Cardinal Health, Inc. (CAH) Q4 2010 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter 2010 Cardinal Health Conference Call. My name is Noelia, and I'll be your coordinator for today. [Operator Instructions] I would now like to turn the presentation over to your host for today's call, Sally Curley, Senior Vice President of Investor Relations. Please proceed.

Thank you, Noelia, and welcome to our conference call today. Because we will be reviewing our fiscal fourth quarter and year-end results as well as our fiscal 2011 outlook on today's call, our prepared comments may be a little longer than usual. Therefore, we plan to extend the call to end at 9:45 a.m. Eastern to allow plenty of time for Q&A. Also 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 found on our Investor page on cardinalhealth.com for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures, and information about these measures is included at the end of the slides. Before I turn the call over to our Chairman and CEO, George Barrett, I'd like to remind you of a few upcoming investor conferences in which we'll be participating and webcasting. Notably, the Morgan Stanley Global Healthcare Conference on September 13 in New York, the Robert Barrett Healthcare Conference on September 14 in New York, and the Stifel, Nicolaus Healthcare Conference on September 15 in Boston. The details of these events will be posted on the IR section of our website, so please be sure to visit that site often for updated information. We look forward to seeing you at one of these or other upcoming events. Now I'd like to turn the call over to George.

Thanks, Sally. Good morning, everyone. This morning's call offers me the opportunity to reflect on our first year, as what I'll describe for the last time, as the new Cardinal Health. It has been an important year for us in many ways, and this morning, I'll give you my observations about the year we just completed as well as my perspective on the year in front of us. I'll devote most of my commentary to the state of our transformation and our overall positioning, and let Jeff cover in detail, the numbers for the quarter and for the full year. I will, however, start with a few numbers. We ended fiscal 2010 with non-GAAP EPS of $2.22, down slightly versus fiscal 2009 and considerably better than we anticipated back in August of last year. Full year revenue was up 3% to $98.5 billion. Our organization did an outstanding job managing our working capital, and we generated $2.1 billion in cash from operations. Overall, these were significant accomplishment, given the considerable strategic changes and investments we made on the business. Some of you have asked me during the course of the year, how I feel about the extent and rate of our progress. As you know, we entered the fiscal year with a commitment to take action to improve our performance, our strategic positioning, our internal culture to shift our center of gravity more decisively out to the customer and, of course, our trajectory. We also knew there were some systemic issues that we would have to weather, some mechanical challenges like the large year-over-year negative comp in generic launches. Having said all that, if you'd ask me a year ago, whether or not I'd be pleased with where we are today, the answer would clearly be yes. We've made enormous progress on our road to position the company for renewed growth, and we've moved the needle considerably faster than we had anticipated. This is still a journey, but I believe we have a lot to be excited about. Certainly, it was not a year of perfection. We hate to lose a single customer and we lost very few. But in the earlier part of the year, we did fail to renew a few key customers on the Hospital side, as well as one on the Retail Chain side, and that was disappointing. We stabilized our margin rate in Hospital Supply, however, would have liked to have seen it moving up. And while we made enormous progress in our efforts to simplify the lives of our customers, we know we can do even better. Nonetheless, our customers are telling us that we're on the right path. Our employees are telling us that as well, that they believe in where we're going and are energized by the journey. As we told you at the beginning of the fiscal year, our focus in FY '10 was on strengthening the core of our business, and we have done just that. In our Pharmaceutical segment, we renewed many of our largest chain customer contracts well into fiscal 2012. We also renewed and entered into new agreements with a number of very important large branded manufacturer partners. All of this is critical to stabilizing our Pharmaceutical segment base and putting us in a position to move margin in the right direction. Pharmaceutical segment profit declined 3% for the full year. This performance was considerably better than we anticipated, driven by strong execution on key initiatives, some of which I'll cover in a moment, disciplined cost management and aided somewhat by the positive impact from some unplanned generic launches. We've placed a great deal of emphasis on our retail independent pharmacy channel, and after a patchy couple of years, we return this part of the business to full year growth for the first time, since fiscal 2008. Just a couple of weeks ago, we held our 20th annual and largest ever Retail Business Conference for our retail independent pharmacy customers. Well over 4,000 stores were represented at the event in Denver. We launched a number of offerings designed to help pharmacists run their businesses more efficiently, including Order Express, which provides retail pharmacies with a more convenient and user-friendly online buying experience. Feedback from customers has been very positive. We made great strides in our generic sourcing initiative, and we developed a highly attractive generic offering for our customers. As a result, we exceeded our full year improvement target of 10% in generic penetration or what we refer to as share of wallet. And our focus on driving sales force effectiveness through initiatives like our Sales College has provided us with additional traction and speed. We recognize that our sales reps are crucial to delivering an even higher level of service to our customers, and we continue to invest in their ongoing training and skill development. We also reevaluated our Pharmaceutical segment portfolio and made a number of key decisions. We felt that the Medicine Shoppe network could be enhanced by providing an alternative model for our franchisees that moves them from a royalty-centric model to a more flexible fee-based model. We decided to divest Specialty Scripts and Martindale, and we made a meaningful move into the fast-growing area of Specialty Pharmaceutical Services. As we discussed previously, our goal was to enter the Specialty Service area in a differentiated way, and we're convinced that the acquisition of Healthcare Solutions or P4, as it is known in the oncology community, provides us with that platform. The commercial activities within Healthcare Solutions serve key participants across the chain of specialty care, including physicians, pharmaceutical companies and payers, by providing essential tools, services and data to help improve patient outcome and increase efficiency in the delivery of healthcare. While this acquisition will have only a modest impact on FY '11, it positions us to participate in the growth of specialty category going forward. We're very excited about the growth potential in specialty and about the enthusiasm of the Healthcare Solutions' leadership team to help us achieve our goals in this area, and also, about how they're working with us to integrate these activities into Cardinal Health. We expect the integration to be substantially complete by the end of the second quarter of FY '11. We also made investments in our relatively small but growing positron emission tomography unit, and are well-positioned through the manufacturing, dispensing and distribution of PET imaging agents and a key role we play in supporting clinical trials. And in the space of exceedingly difficult raw material shortages, our Nuclear Pharmacy organization performed extremely well in FY '10. I'm very proud of this group and how they work so closely with our customers to ensure the needs of patients were met. We're looking forward to return to more normalized levels of supply in the September timeframe from both the Chalk River reactor in Canada and the Petten reactor in the Netherlands. Our Medical segment had a busy and successful year. We finished the fourth quarter of 22% over prior year in segment profit and up 11% for the year. Additionally, we achieved a number of key goals and moved forward with several important transformational initiatives. We developed our segment strategy around channel and category management, which we believe, will better align with our customers' needs and enhance our ability to apply our core capabilities. And we completely rebuilt our sourcing model for medical products, expanding our global sourcing capabilities and our leadership there. I believe this will be an increasingly important asset for us and for our customers. We made good progress on our substantial commitment to simplifying the customer experience and made critical investments in IT and customer-facing activities. In particular, we began the Medical Business Transformation work to enhance our technology platform and processes, and we are progressing well against our critical milestones. We returned our Presource kitting unit back to positive growth trajectory, enabled by our Lean Six Sigma and operational excellence initiative and our expanded presence in surgery centers. We made investments focused on growing our Ambulatory footprint and we expanded our sales organization, while at the same time, enhancing our Web ordering capabilities to better meet the needs of this channel. We also established a cross-selling effort with the Pharmaceutical segment, which is off to a good start. Our lab channel grew both revenue and profit by mid-single digits for the year, helped by demand for flu-related products in the first half. And Canada had an exceptional year, with double-digit revenue and profit growth, also helped by the demand for flu-related products, along with some upside from foreign exchange. In all, Medical segment revenue was up 3% in the quarter and up 7.2% for the full year. I should say something here about demand, as a number of companies have noted the softness in the hospital and physician office channels. We commented in last quarter's call that demand was somewhat soft there, and we can report that we saw no real improvement from a macro standpoint in our June quarter. At the Cardinal Health enterprise level, in addition to our effort to strengthen our strategic positioning, drive performance management and revitalize our culture, I'm particularly proud of how we manage our capital in an extraordinary environment. During this past year, we were able to raise our dividend as well as do some share repurchases, as Jeff will discuss. We've invested in areas of our business critical to supporting our customers and driving future positioning, and we've used capital opportunistically to make moves that enhance our strategic positioning and shareholder value. We entered 2011 with a very strong balance sheet, which gives us excellent financial flexibility. In keeping with our commitment to drive shareholder value, we've launched total shareholder return, or TSR, internally as a capstone metric for measuring our performance. And I'm really pleased that our organization is rallying around this concept. We've been setting internal goals around this metric, and I'm sure you'll hear us reference it in the future. Following the spin off, we took the opportunity to recruit four outstanding new independent board members, with exceptional healthcare and consumer background. These individuals have been terrific additions to our Board of Directors. Additionally, we bolstered our management team with several important additions. At the corporate level, we added Mark Blake, EVP of Strategy and Corporate Development; Patty Morrison, CIO; and Gilberto Quintero, Senior Vice President of Quality and Regulatory Compliance. In the Pharmaceutical segment, we added Tim McFadden, EVP of Sales and Marketing. And most recently, in the Medical segment, Lisa Ashby, who has successfully run our Lab business for several years, was promoted to President of Category Management. We did all of this while successfully managing the CareFusion transition, and this was no small feat. Let me discuss our guidance for fiscal 2011. Jeff will cover our specific assumptions in some detail in a moment. As you know, we provided a preliminary outlook for our fiscal 2011 three months ago when we announced third quarter results. Since that time, we have finalized our budget, and we've been able to get more clarity on several key variables, like the availability of raw material for our Nuclear Pharmacy unit. Of course, one of the variables, which is hard to model is the rate of recovery of the U.S. economy. Although, over the years, healthcare has been relatively insulated from fluctuations in the economy, it is not immune. We've seen consumers alter their behavior regarding their own healthcare consumption, based on their personal economic and employment status. So although, we projected a relatively modest low single-digit growth rate on the revenue side, we do feel that we've come out of fiscal 2010 with some momentum. In the Pharmaceutical segment, we entered 2011 with relative stability, and our customer base for many of our strategic initiatives are beginning to take hold, and with pharmaceutical supply agreements on terms, which we feel are right for us and for our business partners. We feel some momentum in our retail independent pharmacy channel and with our generic programs across all customer segments. And in FY '11, we'll continue to focus on increasing generic penetration. Additionally, we'll more effectively utilize all the tools in our tool chest, including the expertise and resources we have in our Pharmacy Solutions business, to improve the customer experience and provide incremental value. And while we're not expecting the acquisition of Healthcare Solutions to have a big economic impact on fiscal 2011, we're very excited about the new platform it gives us in Specialty Pharmaceutical Services. In the Medical segment, we expect that our new focus on Category Management will enable accelerated growth of our preferred products and private brand program, enhance our ability to provide additional value to our customers and offer potential for margin enhancement. We'll continue to invest in our Medical segment transformation and drive our timelines aggressively, because it's essential to our repositioning in the industry and to delivering on our commitment to our customers. We'll also focus on the Ambulatory channels as we continue to see Healthcare Services move to smaller and more disease-specific units of care. We'll remain an active partner with all players in the system as we help to improve the cost-effectiveness of healthcare, and we'll make sure that our voice is heard in Washington and at the state level as healthcare reform enters the implementation phase. We'll also continue to look for opportunities to complement our capabilities and grow our strategic position. And finally, we will hold ourselves to ambitious goals on those things we control, while modeling more cautiously on those events we don't control. So taking into account all of the non-factors at this point and balancing this with some remaining market uncertainty, we are raising our initial outlook in providing an FY '11 non-GAAP EPS guidance range of $2.38 to $2.48. We are building momentum and feel good about our progress. As we move through the year, we'll talk about our initiatives on this quarterly calls, and I'll also be sure to comment on the environmental factors that are important for you to understand. I'm very proud of the work that we began in FY '10, and look forward to continued progress in FY '11 and beyond. Now I'll hand the call over to Jeff to provide more details in the quarter and the full year and our fiscal 2011 guidance assumptions. Jeff?

Thanks, George. Good morning, everyone. Thanks for joining our call today. Let me expand in our Q4 and fiscal 2010 performance for a few moments. And then I'll add more color around our FY '11 guidance, including our assumptions in both the corporate and segment standpoint. Revenue or P&L numbers that are in our earnings release and slide presentation. I'll try to focus more on some of the underlying financial trends and drivers. Let me start with a few comments on segment performance in Q4, referring primarily to Slides 10 and 11 and starting with the Pharma segment. As George said, we are pleased with the business progress and financial results in Pharma. Otherwise, we alluded to back in our April call, the year-on-year segment profit trend is a bit of an anomaly in Q4 due to some timing and other unique issues. More on those in a few moments. Pharma segment revenue increased by 0.2%, with non-bulk growing considerably faster than bulk. For the quarter, non-bulk sales rose to 52% of total segment revenues. As previously mentioned on earlier calls, the ending of a relationship with two customers in the first half of fiscal '10 has dampened sales growth throughout the second half of the year. The impact from those two terminations was approximately 1.5 percentage points in Q4. We will began to lap these losses by mid-fiscal 2011. Importantly, revenues from retail independents grew 3.3%, a rate which was about the overall market. And overall generics growth was 10%, driven by close to 20% growth in our generic source program for the quarter. From a profit perspective, the segment decline can be attributed to a few expected but somewhat notable factors beyond the drivers and trends we would normally see. As anticipated, we did not see the same level of branded price inflation from our remaining contingent vendors as we experienced in Q4 of FY '09. We continue to face headwinds from Medicine Shoppe transition and the timing impact of a large-vendor DSA transition. Both of which flowed through as anticipated and are worth about $20 million of downside in total for the quarter. The ongoing severe global supply shortage in our Nuclear business also had a significant negative impact. In fact, the loss of moly isotope availability for much of the quarter was, by itself, worth about $28 million. Although, we were able to offset a portion of this in our Nuclear Pharmacy unit, through the use of alternative imaging isotopes and cost efficiencies. On a positive side, we contained the benefit from the strong performance of our generic programs. Our Medical segment had another strong quarter, posting a segment profit increase of 22% to $102.5 million. This increase was driven by volume growth with existing customers and solid expense management. We also had a few notable items in our cost of goods sold, which worked in opposite directions. A one-time vendor adjustment, which negatively impacted last year's Q4 by about $5 million, and that's benefited the year-on-year compare by that amount. And that negative impact of commodities worth a little less than $5 million of downside in the quarter versus last year. I pointed out the commodity downside as it represents the distinct reversal from the benefit we are seeing in the first half of the year. Let me now cover a few items at the consolidated level. Non-GAAP operating expenses were flat for the quarter versus last year, with strong expense controls and bad debt accrual reductions offsetting an increase in investment spend and incentive compensation. Our non-GAAP tax rate for the quarter was 37.7% versus 32.6% last year. The higher rate in the current quarter was attributable to changes in income mix and some discreet items both this year and last. Specifically, this quarter's discreet items include adjustments to our FIN 48 reserves, a reduction in the deferred tax asset valuation allowance related to our business in Puerto Rico and a provision true-up related to our state tax returns. The net of discreet items was worth about $4 million of additional tax expense for the quarter. In FY '09, our effective tax rate benefited from a one-time state tax settlement. So with those comments behind us, let me reprise the EPS walkdown that I did for you in April, where I tried to explain the drivers of our year-over-year decline in Q4. I'll use most of the same categories I referred to then. Where appropriate, I'll indicate where they may differ from what we had anticipated three months ago. But in most cases, they are quite consistent. The Medicine Shoppe and the Pharma vendor DSA transitions were, together, worth $0.03 of downside. A decline in other contingent brand inflation was worth $0.04. Generic launches turn out to have about a neutral impact year-on-year in the quarter, slightly better than the expected $0.01 to $0.02 of downside we had called out previously. The impact of the nuclear supply shortage was as much as $0.04, a little higher than the $0.02 to $0.03 impact we envisioned, really because our supply situation was made even worse by certain air travel restrictions from Europe during the quarter. The Q4 tax rate resulted in $0.04 of impact compared to last year's unusually low rate, an increased investment spend and was worth about $0.02. Generally speaking, the rest of the business performed better than forecast, and our expense controls remained very tight. So we are able to deliver a final Q4 EPS slightly above the range we have projected in April. Lots of detail, I know. But hopefully, that closes the loop on what was a somewhat unusual Q4 from an earnings standpoint. Now shifting gears slightly, let's talk about cash and balance sheet management. Earnings and continued focus on working capital efficiency drove an additional $324 million of operating cash flow in Q4. Of note, we finished Q4 with 21 days in inventory on hand versus 23 last year. I might add that this level of inventory is a little lower than even we have expected, and probably represents a pull-ahead of some operating cash flow from Q1 of FY '11. Our days receivable improved to 18.6 from 19.1. And importantly, our account delinquencies reduced by more than $75 million year-on-year, despite a continuing tough climate for many of our customers. I'd also like to mention a few other items of note that occurred during the quarter. With the Q4 sale of our Martindale business in the U.K., along with the earlier divestitures of Specialty Scripts, we completed the portfolio rationalization activity that we have projected for this fiscal year. We did not sell any of our CareFusion stake in Q4. And finally, I won't go through the detailed GAAP-to-non-GAAP reconciliation that appears on Slide 7. I will highlight that the most notable item this quarter is approximately $41 million pretax of litigation income related to an antitrust settlement. As per our usual practice, this type of item has been excluded from our non-GAAP earnings. Now let me take a few moments to comment on FY '10 in total, starting with the personal reflection that I'm extremely proud of the progress we made during the year, particularly given some of the headwinds, both environmental and the result of some conscious positioning and investment decisions that we knew we'd face when the year began. For the start of the this year, we identified a few key financial metrics in which we needed to focus to win, specifically, margin and working capital improvements. Driven by a number of performance initiatives that George have already referenced, we've made great progress in these areas. First, on margin rates. Although, we did see a decline in overall consolidated operating margin versus last year, we performed considerably better than we expected heading into 2010. Let me comment on two key areas in this regard. First, our Medical segment expanded its segment profit margin by 17 basis points for the full year. Contributors to this was a mix impact of the relative growth of our Ambulatory, Canadian and Lab businesses, the recovery of the Presource kitting operations and a continued growth of our preferred products. We also benefited from the positive impact of commodity prices, although, that benefit was primarily limited to the first half of the year. Within the Pharma segment, although, segment profit margin was down by 6 basis points, this really was driven by our Bulk business. In fact, Non-Bulk Pharma profit margins remained relatively flat for the full year at 1.94% for FY '10 versus last year's 1.95%. Regarding working capital, I view this as a tremendous success as we've continued to see the hard work of our employees bear fruit. In every quarter of the year, our inventory levels and days receivable were favorable to FY '09. In fact, changes in net working capital contributed almost $1 billion to operating cash flow for the year. Overall, we finished the year with very strong cash flow and a robust balance sheet. Total operating cash flow for the full year was over $2.1 billion. In addition, we sold $271 million of CareFusion shares during the year and generated over $150 million incremental from other asset divestitures. A good portion of this cash flow was invested back in the business as we had capital expenditures of about $260 million, mostly in information-technology-related projects. And we committed to our acquisition of Healthcare Solutions, for which we made a payment of $517 million in July. We also returned cash of over $500 million to shareholders, reflecting dividends of $253 million and share repurchases totaling $250 million, including the $200 million we executed in June. By the way, in case you're wondering why our statement of cash flows was $230 million of share repo for the year is because $20 million of it actually is settled after June month end. Our total cash position was about $2.8 billion at year end, of which approximately $400 million is held overseas. Further, our CareFusion stake was valued at approximately $700 million as of June 30. We remain committed to monetizing the stake in the coming periods, although the specific timing will depend on market conditions and other factors. Our June 30 long-term debt position was $2.1 billion, which is effectively our target level at this time. So we entered fiscal 2011 with a fair degree of balance sheet flexibility. We intend to use it wisely in a balanced and prudent manner to maximize shareholder value for the longer term. Now let's turn to Slides 13 to 16 and a look at our FY '11 guidance. Now that we've completed our planning processes and have better visibility into the year, we're updating the preliminary outlook we shared three months ago. As background for our revised non-GAAP EPS range of $2.38 to $2.48, let me expand on some of the information that we have provided back in April, starting with overall company expectations. The revenue expectation is for low single-digit growth on a consolidated basis, reflecting our somewhat cautious view of the overall market dynamics. Our focus on expense management will continue. Organic operating expense will be close to flat for the year, but the addition of our Healthcare Solutions business and its expenses related to both the amortization of intangibles and the cost of its primarily customer-focused resources will boost the SG&A growth rate moderately. We are expecting an annual non-GAAP effective tax rate of approximately 37%, a little lower than FY '10, although it will no doubt fluctuate on a quarterly basis. Our diluted weighted average shares outstanding should be in a range of 355 million to 357 million, reflecting total FY '11 share repurchases, which we currently anticipate will approximate our FY '10 levels. In this regard, you should note that we did execute $150 million of repo in July, leaving us $100 million left on our outstanding board authorization. As you know, the actual diluted shares outstanding we will average for FY '11 will depend on a few factors, including the timing and size of completing any additional repurchases and the impact of share price on the dilutive impact of employee stock options. Finally, our guidance includes no new significant strategic initiatives, either acquisitions or divestitures, beyond our Healthcare Solutions acquisition. Now let's spend a few minutes going through some of the segment-specific functions in more detail. On Slide 17, you can see the Pharmaceutical segment assumptions. Let me hit on a few highlights. Importantly, our FY '11 guidance assumes the renewal of key customer contracts. We expect the rate of brand inflation to be similar to FY '10. We also expect neutral earnings effect from the generic launches versus FY '10. We have risk-adjusted a basket of potential at-risk launches in FY '11 to come up with our forecast. We do expect continued benefit from our generic sales and sourcing programs, which gained momentum last year. In our Nuclear business, we expect Moly [Molybdenum-99] supply levels to stabilize by the end of Q1. In this respect, let me comment briefly on the latest news of Canada. Repairs for the Chalk River reactor are complete. However, the reactor has experienced some temporary delays in the start-up process related to instrumentation. We understand that this is being sorted out in the next couple of weeks. But at this point, we believe our assumptions for the resumption of normal supply remain reasonable, and we will keep our unrelenting focus on lean operational excellence initiatives to improve supply-chain efficiency and working capital. However, I anticipate improvements in net working capital at this stage to be much less than what we experienced in FY '10, particularly given the quite low inventory levels we achieved at June end. Now let's take a look at Slide 16 and the Medical segment. We do anticipate a negative impact on cost of goods sold from commodity price movements. For the full year, we currently estimate that it could be more than $40 million. About half of this relates to oil price movements, with the remainder driven by latex and other commodities, most of which have experienced some pretty significant price increases in the recent past. We expect to benefit from both customer and product mix shifts, including the growth of our higher-margin Ambulatory Care business and increased sales of preferred products. We do not anticipate the extraordinary demand from our pandemic flu season as we saw in the first half of fiscal '10. Our transformational initiative expense will continue at a similar level to FY '10 as we continue to position our Medical segment for long-term growth. Lastly, I did want to touch specifically on Medical's Q1 as it is a somewhat unusual quarter from an earnings trend standpoint. We do expect a significant first quarter segment profit decline due to a tough compare related to unique fiscal '10 Q1 events, namely the early extreme flu season and $14 million of income recognition accelerated by the CareFusion spin, as well as a year-on-year negative impact of commodity prices. So in summary, as I look forward towards the remainder of fiscal 2011, I'm confident of our ability to execute in our priorities and continue the momentum we began in 2010. There are clearly still uncertainties related to items largely outside of our control, such as the impact of the economy on healthcare consumer behaviors and the ongoing movement of commodity prices. But I feel very positive about our organization's ability to respond and deliver as the year unfolds. Let me make one final administrative comment before we turn to questions. In a further effort to make our SEC filings more user-friendly, we've undertaken a review to streamline our reporting. With input from a number of sources, we made an effort to make the upcoming 10-K a little more reader-friendly. Hopefully, you noticed the difference. We've also decided that to be meaningful going forward to report Pharma bulk and non-bulk margins on an annual basis rather than quarterly. If there are unusual or significant trends, we will clearly call those out to you. But periodic fluctuations have rendered these metrics fairly volatile on a quarterly basis and not necessarily representative of longer-term trends. We believe that the annualized rate is more indicative of the company's progress. We'll begin the annualized reporting process in fiscal '11. With that, let me turn over to our operator to begin the Q&A session.

[Operator Instructions] Your first question comes from the line of Tom Gallucci from Lazard Capital.

Jeff, just curious, thinking back on your last statements there, is there anything else that you can say about the seasonality that we should see or the quarterly progression in fiscal '11? Obviously, a lot of moving parts last year and this year over above the Med/Surg that you mentioned at the end?

As you know, Tom, we definitely don't give quarterly guidance. We focus more on the annual EPS and drivers, but let me provide a little more color in addition to the comments I made about the Q1 for the Medical segment. We're thinking about a revenue standpoint, revenue growth will be a little bit more back-end loaded. As a reminder, as I said earlier, we're still lapping the termination of two large customers that occurred in Q1 and Q2 of FY '10, so that will tend to slightly depress our revenue growth below market rates in the first half of the year. And also in the second half of the year, we're expecting at least one additional customer to join us, and we'll also begin to see some of the revenue impact of our Healthcare Solutions acquisition as well. So our thinking about a revenue standpoint, again, those factors will tend to make the back end a little bit more revenue-intensive than the first half. From an earnings perspective, I really don't want to comment more than what I've already said about the somewhat unusual compare in Q1 for the Medical segment.

George, you mentioned sort of proactively volume trends in the Med/Surg business, back offices and hospitals. Could you just, I guess, we've heard a little bit that it was all softer in June and maybe the rest of the quarter and continue to be weaker in July. Are those trends consistent with what you've seen?

Yes, I'm not sure that I would necessarily validate that monthly description, Tom. I think largely what we saw in Q3 sort of carried into Q4, just a general sluggishness. The month-to-month variation for us, I'm not sure that the data is all that sensitive to draw a conclusion from that, Tom. But I certainly didn't see an improvement in Q4 versus Q3.

Your next question comes from the line of Lisa Gill from JPMorgan. Lisa Gill - JP Morgan Chase & Co: Jeff, could you maybe talk about what your expectations are for generic contributions in '11 versus '10? I know there's a lot of debate around timing of things. And if I recall correctly that there's a number of drugs that are coming in the back of calendar 2010, which should be good for your fiscal year, that will have exclusivity. So maybe if you could just give us any color around that?

Yes, I'll repeat some of the comments that I gave in my prepared remarks. But generally, I think the impact of generic launches FY '11 versus FY '10 will be about neutral, plus or minus a reasonable range. I won't comment specifically on quarterly trends. But I would expect our general expectations are in line with what some of our peers are observing. I will say, however, that the momentum we gained in some of our generics programs in FY '10, both sales and sourcing, will -- despite the very strong performance you saw from those in FY '10, we expect continued benefit from those heading into FY '11. Lisa Gill - JP Morgan Chase & Co: But if I compare '11 versus '10, it looks like there'll be more drugs that will have some exclusive periods. If I remember correctly, isn't that better for you? So shouldn't we -- even though maybe it's equal as to the number of drugs that will come to the market in your fiscal year, shouldn't that be better profitability for you in 2011 versus '10? Or am I thinking about that incorrectly?

Lisa, it's George. Let me jump in for a second on this, and this is actually not necessarily the case. I think it varies product by product, and so particularly when there are exclusive launches, you have to look at the market characteristics of those launches. So for example, there's just been an approval recently well known out there of LOVENOX. This is a drug with really unusual characteristics. It is a compound with heavy institutional presence, but also a meaningful retail presence. A single-source launch, particularly because it has such a large institutional presence. The competitive behavior between the branded and the generic is quite different. And again, in this case, because there is one generic approval, you're very dependent on the design of any company's plans for how to launch that product, their own launch strategy. So I guess what I'd suggest to you is the economics of single-source launch can actually be quite variable depending on the characteristics of that drug, its channel, the nature of the launch, how much supply is in the system and the innovative response. So I know that's a long answer. But I would just say exercise some caution on assumptions on single-source launches. They can vary quite dramatically. I think when you get into a two- or three-player launch, actually, the characteristics can change and tend to be more favorable. But again, my advice would be exercise caution, and the general sense of Jeff's observations are right on a year-over-year basis. I would say relatively comparable and, Lisa, of course, the part that we don't know exactly is what will happen on some of the at-risk launches. So our approach is to model with a risk adjustment and then about those, well, we've modeled too cautiously, but I think it's the right way to approach this. Lisa Gill - JP Morgan Chase & Co: And then just secondly as we think about some of your guidance around revenue being low single digit, can you maybe help us understand is that based on what you see, George, as far as the market growth rates, especially if you have margin there that's coming in on the Pharmaceutical side? How should we be thinking about that in context of work, Cardinal Health versus the industry?

So let me just make a quick comment, then I'll turn it to Jeff. Actually, where we are relative to the industry, I feel pretty good about. So I think for us, the primary variable will be what is happening with overall demand. I think our positioning has improved, and we like that. Of course, to some extent, our revenues are tied to the performance of some large customers as well. And so there's always sort of a second-order effect there. But, Jeff, do you want to add to that?

Sure. Well, let me start by giving a little bit more detail about what we mean by low. And in our view, FY '11 revenue will likely be less than 4%, just be a little bit more granular on that guidance and especially in that revenue number are probably four or five key inputs. First one, George already referenced. It reflects a relatively cautious view of the overall market growth, given what we're seeing right now in the economy. Secondly, as I indicated previously, it does assume the resumption of our key contracts continuing into FY '11, with the exceptions being, again, those two large contracts that were terminated towards the beginning of FY '10. It also reflects any known customer adds that we're aware of at this point and then finally, it includes the add-in of our Healthcare Solutions acquisition and the revenues that it will bring as the year progresses. So those are the key inputs that go into that revenue guidance.

Your next question comes from the line of Richard Close from UBS. Richard Close - Jefferies & Company, Inc.: Yes, this is Richard from Jefferies. With respect to -- you mentioned exceeding the 10% improvement target for penetration on the generics, can you talk a little bit about what your expectations are, maybe set a number out there for the coming fiscal year? Jeff, I think you stated that you expect the momentum to continue.

Yes, let me take this. I think our expectation is that we will target that same kind of percentage growth. Obviously, as you get higher up, it's a little hard to make that happen, but we feel like we've got momentum. And so the percentage growth that we targeted for this past year, which was 10%, is a pretty reasonable assumption that we'll try to target a similar growth rate. But we're making really good progress there. Richard Close - Jefferies & Company, Inc.: And another point as a follow-up to your comments. George, you mentioned the cross-sell between Pharma and Medical and some initiatives you're doing on that front. Can you give us a little bit more clarity or an update on how that's progressing, and what stage we're in?

Well, we're very early stage. We really just begun this activity probably in the last three months or so. What we are seeing, of course, and it's a general trend is that there's sort of a confluence of where care is delivered and how it's delivered. I've said this to some of you before, but it used to be quite a bright line between what's institutional or hospital business and what was retail business. It seems to be disappearing, and the world seems to be converging in many ways. And so we're trying to make sure that when we are in ambulatory settings or at the surgery center or a physician's office, to the extent that their needs, that exist both for Medical and Surgical lab products and drug products, that we're able to deliver that. And so that is an early-stage project, but our teams are working really well together, and we're excited about it. Richard Close - Jefferies & Company, Inc.: We were on a conference call last night with MedAssets, and they talked about not really seeing a decline in, I guess, utilization or volumes. They mentioned hospitals going direct to manufacturers for some of the supplies, medical supplies. Are you seeing that at all? Maybe an increase of the hospitals going direct to the manufacturers?

So it's a two-part question, and so let me try to address the first very generally. I think the data systemically, let's forget about Cardinal-specific data, I think the data systemically is relatively clear. You can look at data at admissions and discharges, and it sort of suggests that there has been a bit of flatness in the market. From the standpoint of manufacturer behavior, I wouldn't describe any particular change in behavior, actually. I think our value proposition to work with our manufacturers is really clear. We feel better and better about it. I hope they do as well. So I would not describe a systemic change there.

Your next question comes from the line of Robert Jones from Goldman Sachs.

Actually, Jeff, just one point of clarification there, a few moving pieces in the quarter, and you mentioned the litigation settlement. If we look at the segment performance, so the 1.02% of operating margin in Pharma and the 4.75% in Medical, is that adjusted for that and the other onetime items in the quarter?

Yes, Bob. Any of the items that we exclude from our non-GAAP financials are not pushed down to the segments. So the segment numbers and growth rates that you see reported are consistent with the non-GAAP numbers that we report on a consolidated basis. So that's a long way of saying that the litigation income this quarter and any litigation effects that we ever see or have at the corporate level don't the impact the segment growth rates.

And then, George, just a big-picture question on looking at the $2.38 to $2.48 range. Could you maybe talk about -- I know and there's a lot of detail and a lot of ins and outs, but can you maybe talk about boiling it down to some of the major pushes and pulls you see around that guidance? Is it generic pricing? Is it surprise launches? How should we think about what could push you towards the top end or the bottom end of that range in fiscal '11?

So let me give you sort of a general description of the puts and takes. I can't quantify each of them, but just sort of give you a quick sense. So I would say on the challenged side, we've got the impact of year-over-year repricings, as Jeff mentioned, until we re-lap some of these H2, second half fiscal '11. Commodity prices, clearly, one that Jeff commented on and actually gave some sense of economics on. We had the CareFusion revenue recognition, and I would say the flu, although not a dramatic impact on us, clearly was unusual last year. And the positive sense for us, generic programs, I would say across the board on the selling and the sourcing side, really feeling encouraged there. Growth in Nuclear, we are hopeful and at this point, confident that we'll get some material back into normal status and be able to work at a more traditional way with our customers. We're really looking forward to that moment. Growth and performance really across all of our businesses, frankly, a good progress. And the Healthcare Solutions acquisition, I would say, is neutral to slightly positive. On a sort of generally neutral side, I would put year-over-year generic launches. Again, that can vary depending on what happens, particularly on at-risk launches or settlements. And then I would say from the spending standpoint, Med Trans [Medical Transformation] is probably a year-over-year neutral. It's probably no change. So those would be the big moving parts. As I mentioned in my comments, we feel very, very good about the things that we control. So we got very targeted initiatives to drive the performance of this company, and I think the parts that we just are going to have to watch carefully are the things that are a little bit out of our control, particularly related to economic environment and demand.

Your next question comes from the line of Steve Valiquette from UBS.

Two questions here. First, on Med/Surg. You guys mentioned that growth was driven by existing customers, but given how much you outgrew the industry, you don't think you're taking any market share at all? Just curious to kind of get your thoughts on that.

Yes, this is George. I do think that we're making some progress in market share, but I would also say probably as I mentioned earlier in the year, we probably had a couple of disappointing losses. So what I would say is that in probably the last six or eight months, we have a general sense that our priorities are clear, our value proposition to our customers is better understood, and we think we've been making some progress there. But part of it is, again, expanding our footprint as I mentioned earlier, just even on something like Presource, expanding our ability to drive value into surgery centers, which will serve a new market for us. So we're trying to grow in all dimensions expanding markets, expanding with existing customers and where we think we can create value through services and market share as well.

And then just on the generic profits since we were tracking this all year with your guidance. First down over $100 million, then $75 million, then $50 million. Just out of curiosity, where did you end the year on the generic profits in fiscal '10? Just curious where that number ended up.

Yes, as I said, our Q4 was a little bit better from the generic launch standpoint that we had anticipated. So the $50 million down year-on-year number that we quoted three months ago is probably closer to a $40 million to $45 million negative comparison versus FY '09.

Your next question comes from the line of Larry Marsh from Barclays Capital.

Let me clarify a couple of things and maybe a question for George. First, just on the clarification to the extent you can comment, Jeff, you alluded to the addition of one customer, I guess, of some size later in the year. Has that been publicly disclosed? And I know in the past, you've talked about renewing Kroger and Kmart. I think you've already renewed Kroger, and the illusion was -- you suggested Kmart was closed. Has that been done at this point?

I'll take that. Yes, we did, in fact, renewed Kmart, and we're excited to continue that very solid relationship. The one -- since I think at this point, it is in the public domain, what we will add into our business is doing re-business. As you know, that was an acquisition completed by Walgreens. And so that effective -- by January 1, we'll begin to pick up that business through our relationship with Walgreens.

And then just staying on this sort of the Medical business, I think you're calling out a couple of things, obviously, a $40 million negative on commodity prices. I assume that would roll in pretty evenly throughout the year. I think there was another push back of a $14 million. So if I was doing my numbers correctly, it seems like you might be down kind of mid-teens year-over-year in Medical. Is that the right ballpark and I know you don't guide to quarters, but if you sort of filter that through without a big offset in drug, Nuclear's not going to be a good guide this quarter. It seems I would get maybe flat to slightly up in EPS in the first quarter. Is that basic directionally right?

Yes, let me tackle the Q1 issue for Medical a little bit more without giving a specific growth rate. I'll put a little bit more color around the three drivers. First of all, the accelerated CareFusion income related to the spin, that was worth about $14 million. The stronger the normal flu season in Q1 of FY '10 was in the $6-million range. And then I would say the commodity impact, although it's slightly above $40 million for the full year, that impact will be a little bit more front-end loaded, because some of the price increases began creeping into our cost of goods sold in the second half of the year. They're quite variable in the first half of FY '10. So I expect that comparison to be a little bit tougher in Q1 and Q2 for Medical.

And that's all you're going to say about the actual quarter at this point, Jeff?

Yes, other than repeating that we expect this Medical segment profit to be down significantly.

And then, George, obviously, we know we've beaten this a bit on this call. But med trans [medical transformation], you've talked very, I guess, excitedly about the opportunity in that business under Mike's leadership, your leadership, the coordination to the IT and such. And I think the message is, you can really grow your margins meaningfully over a period of time, and that's a bullish indicator of your business. This year, you're fighting against, I guess, a commodities negative. So how do we think of that sort of the longer-term opportunities? When do we really start to see the margin expansion for Medical because it doesn't look like it's going to be this year? Do we really think of that as fiscal '12 and '13 in your mind?

Let me start, and then I'm actually going to turn it to Jeff a little bit, but it's -- sometimes it's hard to describe this project. It is so deeply embedded in that Medical segment at that point. It's really about taking what I think are just enormously valuable asset that we have, making sure that we can deploy them in the most efficient and simple way, and there are times that the sheer magnitude of what we have to offer actually gets in our own way. And partly what we've tried to do is to make sure that we are sort of rebuilding our processes and the IP platform to simplify our business internally, but more importantly, to make the experience of the customers extremely easy. And this is really what it's about. And I think we'll be able to not only bring efficiencies to the way we operate, but I think we'll be able to deploy our tools more effectively to bring efficiencies to the customer by these initiatives. So we're excited about it, but as I said, it's a pretty heavy investment, which we've observe this year and will continue next year. But let me turn it to Jeff to give you a little sense of how we see the timing and the value drive.

The medical transformation, at least, the biggest bolus of it, we expect to be completed in FY '12, and some incremental significant benefits related to that will begin to accrue in FY '12 and beyond. That now said, we're striving for margin expansion in Medical every year. And we're not waiting for the medical transformation to necessarily be complete. That will definitely facilitate an acceleration of some of the initiatives that we already have under way. But as I said, we expanded the margins this year, and that will be an ongoing goal of ours through increased growth in our Ambulatory business, which we continue to invest in through continuing to sell more preferred products, through offering additional services, value-added services, to our customers. So the medical transformation will help accelerate some of those things and make them easier, but many of those things are already underway and accelerating as we speak.

So just be clear, you said most of the spending would be completed, I think you said, by fiscal '12. You mean by the end of fiscal '11 or is that going to continue to roll over in cost in fiscal '12?

By far, the biggest bolus of spends has been FY '11. The spending will begin to ramp down in FY '12, and we'll have completed implementation of a good chunk of our distribution network by that point.

Your next question comes from the line of John Kreger from William Blair. John Kreger - William Blair & Company L.L.C.: George, a question about key customer renewals. Should we think about that as being fairly evenly spread for you from year-to-year? And if not, how does fiscal '11 and '12 look relative to '11?

It's probably not that evenly spread. It can be a bit lumpy, John. So here's what I'd say, now that we have a number behind us, I would say fiscal '11 would be a year of relatively minimal new renewals that you're unaware of. I think we've really worked our way through most of that. And I would say at this point, '12 is not a year of tremendous renewal activity. There's always some. It's more lumpy on the Pharmaceutical side than the Medical side, which is almost a constant sort of process. So many different hospitals that some say it's almost a constant renewal process of those. But I would say among the big pharmacy customers, that tends to be a little bit more uneven. But I would say the next couple of years, we feel pretty solid about. John Kreger - William Blair & Company L.L.C.: And how do you feel about the competitive pressures out there at this point as you go through renewals and the key new client? When -- do you feel like competitive pressures are increasing or pretty stable?

It's really hard to say that. They tend to be episodic. Every renewal has its own story. And so I wouldn't point to any change, particular change in competitive behavior right now. This is -- it's certainly a plenty competitive of market, but I would not highlight any particular unusual behavior or pattern right now. It's certainly each renewal is sort of its own story. It's like its own little mini-market, and that's the way it tends to work.

Your next question comes from the line of Robert Willoughby from Bank of America.

George, at the time of the CareFusion spin, you broke out some cost that you expected to incur year one, year two as you kind of grew into that CareFusion hole. Can you review what those numbers were? How you think you did year one? And what that expectation for year 2 is? Are you ahead of plan or pretty much on track, still there?

I'll probably put this to Jeff to take that question.

The sort of fixed cost that sort of got reallocated back to Cardinal Health after the spin, which we have referred to in the past, is negative synergies. We more than offset those in FY '10 to our infrastructure cost-reduction efforts, so they really didn't appear anywhere in FY '10. You probably know it but I didn't call them out as a driver at any point in the year because we were able to more than offset them to reducing infrastructure in the remaining Cardinal business. In FY '11, I'd say, likewise. You'll see a relatively minimal impact, if any, from that. To begin, we've been able to hold and reduced costs related to our infrastructure. I would say, the final potential period there is FY '12 because that is when the final IP transition services agreement is expected to expire. Actually, it expires in the summer, at the start of FY '12. So there is a slight potential there for some fixed cost overhang in the Cardinal Health business, but again our goal is to work to offset most or all of that. So my objective is that I will never call that out as a negative driver year-on-year, because we're striving to offset it. So I would say -- long answer to your question but I would say the progress has been great in terms of making sure those will materialized. By the way, before you go out, I want to complete my answer to Larry, other couple of calls ago, related to the medical transformation, just so there's no lack of clarity. When I refer to the bolus of spend in fiscal '11, I was referring to capital expenditures, and this will be the highest year of our capital expenditures related to the medical transformation. But from an expense standpoint, actually, FY '11 versus FY '10 is completely neutral, just to be clear.

Your next question comes from the line of John Ransom from Raymond James. John Ransom - Raymond James & Associates: I just wanted to go back and revisit for a minute the P4 acquisition. First of all, what is the effect this year on -- remind me the effect on amortization expense from that deal? Or has that been figure out yet?

Yes, we're still having an outside firm complete that analysis. But when we announced the deal, I allude to the fact that it could be as much as $30 million to $35 million of annual amortization, and that's the assumption we're continuing to work with until the outside accounting firm complete its evaluation. But I think that's a resonably safe number. John Ransom - Raymond James & Associates: I think I tried to figure this out last quarter and I remember that I didn't circle back, is that tax-deductible amortization or not?

Yes, it is. For tax purposes, because of the way we structured the deal, the entire step-up in the basing for that company is it's a tax-deductible over an extended period. So yes, it is tax deductible. John Ransom - Raymond James & Associates: And just kind of getting to the real question, what is the EPS effect of that deal in fiscal '11? Could you remind us of that please?

We said neutral to modestly accretive. John Ransom - Raymond James & Associates: And you still think that's the case?

Yes, we remain very on track with all of our quantifiable and non-quantifiable goals and milestones for that. If everything, I would say that the integration of that team into the Cardinal family has gone extremely well, and we continue to make great progress in that business and combining that business with the existing Pharma businesses. John Ransom - Raymond James & Associates: I remember working through their business plan online and talking to George about it but still, it's a little bit -- could you maybe use very small words and speak really slowly and explain exactly what they do to make money? It didn't register the first time around. And they do a bunch of different things, but it wasn't clear where the money is being made.

Well, there are largely three sources of income. Again, this is not rank order nor weighted, particularly. But the P4 business, as we call it, help the solutions sort of reside in the space that connects the providers and the payers and the pharmaceutical companies, and those are essentially the sources of income. So we provide services, tools, software to our, particularly, oncology practices today. That's a source of income. We provide marketing tools and services for pharmaceutical companies and biotech companies, and we do some work in providing data to payers to help them manage their portfolio and their spend. So these are all the components of it. Think of this again as a service offering. It's a business that works to provide services to each of those components and does some work in, what I would say, aligning the interest of those three players in the system to create more value. It's really about the having the data firm and the network of physicians who really work closely with us, and that's sort of at the heart of it. John Ransom - Raymond James & Associates: And would you have to pick up additional distribution business in oncology to really make this a home run, or you think that's not really built into your expectation?

We certainly intend to integrate that with our activity, and we feel very confident that our increasing presence in the community of providers, given a basket of services, will make our distribution offering more attractive and more logical, but the business model, in and of itself, is attractive to us. But we certainly -- the part of it, and Jeff talked about the integration, is we certainly think of this not sort of a stand-alone activity, but as something that would very much link to our overall pharmaceutical strategy. So I think of this as linked, but we build very modest expectations into our economics as it relates to distribution today.

Your next question comes from the line of Ricky Goldwasser from Morgan Stanley.

First of all, on the generic contribution in fiscal year '11, what would have been the impact of generics without the operating efficiencies and the improved share of the wallet? So we're just kind of trying to understand, what's kind of like what's coming really from the product versus your success in improving compliance rates?

Ricky, it's probably going to be very difficult to disaggregate the contribution of components of our system. I mean, I think, on a general standpoint, I'd give you some observations. The system is generally growing. As you know, generic penetration continues to increase. We also note that as we model the rate of deflation of the older generic products, we're not noticing or seeing any particular trend one way or the other, so that looks like it's fairly typical. And we hope to continue to grow our position with everyone of our customers as well as picking up new customers. So picking apart the component of that is probably not something I'm comfortable doing. It's hard to -- and the value that you get for making sure you do a very effective launch for your customers contributes to your overall positioning, Ricky. So you have to think of it more as an integrated program, and that's one of the reasons why we don't spend a lot of time highlighting individual products. So I think it's all contributing, but I don't think I could give you the components of that and weigh each one.

But would you say that if your genetic compliance was held constant, right, and it was just all the other things, would the contribution from generic be lower for fiscal year '11?

Let me just say this very generally, okay, because again I can't answer the question exactly as you're asking, but let me give you some help. There is always some deflation in the generic business. So part of the keeping in of the generics in general is the flow of new products. And, obviously, for us, there's another component, which is we want to add more customers and we want to add as high a share of a lot of this as we can, and we want all of our customers to source all their generics from us. But those are the moving parts. So there's always some, called, base rate of deflation in the pricing. It's the nature of that business, as you know, quite competitive, but the flow of your products is a very important part of that strength.

And then on the inventories, inventories were down about 12% sequentially. Is this a new level? Or does this relates to some specific manufacturers?

Yes, our inventory level at our fiscal year end is always very low. It's surely the lowest it will be during the year. I would say there were no specific vendors that drove this. It was just the hard work within our distribution centers to optimize the efficiency of those centers. And while there's still time, at the same time, ensuring we have a great service to our customers. I will say it was a little bit lower than we expected, and like I said, it probably was a bit of a pull ahead from some gains we had otherwise expected to get in FY '11. But I think generally, it was a good level, and we're proud of the progress we made this year with respect to inventory.

[Operator Instructions] Your next question comes from the line of Eric Coldwell from Robert W. Baird. Eric Coldwell - Robert W. Baird & Co. Incorporated: For the sake of time, I'll take most of mine off-line, but just a quick clarification on Duane Reade. Amerisource had previously talked about that Athena $500 million-to-$600 million account, and not expecting to renew it after December 31. Should we assume a similar run rate for Cardinal beginning in the March quarter of '11? Is that a fair statement?

Eric, that's probably fair.

Your next question comes from the line of Jaimin Patel from Greenlight Capital.

This is actually Vinit Sethi. One is, you commented on flat generic launch, in fact, the profitability in fiscal 2011. We're wondering what your early thoughts were on the impact from generic launches in fiscal 2012. And second, you guided to about $115 million of net interest expense in fiscal 2011, and we are starting the year with a $2.1 billion in debt and a little over $2.7 billion in cash. So we wanted to better understand why there's such a large interest expense assumption against the net cash position.

The first question again was about generic?

The impacts from generic launches in fiscal 2012.

I take that and I'll let Jeff handle the second question. So again, I think we should assume, without quantifying it today, that fiscal '12, we have modeled this point to be a more robust year for generic launches. So we'd expect that to be an uptick in '12. Jeff, do you want to take the second part?

Sure, that number that you quoted is our interest expenses in other. I think that the primary variation year-over-year actually relates to the other, not the interest expense itself. Our debt levels will be about the same in FY '11 as they were in '10. And although we'll be carrying a higher cash balance, as you know, the earnings we're getting on that cash right now is relatively small. So it's not a significant driver, but what is changing year-on-year is the other piece. And that really is the result of some positive other that we got in FY '10, including some foreign exchange gains, as well as some deferred cost gains. So those tended to drive other positive in FY '10, and we're not assuming that same level of benefit in FY '11.

The other is going from what to what?

The other is increasing in the range of $15 million to $20 million.

And so the rest of the interest expense assumption is based on the starting debt balance offset by interest income from the current cash balance?

Exactly. And as I said, the interest income assumption is relatively modest, given the money market rates we're seeing currently.

Your next question comes from the line of Garen Sarafian from Citigroup.

I guess a follow-up to an earlier question regarding your recent HSH acquisition. I know it's only been a few weeks since the deal closed, but if it's not really -- can you point to any help that that's giving you in winning new clients as result of having this? So essentially, what you're targeted list of clients have said regarding this acquisition?

Yes, I'll try. It is of course very early. We literally just closed this deal a couple of weeks ago, so I would not point to any thing that we can say, put it in the bank it already happened. What I can tell you is that the business that they're running is increasing its reach. It's having wonderful client meetings. It continues to service customers well. And as Jeff mentioned, the integration work into Cardinal is going exceedingly well, but is way too early for me to declare any victories here. We'll obviously, we will let you know as we're making progress, and I fully expect to. What's the second part of your question?

Well the second part was just the feedback from clients as well as, equally and finally, just from the drug manufacturers, what's the feedback then? And how's that going to help deepen the relationships?

Yes, I know it's really positive. Anything that we do -- we have very close relationships with our manufacturer partners. What this does is it broadens our offering to them, if you think about a relationship upstream. It brings in more biotech players with whom we already have good relationships but now gives us another avenue of value creation for them. So business part of the excitement for us, it's not just about this business model in and of itself, but it's the ability to enhance our value proposition through the entire pharmaceutical channel and with our partners. So I'm really excited about that. We've gotten very good feedback from providers, really good commentary from our manufacturers, a number of whom I've met with on this. So we're really encouraged about it.

Quick follow-up, maybe I just missed this in the prepared remarks but one of your competitors recently stated signing a fee-for-service contract with a major branded manufacturer where they didn't have one previously. So I'm wondering, have you done the same? And how will that impact seasonality compared to...

Without calling out individual companies, I think you can assume that we have likewise renewed all the key manufacturing relationship that we needed to do, and so assume that. And I don't know what else will it affect. Jeff?

Yes, I would say any time that we make greater proportion of our branded pharma agreements more DSA-based, that tends to take a little bit more of incremental seasonality out of our business. That all said, keep in mind that about 20% of our branded pharma income is still is contingent based. And I would say that even agreements that are largely DSA based sometimes still have a certain contingent element to them, so you could still see some seasonality from those contracts due to certain price increases that happen over the course of the year. So in summary, I still expect to see the general pattern of quarterly seasonality that we've seen in the past. But I think each year that goes by, probably gets muted a little bit more.

Your final question comes from the line of Helene Wolk from Sanford Bernstein.

First on Medicine Shoppe, can you give us a little bit of an update around your outlook for -- does it become positive contributor in '11? Or how should we begin thinking about that?

Yes, I would say that the transition we had planned for FY '10 -- although I expect there'll still be some ongoing transition that'll happen in FY '11 and beyond, I would say it's largely complete now. So we sort of re-established a new base, and I expect that we'll grow modestly from that base in FY '11 and beyond.

Any update on Longs and conversations there, and presumably, it's not included in your guidance. Is that correct?

Yes, there would be no update to that, Helene.

Ladies and gentlemen, this concludes your question-and-answer session. I'd like to hand the call over to Mr. George Barrett, CEO, for closing remarks.

Thank you so much. Thanks everybody. I know this was an unusually long call, but the end of a very important year for us. So my apologies if we went so long, but I appreciate all the great questions. And as you know, we're here, to the extent that people have follow-ups. So thank you again. We're really pleased about where we are coming out of this first year after the spin-off, and we look forward to 2011. And thanks for your time everyone.

Thank you for your participation in today's conference. This concludes your presentation, and you may now disconnect. Have a great day.