Cardinal Health, Inc. (CAH) Q4 2011 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Fourth Quarter and Full Year 2011 Cardinal Health Earnings Conference Call. My name is Tanya, and I will be your conference moderator for today. [Operator Instructions] As a reminder, this conference is being recorded for replay purposes. I would now like to hand the presentation over to Sally Curley, SVP of Investor Relations. Please proceed.

Thank you, Tanya, and welcome to Cardinal Health Fourth Quarter Fiscal 2011 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 statement slide at the beginning of the presentation, which can be found on the Investor page of our website for a description of risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about these measures is included at the end of the slide. Before I turn the call over to Chairman and CEO, George Barrett, I'd like to remind you of a few upcoming investment conferences and events in which we will be webcasting. Notably, the Robert W. Baird 2011 Healthcare Conference on September 7 at 10:30 a.m. Eastern in New York and the Stifel, Nicolaus Healthcare Conference on September 8 at 9 a.m. Eastern in Boston. The details of these events are or will be posted on our IR section of the website, so please make sure to visit the site often for updated information. And we look forward to seeing many of you at these events. Now I'd like to turn the call over to George.

Thanks, Sally. Good morning, everyone, and thanks for joining us for our fourth quarter and year-end call. Our fiscal 2011 was an important year for us. A year of outstanding accomplishments, exceeding all of our key company financial goals and making great strides on both operational and strategic levels. We continue to strengthen our core businesses, build new capabilities to accelerate growth and take strategic action to position us for the short, medium and long term. I'll begin with a few numbers. Revenue for the fourth quarter was up 9% to $27 billion. And non-GAAP EPS was $0.59, an increase of 18% over the prior year period. Full-year revenue was up 4% to $103 billion, and we ended fiscal 2011 with a non-GAAP EPS of $2.67, an increase of 20%. Our organization did an excellent job managing working capital, generating $1.4 billion in cash from operations, while maintaining -- remaining committed to returning significant value to our shareholders through a differentiated dividend payout, share repurchases and maintaining a strong balance sheet. Now, let me provide some color on each segment's performance in the fourth quarter, and then I'll return to some discussion on our full-year results. Our Pharma segment had an exceptional quarter. Revenue increased by approximately 10%, and segment profit increased by 30% versus the prior-year quarter, including the contribution from Kinray and Yong Yu. Both of these acquisitions performed very well, and their integration into Cardinal Health has progressed seamlessly. Strong performance in our generic programs was a key driver in the fourth quarter. Overall, generic revenue growth was up more than 19% versus the prior-year period, and sales in our Preferred stores program were up more than 14% with increases across all classes of trade. Cardinal Health Specialty Solutions posted revenue growth of more than 30% over the prior-year quarter as a result of continued growth in our legacy specialty businesses and a ramp up of P4 Healthcare. And as we announced back in May, during the fourth quarter, we expanded our P4 Pathways agreement with Aetna to add Georgia, Northern Virginia and Washington D.C. to the program we launched in February in Maryland and Florida. And we entered the New York market with the addition of Independent Health to our Pathways program. In our Nuclear business, fourth quarter revenue increased 6.5%, and while myocardial profusion imaging doses have continued to increase, following the fiscal 2010, technetium supply shortages, volumes have not returned to pre-shortage levels. In the positron emission tomography or PET area, we continue to support numerous clinical trials with innovators in the science of molecular imaging. And we recently launched our state-of-the-art innovation laboratory in Phoenix, that we referenced on our earnings call last quarter. This facility is a first-of-its-kind collaboration center and will expedite the development of nuclear imaging agents that diagnose and treat diseases like Alzheimer's, cancer and heart disease. Turning to Medical. This segment achieved solid revenue growth of approximately 7% in the fourth quarter, primarily from sales to existing customers across all channels. Although commodity cost increases led to a profit decline of 24% versus the prior-year quarter, the underlying performance of the segment is encouraging. There are clear signs that our channel and category management strategies are generating new business. In the quarter, we had some key wins, including the expansion of our business with the Department of Defense and several large hospital networks or IDN, which will begin to contribute later in 2012. In our Preferred products portfolio, we signed a record number of commercialization agreements with national brands in the fourth quarter. Our category strategy better aligns us with customers and suppliers and will be a margin driver going forward. I'd like to take a few moments to comment on utilization, as it did dampen Medical segment profit growth in the quarter. We've indicated, over this past year, that we were continuing to model somewhat soft utilization over the near term, and we have not seen a material change. Procedure-driven activity remained somewhat sluggish for the period, and the results in the quarter for our Medical segment were held back by these dynamics. Having said this, the Ambulatory Care channel continued its strong growth, particularly in surgery centers, where revenue grew by double digits, in spite of the utilization dynamic that I just described. We did outgrow the physician office market, which has continued to be weak. It is worth noting that our focused cross-selling effort between our Pharma and Med segments is bearing fruit. If we include this new Pharma sales, which show up in our Pharma segment, physician office growth would have been closer to 10%. In the lab channel and Canada, both grew by mid-single digits. Our Medical Business Transformation initiative is on track for our pilot launch in October, followed by our national implementation in the second half of fiscal 2012. And we continue to expect a meaningful contribution to margins from this major initiative as we get into fiscal 2013. Now let me provide more color on the full year. Over all, we had an outstanding fiscal 2011. We grew non-GAAP EPS by 20%, even with the commodity headwind of $60 million. We improved our gross margin rate by 22 basis points versus last year, driven by rebalancing our customer and product mix. We generated $1.4 billion of cash from operations. We strengthened our balance sheet despite deploying well over $2 billion in acquisitions and share repurchases. We increased our differentiated dividend by 11% in fiscal 2011, and in May, we increased it another 10%. All in all, we achieved an excellent balance of investing for current and future growth, and returning significant value to our shareholders. We continue to solidify our relationship with national retail customers and large hospital networks as highlighted by a number of contract renewals during the year. In fiscal 2011, we made great progress on continuing to strengthen our strategic position in a number of important areas. We dramatically expanded our footprint in community pharmacy and accelerated the growth of our generic franchise with the acquisition of Kinray, which added more than 2,000 retail independent customers to our base, for a total of approximately 7,000, and significantly shifting our customer mix. This shift is not trivial. Approximately 2 years ago, we highlighted the need to improve our Pharma business mix. Since that time, our percentage of non-bulk business in our Pharma segment has gone from about 50% to 57%, and the number of retail independent pharmacies we serve has increased by about 50%, reflecting both organic growth in our customer base and the acquisition of Kinray. And two weeks ago, we hosted more than 4,000 stores at our 21st Annual Retail Business Conference, and it was another record year. This was a great event for our customers and supplier partners to network with each other and discuss changes in the healthcare landscape. And on a personal level, it's a fantastic opportunity for me to hear from them directly. We acquired P4 Healthcare, giving us a presence in oncology and specialty pharmaceutical services. We continue to build out our capabilities in clinical pathways management, giving us greater strength with new sets of customers and partners upstream and enabling us to build collaborative relationships between payers and providers in oncology, rheumatoid arthritis and new therapeutic areas. I'm very pleased with the pace at which we are winning new accounts with our pathways programs, and specialty distribution is continuing to build momentum. We took a significant step to reposition our Medical business. We continued our investment in our major infrastructure change that we think is critical to delivering on our strategy, and we finished our reorganization around channel, moving decision-making closer to the customers. At the same time, we had accelerated our capabilities in category management, which we think will be increasingly valuable to customers looking for efficiencies and for suppliers looking to grow share. Our Nuclear business really stepped up its strategic commitment to an adjacent growth platform in PET. And we have begun to execute with an eye toward a dynamic future growth in that area. And finally, we made a strategic commitment to establishing a presence in China. The acquisition of Yong Yu creates an entirely new growth platform for Cardinal Health. Not only does this expand our Pharma business in a market which is growing rapidly, but it is -- also enables growth opportunities for other parts of our portfolio, including medical products, medical distribution, nuclear and consumer health. Jeff will provide additional commentary on China during his remarks. As strong as our year was, there are still areas for improvement. Although it was an outstanding year for us in generics, systemwide supply disruptions created challenges for us and for our customers. This did have an impact on our generic compliance growth rate. As you may remember, we set some aggressive generic compliance rate improvement goals for fiscal 2011 on top of strong growth in fiscal 2010. We have continued to progress to competitive levels, but we did fall a bit short of our goal of another 10% improvement. We will continue to keep our foot on the accelerator here. And finally, as I mentioned earlier, specialty distribution is still ramping up. It has taken a bit longer than we had originally projected. But with the launch of VitalSource, it is beginning to pick up steam, and we feel very positive about the future of this business. In fact, we recently announced another large VitalSource customer, South Carolina Oncology Associates, the largest community oncology practice in the state, serving more than 800 patients daily. Now I'd like to make a few comments about fiscal 2012. As you saw in our news release, based on a new GAAP definition, our fiscal 2012 non-GAAP EPS guidance range is $3.04 to $3.19. This represents growth of about 9% to 14% from the comparable base of $2.80 in fiscal 2011. Jeff will cover in detail our guidance and specific assumptions in a moment, as well as why we're adopting a new definition for non-GAAP earnings, which we believe is useful to investors and is more consistent with the approach of other U.S. healthcare companies. We are clear on our strategic priorities. We have the right game plan in place and our organization is executing well. And while we have to weather a few lingering headwinds, we will continue to focus on driving momentum and making sure that each of our businesses has the market position it needs in order to compete. Let me walk you through areas of focus for fiscal 2012. Most of this should sound quite familiar to you. This will be a noteworthy year in generics, with some of the largest pharmaceutical products in history losing patent exclusivity. While we can't control the timing, we can control how well we execute on generic launches. We want to make sure that when the opportunities are there, we execute extraordinarily well. The Specialty business is very important to our future. While our presence in every part of this business is not yet of the scale we would like, we are developing unique capabilities. We believe that Specialty is a great opportunity for us, and we will continue to invest here. We will continue to deliver value to our Pharmaceutical partners as a one-stop shop for their supply chain service needs. Pharma partners tell us that our operational expert -- excellence expertise coupled with the efficiencies of our National Logistics Center have helped drive profits improvements and incremental sales for them. And we will also continue to develop customized tools to support their promotional strategies, including new item launches and medication-adherence offerings. PET will continue to drive the next-generation opportunity in the Nuclear business for us, and we will continue to invest in this space. We are truly excited about China. Our business is growing well organically. We will also look for opportunities to build scale and geographic reach. We will certainly be evaluating tuck-in acquisitions throughout the year, as well as broadening the Cardinal Health portfolio in China. We will remain focused on the way in which the delivery of care is moving between parts of the health system from acute care hospitals to ambulatory centers to doctors' offices, and we will make sure that we have the right capabilities to serve all of those channels and the right scale to execute our strategies. Our Preferred products program represents one of those strategies. It allows us to assist customers in reducing their costs to serve, while reducing overall costs in the healthcare system. We will continue to focus on growing this important cornerstone of our medical strategy. Although the Medical segment begins fiscal 2012 with some lingering headwinds, our competitive position is strong. We're in the second year of implementing our category-management strategy. We will be completing our Medical Business Transformation initiative, and we continue to accelerate our global sourcing capabilities. And of course, we're taking aggressive action to mitigate the impact of commodities. We will continue to focus on margin rates across our businesses, and we will maintain a close focus on working capital. And finally, we remain committed to U.S. shareholders, with respect to our capital-deployment strategy with a differentiated dividend program, appropriate capital reinvestment for growth and opportunistic share repurchase. As we look ahead into fiscal 2012, I feel good about our position and our ability to execute on our priorities. Before I hand the call over to Jeff, I'd like to thank all of our employees for their contributions this year. Our people are passionate about the work they do to serve our customers, and I'd like to acknowledge their efforts by sharing a story with you. With tens of thousands of customers, you might think that it's hard to make each customer experience personal. This story will give you an idea of just how personal it is for our employees. On Sunday, May 22, a tornado tore through Joplin, Missouri, leaving a path of destruction a mile wide and 6 miles long. Our customers' pharmacy was located in the center of the storm and was completely destroyed. There was simply nothing left. I met this customer a couple of weeks ago at our Annual Retail Business Conference. He told me his story of losing everything. And he also described an incredible response from our Cardinal Health people. The news of the tornado's devastation quickly spread to the Cardinal Health team, and they mobilized support, in an incredibly short period of time, along with the support from other medicine shop owners and local volunteers. A new location was secured and outfitted with store fixtures. Phone, cable and a security system was installed. Inventory was ordered and delivered, the front of the store fully merchandised, and an advertisement developed and placed in the local paper to announce the new location. On the afternoon of Saturday, May 28, less than a week after the tornado had ripped through Joplin, the pharmacist owner filled his first prescription in his new location. It's hard to describe how proud of our people this makes me feel. With that, I'll hand the call over to Jeff to provide more detail on the quarter and the full year and on guidance for fiscal 2012. Jeff?

Thanks, George, and good morning, everyone. I'm pleased to be discussing another great quarter, running out an excellent fiscal 2011. I'd like to begin by expanding on some financial trends and drivers of our Q4 and full-year performance. Then I'll provide additional detail on our FY '12 guidance, including some of our key expectations. Let's start with Slide 6. During the quarter, we grew our non-GAAP EPS by 18% to $0.59 per share, leveraging 9% revenue and 14% non-GAAP operating earnings growth. The $26.8 billion of revenue recognized in Q4 represents another all-time high for Cardinal Health. Although non-GAAP operating expenses were up 16%, this was largely driven by the expenses added to the net impact of acquisitions and divestitures, as well as certain strategic and business system investments. Interest and other expense came in better than our expectations and last year, driven by favorably realized in interest swaps, foreign exchange and gains on our deferred compensation plan. As we stated before, when we prepare our internal forecasts, we generally do not include an assumption that these items will continue. Our non-GAAP tax rate for the quarter was 39% versus 37.7% last year. The higher rate is attributable to the effect of changes in income mix and discreet items, including adjustments in reserves related to completed and pending federal and state tax discussions. The net of these discreet items was worth $60 million in additional tax expense this quarter. Last year, we had discreet items in the fourth quarter that netted to $4 million in expense. Finally, we continue to benefit from the $450 million in share repurchases we executed last summer, with our share count in Q4 at about 355 million diluted average shares outstanding versus 362 million in the prior year's quarter. Before shifting the discussion to the segment results, let me comment on consolidated cash flow and the balance sheet. We had operating cash flow of approximately $120 million in Q4, which resulted in about $1.4 billion total for the year. Our strong earnings performance, as well as further working capital improvements, drove these full-year results. You may recall that last quarter I said that we expected lower cash generation in Q4 relative to Q3, due to the inherent volatility in our quarterly cash flows. This is what we experienced. We ended the quarter with more than $1.9 billion in cash, of which $266 million is held overseas. As a reminder, this cash balance does not include our investments in held-to-maturity fixed-income securities, which are classified as other assets on the balance sheet and totaled $142 million at quarter end. Although our net working capital has finished the year flat to prior year end at 8 days, we are pleased at being able to maintain these levels, given the absorption of recent acquisitions into our business. We generated $235 million in operating cash flow from net working capital reduction in fiscal 2011, following a noteworthy $949 million reduction in fiscal '10. One final note on the balance sheet. During the quarter, we opportunistically entered into a new, more cost-effective $1.5 billion revolving credit facility, which is in effect until May 2016. Our previous facility was simultaneously terminated. This line is in addition to our $950 million accounts receivable facility, which expires in November 2012. So we will begin our fiscal '12 with ample balance sheet flexibility to continue to handle any short-term liquidity needs and to maximize longer-term shareholder value. On a related note, I'm happy to report that S&P just upgraded our long-term debt rating to A-, recognizing the improvements in our business performance and the consistency of our financial policy. Now let's move to Q4 segment performance, referring primarily to Slide 7 and 8 and starting with the Pharma segment. Revenue in the segment increased 9.6%, with the acquisitions we completed earlier in the fiscal year contributing 6.1 percentage points to this growth rate. Revenues from retail independents continue to grow at a rate above the market, even when excluding the sizable impact of Kinray. We continue to see strong double-digit generics growth in the quarter, both overall and within our SOURCE program. Our Nuclear business produced 7% revenue growth in Q4, and our traditional core pharmacy or spec procedure volume, increased sequentially for the fourth consecutive quarter, which is a continued positive sign. Our PET business also continues to show strong growth. In China, Yong Yu's revenue was again very strong, growing 23% in Q4 versus performance as a separate company in the same time period last year. We also picked up several new large vendor accounts in the period. Our base business is performing well, and we have also begun to see the contribution from a newly implemented business unit, supporting the growth of retail pharmacy. We continue to explore other possible opportunities in areas like nuclear pharmacy, lab distribution and pharmacy management. And perhaps most importantly, we have now fully staffed key leadership positions to drive our strategic initiatives. In short, our China business is off to a great start, and we are very excited about its potential in this market. Now turning back to the overall Pharma segment. Segment profit margin rate increased by 19 basis points compared to the prior year's Q4, reflecting an increase in both bulk and non-bulk margin rates and a continued mix shift towards non-bulk. For the full year, bulk margins were up 7 basis points and non-bulk margins were up 24 basis points compared to full-year fiscal '10. As part of the ongoing success of our generic programs, we also saw continued benefit from new and recently launched generic items during the quarter, as well as favorable generic deflation rates. Although generic deflation continues to be below historical norms, rates experienced during Q4 were slightly higher than the first nine months of fiscal 2011, as a result of certain drugs passing their exclusivity period. We realized strong contributions from acquisitions in the quarter, which added 12.1 percentage points to segment profit growth, while our performance under our branded manufacturer agreements was also a positive driver. And since I mentioned a possibility of a LIFO charge on our last call, I did want to note that we did not end up incurring one in Q4. Net-net, the Pharma segment, again, had an excellent quarter, resulting in a noteworthy increase in segment profit of 30% to $295 million. Now turning to our Medical segment. For the quarter, revenue increased by 7.1% to $2.3 billion, driven by increased sales to existing customers across all channels and the impact of transitioning our model with CareFusion to a traditionally branded distribution agreement. This change added 2.4 percentage points or $52 million to revenue and had the effect of depressing our segment profit margin rate during Q4 by 18 basis points. Importantly, and as expected, volume from net customer wins was positive this quarter, for the first time in fiscal '11. Our inventory business, a continuing focus for us, had another strong quarter growing its revenue, over 10%. Medical segment profit declined 24% to $78 million, primarily driven by the negative impact of commodity prices on our cost of products sold, certain one-time items and system investments, partially offset by the impact of increased volume to existing customers and net new business. Specifically, commodity prices impacted our current period cost of goods sold by $14 million versus last year and reduced segment profit margin by 14 percentage points. We also had certain charges totaling $11 million in the quarter, which were primarily due to inventory-related items, including a change in estimate related to the capitalization of certain costs associated with self-manufactured products. As expected, the continued sluggishness in utilization disproportionately affected our higher-margin Preferred products, including our Presource kits. Now let me turn to Slide 9, which I will just summarize. In total, GAAP results included items that had a negative $0.01 per share net after-tax impact. This compares to $0.04 of benefit we had last year, primarily driven by litigation gains in that Q4. One last call-out. We recorded a small gain related to CareFusion's shares sold over the last quarter, as a result of slight adjustments to our tax accounts. I want to make a few comments about fiscal '11 in total, starting with Slide 10. For the full year, non-GAAP EPS was at $2.67 per share, an increase of 20.3% year-on-year and at the upper end of our most recent guidance range. Operating earnings of $1.6 billion increased 14% versus fiscal '10. Excluding the Kinray, Yong Yu and P4 acquisitions, operating earnings would have grown 9.6% and non-GAAP EPS, 15.3%. In particular, I am very pleased with the strong progress on our goal to expand margins, with both gross margin rate and non-GAAP operating margin rate increasing versus last year, up 22 basis points and 13 basis points respectively. This was driven by the consistently strong operating results of our Pharma segment, in particular, our generic programs, contribution from the acquisitions and performance under our branded manufacturer agreements. Although our Medical segment faced some unique headwinds, namely commodity price increases, a one-time CareFusion revenue recognition in FY '10 triggered by the spend and difficult healthcare utilization trends, there are good signs in the underlying performance, and we believe we have taken steps to position us well longer term. And positioning for longer-term growth was clearly an accomplishment enterprise-wide in fiscal '11. Through the acquisitions, organic reinvestment and strategic decisions, we laid a solid framework upon which we continue to grow in fiscal '12 and beyond. We did this while returning more than $500 million of cash to shareholders, through both a differentiated dividend policy and share buybacks. Before discussing our fiscal '12 outlook, I want to discuss changes in the way we're providing guidance and reporting results, going forward. As noted in the release and mentioned by George, we are redefining our non-GAAP earnings measures to exclude amortization of acquisition-related intangible assets. You'll see in our reconciliation statements that we have referred to this as the new non-GAAP, as compared to the historical or previously reported non-GAAP figures. During the past year, a number of you pro-actively asked us to consider changing the way we report our non-GAAP earnings to exclude intangible amortization. After listening with you and conducting our own research in comparable healthcare companies, we have decided to adopt this new definition for our non-GAAP earnings measures. This, we hope, will accomplish two things: first, to better reflect our ongoing operations and comparisons of current operations with historical and future results; and second, to simplify for you comparisons of our results against other peer companies, the majority of whom already report on this adjusted basis. Clearly, we also will continue to provide GAAP results, as we have historically. Also note that we will revise previously reported segment profit figures to reclassify acquisition-related intangible amortization to corporate. Fortunately, since we were already breaking out most of our intangible figures for you, making these changes was actually pretty simple. In order to assist in this transition, we have provided quarterly financial tables for fiscal '10 and fiscal '11 under the new and historical non-GAAP earnings definitions at the end of today's press release. So as highlighted on Slide 13, our outlook for non-GAAP earnings from continuing operations in fiscal 2012 is $3.04 to $3.19 under the new definition. This is growing off a comparable base of $2.80 for fiscal '11. Now I suspect some of you may be wondering what would drive us towards the lower end of this range. As always, there are a variety of drivers that could push us in either direction, but probably the biggest single factor that can move us towards the downside of the range is a further significant increase in commodity prices beyond what we've budgeted for. As you know, we do not provide quarterly guidance. However, I thought it would be helpful to highlight one-time item that we might see for fiscal 2012. We anticipate our overall tax rate to be between 37% and 37.5%, comparable to the FY '11 rate. And while this may fluctuate quarterly, currently we anticipate a more normalized tax rate than the quarterly variances we saw in fiscal '11. This means, for example, that in Q2 of FY '12, the relatively low 32.8% tax rate that we experienced in Q2 last year will likely significantly dampen our year-on-year EPS growth rate comparison. Likewise, our ETR in the second half of fiscal '11 is relatively high, which potentially creates a somewhat easier compare for Q3 and Q4 of fiscal '12. Slide 14 outlines some of our other key corporate expectations for the year. Our diluted weighted average shares outstanding should be approximately 353 million in fiscal '12. This is a slight increase from our fiscal '11 weighted average of 352.5 million shares. This forecast for fiscal '12 reflects $250 million of gross share repurchase, which we completed in July. Again, we expect the benefit from these repurchases to be offset by the impact of share price on the dilution calculation and exercising of options. These July repurchases leave $500 million remaining under our board authorization. Interest and other should net between $95 million and $105 million. This forecast assumes that items benefiting interest and other in fiscal '11, such as interest rate swaps, foreign exchange and a deferred compensation program, do not necessarily repeat in fiscal '12. We expect capital expenditures in the $250 million to $270 million range with a continued focus on completing the Medical Business Transformation project and customer-facing IT investments. During Q4, we finalized the valuation of acquired assets and liabilities for the acquisitions, which resulted in a reduction in our expectations for amortization of acquisition-related intangible assets to about approximately $75 million from our previous estimated range of $85 million to $95 million. One final note on corporate assumptions. Our guidance range includes some incremental SG&A, resulting from the expiration of the last of the CareFusion transition service agreements. However, as we have done consistently, when the CareFusion spin has created costs [ph] in the past, we have plans to substantially offset virtually all these costs within several years. Let's now spend a few minutes going through some of the segment-specific assumptions, starting with Pharma on Slide 15. Our expectation for brand inflation is that the rate will be similar to fiscal '11. We continue to forecast good growth from our generic programs versus fiscal '11, driven by our continued momentum in this area. We expect generic deflation, overall, to be steeper in fiscal '12, as certain specific products launched over the recent past move out of their exclusivity period and may deflate more rapidly. Based on our most current portfolio assessment and a very strong generic launch dynamic in fiscal 2011, we project a slightly lower year-over-year contribution from new generic launches in our upcoming fiscal year. Clearly, this area can change quickly, and because predicting generic launches is rarely precise, we use a risk-adjusted approach to modeling. We should also point out that we are using an underlying assumption that LIPITOR generic launches in November 2011 with 2 generic players. We expect to benefit from growth in both our Specialty and PET businesses. We will continue to invest in customer-facing IT, and we will also to continue to invest in growing our platform in China. Although we narrowly avoided a LIFO charge in fiscal '11, we are modeling one into our fiscal '12 Pharma forecast with the range of $15 million to $25 million. Finally, recall that deal announcement, we provide Kinray accretion estimates for fiscal '12 non-GAAP EPS under our historical definition of at least $0.12. We now expect to exceed that accretion level in fiscal '12, even before considering the removal of intangible amortization. Turning to Slide 16 in the Medical segment. We expect mid-single-digit revenue growth, reflecting net customer wins in fiscal '11 and the transition of our relationship with CareFusion to a traditional distribution model, which should increase revenues by $50 million or $60 million per quarter but decrease segment profit margin rate by approximately 20 to 25 basis points per quarter. We also expect continued sluggishness in the relevant healthcare utilization trends. Our guidance includes the full-year expectation of approximately $80 million of gross negative impact on cost of goods sold due to commodity price movements. This is somewhat larger than what we projected in our last earnings call, and let me explain. We use a CDI or Chemical Data Index, as a basis for our internal or related commodity price forecast. CDI is a forward curve for petroleum, petrochemical and plastics commodities. Since we provided our initial estimate on our April earnings call, the relevant forward prices for oil and nitrile have increased on this index. For your information, based on this index, we set a budget for fiscal '12 which incorporates oil prices in a range of $100 to $105 per barrel. Although cotton and latex prices have trended downward recently and are reflected appropriately on our forecast, they have relatively less of an impact on the overall basket of commodities to which we are exposed. As you would expect, we have, and will continue to take actions, including pricing, mix and cost-reduction activities, while offsetting a good portion of gross impact during the course of fiscal '12, and these mitigating effects are also reflected in our forecast. We're expecting a headwind of approximately $15 million to $20 million related to foreign exchange, net of our hedging activities. This is primarily driven by the continued weakness in the U.S. dollar relative to our foreign currency denominated expenses in our international sourcing and manufacturing operations. Our Medical Business Transformation is in the testing phase and on track for national implementation in the first half of calendar 2012, with a phased rollout scheduled to begin later this calendar year. And while we expect to see some slight margin contribution toward the end of fiscal '12, we continue to expect meaningful margin contribution in fiscal 2013 and beyond. In general, much of the Medical story in fiscal '12 and beyond is about further strengthening our value proposition and expanding margins, as we grow our customer base and our presence in higher-margin products, services and channels. We expect continued growth in Ambulatory and remain committed to growing our Preferred products, with a sourcing operation in Asia that continues to expand in scope. In summary, I am very pleased with our overall performance for the quarter and the year. Fiscal '11 was a great period of operational execution, financial performance, important strategic moves to establish long-term growth platforms and delivery on those and other strategic priorities. And very importantly, total shareholder return. I am confident that we will execute well on our priorities and continue our momentum throughout fiscal 2012. With that, let me turn it over to the operator to begin the Q&A session. Operator?

[Operator Instructions] Our first question will come from the line of Larry Marsh with Barclays Capital.

My question really is context and a follow-up is on P4 and Specialty. As you would call that, George, in a year of a lot of successes, you communicated that the ramp took a bit longer than expected. If you could elaborate a little bit more on why that was the case. And now, with the VitalSource GPO in place, announcing important GPO relationship, do you feel like you're now on track to get to where you want to be, or is there still a lot you feel like you can do in Specialty that -- where you're not involved currently?

It's been -- all told, for our Specialty business, it's actually been a good year. It's been -- different components have done well and better, and different components have moved more slowly. I would say the Pathways programs and our legacy business has actually done really well. We knew that Specialty distribution was going to be a building process, and I would still describe it as that. We've begun to feel some momentum recently, but it does take a while to get rolling. You've got to build scale, and you've got to build presence in the offices. And I think we've been achieving that throughout the year. So while I would have liked it to accelerate faster, and I'll always be clear with you about that, we feel good about the fact that it's picking up steam. And I think we've got a reason to feel optimistic about it.

And is it clear that you anticipate announcing more of these oncology practice relationships? And will we see these being announced, or just give us indications of progress as we go along?

It's a great question. I'm not sure that we'll announce every individual account. My hope is that they'll become frequent enough that we don't have to do that. But we'll give you, certainly, ongoing progress updates, and you should expect to hear from us on how -- certainly, all of our businesses are doing -- but this is a priority item for us. And we'll continue to share information on progress.

Very good. And a follow-up on Medical. And I know, Jeff, you talked about $14 million commodities, $11 million with inventory adjustments and charges. You also alluded to incremental IT spending. About how much was that? And is that all related to med trans? And just you talked about the go-live in the second half of fiscal '12 for med trans. Is that going to be a specific catalyst for that margin expansion that you hoped to see in fiscal '13? Or is that really separate from some of the other drivers that you're looking for?

Let me answer both of those questions. First of all, the incremental investments in IT and business systems was worth about $5 million in the quarter. And that was a combination of both the Medical Business Transformation and other changes that we're making to our customer-facing systems. For example, we're dramatically improving our web-based ordering platform that's used both in the ambulatory setting and the hospital setting, so that also drove a piece of that increase. Regarding the impact of the Medical Business Transformation in '13 and beyond, clearly, that's one of the most significant drivers of margin growth and margin expansion in fiscal '13. But I would say, it's also alongside and complementary to all the other initiatives that we're already working on, such as growth in our Ambulatory channel, such as growth in our Preferred products, including expansion of our sourcing in Asia and the additional services that we're providing to our customers in the acute setting and the other channels that we work in. So I would say it's probably the major one, but it's also very complementary and facilitates the growth in those other areas that I mentioned.

Our next question comes from the line of Lisa Gill with JPMorgan. Lisa Gill - JP Morgan Chase & Co: Jeff, you called out the FX impact, as we look at 2012, as a headwind. Can you maybe talk about any tailwinds that you saw in this quarter around FX and the med-surg business?

Yes. Actually for Q4, FX was a relatively neutral impact. Saw some slight benefit from our Canadian long exposure but equally offset by some of our exposure to manufacturing expenses in foreign locations, given the continued weakness in the U.S. dollar. So that was a relatively neutral event. And Lisa, I think, you asked a second question there, which I've forgotten already. Lisa Gill - JP Morgan Chase & Co: And then the second question actually is more on the strategy side. Maybe this is more for George. George, you did mention, when you were talking about your drug distribution component -- talked about lab distribution. Is that an area -- I know that you have a lab distribution business today. Is it an area that you look to grow? And also, as we look at capital deployment -- again, not a lot of share repurchase in the guidance for 2012. So can you maybe just remind us of areas that you would think about from an acquisition standpoint? You're obviously very successful last year with both Kinray and Yong Yu as acquisitions.

So let me start with the first part. Our lab business has really been, actually, a very strong business of recent years. We've got a terrific market position, a very, I would say, technically consultative-driven selling organization and a very broad presence across the market. So this continues an important -- to be an important part of our business, Lisa. It also connects to a lot of the other elements of channel management for our business. And so, we're really going to continue to drive our lab business. As it relates to capital deployment, again, we try to reinforce this notion of a balanced approach to it. Our goal is to make sure that we're in the strongest position in each of the markets, where we want to compete, and compete effectively, and compete to win. So we've highlighted some areas in our discussion that'll continue to be important to us. Obviously, Specialty continues to be important for us. Growth in Ambulatory continues to be important to us, growing our Preferred products capabilities and our Nuclear capabilities as we move towards PET. So we'll continue to do some work there. Obviously, in China, we want to make sure that we have both the scale and the geographic reach that positions us in the best position possible. So these are all areas of focus. Of course, some of this will be -- or all of this will be the focus of our organic attention but to the extent that the right opportunities come up from an acquisition standpoint, we're certainly -- we'll consider those.

Lisa, just a further detail on your question about lab. Our lab revenue was up 6.5% in Q4, which actually, it was pretty impressive, given the overall sluggishness in utilization, so continued good signs in that part of the business.

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

So a lot of happenings, I guess, with some of your key customers, and so, I was curious as to your thoughts on maybe some contract updates. So obviously, we saw the mega merger in the PBM space, and so anything you want to sort of shed your light on or opine on sort of your view on your relationship with Express, and in turn, that transaction. And sort of what you bring to the table that could argue for you to garner a significant share of that. And then also on the CVS front, if there's any update on Longs and maybe a potential relationship there?

So -- yes, a couple of pieces. Again, as it relates to the Express Script and Medco story, as you know, Express is a customer of ours and a good customer of ours. But as you also know, this is early days, and beyond that, there's probably not much I can or should say at this stage. Let's let this thing play out. Your second question was really about Longs. And I guess, I can't share a lot here, but I can say that we have picked up -- we're pleased to have picked up incremental volumes from Long stores.

Okay. Great. And I guess, maybe just going back to the guidance for a second here. If you think about sort of how you executed this year versus your original guidance for '11, and then you think about sort of the plan you've put forward today -- I mean, if you had to highlight maybe 2 or 3 points -- and I think Lisa pointed to it on the capital deployment side, where we could see a delta versus the original forecast, what you would you need to kind of over-execute on, to really move the needle? And where do you see sort of the biggest sort of threats, I guess, on the lower end of the range?

Why don't I let Jeff walk you through just a little bit of some of the sort of puts and takes, as we look at the range. Then I'll sort of come back with sort of a more general comment.

First of all, I think your point about execution FY '11 is a great one, Ross. And obviously we're assuming that we continue to execute well in all of our priorities going into FY '12. What could push us up towards the top end versus the bottom end, I guess, which is effectively your question. I guess, towards the top end, even stronger generic performance than we have projected. And in particular, if generic launches come in stronger or more frequently than we have modeled, that could clearly push us towards the top end of the range and beyond. I think commodity prices are a big swing factor both in the positive and negative direction. Obviously, oil moving closer to $90 or into the $80s would be a very a positive impact on the second half of the year for us. Likewise, oil moving into $110 or $120 would have the opposite impact. You mentioned capital deployment, our base assumption for share repo is that the $250 million that we completed in July is the only repurchase that we do. But depending on how the year turns out, in terms of other uses of capital, clearly, we have authorization capacity remaining under our board approval of $500 million. And as we continue to build our cash, it's always an option that we would discuss with our board about buying back additional shares. Brand inflation -- as we've said, we projected, or we modeled for this fiscal year that brand inflation will continue at about the same level that we saw in fiscal '11. Clearly, that could be a bit of a swing factor, particularly, in our quarterly results, as I mentioned before. Given our less independents on brand inflation than we've had historically, each year that goes by, it because less of a swing factor annually. But given that price increases seem to be spread more and more out through the quarters and on somewhat unpredictable manner, you could get swings quarterly year-on-year. The LIFO assumption is another one that -- we modeled in a $15 million to $25 million charge. It could be 0 or it could be higher than that, depending on certain factors, some of which are within our control, some of which aren't, such as the levels of brand inflation and generic deflation. Generic deflation is another one that -- in terms of the overall economics of our Generics program that has a potential swing factor for us.

I would probably add, Ross, just a few things. And Jeff really covered the big picture. I think, as you know, Generics are very hard to be completely precise about, both in terms of launches and deflation, and it typically is really deflation on specific products. And so you know our approach, I think, to doing this, which is we use sort of a risk-adjusted model. I think that has served us reasonably well over the recent years, and we'll continue to use that approach. Other than that, again, just -- perhaps a reminder of the obvious, we really moved '11 faster and more dramatically than we had originally anticipated, and so our feeling about the ability to grow '12 on top of that is -- well, for us, feels like the right trajectory.

Our next question comes from the line of Glen Santangelo with Crédit Suisse. Glen Santangelo - Crédit Suisse AG: Just a couple of quick follow-ups on the Medical business. Jeff, I just want to follow up on your remarks about an $11 million charge in the quarter due to the inventory-related items. Could you give us a little bit more detail about what drove that charge?

Sure. There were 2 major drivers: one was worth about $6 million -- $6 million to $7 million, and it related to the change in estimation methodology for some of the self-manufactured products that we carry in our warehouses and the way we calculate the capitalized expense that's inherent in that inventory. And we made a change in our estimate to more accurately reflect our current view of that inventory, and that was worth $6 million or $7 million. Second was we had some Presource kits in one of our warehouses that, for certain reasons, we don't think are usable, and we decided to write them off. Glen Santangelo - Crédit Suisse AG: Okay. That's fine. I just wanted to discuss the fiscal 2012 guidance in Medical in a little bit more detail. I understand the commodity issue. That seems pretty straightforward. But I want to get a sense for maybe what you guys are modeling, in terms of volumes and incremental investments that may be needed in fiscal '12. And you're, obviously, calling out the FX -- the potential FX impact. I'm trying to get a sense for how significant those are relative to what you saw in fiscal '11. I'm trying to figure out how much of an incremental headwind it is, because it seems like, to me, you're sort of forecasting that the Medical business is going to be down again year-over-year. And I just want to make sure -- I'm trying to understand the magnitude, so I can think about things that might ultimately go away in fiscal '13 like the investments, for example.

So let me touch on a couple, and I'll turn it over to George. So on commodities, the gross negative impact on our cost of goods sold is $80 million. And I always emphasize the word "gross," because clearly, we put actions in place to mitigate as much of that as we can. And we have, and will continue to offset a good portion of that. But that $80 million compares to a gross headwind in fiscal 2011 of about $60 million. The FX impact, as I said, is between $15 million and $20 million. I believe that's slightly more than what we experienced in terms of the headwind in fiscal '11. Those are the 2 biggest headwinds. You also asked about volume. As I said earlier, and I'll let George comment further on this, we are not being overly optimistic or aggressive in terms of how we're modeling volumes. We're assuming sort of a continued sluggishness in utilization that we experienced in fiscal '11.

Yes. Glen, let me just sort of give a sort of broader perspective on that. I think Jeff gave you the sort of components economically. Let me just sort of put into context, I guess, the way I see the year. Our Medical business really had to weather some environmental challenges with commodities and soft utilization, particularly, as the drivers. But, as our organization knows, while this is some bad fortune, there's no great path. Like we understand -- our organization clearly gets that we're in a competitive market. But having said that, there's, really, for us, a lot to feel good about. And when I look at the performance of Medical, and I sort of ask some questions about the underlying performance, I focus on a couple of things. One, do we offer solutions that our customers need? Second, are we gaining momentum in the market? Are we getting tougher to compete against? Are we positioning for the future, as opposed to sort of thinking about solving old problems? And finally, are we taking actions to drive margins? So when I look at those questions, with all the puts and takes that Jeff just described, I feel pretty solid about where we are. And I can answer yes to those questions.

Our next question comes from the line of Charles Rhyee with Cowen.

I just wanted to maybe touch on Medical here, sorry about this. But if I think about this commodity price headwind that we're talking about, and it sounds like it's really coming from the manufacturing side of the business, am I right to understand that what's really happening is that you're not able to pass on the pricing increase from commodities that's in your manufacturing costs to your end customers? And if that's the case because -- George, you're talking about the underlying performance of the business which sounds more on the distribution side to your hospital clients. Is there any thoughts to think back whether you need to be manufacturing products as well?

Yes. A fair question. Obviously, as you can imagine, we look at this portfolio question all the time. We actually feel very good about the competitive differentiation this gives us, both in margin rates and in flexibility. So in fact, those manufactured products today continue to be important drivers. I'd love for us not to have to deal with the headwind this year, but there are other times that it's been working as a tailwind for us. So we really look at this, and we look at it regularly. But I feel very good about where we are today. But you should assume that we'll continue to always explore the question of whether ownership of those assets has been official. Today, I would say, strategically and economically, we would still answer yes.

Okay. Great. And maybe as follow up, Jeff, you talked about the headwinds. If I understand correctly, the impact on commodity prices, you see it as a lagging effect, right? So we're still kind of hitting the -- getting the impact of pricing -- of the prices that rose, let's say, 1 to 2 quarters ago. Can you give us a sense on -- when you talk about this $80 million headwind, how we should maybe see it as it progresses through the year? Should we get more of an impact here in the next quarter, and then maybe it eases up a little bit? Anything around on sort of that progression will be helpful.

Sure. Let me go back to your prior question first, and then I'll address your second one. By the way, just to emphasize again, the $80 million is a gross headwind that -- which means it's before any mitigating actions we may take, such as pricing or mix changes or manufacturing cost reductions or material changes et cetera. So it's sort of a starting point and then we identify specific initiatives to begin to offset it. I want to be clear about that. Included in that offset are some pricing increases. We are very strategic and tactical about how we do that. And in some cases, we can, in other cases, it's a longer-term process. But clearly, passing on pricing to some of our customers is one of the tools that we have and will utilize to offset some of these commodity price increases. In terms of the timing, interestingly, it's fairly evenly spread over the year, perhaps the negative impact -- perhaps a little bit more concentrated in Q2 and Q3, and that's just the way the year-over-year comparison worked out. But that $80 million, I'd say, as a general statement, it's fairly evenly spread.

And just one quick clarification. You're saying the $80 million is a gross number. When we compare that to the $60 million from fiscal '11 was that $60 million also a gross number?

Yes, it was.

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

George, obviously, Specialty seems to be a big focus for fiscal '12. I just wanted to go back and get a better understanding of how you guys view that market, specifically, specialty distribution. Is this really more of a market share game play, or are there actually untapped areas on the distribution side that you guys are targeting?

First, again, the Specialty business covers a broad group of services, specialty distribution is one of them. So again, I just want to remind you that in our mix, the programs that we do to support bio companies -- biopharmaceutical companies -- the programs that we're doing to improve practice management, the Pathways programs, these are all sort of a big part of our service model and specialty distribution is one of them. I think, primarily, here, it's about building scale and building presence. What has been happening lately is we're getting momentum and sort of momentum builds momentum, in a sense. And so I think we've made it very clear that this is a place we're going to be. We're going to compete effectively, and we expect to grow. I'm not sure that there are unique areas necessarily that people don't know about. I think it's largely about having the right relationships and the right practice management offices and taking advantage of those opportunities. But it is largely about building presence, building scale, and we'll continue to drive that.

Great. And just one quick one on the Pharma side. Obviously, there's some rather large and important generic launches in your fiscal '12. I was wondering if you guys had any incremental compliance programs or concepts that you're going to put in place, specifically, in relation to your retail independent customers to make sure that when they are buying these important generic launches that they are buying them through Cardinal?

Yes. I think the answer is yes. As you might understand, it's not something that we'd necessarily share in a public setting. But yes, we're very aware, obviously, of the big products in front of us. Our customers are very aware. This system is very aware. And so, we'll just want to make sure that our customers are in a position to be very effective in their delivery of key generic drugs to their patients. And we've got a lot of things working to create benefit for them and the ways to facilitate and incentivize.

Our next question comes from the line of A.J. Rice with Susquehanna Financial group.

Maybe first, just there's a lot of inputs here. I won't put pen to paper, as I'm sure everyone else will to try to come up with something. But any comments about overall margin expectations or bracketing expectations around the 2 main business lines, Pharma and Medical going into 2012?

It's Jeff. Good question. Without getting too specific, I think the reality is in order to achieve the goals we have for ourselves, a continued focus on margin expansion has to be there. And we need to continue to make it a priority for both Pharma and Medical. And virtually, all the things we're doing in both of those businesses are very much geared towards not only growing the top line, but perhaps, even more importantly, growing gross margin and growing gross margin rate and operating margin rate. So it'll continue to be a focus going forward, in both segments.

Okay. All right. And then just, I guess, on your guidance, you've, obviously, made a lot of progress in the working capital in the last 2 years. Are there any assumptions about further gains there? And you mentioned the credit facility being redone. Has that changed, meaningfully, your effective borrowing rate? Maybe those 2 data points.

No, it hasn't. And actually, we draw upon that credit facility very infrequently, usually only during brief periods of peak needs during quarters. So even if it was a dramatic change in the rate, I'm not sure you'd necessarily see it flow through the income statement. I will say, however, that in the new $1.5 billion facility that we negotiated, our -- both of our undrawn and drawn rates are lower than they were previously, which is great news, and I think reflects the growing and continued strength of our business. Regarding working capital, yes, we made some great strides in the past couple of years. I think, in total, we've taken somewhere between $1.1 billion and $1.2 billion of net working capital out of the business in total. Getting more efficient, our working capital will continue to be to be a focus, although I will say, given the growth projections that we have in certain parts of our business, like Specialty, like China, and some of the new customers that we have taken on that will drive growth, I would actually expect working capital next year, probably not to see the sort of gains that we've seen previously, and quite likely, will be a slight increase next year.

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

Two questions, I had. One, I think you mentioned independent market share is up or the growth is stronger than the market, I guess, even ex Kinray. So I'm wondering if you're seeing any particular regional strengths or if you can get any granular on maybe where some of that business is coming from? And then number two, I was wondering if you had any comments or wanted to opine at all on the LIPITOR possibility, of it going over-the-counter?

Okay. So Tom, it's George. Let me take the first one. I would have a hard time describing a particular regional distribution of our improvement on our independent business. I think our footprint is national. I would say our tools that we deploy, we deploy on a national basis. And I think our overall presence, our attention to this area of the business is done in a very broad-based way. So I would have a hard time pointing to any particular areas that stand out one versus the other. I think it's a broad-based -- on LIPITOR, that is a tough one to answer. You know that this has been a subject of discussion on some level for more than a decade. And it's a hard one to weigh. I would say switches are not easy. This has -- is a product with an enormous amount of data. That's sort of good news and bad news as some of them go through this regulatory process. So I would have a hard time really giving you a, I think, today, an incredibly well-informed answer, other than it is a product that, as you know, that statins in some markets are available either through a third class of drug or through some other mechanism without a prescription. But I'm not sure how I'd cap that. We're certainly not building it into our assumptions. We're assuming this remains a prescription product, and that come November, that there's a generic launch.

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

One question on the increased volumes from new customers. Is this exclusive to the independent market, or are you seeing new growth in other channels as well?

No, this is actually not just exclusive to the independent channel. We're having, through a good number of our businesses, some encouraging new business, and so it's going to be distributed to different parts of our business.

And that's true in both Medical business as well as the Pharma business.

And then secondly, when you put together the guidance, and you mentioned that you're assuming 2 generic manufacturers in LIPITOR on the launch, how do you think -- what are you factoring into your assumptions and what happens with the generic drugs after -- on day 181?

At this point, again, I'm probably not going to share all the details of our modeling, partly because that is still to evolve, Ricky. I think we can feel comfortable sharing with you our launch assumption, which is that there'll be 2 players in November. It is going to be very interesting to see what happens on day 181. As you know, they're not today, a large line of tentatives awaiting approval. So we're still working through our assessment here, as you would imagine, given the timing, this is not a particularly meaningful issue for us for our fiscal '12, but certainly, one that we'll provide more color on, as we feel like we get more information. And certainly, as it relates to '13, it will become more relevant.

Our next question comes from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C.: Just a follow-up question on some of the utilization comments you've made. If you look back over the last 3 months, have you actually seen utilization trends getting worse? And also, if you look across your Medical portfolio, where and what types of procedures are you seeing the most sluggishness in?

So this is George. I'll give you a little bit more color without going into too much detail. I would say, in the general medical business, it is not a noteworthy change. So if you look at hospital inpatient, outpatient procedures, small dips up and down throughout our Q4 or our calendar Q2. The doctor's office data in June was actually down more strikingly, but it was also up during one of the months of the quarter. So I -- we tend not to get too nuts about a month-to-month swing. We'll watch for longer-based trends. We look at it over a longer time horizon. So I would say, for us, we didn't see a material change, although, I'd say that the doc office numbers for June were lower. John Kreger - William Blair & Company L.L.C.: That's very helpful. And then my follow-up relates to pricing. You've had some nice -- sounds like new customer wins on across both of your segments. What sort of pricing dynamics are you seeing? And as that new incremental business folds in, is it kind of coming in, can we assume at an average margin or perhaps below average?

Well, it's hard to answer that. We have, as you know, so many businesses and so many competitive dynamics. Here's my general sense. On our Medical business, we've worked extremely hard at building out a portfolio of products and services for our customers that differentiate us. And so, the truth is, we're not leading with the price story. We're leading with the value story. We think that as pressure continues to build in the system, as more patients come in, and we have this population health issue driving more demand, that it's important for us to be able to demonstrate to our customer that the we can help them manage their cost. That's not just about price. That's about creating value through different tools, whether or not that's deploying OpEx people in a hospital, in an oncology office, providing practice management tools. So I would say for us, it would be hard to describe a unique pricing dynamic today in any of our markets. It's always competitive, but we work very, very hard at making sure that our lead is valued. And if we're going to continue to drive margin forward, that has to be the story.

I will say that the profitability in a particular account may be less linked to the actual upfront pricing and more linked to the range of products and services that they choose to buy from us and what we can offer to them. And I think what's particularly encouraging is that the more products and services that they buy from us, not only do we have better profitability, but the customer has lower overall acquisition costs and cost of managing the supply chain, so sort of a win-win for those customers.

Our next question comes from the line of Robert Willoughby from Bank of America Merrill Lynch.

George, you've changed the basis for presenting your earnings to the adjusted metric. Has management incentive compensation for the next fiscal year changed at all as well?

Basically, we'll just re-base each of the components. So from a net change, it has no impact on us, so we'll just recast all our numbers. We'll continue to drive other things based on the priorities you heard us talking about. We'll be driving off apples-to-apples comparisons. And anything else to add, Jeff?

Our target growth percentage year-on-year that we've been challenged with as a management team didn't change. It's just the target and the base year both came down. But the percent that we have to deliver is consistent.

I guess, my concern, Jeff, would be if you take out the amortization number, then maybe deal premiums are not being factored in as closely in terms of incentive compensation.

Absolutely not. First of all, if we do a deal in the middle of the year, we don't get to count that towards achieving our target for the year. Our target is based on a set of businesses that we had at the beginning. Secondly, one of the key measures for us is total shareholder return, and that takes into account all the elements. And the final thing I'd say is when we're evaluating a deal, the most important metrics to us are NPV and IRR and return on capital. And we haven't changed how we define those.

Our next question comes from the line of George Hill with Citi.

Maybe to hit on the Medical segment one more time and ask this another way. Is your assumption that commodity costs moderate in fiscal 2012, or basically that they stay flat or that they continue to deteriorate?

We've -- it depends on the commodity by the way. So we've assumed that over the course of the year, oil fluctuates between $100 and $105, and that was really based on the latest forward curves that we have according to the indexes that we look at. For latex and cotton we actually see a slight decline over the course of the year, even versus current spot. And clearly, versus the rates that we saw in FY '11, which was really spiked up during the middle of our fiscal year. And then there's a variety of other components, many of which oil derivatives that have their own index. And each of those is slightly different. Some are expected to deteriorate based on the index and some are expected to improve. So that, overall, $80 million gross headwind is really a weighted compilation of all those.

Okay. And maybe a quick follow-up. I don't know if you'll be comfortable discussing this, but on the dual source launch of the generic LIPITOR that's expected in November 11, given that impairment, do you have any -- would you be able to give us any color on where you expect the drug to launch in price, kind of with respect to discount reference with the AWP level?

Yes. George, that's probably not something at this point that we can provide color on.

Our next question comes from the line of Eric Coldwell with Baird. Eric Coldwell - Robert W. Baird & Co. Incorporated: You mentioned on the prepared remarks that Kinray is doing better than your original expectations, in terms of the accretion outlook. I'm curious whether you can talk about the dynamics behind that, whether it's account retention, cost reduction and efficiency, sourcing leverage, combination of the above. Maybe if you could help us get a sense on what's going better than expected there.

Sure, Eric. Why don't I start now, and then Jeff can jump in, if there's some things to add. I would say, the good news is largely all of the above. We told you from the beginning that customer retention was very important to our model. We've done extremely well, so we're really pleased with that. Our synergy work had turned out to be good. Our due diligence, I think, was pretty well done. And we've been able to achieve those numbers. And our team is executing very well there. We are still -- believe that there's more opportunity there, as it relates to integration, but it's really been sort of an across the board, a good story. And we're really pleased with the way it's unfolded. I don't know what you might want to, Jeff.

When we did the original model, the 2 biggest factors that we knew by far that were going to determine the success or not of this acquisition were customer retention and generic sourcing leverage. And in both cases, we're doing materially better than we modeled, and that really is what drives the economics of this deal.

Our next question comes from the line of Steven Valiquette with UBS.

A couple of questions here. I guess, first on the SG&A. If we ignore the segment breakdown for a moment and focus just on the overall SG&A in the income statement, it was a pretty big acceleration in SG&A growth in the back half of fiscal '11. I think, it was some 16% in fiscal 4Q, in particular. It's kind of hard for us to know for sure what's in COGS and SG&A when you talk about the segments. I guess, the question is what was the primary component that drove the SG&A growth in fiscal 4Q? And what's the way to think about SG&A expenditure growth in fiscal '12 and just in terms of normalized growth versus additional discretionary. And again, just ignoring segments, just overall SG&A, just trying to get a little more color, thinking about it that way.

Sure. Good question. And clearly, it's something we look at about very carefully, because remaining focused on limiting the growth of our core SG&A is clearly an important part of our business model. So we look at the total growth in Q3, we had SG&A growth of 11.5%. The vast majority of that was related to the acquisitions. In Q4, we had SG&A growth of about 16%, more than 50% of that was related to acquisitions. There were some other drivers, including increased EIT spend, which really reflects some of the investments that we've been making throughout the business in IT and just the year-on-year comparison of the expense portion of that. We also made some important strategic investments to accelerate the growth of certain of our businesses. In Specialty, for example, which we're still very focused on ramping up, this is an important investment stage. And we will continue to invest very aggressively there to make ensure that we deliver on our expectation. Likewise in China, we continue to invest to grow some of these new businesses. I will say that these new business units that I described earlier, where we're selling and distributing consumer health products to retail pharmacies, although we did ramp up spending considerably there to grow our sales force and management team, it actually was profitable in Q4 despite that ramp ups. And then, there were the usual things like bad debt reserves et cetera in Q4 that drove a piece of it. But it's a great question. And rest assured, internally, we look at each of these items very carefully and also strip some of this noise out to make sure the core SG&A growth rate in the business is as close to flat as we can make it.

Okay. And just one other quick question here. Just curious to get a little more color on what's driving the LIFO charge assumption in drug distribution in fiscal '12, especially in the year of big generic launches. So that does wipe out some $0.04 to $0.05 of earnings. Does this mean your expecting this be bigger brand drug inflation to remain quite high? Or I guess, what's driving that?

Part of it is and, explaining LIFO, which I just spent a great deal of time doing with our board. It's always a long story. But let me just spend a few minutes on it, because it is an important part of our business. Part of whether we have a LIFO expense really starts with the reserve with which we start the year. The past couple of years, we've been in a net LIFO debit position. And we're in a debit position, we actually don't record income or expense. It's only once we've switched to a credit reserve position that you begin recording expense or income. We started FY '11 with a net debit reserve of over $30 million, and we ate up most of that during the year, actually ended up the year with net debit of $7 million. So our cushion for error -- or cushion going into FY '12 is substantially reduced. It's technically 0. So that's probably the biggest reason why we're projecting some level of LIFO expense in FY '12. Because any movement from that will result in an expense. And then there's operational factors driving it with the addition of Kinray and the branded inventories associated with Kinray, that creates some additional LIFO exposure. And then we have to make certain assumptions regarding generic deflation and brand inflation and the level of inventories that we'll carry. Yes, I think you're correct in your assumption that if all else was equal, the fact that some big brands are going off patent next year may actually reduce our LIFO exposure, but all those other factors I just described also have to go into the mix and net net when we sort of ran our forecast we came up with a projection of between $15 million and $25 million. And that's really our best guess at this point.

Okay. And just one other quick one, if I can squeeze it in just on the drug distribution, you provided a revenue growth excluding acquisitions. Did you provide provide the EBIT or the profit growth in drug distribution excluding the acquisitions?

I did actually. Let me just -- so the overall Pharma segment growth for Q4 was 14%, and excluding acquisitions, it was about 18%.

Our final question comes from the line of Helene Wolk with Sanford C. Bernstein.

This is Zach Sopchack [ph] filling in for Helene. I just had a quick question on Yong Yu. It sounds like you had really good growth rates for Yong Yu for the quarter. I was just wondering how that compares to historical growth rates, and what you see for potential growth going forward? And then margins in the business, since it's got a very different business mix than your U.S. business, how we should think about margins and potential margin expansion?

I would say the revenue growth rate is comparable to, perhaps slightly above, what they've seen historically there, which reflects some of the increased investments we've made in the business, and the focus on it. And in an overall environment, that's doing very well as well. In terms of margin, as we said before, the Chinese business, just given the mix and the types of customers and just the maturity of the business tends to have a higher margin, both the gross margin and operating margin than what we see in our U.S. Pharmaceutical distribution business.

This concludes our Q&A session for today. I would now like to hand the conference back over to management for closing remarks.

Thanks to everyone for joining us today. I know this was a little bit earlier than you're used to having with us. And we appreciate your flexibility. We would just close by saying we appreciate all your support during the year. We're real excited about the period coming in front of us, very proud of the year that we just completed. But it's behind us and on to the future. So thank you for your time this morning and we'll look forward to talking to you soon. Thanks.

Thank you for attending today's conference. This concludes the presentation. You may now disconnect, and have a great day.