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Executives

Sally Curley – Senior Vice President Investor Relations

Jeff Henderson – Chief Financial Officer

George Barrett – Chairman and CEO

Analysts

Lisa Gill – JP Morgan

Glen Santangelo – Credit Suisse

Larry Marsh – Barclays Capital

Tom Gallucci – Lazard Capital

John Kreger – William Blair

Robert Willoughby – Bank of America

Randall Stanicky – Goldman Sachs

Cardinal Health, Inc. (CAH) F4Q09 Earnings Call August 18, 2009 8:30 AM ET

Operator

(Operator Instructions) Welcome to the Fourth Quarter 2009 Cardinal Health Earnings Conference Call. Now I’ll turn the call over to your host for today’s presentation, Ms. Sally Curley, Senior Vice President of Investor Relations.

Sally Curley

Welcome to Cardinal Health fourth quarter and year end fiscal 2009 conference call. Today, we will be making forward looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward looking statement slide at the beginning of our presentation which is 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 these is included at the end of the slides. A transcript of today’s call is also posted on our website on the investor page.

Since we are approaching the spinoff effective date of September 1, today’s call format will be a little different in order to accommodate questions from those investors who are solely focused on CareFusion Corporation. First, Jeff Henderson will provide a brief overview of the fourth quarter and year end FY09 results for total Cardinal Health. Jeff will then pass the call to George Barrett, Chairman and CEO of New Cardinal Health Post-spin and George, followed again by Jeff, will provide color on trends we are seeing in the New Cardinal Health businesses as well as provide FY10 guidance using our pro-forma New Cardinal Health numbers released today and SEC filing as a basis.

We will then conduct a Q&A session and we ask that you focus your questions on either the consolidated results for total Cardinal or for New Cardinal Health. At 45 minutes into the call, approximately 9:15am Eastern we will hand the call over to Carol Cox, Dave Schlotterbeck, and Ed Borkowski who will provide an overview of CareFusion performance and their expectations for FY10 and who will take questions regarding CareFusion results and expectations.

Because we have a lot to cover today, if we don’t get to your questions we will all be available afterward to address them. I’d like to remind you of a few upcoming dates and events. First, and related to the upcoming spinoff of CareFusion, the record date for purposes of determining shareholders who will receive the CareFusion stock dividend, is August 25th at 5:00pm Eastern.

We anticipate that one issue trading for CareFusion and Cardinal Health will begin on the New York Stock Exchange later this week and run through August 31st. One issue trading as a reminder will be under CAHWI and CFNWI symbols on the New York Stock Exchange. Cardinal, CAH will also continue to trade in the regular way throughout this time. As of September 1, the effective date of the spinoff, neither Cardinal nor CareFusion will trade as one issued and CareFusion, CFN will begin trading in the regular way on the New York Stock Exchange. Again, Cardinal will trade CAH; will trade in the regular way uninterrupted throughout these time periods.

New Cardinal Health will be participating in a number of investor conferences during the upcoming months, notably the Thomas Weisel Partners Conference on Thursday, September 10th, Morgan Stanley’s Global Healthcare Conference on September 15th, the Invest Ohio Conference on September 15th, and the UBS Global Life Sciences Conference on September 23rd. As always, the details of these conferences are or will be posted on the IR section of our website so please make sure to visit that often.

Now I’d like to turn the call over Jeff Henderson for the review of the consolidated Cardinal Health Fourth Quarter and Year End.

Jeff Henderson

As Sally mentioned we have a lot to cover today. I’ll be brief in my comments on our fiscal ’09 results under our current reporting structure which included the businesses that we intend to spinoff as CareFusion. I should point out that we very much remain on track for the spinoff of CareFusion to be effective after the close of trading on August 31st. You can see the detail of what I’m about to cover in both the news release as well as in the slide presentation which are both available on our website.

First, a quick recap on FY09. I won’t comment specifically on slides four through nine but will just give some overall comments. As we mentioned in our earnings release, our FY09 results reflect solid progress in healthcare supply chain services and the impact of a challenging environment for clinical and medical products. Consolidated revenues were up 10% to $25.2 billion for the quarter and up 9% to $99.5 billion for the year. We posted non-GAAP operating earnings from continuing operations of $509 million for Q4 and $2.1 billion for the year.

Net interest expense and other was $35 million for Q4 and $219 million for FY09. The year was slightly lower then we had previously anticipated due to favorable valuation adjustments on certain derivative instruments at the end of Q4. Our non-GAAP tax rate for the year was about 33.2% and we averaged 361.5 million fully diluted shares outstanding. Our GAAP tax rate was 31.4%.

We reported strong operating cash flow for the year of $1.6 billion which reflects our performance exiting FY09 combined with excellent working capital management, including a reduction of approximately one inventory day during Q4 versus the prior year and three days sequentially versus Q3. Non-GAAP diluted EPS from continuing operations was $0.86.

For the year we finished with non-GAAP EPS of $3.48 which reflects the shift of our Martindale business to discontinued operations in Q4. This shift reduced Q4’09 EPS from continuing operations by about $0.01 and fiscal ’09 EPS from continuing operations by about $0.03. The results were in line with our expectations.

Special items were approximately $54 million for the quarter and $177 million for the year which negatively impacted GAAP EPS by $0.11 in the quarter and $0.35 for the year. The primary component was the costs associated with the planned spinoff.

Pre-tax impairments and other totaled about $12 million in the quarter and $25 million for the year. However this had a neutral impact to GAAP EPS in the quarter and positively impacted GAAP EPS by $0.05 due primarily to a tax benefit associated with the past divestiture of PTS.

Finally, costs associated with the spinoff that were not included in special items primarily duplicate infrastructure costs totaled $8 million for the quarter and $10 million for the year and negatively impacted the quarter and year by $0.01 and $0.02 respectively.

Now a few general comments on segment performance. HSCS had a strong finish to FY09. Revenue increased 11% to $24.3 billion for the quarter and increased 10% to $96 billion for the year. In the fourth quarter, we had strong sales growth across all classes of Pharma customers, thus the bulk pharmaceutical customers grew 16% and importantly, sales to non-bulk pharmaceutical customers increased 9%, a much better balance then what we have seen for most of the year.

For the third consecutive quarter HSCS reported positive operating growth. In Q4 the segment reported an 8% increase in segment profit to $341 million. Civically, profit contribution was driven by revenue gains, growth in generics, strong performance in our Cardinal Health fee for service arrangements with brand manufacturers, strength in nuclear pharmacy, and disciplined expense management. For the year, the HSCS segment posted slightly positive profit growth.

All in all we are encouraged by the progress we made in the segment over the year which gives us the confidence that we are on the right path. While we realized FY10 will be a transitional year with important work to be done in order to position us for long term sustainable growth.

Clinical and Medical Products segment ended with segment profit down 9% for the full year in line with our revised degradation. A deferral in hospital capital spending and ship hold on the [Olarison] Fusion System continued to impact the business in Q4. As a reminder, the ship hold was lifted on July 10th. Dave and Ed will cover this in greater detail.

Across the organization we have continued to exercise good discipline regarding operating expenses, reporting total SG&A that was 3% lower then last year’s Q4 despite a significant increase in revenue. Strong costs and capital management will continue to be a key focus going forward as I’ll elaborate on in my later remarks.

With that I will pass the call to George to provide an update on New Cardinal Health.

George Barrett

Let me start by recognizing our retiring Chairman and CEO, Kerry Clark. The upcoming spinoff underscores the work Kerry has done to strengthen and refine our portfolio of businesses, enabling renewed focus on our core strength for both Cardinal Health and CareFusion. With just two weeks before the spinoff is scheduled to be completed, I’d like to personally thank Kerry for his leadership, his support and his friendship.

I feel very good about what the company accomplished last year particularly the strong performance of the pharmaceutical businesses across all customer categories in the second half of FY09. Our overall performance was better then we originally anticipated and I’m encouraged by our progress. We are clear on our priorities to sustain improved performance going forward and we’re taking aggressive actions to get that work done.

We are committed to improving the customer experience and we are tracking our progress closely. We have an extremely robust and ongoing customer feedback initiative that crosses all classes of trade and we are actively using the rich data from this program as a management tool. We saw a statistically significant increase in our customer loyalty index this past year with broad based improvements across our businesses.

We will continue to focus on margin improvement and let me provide specifics. We are more thoroughly segmenting our customers to optimize our portfolio of products and services. We are taking steps to improve our pricing processes. We have instituted programs to increase customer contract compliance. We have made significant enhancements to our generic program. We’ve taken the necessary steps to rationalize our infrastructure to offset any ongoing costs associated with the CareFusion spinoff. We will maintain disciplined cost management, making sure our cost structure is lean and appropriately sized for our business going forward.

We further optimized our portfolio with a decision to divest Martindale and Specialty Scripts Pharmacy and as you may recall we announced in June that we are changing the Medicine Shop International business model to better align this business with our existing operations and put this well known national brand on the path for growth.

With the CVS agreement in place for four more years we now have a high degree of stability in our chain customer base particularly with our two largest accounts for at least the next two years. We enhanced our anti-diversion system and processes to ensure that they are effective at detecting the diversion of controlled substances while minimizing the burden on legitimate customers. Without question we can’t lose focus here but hopefully this puts the challenges of the past 18 months largely behind us.

These enhancements and our increased focus on retail independent pharmacies helped drive an 8% growth in this class of trade in the fourth quarter. Additionally, improvement in our service levels and enhanced contract fine compliance particularly in generics has resulted in our third consecutive quarter of growth in our DSD, or Direct Store Door business.

We also had record attendance last month at our annual retail business conference for independent pharmacies. We launched exciting new programs to help our customers more effectively market their stores, improve the profitability of their front of store operations and provide value added services for specialized care centers. We will continue to drive our efforts to deliver meaningful solutions that help independent pharmacies run their businesses more cost effectively and capture a greater share of wallet for Cardinal Health.

We’ve made significant changes to how we work with generics manufacturers. We’ve expanded relationships with our partners and feel that these enhanced relationships will provide incremental value to both Cardinal Health and our generic partners as well as a number of key benefits for our customers including higher service levels, greater clarity on their incentives and generic cost of goods, a more consistent product supply and fewer market disruptions for product switches should manufacturer supply shortages occur.

We are confident that this move, combined with the other aspects of our source generics program will provide our customers with a generic offer that is second to none. We were pleased to see a 14% growth in our generic business in Q4, outpacing the market.

We achieved exceptional performance in nuclear pharmacy services in FY09. Our nuclear team skillfully managed through supply issues and generic launches last year, while increasing profit by more than 45% in Q4 and more than 20% for the year. We also recently announced an accretive acquisition that increases our Cyclotron production facilities in the test phase in the area of strong growth within the nuclear business.

Our medical businesses had a solid year but did see a lighter fourth quarter and let me provide some additional color for you here. Hospital supply had a tough quarter based on the carry through of the loss of a large customer earlier in the year. However, the business did sign two new customers in the quarter, one whose contract will begin early calendar 2010. Exclusive software agreement we signed with Demand Data Systems in March providing data cleansing services and information to help hospitals manage spend is progressing well with a good pipeline of opportunities for this value added service.

We are transitioning from a product management approach to a more holistic category management approach by operating a specific formulary or portfolio of products that satisfies our customer’s needs, we will balance choice and the aggregation of volume to deliver the most cost effective solution to our customers. Based on the success we’ve seen with our needles and syringes portfolio we will be rolling out a number of additional category initiatives in FY10.

The work being done in our pre-source kitting business had improved our response time to customers and our profitability, with positive earnings growth in the fourth quarter for the first time in three quarters. Even with the meaningful revenue increase in FY09 we leaned out our inventory by more than 10% year over year.

In the ambulatory care setting we entered into a partnership with All Scripts to license their leading web based electronic health record software for physician’s offices. With this addition to our extensive portfolio of products and services we truly are a one stop provider for physician’s practices. We continue to expand our position in the ambulatory space as we capture more of the opportunity and as care moves to new settings.

Our work on our medical business transformation is progressing well. We’re now in the strategic design phase of the project and have established two customer advisory groups to directly integrate the voice of the customer in this important work.

Our medical group of businesses is poised for growth with its differentiated portfolio of self-manufactured products, unmatched channel breadth, and a broad range of compelling offerings in supply chain services and specialize sales capabilities dedicated to unique needs of our various constituents.

In summary, we’re tackling the issues we need to tackle and we’re making the investments we need to make in order to exit FY10 in a stronger position and put ourselves on the right trajectory going forward.

Let me take this opportunity to make a few comments about our philosophy with respect to earnings guidance. We are committed to providing you with more color commentary then we have generally done in the past. We want to ensure that you understand the trends we are seeing and the assumptions we are making, balanced by our need for flexibility to make the right business decisions.

While I fully expect the progress we made in FY09 to continue in FY10 the results will be somewhat masked by the strategic actions we are taking. Customer contract re-pricing and the assumption of some unfavorable year over year comps and generic launches, a factor that Jeff will cover in more detail.

From a segment standpoint we do expect the transition year to be felt more in the pharmaceutical segment as that segment experiences the significant headwinds we discussed on June 2nd and which Jeff will discuss in more detail. We anticipate that this will be partially offset by our medical segment showing strong profit growth. This segment already accounts for nearly a third of our bottom line.

Before I turn the call over to Jeff, let me just say that with the spinoff of CareFusion the New Cardinal Health will remain a business of enormous scale and reach, providing comprehensive healthcare and supply chain solutions but one which is more focused, more customer centric and will act more nimbly.

Now let me hand the call over to Jeff.

Jeff Henderson

Before we dive into the details I want to remind everyone that all of our guidance commentary will be based off of the adjusted financial statement for Cardinal Health, excluding the operations of CareFusion. We filed the Form 8-K this morning with that information. Some of the details are also included on slides 20-23.

Turning to slide 13, and a look at our consolidated guidance. We currently expect revenue to be up modestly on a consolidated basis from the FY09 base of $96 billion which essentially reflects market based growth across the businesses with a fairly conservative view of pharmaceutical market growth and the overall economy. However, our Pharma business revenue may grow slightly better then the overall market due to our specific baskets of customers.

We expect non-GAAP earnings per share on a consolidated basis will be between $1.90 to $2.00, down 12% to 16% from the adjusted FY09 base of $2.26, which is primarily due to the items we outlined at our June investor event.

I will go through the segment specific assumptions in more detail now. Starting with the Pharmaceutical Segment assumptions on slide 14, based on a number of factors we outline in June we do anticipate Pharmaceutical Segment profit to decline in FY10. From a revenue perspective, although we are encouraged by the recent trends evidenced in retail sales reports, we are projecting the overall segment to grow modestly.

As I mentioned earlier, we are seeing some favorable trends of bulk and non-bulk revenue growth being more closely aligned. Based in part on the actions we’ve taken to improve our offers and service to ultimately drive a mix shift if our customer base. We do anticipate a significant headwind related to the year on year comparison driven by the timing of generic launches and price deflation.

We believe the difference in our respective fiscal years largely explains why our comments on the generics business may not necessarily line up with those of our direct peers on this topic. This is actually what we see as the largest headwind we face in FY10 and exceeds $100 million year on year.

As George mentioned, there are some key strategic moves we are taking now that will provide longer term benefit but have a negative effect on FY10, let me highlight two of them. First, we expect that our decision to reposition Medicine Shop will weigh on the year. While this represents an initial decline due to franchise fee restructuring we are convinced this is the right move for the future as we build on that brand to grow our retail independent business.

Second, the transition of our Pfizer relationship to a fee for service model is consistent with our strategic direction and although economically neutral to us over the longer term will provide a tough comparison during the second half of our fiscal ’10 compared to the previous year. We believe the combination of these two strategic moves represents more than $50 million in segment profit headwinds in FY10 versus FY09. In the nuclear business we believe it will continue with positive growth with an appropriate risk adjusted view for the recent disturbances in the supply chain.

Now let’s take a look at slide 15 and our assumptions for the Medical Segment. We anticipate that revenue will grow modestly in the current environment. We expect a significant benefit from the fall of commodity prices from the highs of last year. Net, net external market factors are a positive for the year. Our transformational investments in the business will negatively impact the results initially but position us well for the long term. Total expenses for these programs in the year will approach $40 million or more than $25 million incrementally year on year and will be quite front end loaded.

We’re also making some strategic moves in the Medical Segment related to sourcing; category management and new products which net net are a positive. Bottom line, the net effect of all these factors should result in a strong Medical Segment profit growth for the year.

In addition to the segment specific items noted, I want to highlight that we have taken additional broad based actions to improve the cost profile of our businesses. In addition to the normal hiring freezes and restraints on competition and discretionary spending that you would expect during times like this we’ve taken some specific actions to ensure that our infrastructure for New Cardinal Health is competitively positioned. In fact, total headcount for New Cardinal Health is down over 400 people since the beginning of FY09.

In total, excluding the impact of certain transformational investments we expect SG&A to be relatively flat year on year. Finally, while we do not intend to provide quarterly guidance, I would just remind you that the business doctor headwinds and investment side here are slightly weighted to the first half of the fiscal year.

Turning to slide 16 and our underlying corporate base assumptions. We expect interest expense in the $120 to $130 million range. Shares outstanding of about 362 million. We anticipate a non-GAAP tax rate of approximately 36% to 37%.

I should also mention another significant item which I discussed previously. With the spinoff of CareFusion we have to reassess the amount of off shore earnings that will be invested indefinitely overseas. Given the planned spinoff and the decreased international scale for Cardinal Health we anticipate that not all off shore earnings will be invested indefinitely off shore thus an additional tax charge will be incurred attributable to the repatriation.

Initially this is largely a non-cash charge but could eventually translate into cash tax payments when we repatriate the cash related to these overseas earnings over time which we anticipate occurring over the next several years. As previously disclosed, our current estimate of the total non-cash charge is approximately $150 million. This charge is not reflected in the non-GAAP EPR of 36% to 37%.

We expect capital expenditures in the range of $200 to $250 million with the vast majority related to investments in IT systems and infrastructure and the remainder associated with maintaining our physical facilities. We expect to end the year with a little over $2 billion in debt. Along the lines of capital deployment I wanted to remind everyone that Cardinal Health intends to maintain our current dividend on a go forward basis after the spin which includes the 25% increase that we announced in June. This would be expected to result in a payout ratio of over 30% based on our FY10 guidance.

Finally, related to upcoming events, there are a few that I would like to highlight. We’ll be completing some additional SEC filings as the result of the spinoff, what I call three of these filings out here for clarity. The first will be our 10-K filing in the next few weeks, that will show Cardinal Health financials as the company existed on June 30th without any adjustments to the spinoff.

The second will be an 8-K filing in early September. This will be a short form showing pro-forma Cardinal Health financials dating back to fiscal 2007 as if CareFusion had occurred prior to fiscal 2007. There will be a difference between this filing and the set of adjusted new Cardinal Health financials that were filed today. The primary difference relates to certain adjustments that are required under the SECs pro-forma reporting rules.

The third filing will be in November and will include adjusted financials. The adjusted financials will look similar to those included in today’s 8-K filing.

With that I’ll turn it back to George for a few closing remarks before we go to Q&A.

George Barrett

I hope that we provided enough granularity to give you a good feel for what is driving our performance. We’re making important investments and tackling the issues we need to tackle in order to set ourselves on the right trajectory. While some of these will negatively impact our numbers in FY10 we do have a good line of sight on how these same factors will play out in FY11 and this increases our confidence in the path going forward.

First, in the Pharmaceutical Segment, while our competitive market always brings some pricing pressures, we will have a high degree of stability in our chain customer base now that we have signed two major chain customers to multi-year agreements. We expect that our generic comps will improve as generic launches begin to pick up in our fiscal FY11 and again in FY12. Our Pfizer DSA transition will be complete and we’ll enjoy a full year benefit from that switch. We expect that our sourcing in Medicine Shop model changes will begin to bear fruit.

On the Medical side, the benefits from our focus on category management, sourcing, as well as our ambulatory care business will be more evident in our performance. Some benefits of our continued investment in our Medical business transformation will begin to materialize later in FY11 and overall we expect the Medical segment to continue to strong growth trajectory we will begin in FY10.

As I close, let me leave you with this. First, the demand for our product and services is likely to increase given the demographics and the national focus on providing all Americans access to healthcare. Second, we are course correcting for the long term. Finally, I feel good about the progress we’re making and about the team we have in place to drive our performance. Now we’d be happy to take your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Lisa Gill – JP Morgan

Lisa Gill – JP Morgan

Can you maybe just talk about the underlying assumptions for RX growth in your guidance for the coming year? You hadn’t talked at all about cash flow, what are your expectations for cash flow guidance?

Jeff Henderson

As I stated in my remarks, I think we’ve taken a relatively conservative view of overall Pharma growth, probably largely in line with IMS is projecting over the 10 to 12 period IMS is projecting around the flattish growth I think for FY10 its up 1% to 2% I would say our overall revenue projections for Pharma are largely in line with that and as I described them modest and relatively conservative.

Regarding cash flow, don’t want to get into specifics yet on that but I will say that we did finish FY09 with very, very strong cash flow due to some excellent working capital management as I said about $1.6 billion. Clearly with the spinoff of CareFusion we wouldn’t expect anything near that in FY10 and I would expect our cash flow to be under $1 billion in FY10.

Lisa Gill – JP Morgan

When you talked about direct store sales obviously coming in better then what we were expecting, are you seeing any shift out of [inaudible] sources is just increased penetration existing accounts or accounts that you’re bringing on?

George Barrett

It’s primarily the later, I would say it’s not particularly a shift, I think its increased compliance for us, a little bit of recovery of some business that we struggled with during our anti-diversion period. I would say more of that then shift.

Operator

Your next question comes from Glen Santangelo – Credit Suisse

Glen Santangelo – Credit Suisse

On fiscal 2010, you talked about a fair amount about all the investment spending that you need to make to the infrastructure in that year. Could you give us a sense for maybe how much of that spending is kind of one time in nature. When I’m trying to reconcile this we think about fiscal ’10 as a transition year should we think about fiscal ’11 as a recovery year? If I thought I heard you correctly you’re talking about more generics in 2011, your anniversarying the Pfizer fee for service transition but yet at your analyst day you only talked about earnings growth beyond fiscal ’10 in the high single digit rate. How should I reconcile your thoughts on that?

Jeff Henderson

Let me address specifically your questions about investment. I’ll talk primarily about capital investment but obviously that flows through to the expense we recognize as well. We refer to incremental investment virtually all the investment we’re referring to relates to IT systems and infrastructure. The $200 to $250 million of capital expenditures that I laid out for fiscal ’10 up to 80% or so of that relates to IT systems in some form or fashion.

A good chunk of that relates to two very specific programs and one is the Med transformation that George spoke about. The second one is some significant improvements in customer facing systems that were making in the Pharma business. In terms of how many of those are one time versus ongoing I would say we have a particular bullish in FY10 and FY11 related to particularly those two programs I just sighted and It’ll level off somewhat after that.

I would think going forward capital expenditures in the range of around $200 million slightly below are probably a reasonable expectation given the profile of our business and our dependence on the competitive world class IT system to drive customer interface etc. Hopefully that answers that part of your question.

George Barrett

I think many of the issues that we see in ’10 as being a weight on us in ’10 begin to give some relief in ’11. Jeff said the Medical transformation is probably the single largest. My comments in June really were about steady state growth rates rather than tended to be a specific guidance for 2011 [inaudible].

Glen Santangelo – Credit Suisse

Is it fair to think that given we have the depressed growth rate in fiscal ’10 we maybe could see a little bit higher then normal growth rate in ’11 as some of these headwinds become tailwinds in that specific 12 month period?

George Barrett

It’s premature for me to start guiding for ’11. Hopefully in my comments you can get a little bit of a sense of what factors influence us in ’10 and how those might change as we go into ’11.

Operator

Your next question comes from Larry Marsh – Barclays Capital

Larry Marsh – Barclays Capital

At your analyst meeting you went through a number of factors that you said would impact your business for fiscal ’10, I think you said about $1.90. You mentioned those today, I just want to clarify, are you suggesting today that every one of those factors is about the same size, its what you called it in June. If so, which change that gives you a little bit more confidence on the upside is it, you mentioned raw materials and pre-source, or is there something else there as well that is a little bit of a tailwind.

Jeff Henderson

If you look at the three buckets that we described at the June investor conference they were market factors, strategic positioning decisions and transformational investments. I would say the first and third of those have largely stayed the same, that would be the market factors and transformational investments.

I would say what’s slightly improved is some of the strategic positioning moves that we’re making including some of the efforts we’re making related to generic sourcing and some of the sourcing and category management moves that we’re making in Medical are delivering returns faster then we had anticipated. I would say the improvement has primarily come through some of those performance improvement initiatives and the strategic moves that we’re undertaking.

Larry Marsh – Barclays Capital

A little bit less of a bad guy on some of those initiatives as opposed to anything fundamental that’s a lot better versus June.

Jeff Henderson

I would say the bad guy, as you described him, have stayed the same. I think we have accelerated the improvements in some of the good guys. Specifically we’ve put in place some very specific short and longer term performance improvement initiatives like the generic sourcing initiative, like some of the category management and pricing initiatives that we’re pursuing on the Medical side. I would say those are bearing fruit more quickly. I would say operational improvement is happening at a slightly accelerated rate to offset what we knew were going to be the bad guys related to some of the strategic moves.

Larry Marsh – Barclays Capital

On the share count, I’m a little surprised you got into slightly up for this year. How much in the way of equity program issuance are you assuming and how much in the way of share repurchase roughly and is there anything unusual with the typical seasonal option grant this year that could boost that where managers have a chance to get more options this year?

George Barrett

First of all, we’re assuming relatively modest issuances and repo, issuances from a dollar standpoint of about $50 million and the equivalent amount of repurchase to offset that. I would say the share count is going up very slightly just because of certain assumptions we’re making regarding share price etc. and the dilutive impact that has on the diluted number of shares. Really we’re assuming repo to offset the issuances.

In terms of when grants will be issued. Our typical pattern is for options to be priced and grants to be made on August 15th. However, our comp committee and Board made a decision to move that back to September 15th this year really due to the fact this spin is not happening until September 1, and the complexity of issuing all those shares on August 15th and then having to adjust them post spin just didn’t warrant going ahead with the August 15th date so we’ve moved it back one month to September 15th to accommodate the spin.

Operator

Your next question comes from Tom Gallucci – Lazard Capital

Tom Gallucci – Lazard Capital

Back to Glen’s question in terms of how we should expect the upward trajectory over time off sort of the transitional year this year. Some of the proactive things I guess you’ve discussed, the generics programs, two things there. One, your relationship with manufacturers and two, getting compliance improved on the purchasing side with your customers. Which of those has sort of a bigger impact and how do you expect sort of the progress there? On Medicine Shops same idea, how do we think about what you’re doing there as it relates to a negative impact and then when you see the positive effects of that over the next year or two.

George Barrett

On the first it’s a little bit difficult to disconnect the sourcing and the selling. In fact I would argue that in some ways maybe part of our challenge is historically have been not tight enough connection between the sourcing and the selling. Think about it sort of as a balanced issue. They’re both very important to us. I actually feel like we’re making progress on both. On the sourcing side it can happen more quickly, you’re talking about fewer relationships. Obviously on the selling side you’ve got thousands of customers, each on its own marketplace so we’re trying to build the credibility of your program and the power of the offering. I feel like we’re making real progress on both. I’m encouraged by that and feel very positive about that.

On MSI, think of it as a gradual process so what we’re doing is converting, we’ll trade off the royalty or the licensing stream for increased growth in that business and increased compliance and sell through of our products. Its almost like you have to think of a break even point during the course of 2010 we’ll be below that break even. As we move into 2011 we’ll begin to turn the corner there. Again for us long term strategically it’s the right positioning and really allows us again to take advantage of what I think is a powerful brand.

Tom Gallucci – Lazard Capital

On the generic compliance on the sell side is there any metric or way that you can give us some perspective on where that stands now versus where you think it could be to help us understand the magnitude of what we’re looking at?

George Barrett

I’m not comfortable really providing complete clarity here; this is pretty sensitive proprietary information. I would say this; we still in some of our segments under-perform our peer group as it relates to compliance. We’ve been working very hard in recent months to look at those factors that are undermining our compliance. We’ve actually made some of that turn and we’re beginning to see some progress right now.

Operator

Your next question comes from John Kreger – William Blair

John Kreger – William Blair

Could you give us an update on your efforts to retake some of the lost share in the independent pharmacy market? If you’re willing, give us a sense about percentage of your book that class represents.

George Barrett

It’s such a hard number to reconcile because you don’t have a one to one, I lost this and therefore I get it back because we’re getting other business in the meantime. A pure apple to apples reconciliation is probably impossible. What we can say is roughly what we were losing at our low point and it was roughly a run rate of $1 billion a year.

We’re really encouraged to see independent growth at 8%. I don’t want to predict that’s a model going forward but clearly we’re making some headway. That relates to improved compliance but it also relates to picking back up some of these customers some of whom had left us. I wish I could give you a complete reconciliation, I can’t even do it here internally but I think we can see from the data that we’re making progress in that effort.

John Kreger – William Blair

Within the Medical business did you get any benefit you think from Swine Flu in the quarter?

George Barrett

We did, although in the overall mix of our numbers it’s probably a rounding error but we did see some up-tick particularly in our lab business on diagnostic kits. That’s probably the place where we saw it most significantly. In the overall mix it’s pretty small and I would say probably not all that material.

Operator

Your next question comes from Robert Willoughby – Bank of America

Robert Willoughby – Bank of America

Can you give an update on the divestitures timing and expected proceeds you hope to get from Martindale and everything else in the category? Secondarily, did you provide a reason; I saw interest expense and other expenses off sharply sequentially, anything unusual in that line item?

Jeff Henderson

Regarding the non-secures, we’re in the middle of the process right now so I don’t want to comment to specifically on that because we’re in the middle of receiving bids and evaluating those. I would say both sale processes are well underway. We’re seeing a good deal of interest in both. The Martindale divestiture is a much larger one then Specialty Scripts. Someone in a call before mentioned $200 million as a likely price for that, I would say that’s definitely in the ballpark for Martindale and Specialty Scripts considerably smaller then that.

Regarding the fall off in interest expense and other, there are a couple moving parts in there but the most significant one was really the way we have to mark to market our counterparty exposure on our derivatives agreement at the end of each quarter. Through much of FY09 that was actually a negative hit to us given what was going on in the credit markets and CDS rates for our counterparties. Actually in Q4 those CDS rates came down considerably for all of our counterparties. As a result we actually had a mark to market gain on the counterparty exposure at the end of Q4. That was the primary driver.

Robert Willoughby – Bank of America

Is there a run rate going forward then, should be a little more critical on that line item going forward?

Jeff Henderson

In terms of the total interest/other line for FY10 I think the guidance that I gave is a reasonable expectation. If you’re talking specifically about the FAS 157 adjustment that we need to make at the end of each quarter that’s almost impossible to forecast. It really depends on CDS rates during the quarter. We build a bit of cushion into our forecast for that but on the quarter to quarter basis its one of those things that’s very hard to predict in the current environment. In a normal environment you wouldn’t tend to see a huge amount of variation in CDS rates clearly FY09 was an exception to that.

Operator

Your next question comes from Randall Stanicky – Goldman Sachs

Randall Stanicky – Goldman Sachs

After this upcoming investment year a follow up to the previous, how do we think about the profitability, or how are you guys thinking about the profitability targets for the distribution businesses going forward? I’m thinking from a margin perspective.

George Barrett

Let me try to give you a broad answer, obviously we’re as I mentioned in my comment, we’re focused heavily on margin. There’s an interesting dynamic in our business which we’ve discussed with you that has to do with our mix and so one of the interesting, the dynamic here at work is that the part of our business that is lower margin in Pharmaceuticals, which is our bulk distribution, happens to be and historically be a higher growth part of our business. We have this dynamic at work which is growth as we’ve seen now in margin and the components of our business but in the overall mix we’ve been dealing with an overall weighting that is heavily on the bulk side. That’s been one of the forces that I think has been really noteworthy about the business.

I would say in general we’re doing the things we need to do to drive margin improvement and we’re focused heavily on doing that. All of our metrics are tied to that are comp systems are tied to it and focused in each of the components on the driving of margin.

Randall Stanicky – Goldman Sachs

In terms of the investment that we’re expecting in fiscal 2010 this year how do we think about the split in net spend between the Pharma and Med distribution businesses?

George Barrett

I would say slightly more then half of the spend is going to be in the Medical segment and that’s largely because of the large medical transformation that we’re in.

Randall Stanicky – Goldman Sachs

On guidance I think George you talked about providing more guidance going forward. Does that include quarterly guidance going forward?

Jeff Henderson

No, we weren’t referring to quarterly guidance. Our ongoing practice will be to not provide quarterly guidance on a go forward basis. What George was referring to was really to continue to provide as much color as possible regarding what’s driving our results. Hopefully we took a shot at that today in going through the individual segments and some of the specific drivers positive and negative in each of those segments.

We also intend to give as much color regarding some of the corporate drivers like interest expense and shares etc. as possible. Other then our comments today about H1 being slightly more negatively weighted for the year, we don’t intend to give specific quarterly guidance.

Sally Curley

We promised at about 9:15am Eastern we would turn the call over to CareFusion. Before we do that I’d just like to turn it back to George Barrett for some final comments.

George Barrett

Let me thank everyone for joining us this morning.

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Source: Cardinal Health, Inc. F4Q09 (Qtr End 06/30/09) Earnings Call Transcript
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