007. And I believe that again in 2009, we’ll see slower data cost growth than in 2008. So those are the big factors, Larry.

Larry Marsh – Barclays Capital

Okay. I’ll follow up. Thank you.

Operator

And our next question comes from the line of Sandy Draper from Raymond James. Please proceed with your question.

Sandy Draper – Raymond James

Thank you very much. First question, Dave, and again asked in the past or looking out at the year, when you look at the three groups, I know you don’t give specific guidance relative to sales force effectiveness; portfolio optimization; and, launch, brand, and other. But just generally, launch, brand, and other has, over the past year, been the strongest grower. So I guess, would you expect that to continue? And then when you look at sales force effectiveness and portfolio optimization, some of the factors you mentioned earlier about the tougher environment, potential mergers, et cetera, would you expect one of those to be hit more? So as we think about how to sort of model the performance of the different business units, that would be some helpful commentary.

David Carlucci

Sure. Just so I can frame it for us – for how we’ll report the rest of the year, at midyear we readjusted our business lines to focus on commercial effectiveness, product and portfolio management, and new growth areas. So you’re going to see it in that format. And commercial effectiveness, think of it as more of a combination of the launch pieces from sales and marketing, not just sales and marketing divided. So it’s really the way the clients are looking today at their implementation of their new commercial model.

In portfolio and product strategy, you have the additional brand focus pieces in there as well as looking at overall portfolio strategy. And then, in the new growth area as you have things like managed markets, pricing and market access, consumer health, government, payer, that kind of thing. So I just gave you that as a backdrop, Sandy, because that is going to change in the way we talk about it next year. But under the old model, you’re correct. We saw higher growth in launch, brand, and other, and we expect those initiatives to continue to show growth.

If you look at SFE as a part of commercial effectiveness, we certainly continue to see growth in the anonymized patient-level data area and services, certainly, in the emerging market spaces where the sales force deployment is increasing. So those are all characteristics, again, based on 0% and 3% as an outlook and based on the fact that SFE represents nearly half of our business, it’s still will be fairly moderate growth. What was performance optimization or portfolio optimization, as I said, you’ll see the impact a little bit on our global market research offerings. But if you look at the biggest merger that’s been announced, it’s probably going to close at the end of the third quarter or fourth quarter. So we see a minimum impact in ’09 on that. So that’s kind of how it will play out, no dramatic swings in that – in between those business lines.

Sandy Draper – Raymond James

Okay. Great, and thanks. Maybe two just quick follow ups for Leslye. Leslye, on the currency, negative impacts of currency through the year, I would assume with the negative currency impact in the fourth quarter, you would – under normal conditions that – that would be a neutral effect. So how would you expect – would you expect a stronger impact of greater impact of negative currency earlier in the year scaling down or really sort of evenly spread for the first three quarters? Again, that’s given if stable currency environment, which is tough to call right now.

Leslye Katz

Right. And that’s all I can call because, obviously, I wouldn’t pretend to predict where rates are going to go. But we saw that not trivial differential in the fourth quarter between reported and constant dollar. And I think I mentioned that if rates stayed where they are today, then we think that, overall for the year, we would have about one to two points where reported growth would be below our constant dollar growth. And our overall revenue spacing in 2009, I don’t see as terribly different than 2008. They’re possible just based on year-to-year comparison, maybe a little more back end loaded in ’09 than it is in ’08. So I hope that gives you a perspective on the way I think the revenue, reported versus constant dollar, flow.

Sandy Draper – Raymond James

Okay. Great. And then the final question, just in looking at the EPS guidance. I don’t know if you – where you asked about quantifying the dollar sector. Is there any way – because that’s sort of soft, flat – about flat to up to 3% revenue growth with the magnitude the cost savings are getting being in the full year. I guess I may have looked for a slightly hard, not dramatically hard EPS. Pension costs are in there. Would you really rank it as pension costs and maybe higher interest expense so that the two biggest drivers or why that number’s not a little bit better with the cost savings? Or is there anything else I should be thinking about?

Leslye Katz

The last piece is the tax rate. So I’ve got about a 31% tax rate we’re planning for in ’09, and we ended up at about 29% in ’08. So that’s the last piece. You’ve got all the rest of it right.

Sandy Draper – Raymond James

Okay. Great. Thanks very much.

David Carlucci

Thanks, Sandy.

Operator

And our next question comes from the line of Eric Coldwell from Baird. Please proceed with your question.

Eric Coldwell – Baird

Thanks very much. Leslye, on that last comment, could you quantify – I’m sorry if I’d insist, could you quantify the incremental pension cost expectation for this year?

Leslye Katz

Yes. I don’t think I’m going to get down. I just don’t generally quantify the individual line items. But one way to think about it is we are expecting the incremental savings from the restructuring plan. I think that’s in line with what we’ve already cited to. And that the pension, really, puts a big dent in that as that kind of gives you sense of it.

Eric Coldwell – Baird

Just shipping gears, the hedge losses between the press release, the slides, the email that came out and the issue with the – I guess it was with the Venezuelan currency. I just wish you could help me be very clear on what the total 2008 FX hedge losses were both before and after the Venezuelan issue?

Leslye Katz

Just bear with me for a sec. I just want to make sure I get my facts good for you here. Basically, in the fourth quarter, we had about a $16.1 million loss in our GAAP numbers related to the Boulevard transaction that we did. So if you back that out, then I believe that our full year hedge losses were about $23 million, if you back that out on a full year basis.

Eric Coldwell – Baird

Okay. So $23 million. Your expectations then for 2009 versus that $23 million, what’s your expectation for hedge losses based on the rate you locked in on January?

Leslye Katz

Again, I don’t think I’m ready to dive at that level of granularity, Eric. A lot of those hedge losses do diminish as a result. But we also have a piece of our hedging that we do based on cash flows that has a long term hedge. And then, honestly, it’s difficult to know exactly where rates are going to go during the year. So as rates off of the rate we hedged at in January, we could have losses and we could have hedge gains. So I can’t really predict that for you.

Eric Coldwell – Baird

I guess I’m confused. I thought in prior years, the company was pretty proactive in discussing what they expected for that line item and was able to quantify the original expectations for earnings impact.

Leslye Katz

Well I think that was in our EPS line, Eric, really. That’s the degree to which I think we can be pretty comfortable. So we’ve set that EPS guidance based on the fact that in our five major currencies, we’ve hedged our operating income as best we can see it. And so, as there are movements in those five major currencies, whatever the impact on operating income is, we should have a similar impact on other income and expense, whether it’s a hedged gain or loss. So it’s the net effect of those that allow us to be comfortable with the EPS guidance, $1.70 to $1.77. So it’s difficult to quantify one line or the other. It’s the net effect of the two that we’ve encompassed in the guidance.

Eric Coldwell – Baird

Right. And again, I just – I guess my memory maybe off a little bit, but I thought in prior years, you were able to quantify what you expected for hedge gains or losses or lien and (inaudible).

Leslye Katz

I think Darcie will be able to follow up with you with more specifics, hopefully bring some more clarity than I’m able to do on this call.

Eric Coldwell – Baird

Okay. Last question is related to currency moves that were witnessed late in 2008. Given the well above normal profitability of Japan and part of the Asia Pacific market, but primarily Japan, and given the strength in the yen, I would have expected a greater benefit from translation of those Japanese profits into US dollars. Can you give me some sense of what happened there and whether – perhaps our impression of what might happen – why that might not have been fully accurate?

Leslye Katz

Well, I think that’s accurate. But the other thing that happened is we saw a real strengthening of the dollar in the fourth quarter against the Euro and the Swiss franc. And when you look at those two, we have income, also operating income in those two currencies. So that goes the other way, if you will, as you look at the impact. But on balance, benefits from the fact that the yen is strengthening against the dollar, benefits on the pound detriment on the Swiss franc and on the Euro. So it’s a mixed bag in the fourth quarter.

Eric Coldwell – Baird

Got it. Thanks very much.

Darcie Peck

I think we have time for one more question given where we are on a timing, Lorna?

Operator

Okay. Our next question comes from the line of Chitra Sundaram from Cardinal Capital. Please proceed with your question.

Chitra Sundaram – Cardinal Capital

Hey, thanks. I’m glad I got a question in. Congratulations. I thought it was a really exemplary performance with everything that we’re going through in the industry. Pension cost, is there a way to quantify what that number is on an EPS basis? Or how much out of the $55 million to $60 million comes out of – comes out in the form of pension costs – increased pension costs?

Leslye Katz

Okay. So let me again try to put some perspective around it. So year-over-year, we’re going to have some incremental savings from the restructuring, right? I think we talked this fact that, overall, the total savings in ’09, $55 million to $60 million, we expected to achieve about 60% of that this year or in 2008. So the increment to 2009 is about $20 million to $25 million. So that’s the incremental savings from the restructuring in ’09. And we could have an impact that could cut that in half, let’s say, relative to the pension.

Chitra Sundaram – Cardinal Capital

Okay, okay. And I guess relatedly [ph] – and I think you’ve answered this but I’ll just ask it anyway. So it sounds like we have seen the aspiration of the cost savings. In other words, we saw more of it in ’08 than we had expected, I think, in the beginning of ’08. And so, as we go into ’09, I think as we get to the third quarter, we would sort of anniversary the whole $55 million to $60 million, correct?

Leslye Katz

Well again, we definitely had partial year savings in the first three quarters, even partial year savings in the fourth quarter, if you will, because some of our benefits related to actions that we even implemented in November and December. I think we give a pretty good indication now of what this year-over-year benefit is.

Chitra Sundaram – Cardinal Capital

Yes. Thank you very much.

Dave Carlucci

Thank you, Chitra. Well look, I want to thank all of you. Obviously, this call has a slightly different nature with the times we’re in. We broadened our range of debt from EPS perspective. And there’s a certain level of uncertainty that brings us to an outlook of flat to 3% growth on the tope end. I think we’re off to a very fast start with our teams. We are not at all discouraged by what our clients have in front of them and our ability to help them. And we certainly look forward to coming back at the end of the first quarter and reporting on our progress. So we’ll talk to you then. Thank you very much.

Operator

Ladies and gentlemen, that does conclude the conference call for today. We thank you for your participation. And as such, please disconnect your lines.

Copyright policy: All transcripts on this site are the copyright of Seeking Alpha. However, we view them as an important resource for bloggers and journalists, and are excited to contribute to the democratization of financial information on the Internet. (Until now investors have had to pay thousands of dollars in subscription fees for transcripts.) So our reproduction policy is as follows: You may quote up to 400 words of any transcript on the condition that you attribute the transcript to Seeking Alpha and either link to the original transcript or to www.SeekingAlpha.com. All other use is prohibited.

THE INFORMATION CONTAINED HERE IS A TEXTUAL REPRESENTATION OF THE APPLICABLE COMPANY'S CONFERENCE CALL, CONFERENCE PRESENTATION OR OTHER AUDIO PRESENTATION, AND WHILE EFFORTS ARE MADE TO PROVIDE AN ACCURATE TRANSCRIPTION, THERE MAY BE MATERIAL ERRORS, OMISSIONS, OR INACCURACIES IN THE REPORTING OF THE SUBSTANCE OF THE AUDIO PRESENTATIONS. IN NO WAY DOES SEEKING ALPHA ASSUME ANY RESPONSIBILITY FOR ANY INVESTMENT OR OTHER DECISIONS MADE BASED UPON THE INFORMATION PROVIDED ON THIS WEB SITE OR IN ANY TRANSCRIPT. USERS ARE ADVISED TO REVIEW THE APPLICABLE COMPANY'S AUDIO PRESENTATION ITSELF AND THE APPLICABLE COMPANY'S SEC FILINGS BEFORE MAKING ANY INVESTMENT OR OTHER DECISIONS.

If you have any additional questions about our online transcripts, please contact us at: [e-mail]. Thank you!