Cardinal Health, Inc. (CAH) Q4 2008 Earnings Report, Transcript and Summary

Good day ladies and gentlemen, and welcome to the Fourth Quarter 2008 Cardinal Health Inc. Earnings Conference Call. My name is Erica, and I will be your coordinator for today. At this time, all participants are in a listen-only mode. [Operator Instructions]. I will now like to turn the presentation over to your host for today's call Mrs. Sally Curley, Senior Vice President of Investor Relations. Please proceed.

Thank you Erica, and welcome to today's call everyone. In today's call we will actually be slightly extending it to 10:00 AM in order to accommodate at many of your questions is possible, and if for some reason we ran out of time prior to answering all your questions, I would invite you to call Investor Relations and we will be happy to accommodate. Also today we will be making forward-looking statements. These statements also include assumptions around our fiscal 2009 forecast and longer term goals objective. Matters addressing 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 forward-looking statements prior to the beginning of the presentation for a description of those risk and uncertainties. We will reference non-GAAP financial measures and information about these non-GAAP financial measures is included at the end of the slide presentation. The transcript of today's call and a set of recap financials as well as the slide presentations are available on our investor webpage at www.cardinalhealth.com. Now, I would now like to turn the call over to Cardinal Health Chairman and CEO, Kerry Clark.

Thank you, Sally and good morning everybody. I want to start off today by putting some of our recent organization changes in context. And addressing today's news that we're considering a spin up of all or part of our clinical and medical products segment. Going back you may recall that in late fiscal year '07 we sold our pharmaceutical technologies and service businesses and established two sectors; health care supply chain services and clinical and medical products. We felt those structures simplified Cardinal Health, allowing us to create scale in each sector and to create better focus on our core businesses. Last month in the beginning of our fiscal year '09, we took another step in this direction by establishing these two sectors as two separate operating and reporting segments, led by George Barrett and Dave Schlotterbeck. Each segment has been designed to be closer to its customer, to be more innovative, to reach decisions faster and to have best in class cost structure. With that behind us we now think we should explore whether or not to take another step, by spinning up all or all apart of the CMP segment thereby creating two publicly traded companies in a tax free manner. We expect to make a decision by our next earnings call in October. But whatever the outcome please note that the current Cardinal Health that what you see today will be the Cardinal that you should follow through most of fiscal 2009, regardless of our decision. Our goal is simple, to allow each business to become the best it can be in meeting the needs of our customers, our investors and our employees. As Cardinal Health's portfolio has continued to evolve we believe it is important to keep reviewing whether we are designed in the best way to deliver value to all our stake holders. For example CMP has matured and grown especially with the VIASYS and Antoria [ph] acquisitions. It now has sales of approximately $4.6 billion. Its growing rapidly and it has very attractive margins. We are increasing our investments in growing the pipeline of talent, products and innovation. The changes now underway are designed to simplify the organization and create more synergy across the previous CTS and MPT portfolios. Our healthcare supply chain service segment has been challenged over the past year particularly the Pharma distribution. We need to focus on executing the basis with excellence with the right programs, in the right channels at the right cost, and the right profitability. This is the major single minded focus of all Cardinal Health management and it will require investments in customer phasing IT to reach our long-term goals. George will provide you with more specifics on our programs in a moment. But I am pleased to say that we are forecasting the segment will return to growth in the second half of fiscal '09 and we believe that is an important milestone. Decisions about the future design of cardinal Health will be based in what we believe is best for the long-term. This review process is underway and we expect to announce of the decision before the next earnings call. While the timing is uncertain in these matters, should a decision be made to spin-off of all our portion of CMP, it could take us around 12 months before it takes affect. Now before Jeff takes us through the fiscal year '08 actuarial and fiscal year '09 guidance. I want to make a few other comments. First, as we have said over the past two quarters, our CMP and medical surgical distribution businesses have been performing as we forecasted, although there has been some quarter-by-quarter fluctuation. These businesses are healthy and we are looking forward to continue progress in fiscal year '09. Our challenge has been in pharmaceutical distribution. As we've said, the factors that have been effecting the second half of fiscal '08 will continue the impact the first half of fiscal '09. As we have said before, these factors are first the previously discussed reprising of some major contracts, second the loss of customers, particularly retail independence due to anti-diversion challenges and third, volatility around the nuclear pharmacy business as Cardiolite goes generic. As we have also been suggesting, we do not expect these issues to be as much of a problem in the second half of the fiscal 2009. So we are forecasting our return to growth in segment profit in the March and June quarters. And that is great news. But, when we had the full year together for pharmaceutical distribution with the decline in the first half and growth in the second half, overall fiscal '09 profits for HSCS will flat to down 5% from last year, despite reasonable growth and revenue. There are also some other non-operating factors that will provide headwinds to our fiscal '09 results including a higher tax rate and an increase in interest expense which Jeff will cover in more detail. I also should point out that in the light of the strategic options we are considering for the company. We will likely be significantly downsizing our share repurchase program for fiscal '09 which will affect shares outstanding. In addition and very importantly, we will also be making significant investments in R&D and CMP and IT and HSCS. We are choosing to make these investments to help each segment prepare for the longer term future. In many ways, we see fiscal '09 as a transitional year for cardinal Health. Where we put the foundation for future growth under those segments. We are very optimistic about the future for both of these businesses. As you know, these two segments are very different. There have different business models and key factors for success. But both need to refresh their models to be well positioned in our future growth and we will be making those investments this fiscal year. For these reasons, we believe that the guidance of $3.80 to $3.95 per share represents an achievable, realistic forecast based upon what we know today. George and Dave will shortly provide you with more details on each of the segments, but first let me turn it over to Jeff for a recap of fiscal '08 and a fiscal '09 forecast, Jeff?

Thanks Garry and good morning all. Today I would like to provide you a high level comments on both FY08 and FY09, include details in both the news release as well as in our slide presentation which are available to you on our website at www.cardinalhealth.com. I will keep my FY08 comments brief and just highlight a few key items and trends there. And I will spend most of my time discussing FY09 and our forecast assumptions. So a quick recap on our past year. I won't comment specifically slide five to 11 and will just give some overall comments. We posted non-GAAP operating earnings from continuing operations of $568 million for Q4 and $2.2 billion for FY08. Non-GAAP EPS was $0.97 for the quarter and $3.08 for year. Our non-GAAP tax rate for the year was about 32.6% and our operating cash flow was $1.6 billion. We executed $1.1 billion in share purchases under our programs in FY08 and for the year average approximately $364 million fully dilutes share outstanding. For the quarter and the year, we had approximately $35 million and $123 million in special item charges respectively. This net against impairment gains of $10 million in the quarter and $32 million for the year. All these were primarily related to restructuring and acquisition charges as well as the sale of a few of our businesses. And now a few general comments about the year. Both of our CMP business, CTS and MPT had very strong years and continue to bolster the prospects of the future, we are ahead of schedule with the VIASYS integration and we began the integration of Antoria [ph] which strengthens our presence in the inflation prevention area. With an HSP as medical we delivered what we set out to, to turnaround our US Medsure business and to make some key operational improvements within our Presource kitting business. Once solid comment I'd like to make about pharma distribution, where there is the decline in our DST revenue in Q4, which are mentioned in the news release was down about 5%. There's a few apples and oranges here that I can point out, that skew the year-on-year comparison. First there was a change in form of our sales to a large customers in Q4 '07, which resulted in a one time revenue increase of $200 million that quarter. And in Q4 of '08 there was a move in the business from one of our largest customers from DST at bulk, which was worth about $450 million in revenue. In addition the loss of retail independent business associated with our anti-divergent activities had an impact as well as George will cover. Now lets jump to slide to 11 and our key financial drivers. I am quite proud of so many items we accomplished in a challenging year. Specifically we reduced inventory by three days in a quarter versus last year, increased our dividend by 17% to $0.14 per quarter per share, and ended Q4 at 33% debt to capital ratio, which is within our said [ph] goal. The net result of all these activities is a non-GAAP return equity of approximately 18.4% in Q4 of '08 versus 17.3% in Q4 of '07 and 19% for this fiscal year versus less than 17% in the prior full year, a considerable improvement. This leads us to our FY '09 discussion, and I want to start with the rational for a new guidance structure, as well as some assurances you that we will continue to try to be transparent. You can read first slide 13 to 17 as I walk through the guidance. The new guidance structure is more streamlined, fits more with our new structure as announced in July 8th, and consistent with all others in this industry and overall market practices. Based upon what we see we currently are projecting achievable realistic guidance of $380 to $395 per share of FY'09. This is based upon total revenue projections of 6% to 7%, HSCS segment profit flat to down5% and CMP profit growing greater than 20%. We know that our FY'09 guidance may come as a disappointment to many of you. However let me take a moment to highlight the overall trends as well as our forecast assumptions, and why we believe that this is realistic, given what we know now. Our assumptions are split into two categories; our overall corporate perspective found in slide 14 and our segment related assumption found in slide 15 and 16. I will start with some overall corporate assumptions. First and probably most importantly, both of our segments are making significant investment in FY'09, to further improve our competitive position. As Kerry mentioned, much of our incremental strategic spending in FY'09 will be focused on product guarantee, needle IT improvements, both of which will best position our respective businesses for the future. In fact compared to our last fiscal year, we are budgeting up to $100 million worth of incremental strategic investments, and that is reflected in our guidance range. We expected higher overall corporate tax rate of about 34%, which reflects anticipate shift in income from lower to higher tax regions as well as impact as an expiring international special rates. Interest and other is estimated to be approximately $180 to $190 million, which was higher than FY '08 due primarily to some asset gains we experienced last year. And we are estimating average diluted share outstanding for FY'09 in the range of $361 to $362 million. In light of today's announcement about the strategic options we are considering, the share forecast incorporates a relatively conservative view of share repurchase, size and timing. It is clearly an assumption they will be [indiscernible] when we have reached a decision regarding expiration of the spin off to CMP, and I should point out that the previous Board authorization in this area stays intact. When compared to FY'08 the impact of these three items, increased tax rate, high interest expense and shares outstanding account for about $0.05 of incremental head win, few of the items in note which effect our consolidated projections. Growth [ph] to our recently announced restructuring program we had forecasting cost savings in the range of $80 to $90 million which are built in our numbers and a significant portion of which will be used to offset the rising cost of oil and oil related commodities. In fact with respect this to while we are not immune to increases, we believe we are budgeted for them appropriately this year and is reflected in today's guidance. To date we have taken on the majority of the increased cost burden but we are working closely with our partners to ask that they share in this responsibility. We anticipate operating cash flow to be in a range of what we experienced in FY'08. And finally just a few comments regarding the balance sheet; our goal is to maintain our strong investment grade rating and our debt levels at above of what we've see in FY'08. We anticipate capital expenditures to be in the mid $400 million range, with much of that devoted to IT investments. Regarding divestitures we are assuming that [indiscernible] systems are not in our FY'09 guidance. In fact to an end we have signed a defended agreement to sell [indiscernible] to Charles River [ph] Capital partners and [indiscernible] management. That's it for the overall corporate assumptions. Let me move into the segments assumptions now, I am not going to go over each one, but we'll try to highlight just a few. In the distribution side we anticipate that our DST margins will stabilized as we get into 2009, however on our overall margin basis, we would not expect it to be enough to offset the mix impact of the faster growing bulk business. Our assumptions also include that we will be able to start off with the DA in first half of the year and force out accretive and that we will not participate in the manufacture of generic [indiscernible]. George will elaborate a little bit more on this last point in a moment. Our assumptions for CMP are that we will a year of continued growth. As previously mentioned will be increasing R&D expense and anticipate approximately 50 new products and product enhancements to be launched during the next 18 months. We will discuss that in more detail in a moment. Finally I want talk a little bit about our financial reporting format for this year. Many of you have asked about this, specifically I will be reporting next fiscal year or this fiscal year on what visibility you have into the businesses particularly CMP as it involves products with the spare industry growth rates. We'll obviously start with reporting revenue and segment profit for our two new reporting segments. In our SEC filings we will supplement that with our anticipated reporting product categories for revenue as shown on slide 17. This may change slightly but our goals to provide you with the appropriate level of detail, so you can best understand the business and make your own assessments. And the final word, although we don't wanted to get in the habit of providing quarterly guidance I do want to make a comment on Q1, given it's somewhat atypical over. The numbers for Q1 FY '09, will be relatively weak around $0.70 per share, there are challenges which still persist in the pharmaceutical distribution area, unfavorable comparisons to the prior year based on strong Q1 FY '08 branded inflation contribution and a fact that the impact of some of our new efforts won't take hold until the second half of FY '09. As a result the comparison for this year Q1, versus last will be challenging, before we get back on track for the rest of the year. We look at our full fiscal 2009 forecast, I recognize that [indiscernible] higher EPS estimates for the year, compared to some of the estimates we have seen published, I suspect that our assumptions for tax rate, shares outstanding and interest and other accounts were about $0.14 to $0.15 of difference. Majority of the remainder of the differential is really based on the additional significant investments which chose to spend in this fiscal year to better position the company for the future from a competitive standpoint. I hope this provides you with color about our historical financials as well as our FY'09 forecast. I am happy to answer any additional questions during the Q&A, and now like to turn the call over to George for some comments on the HSCS segment. George.

Thanks Jeff, and good morning everyone for those of you following the slide presentation slide 19, and 20 will provide you with some additional background on my comments here. It has been a year of some challenges for HSCS, but we finished the year as we forecasted. As we anticipated growth in our combined medical businesses was positive for the second half, although our surgical kitting business continued to battle some price pressures and yet had to efforts reduce inventories include in the leaner operation. Our medical distribution businesses which includes lab, ambulatory and hospital supply have very strong years. Hospital supply had a strongest performance in years. Traditionally, our lab business managed to grow year-over-year in spite of the previously announced loss of its largest segment. Our ambulatory business, although small grew nicely and shows its great promise. Cost of medical businesses, we have worked some key contracts late in the year. And expect these to benefit us in the latter half of '09. The addition of Mike Duffy, our fully EVP of Operations to oversee the medical leadership team. We are hoping to bring new alignment between our operational units and our customer phasing activities. Mike and his team will be very focused on matching the right SKU mix to the right customer need and then driving operational efficiencies, improved service levels with it's cyclotron [ph], any more profitable customer and product mix. On the pharmaceutical side, our nuclear pharmacy business maintained its very strong market position and customer loyalty. But accrual experience challenges heavily influenced by increasing cost of raw material. We had expanded our product line to include both Cardiolite and Myoview and remain committed to offering the enter range nuclear pharmacy products used in cardiac imaging, including a low cost alternative. As Jeff, mentioned we have to forecast 2009 with the conservative assumption that we will not be offering our own manufactured system during this year. We have, however, made provisions with existing suppliers to allow us to complete more effectively, should a generic product hit the market. And as you already know we had assume that a generic will in fact be introduced. Also, in nuclear, we announced mid June that opened three additional Positron Emission Tomography or PET radiopharmaceutical manufacturing facilities near our existing nuclear pharmacy locations this year, brining the total number of cyclotrons we are able to our PET products to nearly half of the more than 150 U.S. nuclear pharmacy locations which is needed due to a short half life of the PET imaging agents used to diagnose disease. This is not a large business today, but one that we believe could demonstrate rapid growth. Finally, our largest business, our pharmaceutical distribution business had one of it's toughest years. I want to reinforce driving improvement in this business is our highest priority. In my first opportunity to address you on a third quarter call, I highlighted some of the areas which I believe would be important in improving the performance of our pharmaceutical distribution business. I highlighted the importance of focus and in particular our focus on execution. I discussed our need to more effectively segment our business, so that we can target the right opportunities. I stress the necessity of improving and simplifying our generic programs and to better integrate them into our overall offerings and I told you that we would revisit and reinvigorate our value preposition. Although it's not immediately apparent from our financial results, I'm confident that we're progress on offerings. And I would like to give a brief update on these efforts. Our organization is indeed more focused on execution. Our anti-diversion issues need to be at a starting point. We've fully committed our organization to the necessary improvements, and management of controlled drugs. We have put in place new procedures, both automated and manual to improve our controls. We have conducted over a 100 training programs, which have included over 2,500 Cardinal associates. And I can say that we are in constructive settlement of discussion with the DEA. From an overall, operational execution standpoint, we all are seeing improvement in our service levels, as evidenced by our key customer service metrics. First-line [ph] bill rate, and delinquency days outstanding, both of which are ahead of last year, and ahead of our internal goals. In our segmentation work, we've recommitted to growing our direct store door for DSD business. Our anti-diversion programs... our DSD business and made growth more challenging. Despite this, we e seeing some good signs. We are creating programs specifically targeting these non-bulk customers. We are focused on increasing our share of volatility to our existing accounts. That is capturing a greater share of their purchases. And we are focused on recapturing business lost during this past year. We are doing this by improving the quality and the valuable offerings which help our customers to compete in the marketplace For example we have focused our need [ph] of service offerings around four key areas of retail independent pharmacy. Reimbursement support, streamlining operations, creating open revenue streams, and increasing market share. Our leader pharmacy partners now have access to more front-end offerings as well as medical equipment and high demand from our agent population. I just returned from our 19th annual retail business conference which bring together thousands of retail pharmacists. This was the best attended conference in our history and the feedback on our services and products and in particular our leader offerings was very positive. And just as an example of the impact that program like this can have, we recently completed an overhaul of the retail independent in South Florida. That implemented other than front-end programs in south front-end... excuse me front of store sales increase to 3% for more than 10% of it's total sales. That equated to approximately $200,000 more in annual sales for this particular pharmacy. As we look across all of our classes of trade, we are getting very good feedback on our generic programs, our managed care and reimbursement support services at a automated outline calling [ph] to it's health pharmacies remind patients that their medication need re-going. With that several recent new customer wins, including Prime Therapeutics which was announced last week, each of these is a small step forward, but it helps to validate our efforts, the benefit of which we should begin to feel in the latter half of the year. Although, our genetic program like our other programs has been handicapped by our anti-diversion issues, our new genetic programs are simpler, more transparent and more tightly aligned with our interest in growing our overall retail business. Again, the date of some of recent retail business conference indicated that this was the most successful program, we had ever had for our generic business. Our recent launch of three generics the generic equivalents of risk [indiscernible] helped to highlight that we're getting very good at executing, very fast high volume generic launches, a critical success factor in this business. Finally, we're making reaffirmation of our value proposition for HSCS and actionable [ph] item. We are approaching all of our contract discussions with a conviction that our value is meaningful. And we're working hard to demonstrate this in economic terms to customers in all segments to vendors in our DSA discussions. What I would love to say that our pharma distribution business will turnaround overnight, I realize this will take some time and some investment to help us reposition. But we're putting building the building blocks in place. We expect 2009 to be a transition year one in which we will begin to feel the benefits of the work done in recent months and year in which we expect margin erosion to moderate. Let me take just a moment to elaborate on margins. We divide our pharma distribution business between bulk and non-bulk or DSD business, each having different operating and margin characteristics. As I am sure you know our bulk business which we define our shipments to customize warehouses and mailer [ph] facilities, in lower margin both price limited sales and marketing support and lower operating costs. This is profitable business, business in which we have very efficiently manage our working capital and which is expensing significant revenue growth lead by our largest business partners. We have come to a difficult pf in this business in terms of margin, particularly as we have reprised some major contracts. As we look toward FY09 with most of these major reprisings behind us, we do see moderating of this erosion. Our non-bulk or DSD business has different characteristics. Our margins are margins are better in this group, but our costs to serve are higher. We did see some DSD margin pressure in FY08, but we expect to relatively stable the DSD margin in FY09, an important point here, because of the size of our bulk business and it's expected growth in FY09, revenue growth in FY09, it is likely from a shear math perspective that our overall margin could slowly decline in spite of the fact that we will improve the health of both of these parts of our business. Before turning the call over to Dave, I want to make one final comment. We recently announce the acquisition of Borschow Hospital & Medical Supplies. Borschow, a drug and medical distributor has the unique a powerful position in the Porto Rican market. John Borschow and his team has built up many years of kind of deep customers relationships, both in the retail and the hospital channel that all of us handy [ph] and which will head among Board. In summary, we feel very good about the progress we are making. I will be providing with the updates during the year in some of the areas that I believe represent leading indicators of progress in our business. First, drug elution of our anti-diversion issues with the DEA. Second, growth in our DSD business, third, a return to a meaningful growth in our generic source program and finally, continuing momentum in our medical distribution businesses with a particular focus on our leading transformation activities and the development of our private label offering to hospitals. Now I would like to turn the call over to Dave for his comments about CMP.

Thanks George. I wanted to first take the opportunity to provide you with a broad overview of how I view clinical and medical products and I will be loosely referring to slides 22 and 23 in the presentation. First, we are extremely well positioned in the area of patient safety particularly in medication management and infection prevention. And we have strong competitive advantages. We are a global leader in medication safety and in infusion systems. We have the largest U.S. hospital footprint in dispensing systems and are the largest acute care repertory company in the world. We are the leading provider of disposables used in the sweep. We are the industry's only enterprise life medication management solution, we are a leader in positive patient identification and the prevention of hospital acquired infections. In fact I am sure you have heard by now that the Centers for Medicaid and Medicare services or CMS included an additional three preventable conditions beyond the nine for this fall for which it would no longer pay. With our focus on infection prevention I feel we are well positioned to assist hospitals and improving outcomes. We believe we have a winning vision that ensures our strategy is aligned with key customers concerns. At the same time we do have a few items on our plate that need addressing. First we need to complete the remediation of the Laris recalls on time and on budget and we are on track to do this, second, while we will continue to use our core businesses as foundations for future growth we'll complete the integration of VIASYS to meet our financial commitments. In addition, we're increasing our investments significantly in innovation both in new products and potential breakthrough offerings. We are capitalizing on our overall capabilities to develop and launch approximately 50 new offerings, during the next 18 months both in product enhancements and new products. More than 10 of these new products or enhancements planned for release in our infection prevention business, independent of Antoria [ph]. We have more than 20 new products over the next 18 months in the VIASYS and respiratory marketplace alone. Most notable is the Enve Palmtop ventilator, what we believe, be the smallest and most versatile ventilator in the world. In the infusion area we plan to introduce version 10 of our operating system for [indiscernible] after the first of the year and we are excited about the opportunity this brings with respect to new clinical applications that help our hospital partners improve clinical care. In dispensing the MedStation 4000 will be introduced with many new safety features so all in all we are looking for a solid year of more than 20% segment profit growth, that's why we are so keen to ensure that we invest appropriately in R&D to continue to feed our pipeline beyond FY '09. With that I will turn it back to Kerry.

Thanks Steve, George and Jeff. Let me just briefly close by just quickly topping the key priorities we are making in this year as we covered a lot of them in the last two presentations, let me just hit the key, first of all we are very focused on returning supply chain services to steady growth including making the right IT investments to provide for the future success of this business. Second we are continuing to invest in CMP for a long term growth. We will be focusing on completing the integration of VIASYS, Antoria [ph] and [indiscernible] with excellence. And then we focused on resolving any outstanding regulatory issues and further strengthening our compliance in quality infrastructure. Of course we will also be reviewing whether to spin up of all or part of our clinical and medical product segment is to the right next step. We believe very strongly that now is the time to ensure both our segments are positioned properly for the in long term. And we are going to do this with an eye on our mission which is to continue to innovate services and products that reduce medical errors, and increase patient safety and enhance productivity across with the broad healthcare spectrum. We're looking forward to updating you by our next quarterly earnings call at the end our October and thank you for your time and interest today and we are now open for questions. Question And Answer

[Operator Instructions] Our first question comes from the line of Glen Santangelo for Credit Suisse. Please proceed.

Yeah thanks. I just had a quick question, on the drug distribution George, could you help me understand, it sounds like the DEA issue it seems like its coming to a close somewhere in fiscal '09, and it seems like you have a lot of sales along the way. Have these independent customers, have they gone to your competitors to source product and assuming you do ultimately wrap up the DEA issue, what makes you so sure that ultimately all these sales come back to Cardinal Health?

Yeah, thanks for the question, as it relates to the DEA, as you can imagine since we are actually in constructive conversations now, I probably should not add more to that statement, but we will leave it at that. As it relates to -- we didn't lose a fair amount of business, if you look at this on an annualized basis it's roughly a billion dollar of lost sales, so we had a significant impact from this and yes, the business went somewhere, I would say not to a single place, certainly business has been spread around the industry. Our sense of this, we're working very hard at regaining obviously the products as we worked through the DEA issues of course but also the trust of those independent's and non-independent's as well, this affected all of our classes of trade. I am feeling pretty good that there are good number of customers who will come back to us but they are certainly many who we will have to earn back and that why I said, I wish this would be a flip-to-switch overnight kind of story, but we will have to do this in a hard and well earned way but we know we have to do in front of our [indiscernible] and we.

And George may be just one follow-up question on the margins you sort of are expecting slight margin contraction in drug distribution, is that because I think I heard you say that the bulk sales will accelerate and the DST sales will remain flattish, so it's just the mix component that's driving the margin down year-over-year?

It really is, we have -- the rate erosion that we've experienced in our bulk business it beginning to slow and we have left a relatively stable margin in the DST but the growth on a revenue basis of that bulk business is so substantial that the math just works against you.

And then my last financial question for Jeff, Jeff the $23 million reserve that you set aside for DEA is that embedded within your guidance that you are putting out now today or is that separate?

First of all that $23 million is reflected in our Q4 numbers.

Okay so that has nothing to do with the guidance for next year?

Right it was catheter and special items for Q4 of FY'08 so yeah you're correct that has nothing to do with the guidance for the next year.

Okay thanks for the comments.

Thanks Glen.

Our next question comes from the line of, Ross Muken with Deutsche Bank Please proceed.

Good morning gentlemen,

Morning Ross.

In terms of the new decision to look at potentially spinning off the CMP business, can you talk a bit sort of -- I know you went through the time line of what has happened in terms of the over all Cardinal Health, but can you talk about sort of what are the sort of key considerations you're looking at when you're thinking about whether or not this makes sense in terms of creating share holder value and was there anything in terms of the timing today, of why this is probably -- possibly more of a strategic decision today than it was say 12 month ago.

Hi good morning Ross, Kerry here, let me try addressing, first of all obviously why we would like to tell you a lot more about the process we're in right know, to the situation it just really isn't appropriate to go through a lot of details but what I would just step back a bit and say, looking at what we did on our July 8th announcement were we really established two reporting segments and we really did that through a good understanding of one of the key work counts factors in each of those businesses to make sure that we were simplifying and flattening organization to get synergies, developing organizations and we are closer to customers, more focused and faster decision making and that July 8 was a very sort of natural evolution of the program. We really began two years ago when we created a... the sector structure. As we became very comfortable with what were we doing on July 8 and feeling very good about what that unlocks for us, it just simply became appropriate once that was out the door to step back and say so now without behind us really should we consider additional steps that could unlock shareholder value and so we really sort of see these as very discrete events, we are very happy with what we've done in July, that's going to really underscore the business and support it in through fiscal '09. Anything that we are talking about in terms of next possible steps should any decision be made, it's still a longer term decision. So what really happened on July 8 really was affecting this fiscal year, what we are talking about reviewing now is probably something that is... would not be eminent until somewhere around the next 12 months. I mean I guess, arguably it's possible it could affect to Q4 this year or around the first quarter next year, but it is really hard to tell and it is a longer term addition. So the July 8th announcement and what we are doing now, the time-tables are on how either of those could impact the business on a quite significant and therefore quite different in our view.

And may be just turning specifically to the of the CPS segment, may be Dave, you can go through some of the trends we are seeing, maybe back order or backlog or sort of order trends on the Pyxis business and then sort of from a competitive standpoint, anything changing in terms of Alaris since we have the potential for increased competition in '09 if our comparative product came back to market?

Right, well we continue to show a great deal of strength in both our Alaris and our Pyxis backlogs. As I had mentioned earlier, I believe on our Q3 call; we did have a very tough compare with NCGS [ph] against Q4 of last year, I was pleased that we did beat that by an 8% increase in our operating margins. On the competitive front, Pyxis continues gain strength and who does not gain market share, in the case of Alaris, when I look at the fourth quarter, the accounts were Alaris was the incumbent I only know of one that we loss to a competitor which was Hospira and so I remain very bullish on this business going forward. I would also like to say that the VIASYS businesses that were acquired a bit over a year ago continue to perform and have exceeded our expectations.

And one final just, question quickly may be for George. In terms of the IT investment on the pharma supply chain side the business, is that being driven sort of as a result of what happened sort of with DEA in terms of the control issues or when we talking about sort of the legacy system that's currently being implemented that across the organization is kind of not up to par with kind of what you would think a modern distribution organization would be running.

It's a yes to all. Let me add just a little more color. We certainly had some work that we needed do. Much of which has been done on the control side, but the other thing is that we are facing, for example civilization, requirements for pedigree, require ongoing investment. We've got significant infrastructure issues that we want to really bolster, particularly on our customer facing, if we look at our medical businesses, for example, in ambulatory care, we need to provide a much more effective user interface for this somewhat unique class of trade. On the retail side, we are going to be working very hard in the customers facing activities which have to do with speeding order processing, creating better visibility for customers and in particular improving our cardinal inventory management program which is the cardinal inventory manager as we call it CIM, which drives efficiency for our customer and is a really critical link and increases stickiness with our customers. So, it's a combination of infrastructure and also what we think of as key customer facing investments to drive our value proposition.

Great. Thanks guys.

You are welcome.

Thanks, Ross.

And next question comes from the line of Lisa Gill with J.P. Morgan, please proceed.

Thanks very much and good morning. Already years as Cardinal's made many of these acquisitions, there has been the arguments on Kerry, by management team, previous years, but there are lot of synergies from a cross-sell prospective. And one Cardinal especially in the hospital arena. I am just wondering as you think about now it's spinning up, the companies, can you talk about any potential loss of synergies, going forward and how do you, sort of you had conversations with some of your larger customers, especially on the hospital side, where it looks [ph] to be more impacted. And then secondly George, I was just wondering if maybe you could just talk a bit about the generic source opportunity. I think that some of your other competitors have done a good job of selling generics into the general, especially on the independent side and it seems like Cardinal has been a little bit behind, so maybe if you could talk about that opportunity?

Hi, It's Kerry here. Let me try to a top-line on the hospital, and clearly as we're just announcing this process. Obviously, we still have a lot of analysis and work to be done. So I again I will reference my comments in terms of where we are today. You're absolutely right. We have talked a lot about our ability to sell our products cross hospital and the hospital space is clearly an important part of Cardinal's mix. Our hospital organization is really a combination of what we call generalist and customer account folks. But we also have a enormous amounts of product line experts which are aligned with the businesses we have and in fact the most recent organization we did in July '08, really further so reinforces that in the sense that we have our product line experts. The product experts are very much on line today along Georgia's businesses and days business in the hospital. So it is by a combination if you will, sort of pillars [ph] by product line, with a group across the top. Secondly; what is still an enormous amount of synergy and the hospital supply piece and the pharmaceutical piece, obviously the capital equipment business in days organization is a little bit different. But still I think going forward we'll obviously be looking hard at our ability to execute well in the hospital market. I will just say that today as of July 8, we have structured organization so that still is very modular and very supportive of the segment structure we have today.

Lisa, maybe I can touch on your generic question. Yes, I would give our competitors good marks for having good generic programs. As it relates to hours. I think we are actually making very progress. I think I mentioned this when I first met with all of you. If you look at the data from the end of the calendar '07, you would have seen actually nice growth rates exceeding the market and our generic business. And I would say our anti-diversion activities really made that much more challenging. And very disruptive to our customers. So that's one issue that certainly has had an impact on us. the one thing that's probably worth noting is our unique mix. We have a very large bulk component [ph] to our customers and if you probably know, most of our customers by the generics directly and so we are working with a little bit of a different subset. Having said that we think really to really get signs in the generic problem right now, we have a very strong team. They are extremely knowledgeable, as you know I come from lot years here and these guys know what they are doing. I am really please by what, what they doing and we've done some things to really improve what I say is the transparency of the program to make it easier for our DSD customers to see the value into the offering. I think we are much faster and much more agile than we were. We're focusing heavily on first launch capabilities. And I think that's a run way here, but as I said, we are not [ph] to get it over time, but I am feeling optimistic about we are right now.

I mean George can you, I mean, I know you don't to want to give specific numbers around this. But as I turn to big bulk business and understanding that by direct, we think about the independence in the hospitals, can maybe talk about from our prospective, how penetrated you are and where you think you can go, I mean is it where they could buy 70% or 80% or a 100% of generics from you and today it's less than 50% or can you bucket it for us so we see what the opportunity is?

I can give you general color but I don't think I am comfortable giving specific buckets, other to say this, I would say our general compliance for the existing base of customers is not as high as it should be, and as -- particularly that's heard of us doing this last year because there are those who have moved their narcotic purchases elsewhere. So I would our shared value as I described earlier is suboptimal and there is run rate there and which we're excited about going after. I think the hospital market represents a really interesting opportunity for us. We are effectively got a very strong reach into the channel but I think we can actually be more effective there. So I don't know if can quantify this for you exactly other than to say we should be able to experience up top side from taking a larger share of the purchases of our existing customers as well as of course looking for new customers.

Okay great thank you for the comment.

Welcome.

The next question comes from the line of Tom Gallucci with Merrill Lynch Please proceed.

Thank you good morning I guess a few questions in the drug distribution area primarily, first clearly looking for that ramp in the second half I am curios George as you look at the way things play out how much of the improvement that you expect is simply due to the anniversary of certain issues that were mentioned on the call versus the need to further execute better in that time frame?

AgainI don't know if I can break out exactly the components of this, clearly the lapping of these re-pricings will create a benefit for us as we come out of that. So that's not inconsequential, but I would also say we've invested a lot and we continue to invest a lot in growing our business and in growing our capabilities to manage with these diversion issues, we're feeling like we're on the right part in these things, we know that we picked up some business recently two of which are pieces of business in which we will get the generics one starts in December one start in late September. So we just know that some of this will play out over time and it's sort of the building process for us.

Okay and then just on the re-pricings I guess when one of your big customers I think is still up for renewal, early next year or sometime next year. So how do we think about that in the face of the idea that you are getting better stabilization on that front?

Well again I think it's probably dangerous for me to speculate too much about what could happen with the negotiation is scheduled for next summer. We look a good strong relationship -- this is a reference to CTS and ongoing dialogue about the value each one of us creates for one another, so I am feeling optimistic that we will work away through this, but I would not speculate on what the exact economics would look like.

Yeah sure Okay fair enough

Thomas let me just add little bit of just historical color, I mean compared to all the previous contracts which we have done that were coming up of long term contracts, we did have a contract renewal with new CBS in summer '07. So -- which is very closely market linked and was also, at the same time there was the contract with [indiscernible] was renewed so I think in terms of how far was the old contract from market that was a bigger issue and the older contracts were renewed, I would just point out that we are -- have a much more recent renewal with CBS and so the difference between then and now is that not as great as the then and now in the previous contracts.

Right, that's helpful. In the nuclear business I think you mentioned that you expect to be distributor, but not a manufacturer so can you just remind us what the issues that you're facing on the manufacturing side are, and then also what the timing of that generic you anticipate in the guidance?

Right, so there are things that we can or can't say but yes there are a number of moving parts that relates to the generic cardiologist estimate the issues. So let's say number one, we are manufacturer or had filed a manufactured product of our generic system. I can't provide you additional information on that, other than that we do not believe that approval of our own product is eminent, and we've decided the assumption that we had put for our '09 forecast is that we'll not be own manufacturer. As some of you know for this area the pediatric expansion, to the pan expired at the end of July, and there was one company sitting with a tentative approval that tentative did not convert to a final approval, after the 29th of July, because there is a citizen's petition that has been sent. It appears... and we have probably no more insights than this, it appears that the agency has not yet responded to that citizen's petition, which certainly could have been impact. We have made the assumption in our numbers and you should know that a generic product will launch and our expectation is to model this earlier rather than later. But we'll have to see how this plays out, as I mentioned in my comments earlier we have tried to make some provisions, should a product launched generically we're not ready with our manufactured product to be in a better and more competitive position and will provide color as soon as we get more information for you.

Okay my final question for Jeff, just in terms of R&D in the IT spend, the extra $100 million would we expect that ramp down then in the forward fiscal year or is this sort of sustain ably higher rate, thanks?

Good question, we have actually done a fair amount of bench marking in both these areas in days where we take look at what an appropriate R&D stand as a percentage sales is for a vibrating competitive company in that space and we think the increase is that's oriented and in FY'09 really get us to the more competitive levels we need in order to maintain our competitive position going forward. And I would I would say the IT space within George's area, somewhat similar story, you might be seeing a bit of a bullets [ph] in'09 and as we launch some of these projects but again we looked at the benchmarking of our IT spend versus world class competitors this allows us to get our IT infrastructure and run rates to a competitive level. Did I answer your question Tom?

Thank you.

Thanks Tom, nice question.

Our next question comes from the line of Randall Stanicky, with Goldman Sachs Please proceed.

Great thanks for taking the question, just a follow up to the last one, Jeff can you help us calibrate, you have talked for the last of years, about the one Cardinal health plan and the cost reduction strategy and now we're sort of reversing and talking about incremental spend in some of the infrastructure so I guess two questions, one how much cost flexibility do you have going forward and then, to be even more specifically to the last question is that $100 million that we are going to add F '09, does that $100 million continue or is there any ramp down at all, once there is some initial investment and can you help us think about may be the quarterly variation or quarterly distribution of that investment?

Sure thanks Randall, first of all let me comment on One Cardinal Health, and may be goes a little bit back to Lisa's [ph] question as well a few moments ago, I think the logical question that we received even after the July 8th announcement was -- sort of going to these two defined operating segments is that some how undue everything that you accomplished during One Cardinal Health, and my answer externally and internally is absolutely not. Just from the historical perspective One Cardinal Health was more than brining together two segments, it was brining together 40 to 50 very disparate businesses that had largely been not integrated over a period of years. So, yes it was about One Cardinal Health but it was also about taking 40 to 50 business and bringing them to a common standard in terms of back office processes and approach to customer and the technology. Referring to two segments whether they part of Cardinal Health now or perhaps to [indiscernible] businesses going forward the Board ultimately decides that we want to split up the company, does that undo it, not in the least I think. So because I think we've achieved a lot of the advances we need to get these two businesses where they need to be today. So I would say the benefits of One Cardinal Health remain intact and will continue to benefit us as one company or potentially two companies in the future. Let me also point out that One Cardinal Health was largely about getting common back office systems achieving synergies in back offices about -- one approach to customer or talking about now in terms of $800 million investment is on the CMP side bring our R&D spend to a level that we think is necessary to be competitive the next 5, 10, 15 years a very different proposition than One Cardinal Health. And then on the HSCS side I would say it reflects that technology continue to advance, customer expectations continue to advance and in order to meet our customers needs, we need to make the types of investments that they are asking for and that we need to be competitive. And I would also say the regulatory environment has changes as well category with pedigree and the inter-diversion controls and equipment place [ph]. These are all moving growth loans that we have to be flexible about moving along rest.

Yes, in terms of your second question, I think that was somewhat similar to the question as Tom asked. If I just probably [ph] can, this is really at the heart of some of our... thinking here Randall. It's a really good question to raise. First of all I just really want to underscore what Jeff said. I mean, so far quite some time now the approach of Cardinal has been bringing, if you will allow to use this expression in certain amount of order out of chaos. I mean out of number of various businesses how do you bring some order, how do you create some focus, how do you create some scale, and you know the last couple of years we've concluded that contract manufacture for the pharmaceutical industry was the business we did, one and then fundamentally having got over that part, it really did allow us to start seeing our businesses to largely bucketing into again a opining is very broad, but largely bucketing into distribution base companies and medical product manufacturing companies. And if you think about those to businesses, as Jeff said, I think the company has done a heck of a job on getting the common shared services in IT, HR [ph] financial services. I mean, our ability to manage across the enterprise has been very dramatically improved. But that's a different subject than how do you grow? How do you grow, how do you be competitive, how you become best-in-class and when you look at mostly the manufacturing businesses, again speaking very broadly. This is about creating products, it's about inventing for the future, it's about technology, its about software, it's about electrical engineering, it's about mechanical engineering and this business needs very unique type of support to support its personality, and to develop... support its growth area, and so when we look at days business, we do look at in that comparative space, what are successful companies spending in R&D, what is the type of funnel you have to have in developing products to provide an output that can support the growth of the enterprise. And that review is done not just in a vacuum, but we go out, we take a look at in products and companies that are competitive to days here, what is the type of R&D spend, what is sort of from a long-term investment, what sort of investments you have to have in there and it became very clear to us that we were following on the other side. Now flip it over to Georgia's part. There the R&D and the delivery of differentiation doesn't come as much from creating products, but it's through services, through interfaces, it's how do we support the customer, how do we execute what we do in a world class way, best in class way. And again well these are the things that come out of shared services, these are unique and specific suite business investments that in looking at the concept of, if we are broadly in a distributing products customers. What do we need to do to be the best-in-class in each of those areas and again this is an exercise, it's not undertaken the vacuum and we do a lot of external benchmarking. We do a lot of discussion with the customers. And as we reviewed our future growth plan saying and this is important. We believe in the future of this business. We believe very much in the long term growth capability of both these businesses. But they will both need to be supported in different ways and different services. And to get to the future, we are going to have to pickup the pace and product research and development in Georgia place, and we are not what we need to be in IT, sorry in days place and Georgia's place. And so we come of this conclusions after really what I will say, over the last couple of years with the management team, as we have been looking and try to understand, how do we launch these businesses into high trajectory growths for the future that your needs meet our customers needs, meet our employees needs, we concluded that we were coming up short and we didn't have all the individual support activities to do that way. Now this has nothing to do with shared services which will spread [ph] that has mainly to do with the things we have done on shared services and hospitals. Bear in mind most of Georgia's customers are really in the retail drugs, basically if you were to do a sort of weighted balance. So we have retail customers out there which are different than hospital customers. So I feel strongly about it. And that's why I am taking a few more minutes. These, it's always tough that when should we stop and say wait a minute, are we spending what we need to be competitive in the future, are we really setting up for growth. And what we concluded, this is the year, we've got to start doing what we are doing and start planning for the future, not just one year, but two, three, four or five years down. This process has becoming clear and clear to us, as we got the scale and focus on alignment in the segments, the sectors which became reporting segments. And we see the opportunities there. So it is a change in our thinking, but it is the change for the future and it is the change for the deciding we're going to win and be successful in the places we play.

I just want to emphasize that if you recall at the opening of my remarks, I think you have to look long and hard across the landscape that any other organization that has the kind of market presence that you can find in every business within CMP and this investment intensity is all about maintaining, if not growing that presence. And so in my view this is exactly the right thing to do for shareholders.

Now let me just answer your follow-up question, then we can move on regarding colorization. It does help, so I would say that generally our rate of growth of SG&A expense will be higher in the first half of the year than the second half which I think it give an idea that we're... some of these things we want to get done as quickly as possible, because they are critical to our future.

Okay. And Jeff, just to be clear, you guys have ruled out a sale CMP is that fair?

Randall, as we as said right now, we are going to the exploration process for a potential spin and until we get through that process it's premature only to comment on anything else.

Okay, thanks for the color.

Thanks. Next question please.

Our next question comes from the line of Ricky Goldwasser with UBS. Please proceed

Good morning. One question for Gorge and one for David. Gorge as far as, your outlook for fiscal year '09 what are the embedded expectations for branded pricing solution for fiscal year '09 and then in particularly for September, and then for David, who do you think are your, the appropriate comps that we should used to look at CMP and who would you view as your closest competitors?

Yes, Ricky. It's George, I will take first part. We've assumed sort of mid single digit inflation rate for our '09 numbers.

And for September?

I am sorry.

And for the September quarter?

I don't think will comment on the breakdown by quarter.

Okay, but you... but just kind of like a big picture, do you think that we are going to seek up like slowdown ahead of the election or are you just assuming kind of like steady rate?

Yes, it's always very difficult to try to guess what's going to be happen during the election year. So I think at this point, we get our units on both sides of what will happen. So we've sort of come down to middle on it and said well it just give you a broad expectation of mid single digit.

Ricky good morning. Let me give a list of those folks that I think it would be the most appropriate comps. I would start with Vidian [ph], Hospira, Omnicell getting into a certain extent Baxter.

Okay.

Next question operator.

Our next question comes from the line of Larry Marsh with Lehman Brothers. Please proceed.

Thanks, good morning thanks for the details. I guess this question is I know it's early on in the exploration, when you think about it what might keep the company and the Board from perusing the tax we spend. In other words, what should come up that would cause this process to be put on hold. Of that we're not thinking about, and it seems like it's pretty logical. And then when you make that announcement, soon you go forward. Will you be making specific management team announcements at that times or is it next quarter, or is that going to be something further down the road?

Hi Larry, good morning. Well first of all I don't think I can comment on the internal part of your question. We're obviously, as you say that there is some logical to the certain [ph] which is why we're studying it. But I think I just would leave it at that. But I will tell you yes. It is... giving myself just one sort of... it is highly probable that is make a decisions to do this, and when we make an announcement that it is usually customary when companies do this to identify one or two of the top leadership team, for each of the new ventures so yes you could look forward to seeing something about that should we make decision on that topic.

And should we think of... is there any surprises in that or do we know just sort of based on where we are now is it sort of logical... sort of further and so of what we have already been hearing about management teams.

I have a great management team here and I don't what be surprise to you, but we have a great team here and we are putting -- a lot of people will be -- the other same people that are with the business today, are running the business today, I can't speculate but we are happy with the team we have today.

Great and just a clarification then on the share repurchase, I think you said, your moderating reviews look likes about $400 million in share repurchases this year, but sort of, once you make the decision on where other -- just structural I know you have said in the past you are sort of obligated to give certain amount of capital back to shareholders is that sort of going to be moderated or is there something else we should be thinking about that would keep you from being as active and the purchase the next year or so?

Yeah good question Larry, obviously it's ultimately up to our Board. As we go through this analysis period first of all it will be difficult perhaps to even access the market, so we're in a bit of a wait and see mode as we go through this assessment period. The ultimate decision is there is a status quo it's quite possible that the Board will decide that we will continue with our normal capital deployment plan and repurchases that are originally target for the year, I think that's quite likely but it's the Board ultimately decides that some other structural option is appropriate, I think we have to re-consider the whole capital deployment plan at that point.

Okay, just so, this clarification your other category which you still highlight it made about $101 million in operating profit in fiscal '08, did you see a communicating a general range of expectations there, now you already two of the businesses or announced you're selling them but how should we think of that and then do we think of the pharmacy services and medicine shop as, again ongoing business or just wait and see?

Pharmacy services and medicine shops are in our guidance assumptions for the full fiscal of '09, Larry, [indiscernible] met systems are not, we are assuming that they will be sold. As we said previously with respect to pharmacy services and medicine shops we are going to continue our evaluation of the strategic options with respect to them and as we serve those out, we will make decisions regarding the future of both of those entities. Regarding the guidance for other -- really I didn't get into that specific level of details but let me say this, [indiscernible] and med systems contributed a little less than $15 million in EBITD last year that wont be in FY '09, so quite likely I think we will see a decline in other driven primarily not [indiscernible] of those businesses for the year.

But just apart from those two are you saying the other two businesses would be kind of roughly flat, down or down more?

I want to comment considerably I know as where I will say that they are both profitable businesses and as long as they are in Cardinal family they will continue to contribute to the mean FOI and we will continue to assess them

Okay and then finally just the I just wanted to make sure, I have heard this correctly the $100 million of incremental spending with Dave and George's businesses did you say how that's going be split specifically between the two, is that about half and half or...?

Actually it is, and not just because we split I will [indiscernible]. We looked at specific R&D need within CMP and specific IT needs within HSCS and it just happens that for both to be just under $50 million. And I do want to have re-emphasize that, that spend is reflected in both of the segment brand numbers that we gave or CMP and HSCS.

Right okay, and then just one final quick clarification, George you said, nuclear -- I know Tom talked about that but your messages is really with the incremental cost and nuclear, you are thinking that division, that piece of distribution will be down a good bit again this year, is that right

I think if have say there are moving parts that could really alter the dynamics here so. An example if it turns out we do get a manufactured product earlier that would be good news to us, if generic launches thought out the year it will be more difficult for us to offset some of the cost increases. So this has got some binary aspects to and we'll just have keep watching.

Great okay. Very good thanks.

Next question operator?

Our next question comes from the line of Charles Boorady with Citigroup. Please proceed.

Thanks good morning. In terms of exploring the spin off I am just curious why sale is not also being contemplated or may be one is and if there is any tax of other considerations in looking at a sales verses a spin?

Good morning Kerry here, I think, of course sale transaction has tax implications of course, so obviously we need to -- whatever course we take has to be in the best interest of Cardinal shareholders and our current thinking is that we will be creating two publicly traded companies in a tax free manner is how we're thinking about it, but it's possible about other alternatives, but we need to make sure that it is the right choice for our investors.

What's your approximate book value of the CMP business?

Let me get back to you in second with that.

Okay and just a related question, under a spin what is the -- for sale I guess what's the opportunity for corporate level expense reductions and how did you weigh those against any potential lost synergy by splitting the two organizations?

Charles, this -- as we said we are in the exploration early stages, clearly those questions you are asking are questions that need to be considered and I hope -- I am not trying to be difficult but we are just not really in a spot where we can talk about that until we get a work done and until we get to a decision.

Is it conceivable that through that process you will find that the synergies were greater than any corporate level expense reductions that you could have gotten and you decided its better to keep the organizations together?

Well I don't want to speculate, I do want to keep coming back though again -- I am sorry, I am not trying to dance around your question, and I realize that its -- I apologize that it sounds that way. But really we are going to make the right decisions for the long-term value of our shareholders and that's sort of best I can give you right now and we are going to thinking not just immediately but over the long-term, what's the right place and as I said, I think it's the right place for both our segments going forward that were under consideration here so that all Cardinal shareholders are getting the right long term-- the best long term deal for them.

So we should take this as at face value like you said you're exploring the spin off, sounds like you haven't reached a point where you are leaning towards a spin off?

We're in the explorations as you said.

Okay and then just a last question on just the sharp rise in commodity prices which and specifically how related to the CMP business, how do you think about that increase and do you have an opportunity to factor them into your pricing and benefit from a rising value of any inventories that you have? Or is it the other way around where you take a hit on margins as your costs go up before you are able to raise prices to your customers?

First of all, in our guidance we have taken this into account for the full year when we had an opportunity to partner with our customers to share in some of this responsibility we do take the opportunity to do that. For quite some time we have had relentless cost reduction programs going on because we do so much manufacturing that is commodity related outside of the United States and so we deal with things like the price of latex, the price of oil, currency fluctuations and we have done that for quite sometime.

Andcan you put any quantification around just in terms of how much -- it sounds as like hurt you before and then you have raise price to catch up with it then, am I interpreting that right, is that a reflection of the commodity nature of your products or do you feel like there was a missed opportunity to sort of raise price ahead of your input cost going up

We anticipate and what we believe will happen in the market so that we are prepared for it, I feel that as an obligation to shareholders so that we can maintain the appropriate margins that we have committed to.

Would you quantify the exact impact to your margins from the rising input costs and what you factored in the guidance for it.

Hi Charles, its Jeff, let me comment on that. For FY'08 for the full company the increase in oil prices that effected both fuel and our purchase of oil relate commodities which was incremental cost with just worth of $30 million and that affects both of our segments. We have budgeted for a significantly higher number than that in FY '09, which we think is fairly consistent with where we have seen trading levels over the past couple of months. Let me go back to your prior question on book value and the reason I hesitated, it's not an easy question when you start looking at potentially exploiting [ph] a partner company, I am not going to give you a specific number other than to say that 45% of our [indiscernible] plant equipment, currently left with in CMP and they are 55% in HSCS, there are a lot of assets that are held at the corporate level et cetera, that if we ever went this direction we'd have to split up, so it's hard to give a number, we are a little bit premature.

Thanks very much. Next question.

Our next question comes from the line of Barbara Ryan with Deutsche Bank, please proceed.

Thank you so much mine were all taken [indiscernible].

Oh, hi Barbara.

Hi how are you.

So there's nothing you want to ask us?

Well I mean mine were all about the IT and pharma distributions I think that was, broadly covered and pretty good detail in you answer so I appreciate that, thank you.

Great, Thank you Barbara.

Our next question come from the line of John Kreger with William Blair please proceed.

Hi, thanks very much, a follow question for George, on the pricing environment, as you see contracts come up for renewal in the both the drug distribution and med search distribution side, what sort of pricing pressure are you seeing out there if any, and is your strategy to price to hold the share at this point or are you actually trying to increase shares in those two units?

Well, because you know in most of businesses, both in the pharmaceutical and medical side, these are generally the competitive kinds of market and so part of the key is to have a good feel for market price but the reality is this, price tends not to be much of a differentiator in most of those markets and what dictates our ability to move business is really the perceived value of the customer, our ability to provide the right set of offerings, services, products value; price is a component of that but it almost becomes sort of a market phenomenon so I tend to not see price as a high differentiator in most of our markets and our goal as I mentioned today is related to drive as much value as we can, first from existing customers where I feel like we are perhaps a bit under penetrated and to recapture some lost business and I do believe that there is certain amount of churn in every business and we'd like our greater position of that -- share of that churn. But our general approach is, create value and we have chance of gaining business.

Great, and then just a quick follow up, are you satisfied with your current customer mix or would you like to consciously turn it back towards smaller independence and hospitals.

I am satisfied with that many of our big customers are important partners for us, but I wouldn't in fact like to expand the DSE business and so yes, in essence I would like to also mix of bit but its not necessarily a trade, its... I would like to expand a part of our business what I think has been little bit underdeveloped and I think that will help us.

Our next question comes from the line of John Ransom with Raymond James please proceed.

Hi, good morning, would you mind repeating what you said about the split of depreciation, did you couldn't really offer that at this time, which one did you [indiscernible].

I'm sorry, John you're breaking up a little but, could you repeat your question please?

Yes, would you mind repeating what you said about the split of depreciation between CMP and supply chain?

Actually I didn't us the stir [ph] depreciation, what I gave was a split of property plant equipments and I said about 45% of our current property plant equipment is in the existing CMP segment.

If we would have booked the depreciation that way, would it just be widely off. I think due to penny, but just small part.

I really don't have any good guidance to give you on that John, it's not unreasonable portion to take [ph].

Not unreasonable, you said?

Not unreasonable.

Okay perfect, and then my other question is I know the company has the legacy of the acquisition history. It has some 15 or something different IT systems, what does that look like three years from now, is that going to be five, or three, or one. I know it's been a... it hard... easier that talk about them, but I was just kind of curious about customer pricing software and IT and kind of where you are, versus where you need to be.

I am not sure of company, of our complexity inside and then we down to just one system [ph]. But we did make a decision several years ago to begin migrating for one general platform and as you think as IT, we are on a multiyear path towards achieving that a great deal of that work has already happened within CMP and manufacturing. We are also just at the finishing stages implementing our financial module of SAP across the company. And it also begun some of those steps within the HSCS, as well. So our goal is to put as much as we can on SAP, assuming it's the value proposition and the benefits of that system makes sense. Now, obviously certain system that need to be focused on, but our goal is to get as consistently on SAP as we can within the next three years or so.

Hey, John Kerry here. I mean, we do have a well above the average number of legacy systems in our company. A very large number which also impacts how our current IT dollars are being stamped, because a lot of them are being stamped on one maintenance of legacy systems. And so we... we are spending below that we also, not really feel [ph] comfortable as where those dollars are going because of the high number of legacy systems. So getting to a much fewer legacy systems, Jeff said to one is not unlikely, but to get a significant reduction on our legacy systems is a benchmark number, we've set internally.

And next question comes from the line Eric Coldwell with Robert W. Baird. Please proceed.

Thank you. Actually John did that point of my main questions on the D&A split, but would it also be safe to allocate debt in speaking to that [ph] manner, or how would we allocate that to the GNP division?

Hi Eric, it's Jeff. I understand why you are asking this question. I think it's much premature. We really need to get through this exploration before we can start talking about things like capitalization, but thank you for the question.

Okay, just a follow-up question, is it too early to give us some sense proceeds from which you can add to sale?

We expect the gross price to be just under a $100 million.

Okay and same kind of discussion on Borschow, can you give us a sense of the acquisition cost and then also the revenue of that business and what percent of split between medical and pharmaceutical?

Yes, in terms of the acquisition price it was $125 million or so Eric and I am sorry, I forget [ph] your question.

The revenue in and the split between medical products and pharmaceutical products?

I can't give you again. Eric it's George, an exact breakdown, but it is more heavily balanced towards the retail part of the world than hospital part of the world.

And revenue [ph].

Thanks Eric, next question.

There are no further questions. I will now like to turn the presentation back over to Mr. Kerry Clark for closing remarks.

Thank you very much for joining us for this extended call. And we appreciate your attention and interest and please don't hesitate to give Sally or Hurgain [ph] if call you would like to have some further follow ups. Thanks for being with us today.

Thank you for your participation in today conference. This concludes the presentation. Everyone have a great day.