Cardinal Health Inc. (NYSE:CAH) 2013 Annual Shareholder Meeting November 6, 2013 8:00 AM ET
George S. Barrett - Chairman, Chief Executive Officer and Chairman of Executive Committee
Stephen T. Falk - Executive Vice President, General Counsel and Corporate Secretary
George S. Barrett
And welcome. I'm George Barrett, Chairman of the Board of Directors, NCL Cardinal Health. We're pleased to call to order the 2013 Annual Meeting of Shareholders. We're webcasting today's meeting and welcome our shareholders who are listening to the webcast.
As you can see from this agenda, we'll begin by considering the proposals outlined in our proxy materials and announcing the preliminary results of the shareholder voting. Once the formal portion of the meeting is concluded, we'll provide a brief business report, and then I'll be happy to take questions from the audience.
Please refer to the annual meeting guidelines in the back of your agenda regarding the procedures applicable to today's meeting. I'd like to begin by introducing each of our current directors who are here today. Their biographies are in our proxy statement.
Each of you stand as I call your name. Colleen Arnold, Glenn Britt, Carrie Cox, Calvin Darden, Bruce Downey, John Finn, Patricia Hemingway-Hall, Clayton Jones, Gregory Kenny, David King, Richard Notebaert.
Before I go on, I'd like to say a few words about our Director, Jean Spaulding, who has decided not to stand for reelection. We want to take this opportunity to thank Jean for his significant contributions to Cardinal Health. For over a decade, Jean has been a voice of experience and wisdom. And I know all of us are greatly appreciative of her guidance over these last 11 years. We will miss Jean and we wish her all the best.
I'd also like to introduce Jon Weaver, Craig Marshall and Andrea Heck of Ernst & Young, independent auditors for Cardinal Health. Could each of you please stand? Also present today is Fred Papenmeier, representative of Computershare Investor Services, Cardinal Health's transfer agent appointed to act as Inspector of Elections at this meeting.
Now I'd like to ask the Secretary of the Meeting Steve Falk to provide us with the quorum report.
Stephen T. Falk
Thank you, George. I present to the meeting the notice of today's annual meeting of shareholders and related proxy materials, together with an affidavit of Computershare Investor Services certifying that the notice of Internet availability or proxy materials was mailed to -- was mailed on September 17, 2013, to Cardinal Health shareholders of record on September 9, 2013.
I also have copies of Cardinal Health's annual report sent to shareholders containing Cardinal Health's consolidated financial statements for the fiscal year ending June 30, 2013.
According to our Inspector of Election, approximately 298 million common shares, being approximately 87% of total outstanding shares, are represented at today's meeting. This represents an excess of a majority of outstanding shares on the record date and therefore, constitutes a quorum.
George S. Barrett
Thank you, Steve. The first item of business at today's meeting is the election of 12 directors, each to serve until the 2014 annual meeting, and until his or her successor is duly elected and qualified. The 12 persons nominated by the Board are: Colleen Arnold, George Barrett, Glenn Britt, Carrie Cox, Calvin Darden, Bruce Downey, John Finn, Patricia Hemingway-Hall, Clayton Jones, Gregory Kenny, David King and Richard Notebaert.
The next item of business is a proposal to ratify the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2014, as described in our proxy statement.
The next item of business is a proposal to approve on a nonbinding advisory basis, the compensation of our named executive officers, as disclosed in the compensation discussion and analysis, the summary compensation table and related information in the proxy statement.
The next item of business is to vote on a proposal, if properly presented, from the International Brotherhood of Teamsters General Fund. The Board of Directors recommends to vote against this shareholder proposal. The Board's statement and opposition to this proposal is contained in the proxy statement.
Is a representative of the sponsor of this shareholder proposal present? Microphone is right there. Please introduce yourself and identify the shareholder you represent, provide any comments regarding the substance of your proposal within the 5-minute limit.
Good morning. My name is Dan Willett from the International Brotherhood of the Teamsters General Fund, holder of 75 shares. I'm here to move proposal #4 seeking to establish greater accountability and transparency in our company's political spending. Long-term shareholders of our company consider disclosure of political expenditures made with corporate funds and payments to third-party groups to be an important Board accountability issue and a new standard in good governance.
Since the Supreme Court's citizens united decision, the landscape of third-party spending in our country has changed significantly. We acknowledge that the company currently offers a policy on political contributions on its website, as the company says in its statement of opposition to this resolution. We believe that this is deficient because the company will not disclose an itemized list of direct contributions to political candidates and ballot measures, a list of trade associations to which it belongs and how much of our company's payments were used for political purposes, and a list of contributions to other third-party organizations, including Governor's Association and 501(c)(4) groups. For example, our company is a member, or has recently been a member of the following trade associations:
Business Roundtable. In 2008, the Business Roundtable reported lobbying and political expenditures of $10.2 million. Healthcare Supply Chain Association. In 2011, the Association reported lobbying and political expenditures of $541,000. America's Health Insurance Plans, or AHIP. In 2011, AHIP reported lobbying and political expenditures of $11.4 million. These trade groups are engaged in advancing positions that are just as significant as those advanced by candidates for office and political action committees. We only know about our company's membership in these trade associations because of disclosure by other sources. It is virtually impossible to obtain a full accounting of corporate political spending from public sources. The only way to take get a full picture of Cardinal Health's contribution is for the company to disclose them.
As of October 2013, more than half of the S&P 100 and 118 companies overall have adopted disclosure of their political spending and implemented Board oversight. Some of these companies include Cardinal Health's peers: UnitedHealth, WellPoint and Aetna. We are asking Cardinal Health to disclose all of its corporate political spending so that shareholders and our Board can appropriately evaluate and mitigate any risks associated with these expenditures. Without an effective system of reporting, our Board cannot assess whether these expenditures present unacceptable risks. Thank you.
George S. Barrett
Thank you, Mr. Willet. Excuse me. Anyone who has not yet voted or wishes to change or vote his or her proxy should do so now by turning in into her ballot. If you need a ballot, please raise your hand. I now declare the poll is closed. Steve, would you give us the preliminary voting results?
Stephen T. Falk
Yes, I will. The results I'm about to report are considered preliminary and subject to final verification by the Inspector of Election. We will post the final results on our website at www.cardinalhealth.com on the Investor Relations page shortly. We will also disclose voting results in an SEC filing no later than November 11, 2013. On proposal #1, the election of directors. It appears that each director nominee has been elected, receiving at least 96% of the votes cast for his or her election. On proposal #2, ratification of the appointment of Ernst & Young LLP as our independent registered public accounting firm for the fiscal year ending June 30, 2014. It appears that this proposal has passed by a vote of 98% of votes cast for the proposal.
It appears that proposal #3 to approve on a nonbinding advisory basis the composition of our named executive officers has passed by a vote of 94% of votes cast for the proposal. It appears that proposal #4, shareholder proposal regarding political contributions and expenditures has failed by a vote of 40% of votes for and 60% of votes against that proposal.
George S. Barrett
Thank you, Steve. The reported voting results is now concluded. And that ends the formal portion of today's meeting, and the meeting is now concluded. I would like to take this opportunity to provide you with a brief update in Cardinal Health. And at the conclusion of my discussion, I'll be happy to take any questions from the audience.
So let me ask us to advance to this slide. And please -- I won't read this. I will remind you that we will be making forward-looking statements in this discussion. Next Slide, please.
It is an extraordinary time in health care, and Cardinal Health has spent a good number of years thinking very carefully about the evolution of change in our system, how quickly that change is occurring and positioning ourselves to compete effectively in that setting.
As you know, in many ways, we've repositioned our company, following the spin-off of what became to fusion. I'd like to just offer this perspective on financial performance recent that's spin-off. As you can see, we've had a strong history of performance. As you look here, you'll see consistent growth of our non-GAAP EPS, CAGR 8 campaign-- annual growth rate of 18.5% and a non-GAAP operating earnings growth of 13.6%. And this has been a track record fueled by a very talented organization and a group of leaders and all the people at Cardinal Health who are working very carefully to compete every day in a world that is changing in some ways faster than anything we've ever seen. But we're very proud of the progress and we are making here and we continue to focus on adapting to a very fast-changing environment. Next slide, please.
During this time, we've deployed our capital carefully. We regard ourselves as stewards of your investment. And as you can see here, we've approached this -- our organization has approached capital deployment with a very thoughtful strategic perspective. You can see during this period, there has been some heavy investment in acquisitions. A lot of this, again, around the repositioning of the business and much related to the acquisition of AssuraMed, which we'll talk about. But we continue to believe that a balanced approach to capital deployment is the best way to create value for our shareholders. This includes a robust dividend. I'll speak about more in one moment. The capital expenditures to drive the infrastructure and the heart of this business, the core of this business, share repurchase that we believe, from time to time, is very important for us in terms of effective deployment of capital. And then, finally, acquisitions that are really driven to create sustainable, long-term competitive advantage. And we'll continue to approach this with a very balanced style.
If you go to the next Slide, you'll see that we believe that a robust and growing dividend is important part of our value proposition to our shareholders. And you can see the history as you go back to the year 2000, a strong history of growing dividend. So we are committed to this, and we'll continue to believe that being able to return value to share through a strong dividend is a big part of our value proposition.
Just a few minutes on the year 2013. It was an eventful year in every way and a very successful year for us financially. As you can see here, we completed the year with $101 billion in revenue, on a slight decline or a 6% decline in sales. As you may remember, if you go back a couple of year or so ago, we had the expiration of one of our large contracts. And that accounts largely for the shift in revenue, as well as the conversion of certain branded products to generic products, and the revenue line adjust quite dramatically when you see that. We finish the year ranked #19 among Fortune companies.
Our non-GAAP earnings, as I mentioned earlier, continue to grow very nicely, but we had a 10% growth in fiscal 2013 and generate $2 billion of non-GAAP operating earnings.
Our non-GAAP EPS, diluted EPS from continuing operations, grew by 16%, and we had a very strong year, generating $1.7 billion of cash. But it was in many ways a year of huge transition, and I'll highlight 2 issues. One was that one of our major contracts, contract with Walgreen expired in late August. That news was clear to us in the spring of 2013. And we have done a great deal of work, as I've said, over these past years to position Cardinal to diversify our customer base, to diversify our product lines and the segments to whom we supply products and services. And I think that is benefiting us in our overall positioning and in our overall potential for growth.
And so this was a very significant event that occurred during 2013. Through that, we continue to believe that our business was well-positioned to compete in a changing landscape. And as I said, the landscape's changing at a pace that we probably have never seen before.
So a very, very strong year in 2013. A few accomplishments I wanted to highlight. As I showed in the slide, we expanded a lot of our -- virtually all of our financial goals for the year, expanding gross margin by 65 basis points and our non-GAAP operating margin by about 29 basis points. So very strong progress along margin expansion, which is critical to us. I mentioned we grow our non-GAAP operating earnings by 10%, generate $1.7 billion of cash. Then I think we have very effectively deployed our capital. I'll come back on that one moment for our shareholders. We made very strong progress against our strategic priorities. We have identified these quite clearly for everyone. Our Pharmaceutical segment grew and diversified its customer base. We expanded our generics programs.
As you probably know, generics represent over 80% of perception today in the United States. Just like an extraordinary number. And we brought in our specialist a specialty offering. PGD believe that with the evolution of the genomics the explosion and our ability to do really personalize causes of every patient specialty pharmaceuticals will continue to grow.
Our Medical segment, completed it's very important investment in IT infrastructure, positioning us for growth. We made a very important acquisition of a company called AssuraMed, which for the first time, really positions Cardinal, not only follow the patient from the hospital to pharmacies, to doctor's office, to clinic, but also now to follow that patient to the home. And we greatly expanded our product line of approved products. So it was an important year for us in terms of growth of our strategic mentions.
We reported, this past week, our Q1 2014 results. We're off to a terrific start. We have revenue of $24.5 billion on an expected decline of sales. Our non-GAAP operating earnings were up 13% to $532 million, and our non-GAAP diluted EPS from continuing operations grew by 36%. That was accelerated a bit by some tax resolution that contributed $0.18 along that growth or $63 million.
But our operating earnings base has been very strong through the beginning of the year, and we continue to be very optimistic. And with those results in Q1 and our sense of optimism about our performance, we did raise our guidance for the year. The new guidance is to 3 62 to 3 72. So up to a very strong year. And as I mentioned, our cash generation has been quite strong.
We really built our strategies around 5 key principles, and these are powerful forces that are occurring around health system. As a starting point. Demographics will drive the demand in public health, particularly around obesity and smoking continue to challenge us as a nation. And this is happening largely everywhere in the world. And economic forces and industry forces are going to require a health care system, which places a very high-priority on efficiency and cost effectiveness. And that's at the heart of what we do.
Second, care needs to be more coordinated on health care system and it needs to be delivered in multiple settings. It will be delivered and is increasingly delivered in multiple settings, and gravitating towards those settings that are most cost-effective.
Third, people will want and need more care in the home. They'll be increasingly knowledgeable and involved their own health care. This is a trend that has really been at work for some years, but we do see this accelerating. Fourth, our health care system needs continuing innovation. We are huge supporters of innovation, and we'll continue to drive innovation ourselves. But we also believe that when you cost-effective alternatives on to some products that are in their mature stage. And this is true on the pharmaceutical side. We will see this in generics, and we think this is true on the medical side and we're investing in this area.
And fifth, system shifts from fee-for-service payment systems, payment models, are beginning to migrate more towards payment for outcome. And we think that shift is very profound. It's an important one, and we do believe that all of our business partners and particularly we're seeing this in the hospital and the integrated liberty systems. They're going to be looking for partners who specialize expertise and can create value in an environment that's changing some of its delivery models.
So given those factors, we've-- I am focused on 5 key areas, and I'll just touch on the things here at the bottom. Ultimate sight of care is really a way of saying that we know that care will be delivered in the hospitals. But increasingly, we'll see much of the care that has been delivered in hospital, delivered in different settings. That maybe a surgery center, that maybe an oncology clinic, and maybe it a doctor's office and increasingly, the home. So we have continued to invest in our ability to serve the system along the continuum of care and through the ultimate sites. We believe generics will continue to grow. We know there's a very cost-effective way for us to hold down the cost in health care in this country and its happening everywhere in the world, and we've invested very, very substantially and growing our position and our capabilities around generics.
Health and health systems in hospitals solutions, as I mentioned, they are these changes occurring in a way that care is delivered, but also, the payment models that's support that care. And I think, for us, we need to be that trusted partner that a health system in a hospital can turn to, to say, "What are the ways that we can do business differently, that we can deliver care different in our institution? And how do you help us do that?" I think Cardinal is increasingly offering the services and the products that enable that.
We continue to believe that specialty pharmaceuticals are going to be a unique aspect of our pharmaceutical care. Again, the explosion of the biological sciences, our ability to understand the genetic makeup of every patient means that we will have much more targeted drugs that are addressing specific and unique needs of that patient. Those are going to require special expertise. And we continue to be excited about our position in China. We think it's an extra ordinary market. It continues to grow at a very rapid rate. We have a huge population, but also, a government committed to providing health care for its citizens, and we've continue to grow very nicely. In China, we believe that we've got lot to bring to that market. And in part of our strategies been to take -- not just to see a market that is growing and is large, but one where we think we can bring any capabilities and we continue to be extremely excited about work there. So in the next slide, if I just summarize.
We offer efficiency, scale and global reach to serve what is a very rapidly changing environment. We provide a broad range of cost advantage products and services. We meet the needs to reduce cost and improve efficiency throughout the system, while maintaining quality. We think we are uniquely positioned to serve all care settings as sites of care and sites of delivery shift. We're uniquely positioned to bring products and services to a large and growing market in China. And we are committed to providing both growth and income profile with the differentiated dividend among health care services companies.
So I want to just finish with this one slide. No progress occurs for our shareholders that have worked of extraordinary ways. We've got amazing people. And I'm very gratified that we occasionally get recognized for those people. And I just put up here on this last slide some of the ways in which our organization distinguishes itself. We are deeply committed to development of talent and devote a huge amount of energy to creating what we think is the most talented workforce in the industry.
We've done a lot of work around diversity. And you'll see here our work on increasing the number of women in key positions in the organization working actively, both here in our community and the organization around the country to promote that. We focus heavily on diversity, on human rights, on making this place a great place to work. We want Cardinal to be a destination for talent, and we want Cardinal to be an organization where people will grow their careers and do so with that potential to create additional value. This is the ultimate virtuous cycle, the investment in our people.
So with that, I will close my comments. Thank you for your attention. And I'd be happy to take any question if you have some.
George S. Barrett
Hearing and seeing none. I will again thank you all for your time. Have a good day. Thanks.
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