Cardinal Health, Inc. (CAH) Q1 2009 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the 2009 First Quarter Cardinal Health Incorporated Earnings Conference Call. My name is Ann, and I will be your coordinator for today's call. [Operator Instructions]. As a reminder this conference is being recorded for replay purposes. At this time all participants are in listen-only mode. We will be facilitating a question-and-answer session toward the end of the presentation. I would now like to turn the presentation over to Sally Curley, Senior Vice President of Investor Relations. Please proceed.

Thank you, Ann, and welcome to the Cardinal's first quarter 2009 conference call. Today we will be making forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation can be found on the Investor page of our website for description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about non-GAAP financial measure is included at the end of the slide. A transcript to today's call is also posted on our investor webpage at www.cardinalhealth.com. With that out of the way, now I would like to turn the call over to Cardinal Health Chairman and CEO, Kerry Clark. Kerry?

Good morning, and welcome everybody. I'm very pleased to report progress this quarter on a number of fronts. The company performed as we expected with double-digit revenue growth in HSCS and another solid quarter in Clinical and Medical products with overall double-digit revenue and profit growth. While successfully spinning off our CMP business is a top priority, we also remain very focused on delivering this year's numbers. As I mentioned on the Q4 in late September conference call, that means focusing on excellent execution. For Healthcare Supply Chain, it means focusing on the right programs in the right channels, at the right profitability and making the right investments for the future. We're making progress here. For Clinical and Medical products, it means delivering clinically differentiated products that win in the marketplace. We're pleased with the continued strength of this business. The core business continues to enjoy industry leading position and we have recently seen good signs from some of our investments. We're making good progress towards the spin-off and still anticipate an effective date around the middle of calendar 2009. We will likely file the private letter ruling request on the tax-free nature of the transaction by the end of the calendar year, and still anticipate filing, the Form 10 registration statement with the SEC during our Q3. As a reminder, the Form 10 will include the spin-off company's financials. Cardinal Health's pro forma, historical financials reflecting the spin-off will be available separately closer to the effective date of the spin. We remain optimistic about the future of both of these businesses and continue to refresh their business models to be well positioned for growth. Both organizations are truly energized about the spin-off and enthusiastic about the respective prospects. Finally, we continue to be very sensitive to these extraordinary times we are now operating in and the impact they have, have and could have on our retail and hospital customers. For now we believe it is too early to make financial adjustments but we are monitoring the situation very closely and are taking the necessary operational steps to be sure we are on solid footing for the balance of the year. Now I will turn it over to Jeff to provide you with an overview of our Q1 fiscal 2009 performance, and more commentary around the credit markets. Jeff?

Thanks, Kerry. Good morning, everyone, and thanks for joining us. This morning I'm pleased to be reporting first quarter consolidated results at or above our expectations, despite the current challenging environment for the macro economy. Truly, we are not declaring victory by any means but we are making solid progress on our key initiatives. As Kerry mentioned, Dave and George will discuss this in a more detail in a few moments. Later I'll also update you on the outlook for the remainder of our fiscal year. But, first given the credit market issues, we are all familiar with. I want to take a few minutes to provide you with an update on our liquidity position. This might be top of mind for all of you, so we would address it upfront. We finished Q1 with just under $700 million of cash in our balance sheet, of which approximately $400 million was overseas. Cash was down from our FY08 year-end balance due to some debt repayments made in Q1, as well as some normal variance in our quarterly operating cash flow, which I will touch on later. Outside of our U.S cash we have three primary sources to meet our short-term funding needs. First, we have $1.5 billion commercial paper program, which is fully back stopped to make credit facility led by Bank of America, JPMorgan Chase, and Barclays. We have been able to issue commercial paper during the past several weeks albeit at higher rates. Right now we believe there is about $200 million of available liquidity for us in this market, which we monitor and test frequently. Second, is our $850 million committed accounts receivable sales facility. We're in a process of renewing that facility, which expires in November. We recently tested it with a short-term $300 million dry down without issues. Third, we can also utilize international cash on a temporary basis. The government recently expanded the Safe Harbor for temporary loans of international funds to the U.S for 180 days without creating a tax liability. So we can access those funds if a short-term need arises without a significant tax costs. From a usage standpoint we do not have any significant debt maturities until the fall of 2009, and as you know we have down sized our share repo program and advance for the planned spin-off next year. So bottom-line we've a strong balance sheet, good liquidity, and continued access to capital. Let's now discuss the consolidated results for the first quarter. Please note that my comments will reflect the financial results and continuing operations on a non-GAAP basis. Consolidated revenues were up 11% to $24.3 billion. Operating earnings were down 6% to $482 million, which reflects the challenging quarter we anticipated in HSCS partially offset by the expected growth in the CMP segment. Earnings from continuing operations were down 16% to $268 million driven by the segment results, a year-over-year increase in interest and other, and a significantly higher tax rate than last year. And just a few more details of our net interest expense of $62.5 million for Q1. This is an increase of almost $20 million versus last year driven by two primary factors; low investment income, and a swing in the impact of foreign exchange. And as we reported that we have zero write-offs in our cash portfolio related to the credit crisis. Our non-GAAP tax rate for the quarter was well over 36% versus about 32% last year, which in part reflects the one-time reserve adjustments related to some ongoing IRS controversies, as well as the mix changes and some expiring non-U.S. tax incentives. Diluted EPS was $0.74 for the quarter down 14% in the prior year. Operating cash flow for the quarter was a use of $350 million partly driven by an increase in working capital. So there's a significant increase in revenue in HSCS, and partly due to normal fluctuations in working capital that arise on a day-to-day basis that can impact the reported numbers. For example, Mondays and Tuesdays are high payment dates, so there is a negative impact ending on a Tuesday like we did this quarter, versus ending on a Friday which is the high collection day. And actually we made good progress on our key control for working capital metrics. Days inventory on hand improved by one day versus the prior day. And receivable days also improved almost a day versus the prior year. We also made good progress in reducing our overall portfolio of customer delinquencies, which is particularly important during these times. Now turning to the next slide, during the quarter, special items totaled approximately $35 million, which negatively impacted GAAP EPS by $0.10. The $35 million was comprised mainly of severance and other employee costs associated with our July restructuring. Impairments and other totaled about $17 million in the quarter and favorably impacted GAAP EPS $0.05 due to the release of a tax reserve as a result of the divestitures in that period. The end result of all this was a negative $0.05 impact to GAAP EPS. And going forward I'd just like you to know that we are going to flush out this chart a little so you can see which cost in the period was related to the CMP spin-off. In Q1 this number was under $1 million, so we didn't break it out this time. Further going forward in the future, you will have complete transparency to these costs. Now I would like to switch the performance of the individual business segments on a year-over-year basis. Please recall that some of the businesses currently included in this part of the CMP segment such as gloves, converters and fluid management will remain at Cardinal Health following completion of the planned spin-off. While over the following segment results reflect a current operating and reporting structure to the company, which is reporting methodology we plan to use until the spin-off is executed. Within HSCS; revenues for the first quarter increased a 11% to $23.4 billion, which evened with the actual billing day in a period, which contributed a little under 2 percentage points of growth represents a very strong growth in our core businesses including both Medical and Pharma. Specifically, in the Pharma business, we are able to achieve very good growth in number of areas. Revenue from bulk customers is up 20% on increased volumes from existing customers and customer wins. Revenue from non-bulk customers was up 4% driven by growth in retail chain and hospital market. More like to do here but we are happy with our progress in this area. I should point out that our current mix of bulk and non-bulk revenue within the Pharma business is now about 50 - 50. As expected segment profit was down 16%, $293 million primarily driven by the ongoing impact of previously announced customer re-pricings in Pharma. In fact, that the anti-diversion activities and lower branded price inflation for vascular products than in the prior year, partially offset by the strong revenue growth and increase profit dollars from generic products with the launches of Respodal and Lyntas [ph]. With regard to branded price inflation, I know it's been a lot of speculation as to the year-over-year changes inflation level. It is clearly lower for our vascular products. Also keep in mind that about 80% of our business is now fee-for-service. So the most relevant price increases in any given quarter are the ones that impact the remaining 20%. We're seeing some benefit versus our budget from lower fuel prices. But as we mentioned before within HSCS they are the relatively small part for overall cost structure, and now I also did want to mention our medical supply chain which also had a strong quarter with revenue up approximately 8%. Then last but not least and very importantly, we've also begun making the increased investment in IT and HSCS which will be critical to our longer term success. Now turning to CMP, revenue was up 12% driven by insulation of specific products, growth in international, and the acquisition of Enturia which contributed approximately 5 percentage points of growth. We have begun the important path of increasing our investment in R&D. We'll see R&D increases as the fiscal year progress and expect to spend about 4% to that revenue on this area spent. Segment profit was up 15% on the revenue growth and the acquisition of Enturia which contributed approximately 9 percentage points. It was partially dampened by the increased cost of raw materials. On the topic of commodities, I would like to briefly explain how they impact our CMP business. This has been a lot of volatility in oil price and there is some speculation as to how it impacts us. Now for clarity, there are really three buckets of exposure to commodities within CMP. Number one is fuel and honestly it's the smallest bucket and does not immediately impact the P&L in most cases that this is primarily absorbent to inventory and rolls into cost of good sold as inventory turns. Next category of commodity products for oil is one driver of the cost. And it includes resins like polypropylene, polystyrene, polyethylene and PVC. Now, all the prices of these raw material sources are generally linked to oil in most cases, they lag the movement in oil prices about a few months. And, in addition our contracts are typically structured towards just based on index on a 30 or 90 day basis which has a further delay in impact. Then lastly these costs are also absorbed into inventory and rolling to COGS as well as inventory turns. Then, last bucket is made up of commodity products where oil is not a driver of the cost, and an example of this will be the latex that were used in glove manufacturing. Any change in these costs would also first be absorbent to inventory. So, all in all they can take six to nine months for most commodity cost changes to impact the P&L which means you are just now starting to feel the full impact of driving cost some earlier in a calendar year. So I would caution you not to look for a dramatic near-term benefit from falling prices, given the time it takes to see those prices impact the bottom-line. Well... all those being equal, we should start to see some benefit from current prices in the fourth quarter of this year and beyond. Dave will obviously touch on the CMP later and what he is seeing on the hospital market in a few moments. Now, turning to slide nine and guidance, Q1 did play out largely as we expected. Despite the various potential pressures created by the ongoing and economic and credit conditions. But looking forward, it would be naïve for us to assume our business is totally immune from a continuation of the over all negative environment. We will see higher interest expense if credit spreads not come in and we are keeping a close eye on bad debt expenses. Although I will point out that our bad debt reserve is a percent of receivables felt pretty steady thus far. On the business side IMS is reporting slower script growth. Although, we haven't really seen that come through in our supply chain revenue to date. But perhaps even more importantly, we're seeing a pause in certain hospital capital spending which will affect our CMP business in Q2. Specifically although we expect Q2 segment profit for CMP to still grow significantly year-on-year and versus Q1. To perhaps it will be not at the rate of growth that we expect for the full year. However, it's not clear how that will play out for the year so we are not changing full year guidance at this time. Although it's something we will be watching closely. With regard to non-operating items let me also provide some additional color. For the full year tax rate we still do expect to be on track to hit our guidance of around 34%. But we anticipate the rate in the second quarter to be close to the 36% or so realized in the first quarter. We expect net interest expense to be only slightly lower in Q2 to Q1 and given our experience in Q1 as well as the expectations for a higher borrowing cost and a lower interest rate on investment. We now anticipate the full year net interest expense to be north of $200 million. We expect shares outstanding to be slightly higher in Q2 to Q1 with average diluted shares outstanding for the full year in a previously indicated range of $361 million to $362 million. This reflects our plans to repurchase no more than now require to offset dilution from equity compensation issuances. So there are some puts and takes, but in summary, our full year guidance remains unchanged at this time. Despite the fact that Q2 might be lower than some expect due to some of the CMP customer issues I said and certain below the line items. However, Q3 and Q4 are expected to be stronger due to our usual quarterly profitability patterns and our previously indicated return to profitable growth for HSCS in the second half of the year. We will continue to monitor all of the environmental and market issues closely and to take the actions necessary to mitigate the impact as appropriate. As we said before, our guidance does not reflect any incremental cost we will incur associated with the spin-off and separation of the two companies As, I mentioned earlier, our plan is to separately identify and call those costs on a quarterly basis. With that I'd like to turn over to George to provide a few comments on HSCS. George?

Thanks Jeff, and good morning everyone. For those following the presentation slide seven and 11 in the presentation will refer to my comments here. I'm happy to report continued progress in our HSCS business. We still have enormous work in front of us but we do see some positive signs. Let me start by talking about our medical supply businesses which grew revenues by approximately 8%. We continue to focus on three things. First, reducing complexity in order to improve customer service and profitability. Second, aggressively moving forward on our retransformation in our Presource kitting business. And third, driving growth in key areas of opportunity, as it relates to the first producing complexity, we've been able to reduce our medical surgical product line by nearly 2000 SKUs without a reduction in value of our customers. Although, this does not translate to an immediate financial benefit, this SKU rationalization process will simplify our business and create value as we go forward. Our retransformation and our Presource kitting business is progressing well as push to reduce inventory showing cycle times eliminate weight and approve the customer experience. And finally, our efforts to target growth areas are bearing fruits as our end of the total business grew a double digit rate and our scientific product business has recovered from last year's loss of it's largest customers and is actually return to profitable growth this is really a great accomplishment. Our nuclear pharmacy business continues to lead the market and serving Cardiac imaging and we are able to take advantage of the first launch of a generic cardiac through an improved cost position with our existing suppliers. I would like to turn to our Pharma Supply Chain business, our largest business. Our year-over-year revenues increased 11% driven largely by the growth in our bulk customers, good news in what IMS is reporting at a particularly slow growth script environment. But we did see an uptick in our DSP business, direct store business up 4% relatively modest number in absolute term. But encouraging given the fact that we grew in a face of the anti-diversion negative impact and a reclassification of some volumes business from non-bulk to bulk which we discussed last quarter. In addition, although independent retail business was flat year-over-year our performance looks more promising when you remember that our controlled drug issues resulted in lost business of roughly $1 billion on an annualized basis starting in Q3 of last year. Most of which came from a dependent retailer. As we announced a few weeks back we did come to a settlement with DEA with regards to our distribution of controlled drug and expect that our New Jersey, Florida, Washington and Texas facilities will be back in line by the end of November. This is an important threshold for our customers and is a critical milestone in our effort to turn our business to a positive trajectory. Our generic programs also showed signs of progress. Our sourced generic programs grew at about 10%. Although we saw modest growth in our overall retail generics, we experienced a more dramatic double-digit growth in other segments, as we continue to tailor our offerings to specific customer needs and this included some effective use of telemarketing towards our permit operations. Given the complexity in generic environment the heightened awareness of the importance of access to low cost pharmaceuticals and the ongoing slow drugs, which will lose PAN [ph] protection in the coming years we'll continue to focus on building our generic capabilities. Our drive to achieve best-in-class speed and execution of generic launches will put to the test with the launch of the Lomotrigene [ph] and the full rollout of Espiridon [ph] which began at the end of last quarter, both of which were executed extremely well. This is crucially important to our customers who gain from our ability to source efficiently and to our generic manufacturing partners who benefit from our ability to aggregate share. In summary, we fell good about our progress and are well aligned around our priorities. We have a strong focus on execution and are mobilized towards improving the customer experience while maintaining a very disciplined approach to management in this extraordinary environment. Getting the DEA element behind us is a big step for us and our team is energized and excited about the challenges and the opportunities in front of us as we move towards the spin-off. I would now like to turn the call over to Dave.

Thanks, George. CMP delivered solid results in the quarter. We continue to set the standard in medication management and make progress on our goal to set the same standard prevention. The changes that CMS has made in it's reimbursement for a number of events including those related to hospital acquired. Growing challenges for our customers while we bring the industry leading expertise to help. We continue to maintain or expand our market positions in infusion, respiratory, and dispensing equipment. While the landscape remains competitive, we continue to win with our products and Alaris continues through displace competitors and gain share. We won more than 60% of DEOs in infusion were competitor was the incumbent. Some of our strategic investments are also making excellent progress for example, we closed more deals for MedMined's infection detection and prevention service this quarter alone and we did in all of FY08 and we gained more customers and picks a supply in the quarter than we did in all FY08. In addition, our entire Enturia acquisition performed very well confirming our belief that ChloraPrep will continue to gain share as the preferred antimicrobial skin prep solution. As Jeff said earlier we are seeing hospitals delay some purchase decisions. It's not been a dramatic slowdown at this point, but we are seeing it have an impact on Q2. Our committed contract run-rates slowed at the very end of the first quarter and we're being somewhat cautious in working forward. A outlook is more difficult to determine in our business since it's not obvious that purchases of our capital equipment products would be deferred over an extended period of time. Let me highlight that our offerings such as ventilators and IV pumps are critical to providing care and that we do provide a leasing structure for dispensing equipment. Our leasing provision is a key competitive differentiator for us. In addition, many of our disposable products, surveys and annuities stream for our business. Now we do have lines of disposable products and infection prevention like gloves. More than 50% of our infusion revenue comes from disposables and more than 35% of our respiratory revenue is from disposables. So there are some revenue streams that should be relatively insulated from any slowdown in capital spend. We are also making great product, progress on product remediation and infusion. We completed the recall work on the signature addition pump in the quarter as expected and currently anticipated will be back in the market in the spring. So this is already factored into and expect completing this remediation is a significant milestone for the business and for our customers. We're also on track to complete the remediation on our flagship product, the Alaris system by the end of the calendar year and I'm pleased with the great progress we've made on our overall quality system and we'll continue to work through the process with the FDA to resolve the consent decree. Despite the challenges of the current economic landscape, we have a great business with industry leading products that make a clinical difference for patients. We are increasing our investment in R&D. In fact, R&D is a percentage of sales historically has been in the 3% range and we expect that number to increase to about 4% in FY09. Our goal is to move it to the 5% to 6% range overtime. This is a blended rate, which means that our investment needs will be lower in disposables and higher in capital equipment where we lead with innovation. We continue to invest in our already strong innovation pipeline and to be well positioned for the long-term. Now I'd like to open up the call for questions. Question And Answer

[Operator Instructions]. And the first question comes from the line of Tom Gallucci from Merrill Lynch. Please proceed.

Good morning. Thank you very much. I had one each, hopefully for Dave and for George. Dave, just wondering you gave some steps there in consumable, individual product lines, as you look at your whole segment, any idea of what consumables are as a percent of revenue and what are the margins are in that business? And then for George, it seems like maybe did you take market share or your existing customers just growing very well, particularly in that independent business that you noted. The DSP is up despite the loss of independent. So can you just describe where that business is coming from? Thank you.

Thanks for the question, Tom. I'll take the first one. To the question as what percentage of revenue for the overall segment disposables represent. Over 40%, and as far as margins are concerned, disposables typically have fairly strong margins, particularly where they are dedicated to the equipment like in infusion. George?

Yes, Tom it's really a couple of components you asked about the contribution to growth and what's happening. I think it's a little bit of three components. One there is some improvement in capturing a high percent, higher percentage of our existing customers business. The other single business, and I think we've mentioned this in prior quarters that we've been picking up a little business along the way, in spite of some of our challenges in the anti-diversion environment for us. And then finally, we actually had some more unusual growth in certain segments, in the health systems part of our business in ambulatory. So it's really several components that are contributing to this, and feeling like we're on the right path here.

George, have you had any major discussions with clients that were affected by the DEA issues, and that you're going to be up filing in November, you think any visibility on which of those customers you may win back or not?

We've had plenty of conversations. Probably... actually now for some months about the future. It is very difficult to give you a quantitative analysis on what's going to come back to us. I think as I've said before, we're probably going to have to work out in about slowly, but I am optimistic that the things that we've been doing in recent months are signal to them our commitment, and I think it will take time, but I think we're on the right path with them.

Thank you.

And the next question comes from the line of Ross Muken from Deutsche Bank. Please proceed.

I also have one question each. As we look at sort of the commentary around hospital base spending. Is there certain price points where you are seeing a bit more softness, I mean it certainly seemed on some of the CapEx side that you are seeing a bit, you saw a bit of softness at the end of the quarter. Is there sort of a certain price point that there is a breakpoint for purchasing departments? And then in turn, have we seen any sort of normalized resumption of demand patterns in the early weeks of this quarter that maybe made you a little less cautious, or potentially held you off from doing any sort of change to guidance?

Ross, I think the answer to your question is that I don't detect any particular price points that are driving hospital behaviors. I think it's much more a function of the behavior of the individual Chief Financial Officer. So the answer, the short answer to that question is no. And we've continued here in the early weeks of our second quarter to see hospitals continue their cautious way, and I'm hoping that obviously that, that turns around as governments around the world intervene in the credit markets.

Right. And George, how would you sort of characterize the morale of the sales force at this point. There's been so much change in Cardinal in the last few years but certainly, even more recently a lot of things put in place and certainly with the spin-off and now obviously with some of the DEA issues getting towards resolution. Is there sort of any kind of change in the overall sort of behavior pattern in the sales force to make feel a bit like that the opportunities ahead of them now as you've been somewhat of a share loser in the last few years?

That's a great question and it's always delicate to speak sort of people, but the energy I see from the Group at the moment is really high. It's been interesting as we have announced the spin-off of another area in a sense of uncertainty and yes for individuals and yes people are extremely excited about it. And I think that the resolution of our agreement with the DEA, I think there is some lifted a cloud. We know that we've got a lot of work around that area continued to do. But, I think the sense optimism has shown us significant uptick. So I'm excited about the way people seem to look and talk and feel about our business moving on today.

Great guys, thank you very much.

And the next question comes from the line of Lisa Gil from JPMorgan. Please proceed.

Hi, and good morning. George as we look at the fact that IMS is now lowering their global forecast and the U.S. forecast for pharmaceuticals. How much of that do you think is clearly it's a sales number that they are talking about? But how much do you think is actually utilization, first is the push towards generics, you're talking about, you pushing more generics into the channel or looking at the price point difference between a branded and a generic. Are you seeing big shift in actual utilization of pharmaceuticals or the actual buying patterns of your customer overall or do you think it's more of a shift from a branded to the generic? And then secondly Dave, I know that you talked about the fact that it is not specific price point for the product, but are there certain products that they are holding up on buying or is this just more of a credit crunch. The CFO is concerned about borrowing to buy the product and therefore we think that this will come back when things start to ease perhaps in that the early part of 2009? Thank you.

Yes, Lisa, let me comment a little bit about your question on the IMS data. It's a really good one. I think right now, there's no question that the shift from branded pharmaceuticals to generics continues. Now this is not a new trend, obviously it's getting up to particular lot of play right now. This is a trend that's been pretty heavily in motion for you. So I can't say that we're suddenly seeing a dramatic swing but the trend is clear. Generic utilization is going up, the conditions that we find ourselves in as the health system probably will continue to promote that. So there is some dynamics for the overall script data or the overall market data. As we read the script there is some data that suggest a slowing of utilization a bit and when I say this to folks in the channel is that fundamentally the demand for what we do will not go down. The population is aging, we know that pharmaceutical treatment is an incredibly cost efficient treatment. So whether there maybe some delaying of doctor biz sort of things, there has been a lot of anecdotal report to that. We are seeing at least in some of the product data a little bit of utilization slowing but I think that certainly large statistically you drop your raise which is the shift from the branded pharmaceutical generic is clear.

And are you hearing that sorts both from your costumers when you touch your retail base costumers they are saying our volumes are down, utilization is down or we're not quite seeing that yet?

Not particularly. I don't think I would say that sort of a loud voice coming from our customer base right now. I think they are more aware of the overall economic climate as a driver of concern for them than particular script utilization.

Okay, great. And then Dave any comments as to how you think this will rebound and if there are specific products that they are looking at?

Yes. Actually I don't see this applied to any specific capital equipment purchase. As you know we have three lines of capital equipment, the infusion line, the dispensing line and the ventilator line. In dispensing as I have mentioned in my earlier comments, we do offer our own leasing option. And so the decision that the customer would make and... is a decision to extend a capital lease which would typically be five years and doesn't mean that they are not continuing to use the equipment that they already have and continuing to make lease payments on a monthly basis. The size of the deals I think is more what drives the decision from the standpoint of the CFO. And if you look at the size of the purchase, decision that they had been making across all three of these product lines. Depending upon the size of the institution it will range from roughly a $0.5 million at the time of a purchase decision up to as much $15 million. And so these are numbers obviously that get the attention of the CFO and I think that they are simply vary about the availability of capital. And I think that once we see the availability of capital clearly begin to free up but they are going to be in a different frame of mind.

Okay great. That's very helpful. Thank you.

And the next question comes from the line of Charles Rhyee from Oppenheimer. Please proceed.

Yes, hi, couple of question maybe for Jeff here regarding the guidance and I think last quarter, you guys mentioned that as part of the first quarter, you were expecting a hefty amount of investment spending and I think it was roughly about $50 million for each HSCS and also for the CMP division. Looking at results, it is fair... can you give us a sense on, did you spend all that money in the current quarter or is there a little bit more than investment spending which is in the next quarter. And also in regard to your interest expense guidance, you said you expect over $200 million clearly got hit a little bit in this quarter by the FX. Can you give us a sense on what you are seeing currently in regards to FX and how you are accounting for that?

Sure, thanks Charles. Good question there. First of all, I'll turn to the incremental investment spend for FY09. What we had said in the prior call was we expected to be about a $100 million in total for both segments divided approximately equally between $50 million of expense for HSCS mostly for IT related spend and an about $50 million for CMP primarily related to product research and development. Yes, I would say we are off to a good start in terms of the spend thus so far this year. Despite the fact that, we are scrutinizing every expense in a company right now, given the current macro environment. There is certain expenses that we recognize, certain investments that we recognize, we are going to need to make for the long-term future of this company and those are two of them. Continuing to improve our IT investments in HSCS and building our product pipeline for the future of CMP. So I would say in Q1, we are pretty much on track with those investments and we still have every reason to believe that we'll spend close to the $100 million by the full year.

If there is not necessarily expected to come in the first quarter all of that. Is that right?

No, we would not book on the first quarter. That's $100 million what's spread over the year. We've said that there would generally be front end loaded and I think generally that in terms of the activity, that to whether all the expenses and sales that will be recognized in Q1 or Q2 or later remains to be seen that depends on the pace of some of the activity particularly in the IT area, where it takes time to ramp up projects. But those projects, they are all fully underway including some very important customers facing projects that we've committed to that we are doing. On the FX front, the net, net impact, if you look at the operating impact and the impact below the line for Q1. It was little over $10 million of negative impact for Q1. Most of that actually was below the line related to some revaluation of inner company receivables etcetera in light of the strengthening U.S. dollar. Overall for the year though I would think generally Charles, FX isn't a big driver of our results. We have a global company but perhaps not as international as the other companies you may cover. And we're pretty well hedged both operationally and financially where appropriate. So I don't expect FX to have a huge impact on the bottom-line. On balance right now it's probably more negative and positive given the strength of the U.S. dollar but we'll continue to put in place the appropriate hedges. But again, for Q1 it was about $10 million negative impact.

Thanks. And if I could ask one more here obviously had a strong quarter in distribution on the top-line even if we back out sort of the extra day in the quarter. But the full year guidance remains in a sort of greater than 6% top-line kind of implies as the growth rate slows a little bit. Just can you give us a sense on what are the dynamics that we should be thinking about as we move to the course of the year?

Well I can touch Charles on one piece of that. We got some particularly noteworthy growth from business that we had picked up on the bulk side from all brands which we have talked about in the past. So that was one component of it, but generally I think we feel comfortable with the kind of revenue guidance we've provided. Obviously, our hope is always that as we start to build momentum coming out of our anti-diversion issues that we will start to see some noteworthy progress but I think we're comfortable with the kind of revenue forecast that we've provided.

All right. Thanks a lot George. Thanks everyone.

And the next question comes from the line of Glen Santangelo from Credit Suisse. Please proceed.

Yes, thanks. George I just wanted to talk a little bit more specifically about your distribution margins. You talked in your remarks pretty generally about the progress you are making and the fact that you are on the right path. And clearly settling with the DEA was a major part of that. Could you maybe talk a little bit more specifically about what ultimately turns the margins in this division because the operating margins are down year-over-year. They are down again sequentially. We get it sounds like you are making progress and try and understand is the DEA settling that issue going to be enough to turn the margins or there is something more specifically we should be focused on? And then I just had a follow-up question on the nuclear pharmacy business.

Greatlet me just give you a quick observation a little bit comes back to some math exercise we did actually on the last earnings call. Again it's sort of an interesting dynamic. I mentioned in that call that because our bulk business and those customers are growing disproportionately fast. Our margins are influenced by this math exercise, which essentially is that the lower margin component is simply growing faster than what can happen realistically on the direct store side. So part of what you are seeing is completely expected and in fact I don't think it's unhealthy. We're very happy to grow that bulk business. What's really important to us though is to...around that is to grow our direct store business shifting that mix, so that we start to see some favorable direction in our margins. But again, very important this component of math is one that we just need realistically understand. So, again biggest issue is mix, I'd say first customer mix, and second is actually product mix. And again, that has to do with a little bit of what we're doing in our category management, our medical businesses, as well as driving our generic programs. So those to me are the single largest drivers of margin. Coming on to the anti-diversion issues, no question that this will give us a better shot at catching some of the business that we really believe can help get some margin to stick to the bones.

George, could you maybe just comment a little comment on the nuclear pharmacy business. How big is that as apart of your total business and analysis a version of generic cardio light out there. Could you give us a sense of the pricing and profitability on that product? Where you thought a little better or little worse than you thought could that be something ultimately that could the margins as well?

Yes, I think it looked very broad sense of the nuclear business contributes about a $100 million to our profitability. It is here is where to the... planning out. I think at the moment, for us the good news is that the generic launch triggered a provision with our existing suppliers that allowed us a better cost of goods going into the market. Of course, there was a corresponding drop in price in the nuclear pharmacy business. I would say that has played out, although we won't provide exact margin direction to you. I would say that played out about as we expected in relation of pricing and of course we knew specifically what our acquisition cost was going to be in that event. So that's the sort of key component, the other thing that's probably worth reminding you is that we've said probably going back, a quarter two that were not model in for this year, backed us to our own manufactured generic Cardiolite. So that is a assumption that we continue to stick by. I hope most of you are wrong but at this point I think that's the appropriate and conservative assumption.

Okay, thank you.

You are welcome.

Operator can I just ask, we have actually quite a few folks in queue that we're going to try to get through this morning. So if people could limit their question, maybe to one question and one follow-up, that would be helpful. Thank you.

Okay. And the next question comes from the line of John Ransom from Raymond James. Please proceed.

Good morning. Looking at your initial guidance for fiscal '09 part of the issue was additional investments particularly for the September quarter. How much of that investment was actually in the September quarter versus how much is going to be for the rest of the year? Thanks.

Hello John. This is Jeff. I would say in Q1 the total was probably less than 20% of expense that showed up on the income statement. Now that doesn't mean there wasn't a lot of activity and some capital investment etcetera. But in terms of the actual expense I would say it was less than 20% of the full year amount. Now I do expect that a ramp up particularly in Q2 and particularly in some IT areas where we'll begin to recognize some expense etcetera. So I think you will see more of a boost [ph] in Q2.

So less than 20%. What was the EPS impact of the 1Q investment approximately?

Let's say $0.03 to $0.04.

Okay. Thank you.

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

Good morning. Two questions and no follow-up. First of all for George. What was the growth rate that you experienced this quarter for your generic program? And then David if you can just elaborate further on what type of actions are you taking on to mitigate the impact that you are seeing on the hospital side?

Ricky, our generic program grew about 10% for the period.

Thank you.

Okay.

And to your question about actions on the hospital side. Well obviously, we have already started our belt tightening when it comes to things like various spend. It's a primarily a focus on holding down SG&A and making sure that money that goes into investments would likely give us a faster return to help believe the business overtime.

Next question please?

And the next question comes from the line of John Kreger from William Blair. Please proceed. John Kreger - William Blair & Company, L.L.C.: Hi, thanks very much. Question for George. George could you give us an update on the buy side part of the drug distribution business. How are your various e-contracts renewing? Are you seeing any changing economics there? And on the non-fee I think you said 20% part of the business? Are you seeing a forward buy opportunities go up or go down, as you look out in the future?

I would say, the dynamic between us and our branded manufacturing partners is relatively stable at the moment. As you know, we have that part of our business that is more inflation sensitive has been shrinking, in recent years I think that direction, that trend will probably continue. We do have some lumpiness throughout the year, this period was probably a period just based on the timing of how we are compensated, through brand manufacturers, probably a little bit lower this period. But I would say that would have been as we have a model that's based on the nature of price increases when that occurs and the mechanism that drives it. John Kreger - William Blair & Company, L.L.C.: And how would you say the... is that relatively stable in terms of the fee portion, does that mean, you are kind of hitting your general performance targets across the board?

Yes at the moment, I'd say that's right. John Kreger - William Blair & Company, L.L.C.: Great thanks.

Yes.

And the next question comes from the line of Bob Willoughby from Banc of America Securities. Please proceed.

Hi, Jeff or George, does the guidance contemplate any change in Walgreen's store openings? And secondarily is there any indication that Cardinal has provided as yet for the stock that the CMP dividend that it will pay to Cardinal with the spin?

Yes, good morning, Bob. No, there's nothing specifically contemplated for store openings. We obviously had some expected shift in the Walgreen business which we knew when we renegotiated our contract but nothing specific related to store openings.

And Bob, your second question I didn't quite get it.

I assume CMP will pay some sort of dividend to Cardinal with the spin that deliver up to some extent and pay a dividend to Cardinal. Is that not the case?

Yes, let me explain the way to you, these sorts of transaction that's typically structured in the exact mechanics, we're still looking to you and obviously we want to make sure it happens in the most tax efficient and cost effective manner possible. But typically what would happen is at the time of the spin CMP would take out some sort of loan and then use the proceeds from that loan to transfer money to Cardinal Health and then that was a bridge long for example, they would then replace that with bonds overtime. So effective... that the net result is, CMP would borrow in order to transfer cash to Cardinal Health and that's effectively the way it will happen. As we've said before, we expect the debt that CMP will have on it's balance sheet to be somewhere in the 35% to 45% range of what Cardinal Health currently has on its balance sheet.

And that includes that loan then?

Yes, that effectively... that loan would represent the debt they would take on.

That's great. Thank you.

You are welcome.

And the next question comes from the line of Leo Carpio from Caris & Company. Please proceed. Leo Carpio - Caris & Company: Good morning, gentleman. Just quick more question on the purchasing slowdown. Regarding the slowdown, is it something that's been confined to particular specific market segments or is in across the board phenomenon? And the follow-up question is, our Pyxis cabinets being deferred in favor of other price that is either higher price points or lower price points items? Thanks.

Generally speaking I think as you listen to the earnings calls from other companies that are in the capital equipment business and serving the hospitals, it seems to be more across the board and anything else and as a result at least there is a short-term impact. As far and... what was the second part of your question? Leo Carpio - Caris & Company: The second part of the question was regarding the Pyxis cabinets. When your sales people speak with the hospitals about are they telling them in terms of the list of priorities or looking after CapEx spending to referring them in favor of other more bigger ticket items or are they looking at small items in terms of... where it falls in that hierarchy?

In terms of Pyxis cabinets, I really would not categorize the decision making of the hospitals as focusing on other items, those cabinets, whether it's higher priced. Just not seeing that. Leo Carpio - Caris & Company: Okay. Thank you.

And the next question comes from the line of Randall Stanicky from Goldman Sachs. Please proceed. Randall Stanicky - Goldman, Sachs & Co.: Great, thanks for taking the question. Just two relatively quick ones. Jeff firstly, we talked about this before but of the $100 million in investment spend that you guys have talked about this call. How much of that continues post fiscal 2009 and then secondly to the extent that you can will, or you want to comment on can you give us a sense of quarterly distribution or some sort of way that you're thinking about quarterly distribution from the EPS perspective going forward?

Thanks Randall. Let me answer the first question then I need some clarifications from you on the second. With respect to the first, let me divide into the two pieces for CMP the R&D investments as we said before I view that as a permanent increase in the rate of R&D spend required to continue to replenish the pipeline and remain competitive so I would say it's a permanent addition. And as Dave said the goal here is to get to 4% of sales this year and then increase that close to 5% or 6% mark overtime. So bottom-line it's a permanent add. With respect to HSCS I would say there's going to be a particular bolster in this year and FY10. There maybe some diminishing of that amount in years to go forward what we get some of the major investments made. But I don't have to believe that's going to go down to zero. I think, they are continuing to invest in IT really is the life line of HSCS. So we will continue to, have to make sure that, we spend appropriate amount. But I would say, it's probably more of a bullish and this year. And can you repeat your second question Randall? Randall Stanicky - Goldman, Sachs & Co.: Yes, I am just trying to get a sense. If there is anything, that we should be thinking about, in terms of quarterly distribution that is abnormal relative to the distribution historically, I know you guys a have talked about a number of swing factors in that guidance and specifically that $0.15 range, I think today you have probably better visibility around some of the commodity prices, tax rate sounds like George you have better sense of where Cardiolite is. So as you think about, the other swing factors that are left, I guess what are the major swing factors and how do we think about EPS distribution or is there anything that we should be thinking about?

Yes, let me repeat some of the comments I made during my prepared remark specifically as it relates to Q2 I do think Q2 have a little bit of pressure on it due to the CMP hospital buying patterns that Dave alluded too and also there is some below the line activity going on particularly in the tax rate where indicated, we expected to be relatively high and in Q2 as well. And as we've discussed before, the entire first half for HSCS will still suffer the effects of the rags reprising that we did last year and the anti-diversion impact as we climb back out of that pole. So, I think we... first half of the year, we have consistently indicated that there will be some pressure on our EPS and I think that holds it and some of the unique factors that I've mentioned for Q2 as well. If you looked at the second half of the year, a couple of things happening. We have said before that we expect HSCS to get their profitable growth and in the second half of the year and we continue to standby that. I think for CMP, we continue to be optimistic but cautiously filled because of the reasons that Dave cited and it's a little hard to have that much visibility into Q3 and Q4. Just given the uncertainty of the credit markets. So, I would say that this one of the major factors. Randall Stanicky - Goldman, Sachs & Co.: Yes, thanks very much.

You are welcome Randall.

And our next question comes from the line of Larry Marsh from Barclays Capital. Please proceed.

Thanks and good morning. Just a clarification around that and I appreciate the discussion Jeff on the comments. But, CMP directionally is usually up a good bit second quarter to first quarter, and you did 167 in the first quarter. Just broadly speaking, you are saying it's going to flatter. You think it's going to be flatter in the December quarter and you're going to make that up in the second half or is that not what you're saying?

Yes, that's not what I'm saying. CMP will show good growth both versus last year and versus Q1 and Q2. It might not be growth that the overall rate we expected full year because there are so many issues that Dave mentioned. But we still do expect to see good bottom-line growth. And we also expect to see the continued ramp up in the second half of the year, as we typically do with CMP, where they generally have strong third and fourth quarter. And so I would say the overall pattern for CMP generally looks as it has looked in the past with some slight dampening from prior expectation in Q2.

I got it. And then just Jeff you say FX below the line $10 million. Do you mean below the interest line or is that included in the interest and other. And then also as you think about it, sounds like you are saying you anticipate a decent reductions, second half versus first half on net interest expense. Is that just a pattern of your cash flows or do you think that credit spreads have tightened or both?

First of all, the $9 million or $10 million or so that I've mentioned that below line actually that would in interest and other, I think below the operating line.

Okay.

In terms of the rest of the year, we do expect that Q1 and Q2 will be the heaviest in terms of net interest expense for the year. We'll see some lightening of that as the year progresses and that to do in part to the fact that we'll have higher cash balances as we build that property cash over the course of the year and the fact that we don't have any major plans for that cash at this point.

Okay. And just have a quick question for George. Your largest customer you talked about is up for a new fiscal, middle of calendar '09, CVS due. Is there any update in time. I mean do you still anticipate that to be announced close to June of '09? Do you still anticipate pricing that you already have is about in line and is there any difference on how you are thinking about it given how that longs in the mix and your commitments there? Thanks .:

Thanks Larry. Yes, I'd probably would say, we don't have any update nor we're really changing expectations. We again expect to renewal as we come toward summer and again I think we continue to feel that as in newer contract, it is a tighter fit to market conditions. So, we remain helpful that it's going to be up a relatively some of transitions but nothing really new to update.

Okay. Very good. Thanks.

And the next questions comes from the line of Eric Coldwell from Robert W. Baird. Please proceed.

Thanks, good morning. Typically distributors have reached historically and have built inventory in the December quarter for a number of reasons in front of the holidays, Dave you talked with the weather price inflation opportunities what have you. At the same time, we're in an environment where perhaps costumers might be a little more willing to let inventories decline and not work a little closer to a just in time model given the spike in interest rates and that the credit crisis. I'm just curious whether you see any, maybe Jeff would can answer this if you see any potential in the quarter where perhaps your inventory days on hands will jump in and that we might see cash flow delayed until the March quarter or any things on that front would be helpful?

Hi, it's a good question. But as far we really don't se any significant trends that would indicate that our inventory patterns in the December quarter be much lower [ph] than those we have in the past. I wouldn't expect a major change there in terms of data, inventory etcetera.

And there is a follow one. You've shown some continued improvement year-over-year and your days on hand typically that's seems across the board. Do you still target showing a few days of additional improvement over time, is that still something that's on the horizon for you?

Yes, what we said in the past is, we are not going to see the huge improvements that we saw back over the last three years where we're the making transition from the buy and hold model that we pursued it. With that all said we still do see opportunities to take a day or two out of inventory each year. Really just to the hard work of operational excellence and getting much better about demand calibration and minimizing the amount that we need to carry. So yes I do think that day or two a year is a very reasonable objective and we're very much driving for within our distribution channels.

Thanks very much.

Thank you.

Operator I think since we've run over time I am going to ask that we actually conclude the call and I am going to turn the call back over to Mr. Kerry Clark for just some concluding comments. And then we're happy to take any comments or questions from folks, little bit later.

Thanks everybody for being with us today we look forward to seeing some of you at investor meetings in November, December and as Sally said, if there is any questions please feel free to give the call to Cardinal Health. Operator that concludes the call. Thanks again everybody.

Thank you ladies and gentlemen and thank you for your participation in today's conference. This concludes the presentation and you may now disconnect. Have a good day. .