Cardinal Health's (CAH) CEO George Barrett on Q4 2014 Results - Earnings Call Transcript

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 |  About: Cardinal Health Inc. (CAH)
by: SA Transcripts

Cardinal Health, Inc. (NYSE:CAH)

Q4 2014 Earnings Call

August 4, 2014 8:30 am ET

Executives

Sally Curley - SVP, IR

George Barrett - Chairman & CEO

Jeff Henderson - CFO

Analysts

Ross Muken - ISI Group

Lisa Gill - JP Morgan

Eric Percher - Barclays

Charles Rhyee - Cowen and Company

Robert Jones - Goldman Sachs

Jeff Bailin - Credit Suisse

Ricky Goldwasser - Morgan Stanley

David Larsen - Leerink Partners

Greg Bolan - Sterne Agee

George Hill - Deutsche Bank

Steven Valiquette - UBS

Garen Sarafian - Citibank

Robert Willoughby - Bank of America Merrill Lynch

Operator

Good day. And welcome to the Cardinal Health Fourth Quarter Fiscal Year 2014 Earnings Conference Call. Today's conference is being recorded.

At this time, I would like to turn the conference over to Sally Curley, Senior Vice President of Investor Relations. Please go ahead.

Sally Curley

Thank you, Tina, and welcome to Cardinal Health's fourth quarter fiscal 2014 earnings and fiscal 2015 guidance call. Today, we will be making forward-looking statements. The matters addressed in these statements are subject to risk and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to the SEC filings and the forward-looking statements slide at the beginning of the presentation, found on the Investor page of our website for a description of those risks and uncertainties.

In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slides. Our press release and details about upcoming events can be found on the IR section of our website at cardinalhealth.com. So please make sure to visit the site often for updated information.

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

George Barrett

Thanks, Sally. And thank you everyone for joining us this morning. Fiscal 2014 was an enormously important year for Cardinal Health. Our organization exceeded our financial goals for the year, along multiple dimensions: revenue, gross margin dollars, non-GAAP operating earnings, and operating margin rate, and cash flow.

A particular note, we were able to absorb a revenue headwind of nearly $17 billion, due to the FY 2014 first quarter expiration of the Walgreens contract and still grow our non-GAAP earnings over the prior year.

At the same time, we have been able to enhance our market position, deploy capital efficiently, and continue to grow the talent so critical to our future. Equally important, we began our fiscal 2015 stronger and better position than ever to address the needs of a healthcare system looking for solution to two very basic questions. How do we deliver better care more cost effectively? And who are those industry players who listen and act to bring innovative solutions to the table? Answering these questions is at the heart of what we do and our teams approach is recognizing that we need to compete and win every day in today's marketplace, while at the same time making the important moves to adapt to a changing healthcare environment.

We could make a strong argument that this has been a transition year for the industry as well. It's been an extraordinary 12 months in healthcare, particularly here in the U.S. Last fall, we saw the first rollout of the exchanges under the Affordable Care Act. And throughout the year our system continued to explore different models for providing coverage for patients, delivering care, and managing cost. We saw consumers playing a more active role in their own healthcare, much of this fueled by the impact of changing benefit design, and we saw some medical breakthroughs that expanded our systems capacity to manage and even cure disease, but also test our abilities co-readiness to take with that innovation. At the same time, with such clear signs of an industry actively repositioning and consolidating upstream, among pharmaceuticals and MedTech manufacturers, as well as among providers and health system, and a continued learning of the lines that delineated, which used to be the distinct segment of the healthcare market. This is truly been a year of transition.

With that as context, let me talk about our performance in FY 2014. My remarks will focus broadly on our annual fiscal 2014 and our 2015 outlook. As I mentioned in our opening remarks, fiscal year 2014 required some major transitions for Cardinal Health, after the expiration of the Walgreens contract. And given this headwind, I am particularly pleased with our results. Our revenues for the year, excluding Walgreens, grew by 8% fueled primarily by strong growth from existing customers. Our reported revenues, including the impact from Walgreens for the year, declined by 10% to $91 billion.

Non-GAAP operating earnings rose 4% to $2.1 billion, while non-GAAP diluted earnings per share was $3.84, up 3%, and our gross margin rate expanded by 80 basis points to 5.7% for the year.

Our team continued to drive capital efficiency this year, generating $2.5 billion in cash from operation. We returned over $1.1 billion to shareholders in fiscal 2014, through both our strong dividend and share buybacks. And I'm very pleased that we were able to provide our investors with a total shareholder return of 46.7% per year.

Now let me turn to the segment. Our Pharmaceutical segment more than met the challenge associated with the Walgreens contract expiration, actually delivering a profit increase, while absorbing net $17 billion revenue headwind. It's worth noting that the rate of revenue growth excluding Walgreens would have been a robust 8% for our Pharmaceutical segment. Our overall Pharmaceutical segment profit margin expanded almost 30 basis points for the year.

I would like to take a few minutes to cover a few strategic priority areas for our Pharma segment. There is little doubt that generic drug will continue to be a significant lever in holding down prescription drug cost. Track data suggests that generics now represent over 85% of our prescriptions in United States. We have significantly increased our scale in generics through our various internal and external moves, most notably our joint venture with CVS Caremark, now named Red Oak Sourcing.

A few quick comments about Red Oak. We are extremely excited about our progress to-date in getting to a go-live with Red Oak, which was formalized last month. And CVS Caremark has been a perfect partner throughout the process. As we work through the details in our preparation for the launch, our enthusiasm has only increased.

We have assembled a talented team with both Cardinal Health and CVS Caremark well represented. Our teams are putting the hard work to manage through all of the intricate detail so that we could go to the manufactures with one face and as one decision maker. We feel confident that our participation in Red Oak will ensure that Cardinal Health is in the best position to serve our diverse mix of customers in this competitive landscape.

I understand that many of you will want to know more details about the impact, the value, and mechanics of the joint venture, but I'll ask you to recognize that Red Oak has only just this past month been engaging in discussions with manufacturers. It is important to respect the process and for us to let these negotiations proceed between Red Oak and the manufactures. And so other than the comments Jeff will be making, we will not provide specifics in the mechanics or the exact value derived from the joint venture. Of course, FY 2015 guidance include the assumption associated with the net benefits from Red Oak.

You know that diversifying our customer base has been a priority. We've continued to grow our position with independent pharmacies and other pharmacy channels over the year. Our portfolio of solutions for these customers has never been more comprehensive and the response of the retailers has never been more enthusiastic.

I just returned from RBC, our Annual Retail Business Conference held in Washington DC last week. The gathering of thousands of owners and pharmacists was our largest ever, reinforcing their importance to the healthcare system and the Cardinal Health. The conference gave these retailers exposure to over 60 continuing education courses and provided access to latest tools, technologies, solutions, and innovative generic program. Special emphasis was placed on patient solutions that helped with medication adherence and medication therapy management.

Our focus remains to help these critical members of the healthcare system improve patient care, the breadth of their products and services, and the efficiency and profitability of their businesses. At the same time, our ability to serve hospitals and health systems with pharmaceutical products continues to strengthen, including some of the important work we are doing with our clinical pharmacy teams to help with discharge management.

Specialty medicine and the services surrounding these innovations continues to play an increasingly large role in our healthcare landscape and of course, for Cardinal Health.

During fiscal 2014, we are able to deliver a 30% revenue growth in the Specialty Solutions group. We have expanded our presence in specialty biopharmaceutical, particularly in building at our tools to interface with patients who need to be served in an integrated and high-touch model. This enables us to serve the providers up here to these unique patient population and also to capture value as a partner to biopharmaceutical companies who seek to get closer to the patient.

Support this program; we established our best-in-class patient-centric hub with the acquisition of Sonexus Health in the third quarter of FY 2014. This platform and experienced team is an important step to position Cardinal Health to assist in these efforts and to deliver value added services.

Moving to the Medical segment. Fiscal 2014 revenues grew 9%. Margin rate expanded by 35 basis points and segment profit grew at almost 20%. The delivery of medical care has been undergoing fairly rapid change and the work of our medical segment has been focused on aligning to address the evolution in the system. Just these past few weeks we formalized some adaptation to these changes launching a team based approach to addressing the needs of large integrated delivery networks. These are not sales teams but rather business and systems experts, who are charged with delivering the full range and breadth of the Cardinal Health portfolio to address the complex needs of these diverse customers.

As I mentioned earlier, we've seen consolidation among hospital systems, continued affiliation between doctors and those systems, and some shifting stand as it relates to where care is delivered. On this last point, well the sickest, sickest patients will continue to be served in acute care setting. It's clear that many patients with lower acuity will be served in different settings, whether that's a community hospital, surgery center, a clinic, a physician's office, or even the home. This has been at the heart of our strategy to serve patients across the continuum of care.

In this context, the acquisition of AssuraMed, a year ago, has been an important extension of our strategy. It has significantly increased our touch points and created opportunities in a market that is growing and estimated 5% to 7% per year.

Most important for Cardinal Health, it's increasing our direct linkages with chronic patients. Through AssuraMed, we have some form of interaction with the patient, 44,000 times a day. With this increasing patient interaction, we recently made the decision to rebrand our AssuraMed platform as Cardinal Health to Home -- excuse me, Cardinal Health At Home.

As we told you at the time of the acquisition, we intended to increase the AssuraMed portfolio. We have in fact broadened the product line, as well as increased the number of Cardinal Health branded products to this important channel of the home. Although, we are extremely pleased with the progress here and the fact that AssuraMed exceeded our full year accretion target of $0.18 per share.

Our medical consumables business has represented an opportunity to use our scale to bring significant savings to the healthcare system, while at the same time expanding our margin. Our consumable business grew faster than the market this year driven by share gains from new private label product launches, new channel penetration, and from growth among our strategic accounts. We saw full year sales growth of 6% and launched over 500 new SKUs during FY 2014.

During this past year, we discussed with you the challenges many of our hospitals, IDN, and surgery centre customer faced in managing physician preference items. These categories tend to consume resources and from our perspective represent an inefficiency. We've recognized an opportunity to bring standardization and with that real time value to this system. We position ourselves to address some critical pain points, building platforms in orthopedic, wound management, and with our third quarter acquisition of AccessClosure interventional cardiovascular.

A few comments on China. China has continued to be an outstanding growth story for us. In 2014 we grew revenues by 30% reaching $2.6 billion. We continue to build strong relationship with our pharma and medical device company, at a time where company reputation is particularly important. We have expanded our geographic footprint and our lines of business which now include 30 direct-to-patient pharmacies focused on specialized pharmaceutical product.

Before I turn to 2015 one more note, it's been our practice to be transparent with you with regard to areas where we need to be better. This was a year of enormous accomplishment. But we had a few areas that did not satisfy our high expectations. Fortunately these are relatively small parts of our portfolio and in each case we are taking action to accelerate improvement but I do want to call them out.

Canada was a particularly tough market for medical supplies this year, and our business declined there year-over-year. We believe that we've made the necessary moves to address the pressure to that market and we look forward to recovery in that business.

Our work supplying medical products to small physician offices has not had the growth that we like to see. While we had solid performance in most post-acute settings, including surgery centers, and large practices, we are committed to making greater progress within these smaller practices and are taking steps accordingly.

As we leave 2014, and turn to our fiscal 2015, we begin the year with increased scale and generic, a more robust specialty business, a reconfigured customer and product portfolio, and some important solution offering for the medical system. The flexibility that comes with financial strength, a deep bench of organizational talent, and a sense of confidence in the future. Most importantly, we believe our strategic priorities align with the needs of a system experiencing a rapid change.

New performance based model, and a world of bundled risk, changing network design, accountable care organization and a more involved patient acting more like a consumer. So with this as backdrop, we are guiding to a fiscal year 2015 non-GAAP EPS range of $4.10 to $4.30. This puts on track to deliver on the long-term aspiration we laid out in our December Investor Day.

It's our year-end so I would like to voice a few thank you. To our shareholders, we appreciate your support and your high expectations. For business partners, manufacturers, providers, and caregivers, those who directly touch patients, we thank you for putting your trust in us, and allowing us to help you serve your patients. To all my colleagues at Cardinal Health, my gratitude for your talent, and your spirit, and your readiness to respond to important challenges, and to do so, with your eyes always on the patient.

Before I turn the call over to Jeff, I want to make a few quick comments on our announcement about his retirement, which will become effective following the end of our fiscal 2015. Jeff has been a talented and trusted partner to me since my arrival at Cardinal Health. I have often leaned on his agile mind and his quick wit. Although there will be no Derek Jeter farewell tour, we have a healthy transition scheduled and I know all of you will get a time with Jeff to thank him in the coming year. And of course, we will update you as we formalize our succession plan.

And with that, I will turn the call over to Jeff.

Jeff Henderson

Thanks, George, and good morning everyone. And by the way I'm counting on Derek Jeter farewell tour, okay. But thank you for the comments.

I'm happy reporting a solid finish to an important transition year. This morning I will begin by highlighting key financial trends and drivers of our fourth quarter results and then make a few comments on our full year performance. I will provide additional detail on our fiscal 2015 guidance, including some of our key expectations and underlying assumptions. You can refer to the slide presentation posted on our website as a guide to this discussion.

Let's start with consolidated results for the quarter. As we indicated during our third quarter call, achieving the upper end of our non-GAAP EPS guidance range would really depend on two items: the impact resulting from generic manufacturer price increases, and our tax rate.

During the quarter we grew our non-GAAP EPS by 5% to $0.83 per share, or $3.84 for the full year a reflection of a relatively favorable outcome for both these factors. Again some more detail in a moment.

Now let's review the rest of the income statement, starting with revenue. Consolidated revenue came in better than expected, down 10% to $22.9 billion, was a decline due to the expiration of the Walgreens contract.

Gross margin dollars were up slightly for the quarter, resulting in a gross margin rate 58 basis points higher than the prior year's Q4. This continues a 16-quarter trend of gross margin rate expansion.

SG&A expenses moderately increased by 2.5% in Q4, driven by recent acquisitions and year-over-year competition related items. Our core SG&A costs were slightly favorable to last year, due to our continuous focus on operational efficiencies.

Our consolidated non-GAAP operating margin rate increased 16 basis points to over 2%.

Net interest and other expenses was favorable in the fourth quarter versus prior year due in part to lower interest expense.

The non-GAAP tax rate for the quarter was about 34% versus the prior year's 37%. This period lower rate is related to favorable state tax outcomes in the quarter.

Our fourth quarter non-GAAP diluted average shares are outstanding was $343 million nearly $2 million favorable to last year's period.

During the quarter we purchased about $285 million worth of shares bringing the full year repurchase to $673 million. We have over $700 million remaining on our board authorized repurchase program.

Moving on to consolidated cash flows and the balance sheet. Our operations generated $715 million in cash flow during the quarter. This brings the full year to approximately $2.5 billion, include the expected benefit of more than $500 million from the unwind of the Walgreens business. We continue to make good progress in reducing our overall networking capital base, which are down 1.8 days largely related to a shift in customer mix. Overall we ended Q4 with strong balance sheet, including a cash balance of $2.9 billion, with $420 million held internationally.

Now let's move to segment performance starting with Pharma. Pharma segment revenue decreased 12% to $20.1 billion, driven by the continued impact of the expiration of the Walgreens contract. The decline was partially offset by organic sales growth especially in China. The contribution of revenue from Walgreens in the prior years was approximately $5 billion for the quarter. If you adjust for that contract loss, our Pharma sales growth in Q4 was a strong 13% driven by both pricing and volume effects.

Specialty Solution have revenue growth of 21% versus the same period last year.

Our China business also contributed to Pharma revenue growth. Total China sales were up 24% versus the prior period. This was driven primarily by a local distribution business from both organic growth and as a result of our strategic geographic expansion. Pharma segment profit decreased by 5% to $377 million, primarily driven by the continued impact of the Walgreens contract termination, which was partially offset by strong performance in our generic programs.

On the topic of generics, I do want to mention that we saw a sequential quarter increase in contribution from generic manufacturer price increases, although it was not to the level we experienced in our second quarter. Manufacturer price increases continued to impact a relatively small basket of generic items. The overall generic portfolio experienced net inflation in the low-single-digits in the quarter.

Very importantly, our generic program saw strong sales growth of about 9%, more favorably driven by strong double-digit growth in our stores program. We also saw continued brand inflation in the low-double-digits, about as we expected.

Pharma segment profit marginal rate increased by 14 basis points compared to the prior year's Q4, a reflection of the strength of our generic programs and our continued focus on margin expansion.

Moving on to the Medical segment performance in the quarter. Medical revenue grew 4% in the fourth quarter versus last year driven by growth of existing customers, including solid growth in our strategic hospital network accounts, and the benefit of acquisitions. Regarding our strategic hospital accounts, we saw low-to-mid-single-digit growth in this key customer category in both Q4 and the full year. This represents great work on the part of our medical team, given the continued challenging utilization environment. We expect more of the same in 2015 and beyond.

Medical segment profit declined 8% which includes two items worth a combined negative $13 million year-on-year.

First of these was a year-over-year increase in incentive compensation, the majority of which is based on total company performance that's been allocated to the segments. Secondly, we also had some performance shortfalls in our Medical business in Canada, which as George mentioned, reflected substantial market pressures related to Medical spend. Excluding these two items, Medical segment profits would have shown solid growth.

Turning to Slide number 8, you will see our consolidated GAAP results for the quarter. A $0.50 variance in non-GAAP results was primarily driven by amortization and other acquisition-related costs, which reduced our GAAP results by $0.12 per share. In Q4 of last year GAAP results was $2.51 lower than non-GAAP results, predominantly due to an impairment charge associated with our nuclear division.

Now let me add a few additional comments on the full year. Fiscal 2014 non-GAAP operating earnings were up 4%. I am particularly pleased with our excellent progress in margin expansion with both the gross margin rate, and the non-GAAP operating margin rate increasing versus last year, up 80 basis points and 32 basis points respectively. This is solid performance in a transition year and is a testament to our organization's flexibility, adaptability, and commitment to growth.

Fiscal 2014 non-GAAP EPS was $3.84, up 3% versus last year. As a reminder, our fiscal 2013 non-GAAP earnings per share included a discrete positive $0.18 per share benefit from the tax settlement. In fiscal 2014, our non-GAAP earnings per share included a net $0.02 per share benefit from two large offsetting tax items. Excluding these items in both years, the company achieved non-GAAP earnings per share growth of 8%.

For the year, Pharma segment revenues declined 12%, but were better than expected as organic customer growth exceeded our original expectations. Full year Pharma segment profits increased over the prior year and the margin rate expanded 27 basis points to 2.18%.

Our Medical segment achieved strong year-over-year growth with revenues up 9% and segment profit growth of nearly 20%, including the impact of AssuraMed. In addition, Medical reported segment profit margin rate improvement up 35 basis points to 4.05%.

Very importantly, during the year we also made excellent progress against all strategic priorities, which George in some detail on his remarks. We are also returning $1.1 billion to shareholders through share repurchase and dividends.

When I look at our entire fiscal 2014, I am extraordinarily proud of the growth and overall performance we were able to achieve given the headwind we are facing from the considerable shift in our customer base.

With a strong 2014 behind us, I would say we are well positioned heading into a new fiscal year.

Before discussing our fiscal 2015 outlook, I want to mention a change in the way we are providing guidance and reporting results going forward. As noted in the release we have redefined our non-GAAP earnings measures to exclude LIFO credits or charges. This change in our non-GAAP definition comes after conducting research on comparable healthcare companies and deciding to simplify comparisons of our results versus other peer companies.

We felt that doing this now, when we do not have a LIFO charge in FY 2014, and do not expect one in fiscal 2015 made the most sense.

As George stated, for fiscal 2015, we expect our non-GAAP earnings per share to be in the range of $4.10 to $4.30 and we expect revenues will increase modestly.

I will now walk through our other corporate assumptions for the year. We anticipate diluted weighted average shares outstanding will be approximately $337 million to $338 million which implies that we intent to repurchase well over $500 million worth of shares during the year.

We expect net interest and other expense of $140 million to $150 million. As a reminder, our fiscal 2014 benefit of over $30 million related to gains of minority investments is not expected to repeat.

For fiscal 2015, we expect capital expenditures of about $350 million with the bulk of that spending on our strategic priorities and IT investments. This amount is higher than historical averages, as we focus on updating our information systems within the Pharmaceutical segment, adding incremental manufacturing and 3PL capacity in certain areas, and continuing to build our footprint in China.

We also expect amortization of intangible related assets to prior acquisitions to be approximately $177 million or about $0.33 per share.

We are projecting an overall non-GAAP tax rate in a range of 36% to 37%. This tax rates reflect our expectations of further discussions and potential settlements of outstanding audit periods, as well as a benefit of our tax planning effort.

Let me comment on a few segment specific assumptions. In Pharma, we are expecting a modest increase in revenues versus prior year. As a reminder, the impact of the Walgreens contract expiration will not last until September. We still have a negative impact of two full months or about $3 billion in revenue and the fact that we have full quarter of earnings. As we noted on our first quarter call, given the nature of the wind down of the Walgreens contract, the expiration did not significantly impact our operating earnings in Q1 of FY 2014 compared to the prior year period.

With respect to other key retail customer contracts, all now extend beyond our fiscal 2015. We are planning for the brand inflation rate to be similar to fiscal 2014. Generic programs overall are expected to contribute positively to year-over-year profits. Included in this expectation are a number of underlying assumptions. First we forecast a slight year-over-year decline in the benefit of new generic launches. Also we have modeled moderation in generic manufacturer price increases with less impact in fiscal 2015 than we experienced in fiscal 2014. Remember that the frequency and magnitude of these generic price increases are uncertain and difficult to predict.

Across the overall generic portfolio our guidance range assumes slightly deflation versus fiscal 2014 which is a fairly typical pattern. Also included in our expectations for performance under generic programs is benefit resulting from the formation of Red Oak Sourcing, net of our payments with CVS Caremark.

As George mentioned in his remarks, we are pleased with the work we are able to accomplish with our partners CVS, creating a mutually beneficial long-term joint venture. As we work together to get this venture up and running over the six months that are left, since the announcement of the deal, we further refine certain aspects of our agreement. I would like to cover those briefly.

First, the initial payment of CVS is delayed in to our fiscal 2015 second quarter reflecting the operational ramp up associated with this venture. To be clear the total amount of our fixed payment from Cardinal Health to CVS over the life of the 10-year agreement remains the same. This is simply a slight timing shift. The actual quarterly fixed amount will be $25.6 million spread over 39 quarters instead of 40. This fixed payment of $25.6 million will be expensed evenly on a monthly basis, beginning with a realization of meaningful benefits from this JV. With the operational ramp up, we have modeled minimal net benefit from the JV in our first quarter of 2015. We expect during the course of the fiscal year that the value to us will ramp. The payment expense will be reported in our cost of goods sold.

Second, if certain milestones were achieved, we will make additional predetermined quarterly payments to CVS beginning in our fiscal 2016. Reflects the long-term nature of the deal and is designed to align incentives.

Again, all assumed benefits and expected payments are included in our fiscal 2015 guidance and longer-term goals. We are very pleased that we are able to get this joint venture up and running in early July as we have planned. And we look forward to our continued partnership with CVS and the opportunity to grow the strategic relationship.

Finally, to conclude our Pharmaceutical segment assumption, we expect continued growth in our specialty and China division, as well as increased investment in information systems within the segment.

Looking to our Medical segment, we are planning for low-to-mid-single-digit revenue growth. We also anticipate continuous segment profit growth and margin expansion, primarily due to contribution to my strategic priorities in the second half of the fiscal year.

Our preferred products strategy will continue to develop as we move through the fiscal year. As we discussed before, preferred products are expected to be a contributor over the midterm as we expand our portfolio, particularly in the physician preference area.

Additionally, we continue to expect market growth -- sorry. Additional, we continue to expect above market growth from Cardinal Health At Home, which is a new branding we have rolled out for AssuraMed platform.

As our Medical segment performance ramps over fiscal 2015, we expect a relatively flat utilization environment in the acute settings and mid-single-digit growth in the home setting.

As always, we will keep our operations lean and use our flexible model to capture any upside related utilization should it appear.

Finally, when we net together our assumptions for a slight headwind from commodities with a positive impact from foreign exchange, these net assumptions essential neutral on a year-over-year basis.

Before I leave guidance, I want to add a few comments related to the first quarter of 2015. Typically we don't quarterly guidance but I do want to point out a few unique issues, which will likely make Q1 our toughest quarter on both an absolute earnings basis and year-on-year growth. From a compare standpoint, keep in mind the last year's first quarter adversely a full quarter of earnings from Walgreens and a beneficial tax settlement of $0.18. And again, we have not modeled net benefit from the JV in or fiscal 2015 Q1 but expect that during the course of year the value to us will ramp. And we will be investing to win in certain areas, including the ramp up of our physician preference platforms and our IT upgrades in the Pharma business.

With that, let me move on to my final remarks. On the whole, I am very proud of what we are able to accomplish this year. At the beginning of fiscal 2014, we faced sizeable challenges. And I could to be more proud that work of our teams resulted in a positive outcomes we are reporting today. As we look forward, we have the fundamental positioning, a strategic alignment to make excellent progress against our long-term goals of margin expansion, earnings growth, and returns to shareholders.

With that, let's begin Q&A. Operator, please take our first question.

Question-and-Answer Session

Operator

Thank you. (Operator Instructions).

At this time, we'll take our first question from Ross Muken, ISI Group.

Ross Muken - ISI Group

So on the generic inflation front, it seems just in general it's something that is incrementally hard to forecast just because of some of these one-off portfolio that you've talked about. In terms of getting the buying organization kind of amenable to may be trying to pre-buy where there is opportunities or where you see in a certain category, how do you foresee sort of your ability to kind of change the way you've been doing business to basically try to capture more of this? Or -- so basically, what I'm asking is, it's hard to forecast but if you could see it in a category it's obviously quite profitable. I guess, if I doesn't go into the guidance because it's tough to predict. But how are you sort of working with everyone to kind of make sure you are able to modify this? And then, how does that also change the way and then you deal with CVS on things like this?

George Barrett

Ross, this is George, good morning, and thanks for the question so little hard to answer this. Partly as I said during my prepared comments, we are literally just this past month beginning negotiations. Let's start with some basics. You're right it is difficult to model price increases. We have talked a little bit about this in the past, which is -- well, it's difficult to sort of model the products. We think about the environment and what are the conditions like. And so as we start thinking about our year, well we can't model each product necessarily perfectly. We start thinking about how -- what are the conditions that lead to this, whether or not that is intense regulatory environment or various market disruption.

Here's what I would say, we have an incredibly sophisticated team and I would say now team put together, when we look at Red Oak to evaluate the market and to build into our modeling all the assumptions around price and price increases. I think we've done a recently good job of doing that. We do what we can and we build that into our forecast. So if you look at our FY 2015 guidance it includes some assumptions about way products go through and how they are priced.

But again, it's really hard for me to say too much about this and that we're just beginning these discussions with manufactures. But I will say that I couldn't be more excited about the quality and the know-how and the experience of the teams that have been put together to do this kind of work.

Ross Muken - ISI Group

All right, George that was a much better answer than my question was. May be just turning to the Medical side of things that you guys have been pushing more on the preferred product side obviously with AccessClosure that gets deeper into cardio, you have done stuff in ortho. I think wound care make sense in a market. I mean, what's the response you're getting incrementally if you guys continue to move forward with the strategy? And where are you seeing the most openness and where are you seeing sort of the most pushback at the hospital level?

George Barrett

I think in general, we are seeing a tremendous responsiveness. And I would say it's pretty consistently across the board at this point. Again, hospital systems are really facing different kinds of changes, including reimbursement models that look different. And so they're looking carefully not just about how they squeeze cost but how they change behaviors. This is really a behavior change where they begin to think about forcing more standardization on the commodity types of products that are in their medical service category, excuse me medical products category. And I think our conversations have been really encouraging. I've been involved in some of those myself.

Yes, we've said along this is sort of a mid-term driver because this is a change of behavior. But we are really excited about the response and we are excited about the build-out of our program not just with the step-in interventional cardiology but little bit of the growth of the platform that we guided in, in ortho and our movement into wound care. So we are really excited about it and we are getting a very positive response. But again, it's I would say more a little bit of a mid-term driver as we think about the way this will ramp.

Operator

Our next question from Lisa Gill with JP Morgan.

Lisa Gill - JP Morgan

Thanks very much. And good morning. George, kind of start with this quarter and just may be if we can talk about the revenue growth. Revenue growth is coming in substantially better than our expectation. Could you speak anything on the specialty side, some of your competitors called out Hep C or do you think we're seeing the beginning stages of the Affordable Care Act?

George Barrett

Hi. Good morning Lisa. It's interesting question. We'll start with the Hep C first. I would say that the Hep C products did have some impact on revenues, although I would say was not that meaningful and a less effect on margins. So I wouldn't say it was a major driver of our business.

What we are seeing I think -- first of all, again the balance of our portfolio of customers is improving. We are getting great response. We have seen some important growth in our strategic accounts meaning, I think we're identifying the right customers who really are positioned to compete in a changing environment.

So I think in general, when I look at execution, we managed it pretty rigorously. We are executing on our things that we're supposed to be doing with our customers and I just think in general we've seen good performance on a revenue basis across the business.

Specialty again, you mentioned specifically, just a reminder the two FC drugs are going really primarily through traditional distribution channel so they are unique drugs obviously in many ways. They are drug patient populations with very special needs. But these are solids and are moving through the traditional drug channel rather than with specialty. Our specialty growth is really not been about that; it's been about organic growth, picking up new accounts, and adding to our service package.

Lisa Gill - JP Morgan

And then my second question would just be med-surg Canada. Jeff called this out specifically as an area -- or you've called that out as an area that didn't meet your expectations. Can you just go into a little more detail as to what's going on in that market right now? Is it a reimbursement issue? How do we think about med-surg in Canada?

George Barrett

I'm going to let Jeff touch on it.

Jeff Henderson

Lisa, I'll take it. This is my home country. We have seen some pressures in the hospital market in Canada and primarily related to reimbursement pressures on hospitals due to government funding changes. So there have been generally low utilization and pressures on pricing over the past 6 to 12 months. And as George said, we are taking the necessary steps to address those performance shortfalls, both organizationally from a portfolio standpoint and from a cost standpoint and we're being very encouraged given strength of our Canadian business over the medium-term we will see that business get back on the right track.

Operator

And our next question from Eric Percher of Barclays.

Eric Percher - Barclays

Thank you. A question on capital allocation. Appreciate the detail around repurchase and IT investment. So as you think back over the last year with investments in specialty and med-surg, do you think we're seeing a natural balance? I know you have more cash that you can put to use than just what you're generating. Where do you think the opportunities are?

George Barrett

Well, Eric good morning we have identified a number of areas that we've been public about that are high priority areas for us and obviously we're doing everything we can in every one of those strategic areas to improve our strategic positioning and to be in a position to win. Where we can deploy capital against them we will. So we've done some obviously major work in generic this year, specialty has been a target, our consumables and physician preference item area has been an area of priority for us.

Obviously we look at diversified customer base; the home continues to be an area of real interest for us you think about again the continuum of care. And then, of course China has been our main priority in terms of our international expansion because we've seen so much opportunity. We will continue to look globally to see whether or not the opportunities that really enhance our long-term positioning. Jeff, if you want to add anything to it.

Jeff Henderson

From a external standpoint with respect to shareholder return obviously we remain very committed to our dividend as demonstrated by our Board's recent decision to increase the dividend by a further 13% heading into this year. And as we said, consistently for the past several years, we will look at share repo opportunistically and from a flexible standpoint to look for opportunities to buy back shares and enhance shareholder returns again as we did in 2014 and as we have modeled for 2015 as well.

Eric Percher - Barclays

And as you think about specialty, it feels like you've tried to stay away from the lower-margin areas and build the services piece. Do you feel like there's more to be built there? Or do the acquisitions you made this year position you to grow organically?

George Barrett

Well I think there is more opportunity there. Again if you think about what's happening in the Pharmaceutical side and the R&D side and the need both of these unique patient population, the physicians who are serving them in biopharmaceutical companies, I think there is a real opportunity there, and so we will continue to look organically how we build out our programs. We've got some really exciting work that we can do on the technology side internally. But if we see something externally that adds to our positioning we're certainly going to be open to it.

Operator

And our next question from Charles Rhyee from Cowen and Company.

Charles Rhyee - Cowen and Company

Thanks, guys. George, Jeff, just moving back to Medical for a second, we always talk about Canada. What about on the alternate side? You talked about the small physician practice needing some work. Can you talk about; is this an issue of scale? Is this an area where you think you need to invest more, maybe build more assets here? May be talk about that area.

George Barrett

Good morning, Charles thanks. So I think when we talk about the small physician office obviously we started from a small base, so certainly scale has helped. But I would also say this -- that our physical operational footprint, if you look at the way we are designed over many years, so really more tuned to larger type customers. So we've had to do some repositioning of our facilities and that sort of touch points with those smaller accounts. It's just a little bit of more like a -- almost like a B2C than a B2B business. So I think we have to just do some thinking about how we position respectively both to touch them in a simple way and to serve them on our platform and so we've been looking at various ways to enhance that capability and that's the position there.

Generally going back to the beginning of your question, our Medical business actually is performing well. I mean, if you look at this in a low utilization environment and you take as a discrete factor that Jeff just described, our core business is doing well. Our strategic accounts are growing. We grow our consumables. We've significantly expanded our footprint on position preference in AssuraMed, achieved the numbers that we said that they would achieve in terms of accretion. So I'm feeling pretty optimistic about the way we're position in that business and we'll just wrestle through some of those smaller challenges.

Charles Rhyee - Cowen and Company

Okay that's great. If I recall, though, when you acquired AssuraMed last year, what, a year and a half ago, that was one of the things you talked about, them bringing you sort of some expertise in small picking and packing that could help your physician business. Has that not yet translated or is that still your -- are we then closer to it?

George Barrett

Yes, that's a great observation. I should have pointed it out. I think it has been helpful but I would also say this, we've had some real opportunity directly in the home estate. And so as we've looked at this past year most of our efforts would be AssuraMed or Cardinal At Home -- I managed somehow to bury the lead, as they say, before defining our new branding. Our Cardinal At Home actually has more significant opportunity directly in that business and that's really where we've devoted most of our energy.

Operator

We'll take our next question from Robert Jones with Goldman Sachs.

Robert Jones - Goldman Sachs

Thanks for the questions. Just a couple on the assumptions around guidance. One, I thought my understanding here was that there would be more brand to generic conversions in fiscal 2015 versus fiscal 2014. So just trying to understand the assumption a little bit better about less contribution from new generic launches.

Jeff Henderson

Hey, Bob, this is Jeff. Yes, what I said was that the benefit that accrued to us from new generic launches in 2015 we expect it to be slightly less than 2014. Whether the actual amount of branded dollars that those generic are not increased or decreased is a different question? What we look at -- when we look at each launch on a case-by-case basis and look at whether it's exclusive or not and the timing et cetera, the net result in our forecast is a slight decrease in the contributions from new generic launches.

Now obviously like every year there is a certain amount of estimates and educated guesswork that goes on and inevitably the year turns out a little bit different than we expected. And frankly the last couple of years turned out more positive than we expected. So we'll continue to assess this as the year goes on but based on our best information right now we think the benefit to us is a slight decrease.

Robert Jones - Goldman Sachs

And I guess the follow-up, just around the assumptions, again, would be around the assumption around slight generic deflation. I would think your average price per generic would be higher in 2015 relative to 2014, just again, if I think about all the attractive anticipated launches in 2015. I guess I'm just trying to better understand if the expectation for slight generic deflation is on your total book or is this more a comment on a like-for-like generic basis year over year?

George Barrett

Its like-for-like generic, Bob. The way we calculate generic deflation is we look at all the generics we had on our book prior year and look at their expected prices as a portfolio for the next year. So it actually does not include generics that launch over the course of the year, so it's a like-for-like analysis.

Operator

We'll take our next question from Glen Santangelo with Credit Suisse.

Jeff Bailin - Credit Suisse

Good morning. It's actually Jeff Bailin in for Glen. Thanks for taking the questions. So I know China's been a nice growth driver for you guys, and the company has employed some pretty rigorous standards looking at other international markets. But as you consider the evolving marketplace, and with your competitors currently in both Europe and Brazil, do either of those markets screen incrementally more interesting than in the past right now?

George Barrett

Yes, so -- good morning, Jeff. This is George speaking. I would say this; we have for many years actually looked around the international environment to see where there are opportunities for us to bring our value into the system. And we've continued to look at Europe, Brazil, has always been in our sights we've mentioned that, obviously China has been a priority for us. We'll continue to evaluate whether or not we think that there is opportunity and value for our shareholders in deploying capital into those markets. To this date we've continued to evaluate and we've made decision based on what we see as the opportunity to create value, sustainable competitive advantage, and value creation for our shareholders.

So we'll continue to look at many markets. The fact that a competitor makes a move in one market is not our driver of strategy. Our driver of strategy will be what we do to compete effectively and create value for all of our shareholders.

Jeff Bailin - Credit Suisse

I appreciate that color. Just a follow-up on the sourcing JV with CVS. I know it's obviously in the early months of that relationship, but anything you can comment on how your conversations with your other customers have proceeded in terms of any that might not buy generics from today perhaps being incrementally more interested in being involved on their generic sourcing with Cardinal?

George Barrett

Yes, so Jeff I'll give you a bit of a generalized answer because I have to, it's a tricky area. But I would say that we have substantially through the joint venture Red Oak enhanced our scale and ultimately it's about being in the most competitive position possible. I think the market is probably going through its own changes, various players in the market as they look at their own ability to compete and compete effectively in this market.

I think this may create some opportunities for us as companies look and see what their own capability looks like and whether or not they need to rethink their own model. And so I don't think it will be unusual to expect that those kinds of compensations are going on in this market and I think we're extremely well positioned, should our customer base or some of the customer base rethink the way their models work.

Operator

And our next question from Ricky Goldwasser, Morgan Stanley.

Ricky Goldwasser - Morgan Stanley

Hi. Good morning. First question, just some clarification on the progression of fiscal year 2015 guidance. So I know, Jeff, you said that the joint venture will have an impact on 1Q 2015 in terms of the timing of contribution of benefit versus payment. But just to clarify, do you expect the joint venture to be dilutive to your first fiscal 2015 quarter or will you be able to offset the $25 million payment by the benefit from better sourcing?

Jeff Henderson

Thanks for that question Ricky. First of all I don't expect that we will expense the full amount of the $25.6 million payment in Q1. As I indicated in the call and it's a bit of a selleeb. But we will begin expensing that on a monthly basis, once substantial benefits, the material benefits begin to be realized.

I think the more important part of your question though is whether we expect net benefits in Q1, and I would say yes we do, but I would say that not to any meaningful extent. But I do expect the benefit to slightly outweigh any expense that we will incur in Q1.

Ricky Goldwasser - Morgan Stanley

Okay. That's helpful. And then, secondly, just back to the topic of generic price inflation, you talked in your prepared remarks about net inflation being in low-single-digits. Your competitors, as well, are check as opposed to high-single-digits in the quarter. I know you also talked about your generic basket and your portfolio. But -- so can you just explain to us why would your basket be different versus your competitors', assuming that you're seeing inflation on retail drugs, which I assume you have got like similar share within the retail market as your two other competitors?

George Barrett

Good question Ricky. First of all I do not know exactly how our competitors calculate generic inflation or deflation. As I said to Bob earlier on though we calculate it based on a like-for-like analysis of drugs that existed last year versus the price of those drugs this year, looking at the entire portfolio weighted for the volume that we have. Now again it's possible they calculate it slightly differently it's also possible that our mix of business is different. We tend to have less mail order for example than our competitors may. We may carry slightly different levels in inventory et cetera.

So I can't speak for our competitors. But as I said I think low-single-digits actually describes what we saw during the quarter.

Jeff Henderson

Ricky, I will just add it would be hard to actually explain a reason that there is really any difference. This probably has to do a calculation. However one company calculates versus another but the market is a market. So I'm not sure there's really a difference.

Operator

And our next question from David Larsen with Leerink Partners.

David Larsen - Leerink Partners

Hi. Can you talk about your ability to ship products to large doc offices on hospital campuses versus the smaller doc offices in the community setting, and progress you're making in shipping to alternate sites of care? Thanks.

George Barrett

Yes, so I'll start again. I think our ability to certain general across the system David is very strong. It's probably the most challenging for us historically when we deal with very, very small practices, just in that the number of skews that they might order, the way they order, and sort of tick tack operations or not that weren't quite as designed for those. But our ability to serve across for the channel is really high. We got recognized again this year by Gartner as the number one supply chain company in healthcare. This has been an area of real strength and fluency for us across the board but there are some little gaps where I think we need to do something differently or bad and we will continue to do that.

David Larsen - Leerink Partners

Okay. So, when you approach an IDN you can ship products to all their doc offices across all their sites of care, pretty much?

George Barrett

Yes, we did an IDN, we're able to make a very comprehensive offer and that's important for our strategy.

Operator

And our next question from John Kreger with William Blair.

John Kreger - William Blair

Hi, thanks very much. A follow-up question on Medical. Can you talk about your preferred product pipeline? I think you said you launched about 500 in fiscal 2014. What would your expectation be for 2015?

George Barrett

We have not at this point shared publically where we are in terms of our internal target. But I do not think it would be unrealistic to expect a similar number. We are aggressively going after that. And so I would say it won't be surprising if we were in the same kind of range.

John Kreger - William Blair

Great. Thanks. And, Jeff, I believe you mentioned, as you talked about the sourcing venture, that there could be an added milestone starting in 2016. Can you just talk a bit more about that? What metrics would trigger that? Should we assume that that's an annual payment or more of a quarterly true-up?

Jeff Henderson

Yes, I don't want to go into a lot of detail there. But first of all the fixed payment, the $1 billion in total basically stays intact versus what we've discussed earlier. But as we went through the formation of this joint venture, looked at the long-term nature of the deal, looked at the desire it creates coming instead of going forward, we did agree that again achieving certain milestones and I won't go into specifically what those are, but should be a key certain milestones that would be additional payments that will be made on any quarterly basis after achieving those milestones. That's probably all the detail I want to get into at this point, John.

Operator

And our next question from Greg Bolan with Sterne Agee.

Greg Bolan - Sterne Agee

Hey thanks for taking the questions. Just on the Medical segment operating margin, I understand Canada was one source of the weakness, the other maybe a little bit weaker performance on the ambulatory side. But just as we think about FY 2015, and we think about the margins that you guys put up this quarter, it sounds like you guys possibly have done some restructuring in Canada, made some pretty decent changes. What, as we think about kind of the trajectory of Medical segment operating income should we be kind of thinking about throughout fiscal 2015? Is it kind of -- just may be this is a low point and just off of that point may be kind of an ascending trajectory? Or is it going to be somewhat spotty? How should we be thinking about Medical?

Jeff Henderson

Yes, Greg, good question. Thank you. First of all just to clarify the two biggest negative drivers in Q4 were Canada as you referenced, and incentive compensation, that the amount that was pushed down to the segment based on overall corporate performance was higher than last year. Now George also indicated some disappointment with our performance in the small physician's office but from a qualitative standpoint that was not one of the bigger drivers in the quarter.

George Barrett

Getting to the root of your question by going forward, we do expect overtime to continue to drive margin expansion within the Medical segments and obviously segment profit growth as well. However that won't necessarily be consistent every quarter. And in terms of the profile next year I expect most of the beneficial improvement will be back loaded for the second two quarters of the year. First half of the year, will be largely about continuing to invest in our strategic priority, particularly our physician preference items to ensure that we're reaching critical math in those of areas and I expect to begin seeing the fruits of those labors as we get into the second half of the year and beyond.

Greg Bolan - Sterne Agee

That's great, thanks. And then, I'm sorry if I missed this, but just the CapEx guidance for fiscal 2015 obviously going higher. Can you just remind me what's driving that, please?

George Barrett

Yes, a number of things. First of all we're going to continue to invest to improve and expand our information systems within the Pharmaceutical segment that's number one. Number two we are increasing capacity both for -- some of our physicians, I'm sorry our preferred product manufacturing and for our 3PL capacity and capabilities. And, fourthly, we're going to continue to invest to expand our geographic presence in China. Those are some of the major items I would generally characterize as though as investments in IT and investments in our key strategic priorities including the ones I just mentioned.

Operator

And our next question from George Hill, Deutsche Bank.

George Hill - Deutsche Bank

Good morning, Jeff and George and thanks for taking the question. And I'll say, Jeff, I look forward to grabbing a blue or a Canadian at some point during the farewell tour. Just maybe I missed this point already, but I actually thought your fiscal 2015 was going to be a better generics launch year than your fiscal 2014, given some of the drugs that have been pushed out and what the calendar looks like for your fiscal 2015. Is there any more color you can give us on why fiscal 2015 isn't an improvement from the launch calendar perspective, or kind of maybe what you're seeing that we're not seeing?

Jeff Henderson

So first of all I would not describe it as a major drop-off, like the clients in terms of the expected impact. Obviously depends on what assumptions you make for some of the larger launches. For example, the Nexium launch, still a big question mark right, regarding when and how it's going to get launched. And so depending on what you assume for that that can have a fairly material impact on the overall assumptions for the year.

So it really comes down to our assumptions for each of the individual major launches and obviously we could be wrong. We tend to model these things relatively conservatively.

George Hill - Deutsche Bank

Okay. And then maybe just a follow-up -- on the incremental payments that would get made as part of Red Oak, I would imagine that that would assume that you guys are going to deliver earnings performance above and beyond the original agreement if you guys are required to make incremental payments to CVS. And then I might even ask with that, kind of why renegotiate the deal that way? I thought part of the deal was that you guys were making the $100 million payment such that you could enjoy some more of the upside. What led to CVS having the ability to call back some of the upside?

George Barrett

Yes, George the lift I think in general we've -- as we got through the process and more information, more data, and the teams got together, we felt it was appropriate to make a number of adaptations. Again this is a long-term deal. And we want to make sure that it reflects the direct value equation for both parties. So we did make some modifications that under certain circumstances and certain milestones are achieved we make some additional payment. This we feel very positive about this and the final terms of our agreement and the strength of the relationship and economics that will flow from it. I guess, I would leave it at that.

Operator

And our next question from Steve Valiquette, UBS.

Steven Valiquette - UBS

Thanks, good morning. Just a few extra quick ones here on the Medical segment. And I guess first for the AccessClosure deal, which closed in mid May, did that provide a positive EBIT contribution or an EBIT loss in the quarter just from the deal mechanics? And will that deal still hopefully be slightly accretive in fiscal 2015?

Jeff Henderson

Yes. Hi, Steve, Jeff. It was effectively neutral to our Q4 given that we're still just ramping it up and continuing to invest to expand our capabilities there. And, yes, our assessment of it being slightly accretive in FY 2015 has not changed. If anything or even more enthusiastic about the potential of that portfolio can bring to us in the future.

George Barrett

Yes, the Mynx product line is really one we're excited about it. And so, as Jeff said, we're feeling pretty enthusiastic about the way this is unfolding.

Steven Valiquette - UBS

Okay. One other quick one, just on Red Oak, even though the party's just getting started there. Can you remind us again of the just feasibility of other partners potentially joining into that JV? We've seen with some of the others ones in the industry that other parties have come on later which have enhanced those. I'm just curious, again, let's say, feasibility of that happening for Red Oak. Thanks.

George Barrett

So Steve, we obviously, we have always the opportunity to expand our customer base bringing people into the venture itself is a different story. Today our joint venture is strictly between CVS Caremark and Cardinal Health. And we're thrilled about that relationship. But we always have the opportunity to again take advantage of the scale that we've achieved and sort of customers of every kind around the system.

Operator

We will take our next question from Garen Sarafian, Citibank.

Garen Sarafian - Citibank

Good morning, guys, thanks for taking the questions. First, I want to follow-up on the JV questions. I understand things -- it sounds like things were fluid in terms of as you looked at the deal, and you guys made some adjustments. But I'm just wondering, does it continue to be a fluid kind of a situation where terms and payments might change one way or the other as you go through this year? Or is this sort of the final leg as you guys were finalizing the deal?

George Barrett

Yes, I think we've -- thanks for the question, Garen and good morning. I think we've at this point finalized all the agreements that formed the venture. Obviously it's a fluid market. So we're always as a company as we sell products, we refine our market condition. But all the terms that are part of the joint venture agreement are now done and complete. Red Oak has formed, it has got leadership and talent and it's negotiating directly with manufactures today.

Garen Sarafian - Citibank

Got it. Great. And then just a follow-up on this fiscal year. Just on the distribution of EPS, I know you try to stay away from giving quarterly guidance but there seems to be first quarter some comments that it will be the most challenging through this year. With Red Oak coming on to the back half of the year, it looks like the slope may be a little bit steeper towards the back end. But when I look at your historical numbers, the back half really hasn't exceeded about 53%, 54% of your annual earnings. So do you expect this year to be higher than that? Or if you can just give us any sort of quarterly progression that would be really helpful. Thanks.

George Barrett

Yes. Thanks. I'm not going to get into too much details because I don't want to get down to slippery slope to provide detail quarterly guidance. I will repeat what I said though, that we do expect Q1 to be the lightest. And just to clarify, what you said, we expect meaningful net benefit from the CVS JV to begin to materialize at the end of Q1, not towards the second half of the year, as you mentioned. But yes, Q1 should be the lightest.

Beyond that, I would say the rest of the quarter's fair amount of consistency. We do have historical seasonality, which tends to make our Q3 larger than the other quarters. Over the last couple of years though that seasonality has continued to reduce as generics have taken up a bigger portion of the portfolio as less and less of our branded income come from contingent payments. And the branded price increases have tended to be spread more evenly throughout the year. That all said, I would expect our Q3 still would be the strongest quarter of the year, although probably less extreme that we might have seen two or three years ago.

Operator

And we will take our final question from Robert Willoughby with Bank of America Merrill Lynch.

Robert Willoughby - Bank of America Merrill Lynch

George, you had mentioned the possibility of expanding your relationship with CVS with Walgreens gone and the joint venture kind of up and running. Are any updates here in terms of any kind of meaningful relationship expansions?

George Barrett

Good morning, Rob. Yes, just I would say again, I probably have to reiterate what I had said earlier. I think our relationship has probably never been stronger. We continue to explore ways to create value for one another. And I fully expect that to continue. So I can't provide any more specifics in that other than to say that working our way through the incredibly intricate details of getting to this go-live has only strengthened I think our relationship and we feel god about that. So it's probably as much as I can say.

Sally Curley

Operator, I think this was our last question.

Operator

Yes. That concludes the question-and-answer session. Mr. Barrett, at this time I'd like to turn the conference back over to you for additional or closing remarks.

George Barrett

Great. Thanks very much. Listen, thank you to all for joining us today and giving us a chance to cover what was a really important and I think successful 2014. We look forward to our FY 2015 and seeing all of you soon. Thanks for dialing in.

Operator

This does conclude today's conference. Thank you for your participation.

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