Cardinal Health, Inc. (CAH) Q4 2012 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cardinal Health, Inc. Fourth Quarter 2012 Earnings Conference Call. [Operator Instructions] As a reminder, this call may be recorded. I would now like to introduce your host for today's conference, Sally Curley. Ma'am, you may begin.

Thank you, and welcome to Cardinal Health's fourth quarter fiscal 2012 and our FY '13 guidance conference call. Today, we will be making forward-looking statements, and 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 the SEC filings and the forward-looking statements slide at the beginning of the presentation found on the Investor page of our website for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slides. Now I'd like to turn the call over to Mr. George Barrett. George?

Thanks, Sally. Good morning, and thanks to all of you for joining us today for our fiscal 2012 fourth quarter and year-end call. 2012 was a year of considerable accomplishments. We achieved virtually all of our financial goals, including revenues, operating profit, earnings per share, margin rate growth and capital efficiency. We made excellent progress in most of our strategic priorities and continued to strengthen our organization through a focus on talent development and supplemented through the addition of some world-class talent. It was also a year which brought us challenges. But through this, we continued to grow and to learn, a necessary ingredient for any organization with bold, long-term aspirations. The work we've done in fiscal 2012 continued to move us down a path we started on 3 years ago when we spun off CareFusion and set in motion a plan to transform Cardinal Health. Today, we serve a total of over 25,000 retail pharmacies, including chain, food combo and over 7,500 independents, a group that 3 years ago numbered around 4,000. So we possess a significantly broader network of Positron Emission Tomography facilities, well positioned to grow and benefit from the exciting developments in neuroscience and oncology. Today, our specialty solutions group serves more than 1,700 oncologists through almost 400 oncology practices. We serve in excess of 150 urology practices, 70% of the nation's largest practices, all customers with which we had virtually no presence just a few years ago. We have grown substantially in our ability to serve health care customers in subacute settings and to follow patients through the continuum of care. Our preferred medical product programs offer significant value for our customers, and this area is growing at a rate significantly in excess of market rates, contributing disproportionately to our margin. We have built an…

Thanks, George. Good morning, everyone. It's great to be reporting a strong fourth quarter and a conclusion to a very successful fiscal year. Let me begin by highlighting key financial trends and drivers of our fourth quarter and full year performance. Then I'll provide additional detail on our fiscal '13 guidance, including some of our key expectations and underlying assumptions. Starting on Slide 5. During the quarter, our non-GAAP EPS growth was driven by 13% non-GAAP operating earnings growth, lower share count and a more favorable tax rate versus 2011. Interest and other expense came in $5 million unfavorable compared to last year, largely driven by changes in the value of our deferred compensation plan. Our non-GAAP tax rate for the quarter was 36%, which is lower than the prior year quarter, but largely consistent with our 2012 third quarter and our expectations. The year-over-year variability was driven by a slightly lower state tax rate and net favorable discrete items versus last year. The 349 million diluted average shares outstanding during the fourth quarter compares to 355 million in the prior year's quarter. The fiscal '12 share count reflects $100 million of share buybacks in Q4 and brings our share repurchase to a total of $450 million for the year. I should also note that thus far, in fiscal '13, we purchased another $100 million of shares, bringing the authorization remaining under our existing board approval to $200 million. Before shifting to a discussion of segment results, let me comment on a few items from our consolidated cash flows and the balance sheet. We ended Q4 with approximately $2.3 billion in cash, of which about $380 million is held overseas. This cash balance does not include our investments in health and maturity fixed income securities, which totaled approximately $70 million…

[Operator Instructions] Our first question comes from Glen Santangelo of Credit Suisse. Glen J. Santangelo - Crédit Suisse AG, Research Division: I just wanted to ask 2 quick questions, George, regarding generics. Based on some comments you made, you said that you saw generic deflation that was not as steep as you had anticipated. I was wondering if you could maybe quantify that a little bit in terms of what you're seeing. And then secondly, you kind of said that you expected generic uplift to be less pronounced in fiscal '13. I think everyone's kind of aware that, based on the timing of the patent expiration schedule. But as we think about that within the context of your fiscal '13 guidance, could you give us a little bit of a sense for how big that headwind is year-over-year?

Glen, thank for the question. I'll take the first, and then maybe Jeff will chime in. So there are a couple of issues that you talked about. One is the general direction of pricing on generics and what we've experienced. Again, largely what has been happening is a lot of movement driven by the exclusivities coming off some of the major drugs. And so that is something that I know you all expect to see and see regularly. Generally speaking, what we've been seeing has been interesting, that a few of those products deflated at a slightly slower rate than we had modeled. As I've mentioned before, we have a very large portfolio of generics, so we've got close to 4,000 products in there. Many of the products that are sort of in their mid-maturity are behaving much as we've typically seen them. Some of the older products, particularly, have been inflating a bit. And then what we've seen is variability on these products that are losing their exclusivity. And so the general direction of that has been slightly favorable to our forecasting. The second one which is, again, I think probably about quantifying it, and there's only so much that we're comfortable providing as it relates to actual numbers in this. I don't know if you want to add anything, Jeff.

Well, it wasn't actually deflationary. I'd say it was slightly better in Q4 than we -- what we saw in Q3. And again, that was in part driven by some unique inflation we had on a couple of products. So overall, I would describe deflation as flattish in Q4. And regarding the impact of generic launches, I don't want to get into a specific number there. I will say it's a fairly significant dropoff from FY '12 that we're expecting, which has been our assumption all along. And keep in mind that, that requires a fair amount of estimation and probilization [ph] of expected launches. But based on everything we see at this point, I would describe it as a fairly significant dropoff in value.

But, be it from the new launches. Yes, Glen.

Our next question comes from John Kreger of William Blair. John Kreger - William Blair & Company L.L.C., Research Division: Could you give us an update on the broad utilization pattern that you're seeing across your portfolio? Have you changed this in the quarter versus maybe March quarter or as the quarter played out?

Yes, John. It's just -- it's a very, very choppy set of data when you -- again, we do probably what you do in terms of looking at external data. And we've got a number of sources. Generally speaking, I would say Q4 looked slightly improved on overall utilization trends versus Q3. But I would still say, if you look at it on sort of a broader basis, it's still pretty soft, and it tends to be very choppy by month. So I would still say we're operating in a reasonably soft utilization market. John Kreger - William Blair & Company L.L.C., Research Division: And should we assume that pattern is roughly unchanged as fiscal '13 plays out in your budget?

Yes. As I said in my comments, John, we're not expecting a significant variation in the pattern of utilization heading into next year based on what we've seen this year. And just to get a little bit more specific on the trends by area -- and again, we're seeing a lot of the same data you are, so I'm not sure this is necessarily new news. But for office-based physician trends, it did appear, based on external data, that there was some pickup in our Q4, but keep in mind that, that data is quite choppy. But for the 3 months in Q4, we saw growth in each of those quarters. I would say with respect to surgical volume, it kind of depends on whether you're looking at inpatient or outpatient. Outpatient appeared to have a fair amount of increase year-on-year. And the data that we have for Q4, I would say for inpatients, it was down year-on-year for the quarter. And then with respect to prescription volume, I'd say overall, script trends was pretty flat. John Kreger - William Blair & Company L.L.C., Research Division: Excellent. One follow-up question. I realize it's early, but what is your initial thinking as the ACA bill is implemented? What sort of growth benefit would you expect from that?

Boy, that's a tough one to answer, John. I think over the long term, we do expect additional patients coming to the system. But also, I think as you all know, some of those patients find their way into the system, as I say, sort of through the back door. And so modeling the actual increase from this is extremely difficult. So I would say, again, over the long term, will see some benefit, very hard to quantify for you right now. On a very short term -- again, that's not something we're modeling in for the very short term.

Our next question comes from Ricky Goldwasser of Morgan Stanley.

I have a couple of questions. But George, if you can provide us with some of your perspective on pricing in pharma in the industry. And has it changed with what you've seen historically?

Thanks, Ricky. Yes, this is always a difficult one to answer, partly in that we operate in multiple markets. And I've sort of said this before and tried to emphasize that we operate across our markets in very competitive markets, and that's true today. I would have a very difficult time discerning a particular pattern or giving a generalized characterization of pricing. It tends to be very business-line-specific, customer-specific, sometimes even region-specific. So it is -- I'm not sure I could give you, Ricky, a discernible trend break right now other than to say that we generally operate in a competitive environment, and I don't see that differently right now.

Okay. And then Jeff, just to confirm the guidance for the first quarter, the growth rates you provided for the EPS was $0.76 to $0.78. So how should we think about the headwinds and tailwinds in the September quarter? And then when you think about the rest of the year, should we think about fiscal year '13 as being a year where growth is fairly fluid quarter-to-quarter?

Thanks, Ricky. This is Jeff. Let me answer your second question first. I don't want to give specific quarterly guidance. But as I said, for the first quarter and I'd probably extend that to the first half of the year, we generally see the growth rate for those quarters to be consistent with the growth rate range that we gave for the full year, so that's probably as far as I'll go in terms of quarterly guidance. In terms of headwinds and tailwinds, I'd say for the most part that headwinds and tailwinds for Q1 are similar to what we see for the full year, with one notable exception being the fact that our Safeway contract extends through September 30, so we'll begin seeing the impact of that last volume only in Q2 and beyond -- I'm sorry, our Express Scripts, not Safeway. Express Scripts contract expires September 30, and so we'll begin seeing the impact of that last volume starting in Q2 and beyond. But more broadly, the headwinds both for Q1 and the full year, I would say -- from a macroeconomic trend standpoint, as I've said, we're being relatively conservative in our assumptions on utilization, particularly with respect to medical procedures and nuclear MPI volumes. And so I'd say, probably best case, that's sort of neutral year-on-year. Also, as we said, less anticipated generic launch benefit year-on-year, and that would be true for Q1 as well. We are expecting steeper generic deflation for the year than we saw this year given the products that have come off exclusivity. We've got the loss of some branded by margin just given the fact that we've had a very large amount of branded products go generic this year. And obviously, that impact will be felt throughout next year just given…

Okay. But at the high end, you kind of assume worst-case scenario for the device tax. Is that fair?

Yes, that would be the worst case half-year impact.

Our next question comes from Lisa Gill of JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: So just a couple of questions on the Medical segment. George or Jeff, you talked about your expectations around mid-single digit growth? Are you taking market share, number one? And number two, can you talk about the different segments where you're taking -- if you are taking market share, where you're taking it from? And on the ambulatory care side, is that more of the IDNs buying physician practices and picking up that business? Or are you actually winning business out of the marketplace and taking market share?

Lisa, I'll start, and then Jeff will -- of course, feel free to chime in here. It's really sort of -- again, recognize, we have a broad line, set of lines that are covered in our medical business. And so generally speaking, we've been doing well in our medical surgical business. I wouldn't say dramatic swings in share. Jeff mentioned DOD. We've had some good progress, and I think some good progress with key IDNs who are performing very well in the market, and that's been beneficial to us. I think we've had solid growth in ambulatory. I think particularly, surgery centers has been an area, as you know, as care has been shifting, to some extent, from the acute settings into more ambulatory treatment centers. We have been well positioned to serve those surgery centers, and I think we've picked up some share there. But they've also grown their businesses there. And the physician's office area, we've probably grown a little bit past market. Some of this, again, it has to do with what you described, which is some of the practices moving into the IDN-affiliated networks. And some of it just, again, increased attention on our part, systems that are more finely tuned towards the needs of a smaller practice. And so again, the growth has been sort of broadly distributed, I would say. Lisa C. Gill - JP Morgan Chase & Co, Research Division: Okay. And then just secondly, on the commodity aspect. And I guess maybe this is a question for you, Jeff. I'm just surprised that there's not more of a tailwind in 2013 just given how big the headwind was in 2012. Is there anything else that goes into that calculation? I mean, oil in the 90s is kind of fairly comparable with what it was in '12? But aren't we seeing some of the other commodities looking better as we move into '13?

Yes, we've seen latex and cotton definitely improve. But I would say from an oil-based derivative perspective -- and keep in mind oil-based derivatives make up well more than 50% of our commodity exposure. I would say in that regard, we're seeing fairly similar rates. Throughout FY '11, probably the average price of oil we experienced was in the high 90s to low 100s. We're modeling a rate in the 90s, so there's a little bit of pickup there. But we don't want to get too aggressive with our assumptions just given the volatility that we're seeing in oil prices. Obviously, if oil stays in the -- or if it goes to the low 80s, which is what we saw a couple of weeks ago, that would provide some additional benefit, but we don't want to count on that yet, again, just given the volatility.

Our next question comes from Charles Rhyee from Cowen.

I've got a question. Jeff, if I heard you correctly, you guys bought $100 million of shares back in the fourth quarter and another $100 million now in the first quarter. Can you talk about what you plan for share repurchase versus dividends this year? Because you [indiscernible] have a higher dividend yield than your competitors, sort of [indiscernible]. But that is the real value with share repurchase. I mean, any way to think about that in terms of change in the cap next year on dividends, if that's the thinking?

Charles, you're breaking up a little bit, but I think I got most of the gist of your question. Just to clarify, the amount we purchased in Q4 was $150 million and the amount that we purchased, thus far, this year was an additional $100 million. Regarding our plans for the year, I never like getting too specific about -- for our plans in this regard, I think, for somewhat obvious reasons. But I will say what our assumption is. Our assumption is basically -- in the 347 million average diluted shares outstanding I referenced in my prepared remarks, that basically assumes that we're done repo for the year, quite honestly. Now that doesn't mean that we may not do more, but for guidance purposes, that is the assumption we've made. So the $250 million we bought over the last 2 months is effectively what's reflected in the guidance. Over time, we will have opportunities to consider repo, again in the entire portfolio of things we may invest in. But also keep in mind that our cash flow will be a little bit lower next year for the reasons that I've stated. So it'll be somewhat of an abnormal year in FY '13 from an operating cash flow standpoint because of the impact of the tax payments and the ESI nonrenewal that I referenced in my remarks. Regarding the dividend, I really can't comment on that. Ultimately, that's up to our board to decide our dividend policy going forward, and that's probably all I can say on that.

If I could follow up, then. You guys have roughly $2 billion in cash on the domestic side, that's zero [indiscernible] speaking. But then you're estimating here a higher interest expense for the next year. I couldn't really hear your -- I might have missed it. What are you expecting to drive the interest expense up?

Well, keep in mind that we issued $500 million of debt a few months ago, which was intended to -- partially to prefund several hundred million dollars of debt that comes due at the end of FY '13. So that's one of the major drivers of the higher interest expense. We're just simply carrying more debt this year than we did in FY '12. We'll also have slightly higher debt overseas as well related to our Chinese operation as well. So those are the 2 primary drivers of the higher interest expense year-on-year.

Our next question comes from George Hill of Citigroup.

I'm going to follow up on Ricky's question on pricing, and I'll get a little more specific in the large national accounts. Obviously, ESI got great pricing on their renewal, which you guys chose not to match. How should we think about, as we look forward with the other national accounts that you guys service? Is that level of pricing kind of going to be the prevalent rate that we should think about at which business gets done? Or was there anything special about that contract process?

George, thanks for the question. Again, trying to compare some of these large accounts one to the other is quite difficult. They have very unique strategies, very unique business models and very unique needs in terms of servicing. So sort of applying some set of conditions across them would be really difficult. I think it's very difficult to try to give you some kind of forward-looking observation about what's going to happen in particular with renewals. I would just say this. We were extremely efficient at the servicing of these large accounts. We've built our systems around them. We're flexible. We're attuned to the needs of their complexity. We provide a very broad range of service components: connectivity, management of significant amounts of working capital. So I think you have to put that into the equation, and then you have to put into the equation the business mix that each of those accounts manages. And in reference to the Express Scripts business, that was a -- largely a bulk -- bulks business for us, and it played out as it did. But as it relates to our other large customers, they have very distinct needs, and we're very, very happy to be serving them. And we hope to continue to do that and bring the services, the tools and the capital to bear to make sure we do that well.

Okay, great color. And then maybe, Jeff, just a quick follow-up on the tax rate guidance. The high end of the tax range -- the high end of the tax rate guidance range would be above [indiscernible] this year. Anything specific that would tend to drive the range higher?

One of the big drivers of our range is our foreign mix, and it's that combination of earnings overseas both related to products that we manufacture and source overseas, as well as products that we sell commercially in places like Canada and China, et cetera. So that's one significant driver. And then as always, there's discrete items that come up over the course of the year as you fine-tune reserves on tax liabilities, et cetera and/or reach resolution with the IRS or other taxing agencies on outstanding audits or appeals. So it's really just meant just to cover those 2 ranges in variability, which are fairly common in any given year. But there's nothing really unusual beyond that, that I would point to. George, in answer to your prior question, just a thing I'd like to mention regarding differences in accounts. As George said, Express Scripts, being an mail-order account, is virtually 100% bulk, whereas most of the rest of our large customers are a combination of both bulk business, as well as direct store delivery business. So again, you have to look at each of those based on the profile of the business that we serve. The other thing I'd say -- and this is often not very visible to all of you, but it's obviously very important as we price accounts, and that depends on the terms and the capital that either gets generated by the business or that we have to deploy into the business. And obviously, those terms can have a pretty significant impact on the pricing that we give, so that's -- obviously there's value to that capital in both directions.

Our next question comes from Tom Gallucci of Lazard Capital Markets.

I think in that last question, we were sort of talking around some of your bigger customers. We usually ask a lot about Walgreens and CVS. Can you just remind us, are they up for renewal next summer? And is there anything in your fiscal '13 guidance that would account for any -- assumptions for any changes there?

So the -- our Walgreen contract expires at the end of August of next summer. Our contract with CVS Caremark expires at the end of June, just about a year from now.

I'm trying to find out, will there be any assumptions in your fiscal '13 guidance for any changes there? I know you don't want to get into the details, but is that really more viewed as a '14 event, fiscal '14? Or what's the relation to this year's guidance?

I think I wouldn't want to get into specifics there just due to the confidential nature of those agreements. But in any given year, we make certain assumptions regarding when we're going to renew and the impact, et cetera, so this would be no different in that regard. But again, I wouldn't want to get into specifics.

Okay, okay, fair enough. And then George, in your prepared remarks, I know you had highlighted the pressure relief, I think, over the last few weeks related to the product offering on the med-surg side. Could you give us a little bit more background on that? I thought it was going to be just one routine resolution [ph].

Yes, so just very generally, as you know, we've been investing here and building out on our own capabilities, particularly clinical capabilities to support preferred product offerings. This is a little bit -- in some ways, it is characteristic of the generic industry, but in other ways, it's quite distinct in that these are products that really need to be sold to clinicians who don't necessarily have a rating system such as maybe ratings happens in the drug setting. So you have to have a clinical capability to be able to support your offering of preferred products. We have seen the area of orthopedics as an interesting area, a place where we have some skills. We have been able to track some skills where we could build a partnership with a player who could support the technical needs of delivering and supporting that market. So we're really excited about this. It's early days, but we have a lot of enthusiasm for and we're getting some high level of interest from business partners downstream on the provider side.

Our next question comes from Robert Willoughby of Bank of America.

Jeff and George, can you remind us why the CapEx numbers falls as much as it does in '13? Was there something unusual in '12? And just as it relates to the deal spending in the coming year, just the normal dinks and dunks or is there some appetite for larger deals?

Let me comment on the first one. The biggest reason for the falloff in CapEx, Bob, is simply because the Medical Business Transformation program ended. Most of the spend ended actually in Q3 of FY '12, so the dropoff of that program is, by far, the biggest contributor to the lower CapEx next year.

So, we -- our thinking about acquisitions is pretty much as it has been, which is, we are trying to continue to make sure that we're positioned in the best way to drive long-term sustainable value to the strategic areas that have been particular of interest to us. We've made some investments in those areas. There's nothing particularly to highlight other than to say to the extent that we can find or do find the opportunity to drive shareholder value through a move, we are ready to do that. But nothing specific to call out at this stage.

Our next question comes from Ross Muken of ICI (sic) [ISI] Group.

So on the China business, it seems like you've had some pretty good growth momentum there. Obviously, the market remains pretty healthy. You've done some interesting acquisitions. I think you highlighted them on the call. As you look forward, do you think the sort of biggest incremental opportunities is sort of moving into some of the Tier 2 or other Tier 1 space that you don't currently service? Or is it also sort of expanding the breadth of products distributed beyond the medical side, maybe lab, and sort of running a broader product set through the distribution network that you've built?

Yes. Why don't you start, Jeff?

The answer is both. And I think they are sort of mutually dependent, too, quite honestly, in that we need to continue to build out our geographic presence so we can cover more of the country, not only allowing us to cover more hospitals and pharmacies, but also giving a greater coverage that, in turn, our manufacturing partners can utilize to push product through. So that's sort of the basic part of the strategy, is to build our geographic presence. And as I've said before, our goal is to get to close to 25 sort of focus areas. We currently have 11 DC sites, so we're halfway there. We'll continue to focus on that both through organic and inorganic means. However, at the same time and really in parallel, we need to expand our portfolio in terms of products that we push through that channel. And I think we have an opportunity to do that in ways that are perhaps very different from the U.S., as we've said before, because it's a very different market and the needs of our manufacturing partners are very different. And how we get to market may vary a little bit, too, in terms of, for example, providing specialty pharmaceuticals all the way directly to the patient, which we've done through several specialty pharmacies that we've set up now in 2 different cities. So I would say it's both. And like I said, they sort of depend on each other because we need the channel in order to provide enough coverage to, in turn, expand our portfolio of products and drive that through to the market.

And maybe on the specialty business. I know you quoted growth on kind of [indiscernible], so I know it's off of a small base. Do you feel like with the deal you announced -- the win you announced in the quarter and some of the momentum you've seen there in terms leverages, building a bigger platform in the context of 1 or 2 or 3 more key wins. I know there's a lot more to look at, presumably a large win to go. But do you feel like you've sort of gotten where you really compete with the other 2 larger players in that market and gain some of their share?

Yes, yes, this is George. You sort of hit it, which is you have to establish a certain amount of scale presence, which brings additional credibility, which allows us to reinvest. It's sort of -- virtually a cycle. And so we are beginning to see that momentum. We had a really great presence out of Chicago at the Cancer Association meeting, the Oncology Association meeting. We're beginning, I think, to establish ourselves as not only capable of doing everything in this space but innovating in this space. And yes, I feel very encouraged about our growth. As you said, we're still smaller in the -- at a different stage. But I like where we are, and we are gaining momentum. And I think others are seeing that and seeing what we're doing, and that helps us as we approach each customer. So I feel encouraged by it.

Our next question comes from Robert Jones of Goldman Sachs.

I just wanted to talk about the Express loss, just wanted to make sure we're thinking about that correctly. Is the EPS impact for next year really as simple as taking a bulk margin against the $7 billion of sales? Or is there some lost P&L leverage that we should expect from losing a customer of that size? Any more quantification around the impact on fiscal '13 would be helpful.

Bob, given the confidential nature of any of those discussions, I can't get into the specific rate that we had previously for Express Scripts. But I do think taking the last sales volume and applying our bulk rate, which, for the year, by the way, ended up at 38 basis points for the full year, FY '12, I think that's a reasonable proxy. Now inherent in that rate is some allocated fixed cost that we would need to cover. But I would say compared to most of our business, the fixed costs associated with bulk business are relatively light because we generally allocate fixed cost based on activity, and activity associated with mail order is clearly much less than you'd see with the other classes of trade. So bottom line, I think applying the general margin rate is probably a good proxy.

And then just on the MedTrend, you guys laid out a lot of the assumptions here. And I know previously on the Medical Transformation, you guys said that the financial benefits would outweigh the cost in '13. I might have missed this earlier in the call, but I was just wondering what the view is today as we look to fiscal '13. And any more quantification around that financial benefit would be helpful.

So what I've said previously still stands, that we expect depreciation of about $35 million in FY '12, and we expect the benefits to net, be accretive to that number. And as George alluded to, they both come in the areas of margin, which would be both gross margin improvement, as well as SG&A reduction. And then separate from that, we would expect to see some inventory reductions as well, which would help our operating cash flow.

Our next question comes from Steven Valiquette of UBS.

Just 2 quick ones for me. First, for FY '13, just given the earlier discussion on direct store delivery versus bulk, should we assume that the Safeway contract position is likely more profitable for Cardinal than the Express Scripts subtraction? Or is that not the right assumption? And then the second one, just quickly. If I missed this, I apologize. You guys announced this Dik Drug acquisition. Is that material enough in size to move the needle on EPS accretion for FY '13? Or should we assume it's not that material and so therefore, kind of more neutral to EPS?

Steve, as you can imagine, we really can't answer the first question. Sorry about that. But it really -- specific to individual customer contracts is a place where we can't go on these calls. But Jeff, do you want to comment on the second part, on the Dik Drug?

Yes, I would say it's relatively immaterial for next year. Net-net, it's accretive, but by a very small amount. So I'd say, for modeling purposes, it's relatively insignificant.

Does it get more accretive over time or just assume overall, it's not big enough to really move the needle?

I would say as a general statement that it's not big enough to move the needle. But I would expect by the second year for it to be $0.01 or $0.02 accretive.

Our next question comes from David Larsen of Leerink Swann.

Most of my questions have already been asked and answered. But for 2014, assuming that 35 million more people do actually get health insurance, how are you guys thinking about now how that may impact your business? We -- and roughly a good portion of those end up being in your exchange-based plans or Medicaid plans. Would that potentially result in lower reimbursement for you guys and that -- and possible higher volumes? Can you sort of talk about that at all?

Yes, David, I can only give you a sort of generalized statement on this. But again, we would assume that in 2014, there will be additional people coming into the system. As I've said, the overall health care system is going to go through this dynamic, one which is more people coming into the system both through legislative change and demographics and then the other is how are we going to, as a society, pay for all of this? And so we just assume that we're going to have to continuously improve our productivity, focusing on our own productivity, but also productivity for our customers so that we can enable them to compete in that landscape. So I think it's reasonable to assume that, that's a dynamic we'll be experiencing generally as a system, and then just regarding the whole.

Our next question comes from Larry Marsh of Barclays.

George and Jeff, two quick ones. First, on nuclear, I know last year you had a tough low energy environment around utilization, but this fall, some exciting potential developments on the clinical trials and tests. You may have already addressed this, but how are you thinking about the outlook for nuclear this year in your guidance?

I'm going to say generally very much as it has been in the past few months, which is soft demand utilization on the SPECT on the low energy side. We're growing at a nice clip on PET, although it's much smaller. We do believe that, again, that the evolution of the diagnostic agents, particularly, right now, in neuroscience, are important. I think part of the long-term drivers here will be what's happening on the therapeutic side. So the combination of the therapeutic and the diagnostic is sort of critically linked. And so we'll be watching carefully, not just to see what's happening on the diagnostic side, but what's happening on the therapeutic side. Any breakthroughs there would be very, very helpful.

Great, okay. A lot of areas could be some variability. And the second quick follow-up is on cash flow. I just want to make sure I got this right. I normally think of you guys generating about 75% of EBITDA and cash flow from operations. This fiscal year, fiscal '12, was a bit below with the fourth quarter. Jeff, you had said, expect cash flow to be impacted this year by, I believe, $500 million and then some negative working capital implications with Express. Are you suggesting that's going to be a deflection off of the $1.2 billion you generated this year or just off a normalized trend? And would there be any reason to think about cash flow trends not being -- being different from that sort of typical 75% of EBITDA as you kind of go forward?

Yes, first of all, I would say this year's cash flow of $1.2 billion was a little bit light because of the $100 million tax deposit we made with the IRS in Q4. So on a more normal run-rate basis, if you can call it that, I would have expected closer to $1.3 billion. I'd say, next year, that's $500 million off of a normalized run rate.

Again, Larry, I just want to make sure, I thought you said $500 million, plus the Express and I don't think that's...

The $500 million is a combination of both the expected tax payments we have to make next year, unique tax payments we have to make next year, as well as the impact of unwinding the Express Scripts business.

Okay, I got it. And that's off of normalized rates. So it won't be a dramatic difference versus cash flow from this year, it sounds like?

No, I've got to tell you it's not [indiscernible]. If you assume this year is somewhat normal other than what the $100 million, it'd be $500 million lower.

Off of that?

Yes.

Our final question comes from Eric Coldwell of Robert W. Baird.

So I think we will wrap it up. I'd like thank all of you for joining us this morning, and we look forward to the opportunity to speak with many of you in the coming days. So thanks, and have a good day.

Ladies and gentlemen, thank you for participating in today's conference. This concludes today's program. You may all disconnect. Everyone, have a great day.