Cardinal Health, Inc. (CAH) Q1 2013 Earnings Report, Transcript and Summary

Good day, ladies and gentlemen, and welcome to the Cardinal Health, Inc. First Quarter Fiscal Year 2013 Earnings Conference Call. [Operator Instructions] As a reminder, this conference call is being recorded. I would now like to introduce your host for today's conference, Ms. Sally Curley, Senior Vice President of Investor Relations. Ma'am, you may begin.

Thank you, Kate, and welcome to Cardinal Health's first quarter fiscal 2013 earnings conference call. Today, we will be making forward-looking statements. The matters addressed in the statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to the SEC filings and the forward-looking statements slide at the beginning of the presentation 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 slides. I would also like to remind you of a few upcoming investment conferences and events in which we will be webcasting. Notably, our Annual Meeting of Shareholders at 8:00 a.m. local time this Friday, November 2, at our company headquarters here in Dublin, Ohio and the Credit Suisse Healthcare Conference at 8:30 a.m. local time on November 14 at the Arizona Biltmore Hotel in Phoenix. The detail of these events are or will be posted in the IR section of our website at cardinalhealth.com, so please make sure to visit the site often for updated information. We look forward to seeing you at the upcoming events. Now I'd like to turn over the call to our Chairman and CEO, Mr. George Barrett.

Thanks, Sally. Good morning, everyone, and thanks for joining us on our first quarter call today. I know that those of you on the East Coast are going through an extraordinarily difficult time and hope that your families and your homes are safe. I'll touch on this again after I cover our performance for the quarter. We're off to a solid start to our fiscal year 2013. Total revenue for the quarter was $25.9 billion, a decline of 3.4% from the prior year. As you know, we expected revenue to be down for the quarter and for the full year primarily due to the continued shift in dollars associated with the conversion of brand to generic drugs. Non-GAAP operating earnings increased by 6% to $469 million. Our non-GAAP EPS grew 11% to $0.81, up from last year's $0.73. Our Pharmaceutical segment delivered strong profit growth of 10% on a revenue decline of 4%. This revenue decline resulting from the generic conversions masked the positive sales growth from net customer wins and higher volume in Specialty Solutions. The Pharma segment realized significant margin improvement due to the robust performance under our generic programs and a result of our continued focus on customer and product mix. Medical segment revenues were up slightly versus the same period a year ago and profit declined by 6%. The profit contribution for medical was less than we expected for the period due to the impact of lower volume with existing customers, as well as the net negative year-on-year impact from our systems implementation we initiated in fiscal 2012. I'll come back to both of these subjects in a moment when I review the segments. First, the Pharmaceutical segment. Our Pharmaceutical distribution business continued its momentum coming out of fiscal year 2012. From a customer and product mix standpoint, we're seeing continued progress. Our non-bulk sales were 63% of total sales in the quarter versus 57% last year, which is helping to drive an overall improvement in margin. Pharmaceutical distribution profit was also fueled by the continued strength of our generic activities. According to IMS data, total generic utilization now accounts for almost 81% of total prescriptions in the United States versus around 77% a year ago. Clearly, it is important for us to be best-in-class in generics and our progress here continues to be encouraging. Our strong generic results reflect robust sales to our customers and strong response to new item introductions during the quarter. We continue to record solid performance and build strong relationships with our branded and biotech partners as we support their evolving business needs. Moving to Nuclear, demand in our low-energy legacy business continues to be soft as the number of nuclear cardiac procedures remains considerably below historical norms. With this in mind, we continue to review our service model, and as a result, we've pursued cost reductions and other efficiencies. In addition, we've made capacity adjustments to align with current cardiac procedure demand. Having said this, our Positron Emission Tomography or PET business continues to be well positioned for the future. We believe PET holds excellent promise and we are investing appropriately. We recently opened 2 new PET cyclotrons in Sacramento and Portland, with an additional site in Chicago expected in the coming weeks. As expected, our Specialty Solutions unit continued to deliver strong top line growth in the quarter, with revenue up over 70%. Profitability continued to be negatively affected by the loss sustained last year of some significant higher-margin consulting business. Specialty Solutions continues to build important partnerships and market share with health care professionals and payers. At the end of the quarter, we were serving nearly 650 oncology and urology practices, rapid growth as we enter our third year of the Specialty Solutions launch. Last week, we announced the Vital path integrated dispensing solution, a web-based automated medication dispensing system, which makes it easier for community oncology practices to improve medication safety, inventory and revenue cycle management. We are committed to helping our customers manage their practices so that they can stay focused on patients. In the payer space, we continue to increase our market presence through innovation, highlighted by the launch of our PathWare, clinical protocol and business transaction system. Turning to our Medical segment, revenues were up slightly as the increase from last year's successful acquisition of the Canadian Futuremed business was partially offset by one fewer sales day and lower volumes from our existing U.S. customers. As others have reported, procedure volumes for both inpatient and outpatient procedures have been soft, somewhat more than we had anticipated for the quarter. From a profitability standpoint, the quarter proved to be more challenging than we originally modeled for medical. Clearly, the volume softness was a large factor, and although our preferred products did grow by 4%, lower procedure volume muted the growth of preferred products, which generate a higher margin for us. I'll come back to preferred products in just a moment. Now a few words on our medical information systems implementation or MBT as we've been referring to it. As you know, last February, we went live with this very extensive transformation, the systems and processes by which we service our customers, manage our supply chain and generate information in our Medical segment. At this point, we had hoped to be through the transition and to be generating meaningful benefits, but with any undertaking as massive as this, the timeline has been difficult to predict with precision. I can report that the system is stable and we are achieving the key functionality we sought. I would also knowledge that the change management aspects of the transition have not progressed as rapidly as we had planned. Operational cleanup activity consumed a fair amount of our attention throughout much of the first quarter. This has resulted in some incremental costs and a deferral of benefit realization. Our organization is highly focused on realizing the benefits from this major initiative. We remain confident that a strong return will be realized for both our customers and for Cardinal Health. Now Jeff will provide a bit more detail in his commentary. Staying with our Medical segment, our improved clinical capabilities, focus on product mix and strategic partnerships fuel our preferred products offering. Despite what has been a challenging procedural environment in the quarter, we look forward to accelerated momentum here. We believe that customers increasingly appreciate the high quality and the value we deliver through these products. In this regard, our new integrated orthopedic solutions offering, launched in the fourth quarter of FY '12, is generating customer enthusiasm. Our health system customers recognize that we offer the ability to save costs through a new business model in the trauma arena that delivers high quality, but lower-priced orthopedic products, along with a specialized distribution and information services platform. Early signs tell us that customers are excited to have a new product and service choices in the very large orthopedic products space. North of the border, our Canadian business reported double-digit growth for both revenue and profit. The integration of Futuremed, our fiscal year 2012 acquisition, has gone smoothly and we are realizing accelerated synergies. Our business in China has also been going very well. Our revenues in China were up over 30% and we achieved strong profit growth. We will continue to execute our strategy of increasing market share by enlarging our geographic footprint through targeted acquisitions and creating new business partnerships, as well as building new growth platforms such as consumer health and direct to patient. It's been estimated that China's spending on health care could triple to $1 trillion annually by 2020, driven by an aging population and government efforts to broaden health care coverage. We believe that we can make a meaningful contribution in this market and participate in its extraordinary growth. In summary, we're off to a solid start to the year and we're reaffirming our fiscal 2013 outlook for non-GAAP diluted earnings per share of $3.35 to $3.50. Finally, with regard to the just announced decision by our Board of Directors to increase the dividend by another 16%, this decision underscores our commitment to a differentiated dividend, adds to the 10.5% increase realized in July and brings our anticipated annualized payout ratio to over 30% of non-GAAP EPS. These actions reinforce Cardinal Health's commitment to returning capital to shareholders while driving the underlying growth in the business. We will continue to pursue a balanced approach to capital deployment with the goal of creating sustainable long-term growth. Before I turn the call over to Jeff, just a few words about this extraordinary weather event and our Cardinal Health colleagues. I know that our teams have been preparing for days, but the storm hitting the East Coast is a frightening and dangerous one, one which is already taking its toll on many of them. This makes it all the more gratifying that so many are working under enormously trying circumstances to make sure that every hospital, every pharmacy, every clinic, every physician practice has the products and services it needs to take care of patients. To our people, our customers, suppliers and shareholders, be careful and be safe, and I'll turn the call over to Jeff.

Thanks, George. Good morning, everyone. My thoughts and best wishes also go out to everyone affected by the storm. Today, I plan to cover the drivers of our Q1 performance and key financial trends, and then make a few comments on our full year outlook. I'll also discuss our recent capital deployment actions. You can refer to the slide presentation posted on our website as a guide to this discussion. With our first quarter 11% non-GAAP EPS growth, I believe we're off to a solid start to the year. Our Q1 EPS growth was driven by 6% non-GAAP operating earnings growth, favorable interest and other and a lower share count versus 2012. Gross margin dollars increased 7%, with a rate up 43 basis points. Distribution, selling and G&A expenses also rose 7%, driven by recent acquisitions which are worth about 2 percentage points of this growth, as well as an increase in IT costs, including our Medical Business Transformation, investments in certain key strategic priorities and $10 million of higher relative deferred compensation costs year-on-year, an amount that is offset in our other expense line. Our consolidated non-GAAP operating margin rate increased 16 basis points to 1.81%. Interest and other expense came in $9 million favorable compared to last year, largely driven by the changes in the value of our deferred compensation plan that I just mentioned, as well as income related to an outstanding equity investment we hold. If you look at net interest expense only, that line was about $3 million higher in Q1 of FY '13 versus last year. Our non-GAAP tax rate for the quarter was 37.8%, which is consistent with our prior year's quarter and slightly higher than our expectations. During Q1, we repurchased $200 million of shares, including the $100 million we mentioned in our August 2 call. This brings our diluted average shares outstanding to 344 million for the first quarter, which is 5 million favorable to the prior year's quarter. At the end of Q1, we had $650 million remaining under our existing board approval. Now let me comment on consolidated cash flow and the balance sheet. Our Q1 operating cash flow was $568 million, which is above last year's amount. Looking forward, and as a reminder, we have previously called out 2 significant items that we expect to moderate cash flow this year, including the negative working capital impact of the nonrenewal of the Express Scripts contract and some large tax payments when we ultimately resolve past IRS audits. Our working capital days ended the quarter higher than the prior year due mostly to the impact of lending receivables related to our Medical Business Transformation and continued growth in China. Brand-to-generic conversions impacted both our inventory and payable space, however they largely offset. Now let's move to segment performance. I'll start with Pharma. As we anticipated, Pharma segment revenue decreased 4% to $23.5 billion for Q1 due to continued brand-to-generic conversion, which George mentioned in his remarks. This decrease was partially offset by sales to new customers and higher volume in Specialty Solutions. Of particular note, sales to non-bulk customers were up 7% for the period. Our generic programs continued to perform well, posting an increase of more than 20% versus the prior year. Our stores generics drove much of this increase. Brand inflation was about as we expected in the high-single digits. In Specialty Solutions, we continue to add new distribution customers, growing revenue over 70% versus the last year's quarter. Pharma segment profit increased by 10% to $400 million in the quarter, driven by the overall strong performance under our generic programs within Pharmaceutical distribution. In fact, we saw growth in both our base generic business, as well as a positive contribution from new item launches this quarter. We continue to see inflation on a few generic products in Q1, which more than offset the deflation on the balance of our generics portfolio. Segment profit margin rate increased by 21 basis points compared to the prior year's Q1, a reflection of the strength of our generics programs and our focus on margin expansion, as well as the industry's brand-to-generic conversions. As many of you are aware, while this conversion is dilutive to revenue, it is accretive to our margin. We also benefited from continued mix shift as our non-bulk customer percentage of sales reached 63% in Q1. But even with the in-customer categories, margin expansion was strong. In fact, margins were up across all customer class of trade within Pharmaceutical distribution. I was particularly pleased with Pharma's growth and margin expansion versus last year given the favorable $17 million impact included in last year's results for the resolution of certain manufacture-related disputes. As George already said, Nuclear had a challenging quarter due to volume softness in the low energy or SPECT market. While we have seen softness in the space for a while, the continued downward trend was below our expectations. We are taking appropriate actions internally to adjust our structure and platform to reflect the new environment. In Specialty Solutions, a downturn in our high-margin pharma services business, in which we disclosed the customer loss in Q3 of last year, continue to impact our year-over-year earnings comparison. All things considered, our Pharma segment performed very well again this quarter. Now turning to Medical, Medical's off to a slower-than-expected start this year in terms of revenues which are up slightly at $2.4 billion. Let me walk you through the puts and takes. Last year's Futuremed acquisition in Canada contributed 2 percentage points to the segment revenue growth rate in the quarter. Preferred products, over 20% of our Medical segment revenue, continue to be an important driver of the Medical segment sales and profit growth and a key strategic area for us. These items were partially offset by the impact from one fewer sales day in the quarter and lower volume from existing customers. We believe this volume softness is driven at least in part by lower-than-expected procedure volume. One final comment that relates to both revenue and earnings. Although we typically do not comment on specific contracts, given that the Department of Defense med-surg contract is already in the public domain, I will note the Department of Defense has reduced its order volume from what we were expecting, a decrease which we believe is related to troop reductions. Profitability in the Medical segment declined 6% versus a year ago due to a few factors. The volume softness I referenced earlier had an impact on profitability as well. The impact of the Medical Business Transformation was a headwind for the quarter, worth a net of about $10 million year-on-year when you consider both the negatives and the positives this period. We incurred $7 million of depreciation, some incremental expenses to refine parts of the system and ensure customer service and have small amount of lost profitability due to orders that may have been temporary placed with backup vendors during the period. Some of the benefit realization we're planning for also got pushed out as we work to ensure customers were getting product on a reliable basis and that the system and process changes were clearly understood. I'm happy to report that the functionality of the system is stable and both internally and externally, we are learning to use the system to its full potential. On the positive side of the ledger, as mentioned earlier, we did see continued earnings growth in preferred products and double-digit earnings growth in Canada. Commodities and foreign exchange were also of slight benefit during the quarter, in line with our expectations. Finally, I will remind you that in the first quarter of FY '12, we did incur some incremental expense related to the FDA Presource matter, which are not in this year's results. All in all, although Medical did not get up to the start we hoped, we are focused on taking the right actions in a still sluggish environment and we remain uniquely positioned across product lines and channels. We continue to target the double-digit Medical segment profit growth guidance for fiscal 2013 that we provided on our August 2 call. Now I'll provide some color on Cardinal Health China, which spans both segments. We once again posted strong double-digit revenue growth and now are beginning to approach an annual run rate well above $1.5 billion. Our local direct distribution business continues to outperform expectations, growing revenue at a rate of almost 90%. We're continuing to expand the product and service platforms, including agreements with medical device manufacturers and partnerships with more suppliers and consumer health to expand the offering in retail pharmacies. China continues to be a strong and exciting strategic growth area for us. On Slide 6, you'll see our consolidated GAAP results for the quarter, which includes items that had a negative $0.02 per share net after-tax impact. Included in this net $0.02 per share was the exclusion of $0.05 of acquisition-related costs, primarily made up of the amortization of acquisition-related intangible assets, which was offset by $0.04 of litigation recoveries related to legal settlements. In the same quarter last year, GAAP results were $0.05 lower than non-GAAP results, primarily driven by acquisition-related costs. Now let's talk briefly about guidance. As George mentioned, our full year non-GAAP EPS guidance range remains unchanged at $3.35 to $3.50. We still have 3 quarters ahead of us and lots of moving pieces as we consider the rest of the year. Within that overall context, I want to point out a few changes to our fiscal 2013 assumptions. Given the recent share repurchases I referenced earlier, we are revising our full year share count projection to approximately 345 million shares from the 347 million which we guided to in August. In addition, we're updating the previously provided guidance for amortization of acquisition-related intangibles to $86 million, to include a few recently closed acquisitions, although keep in mind that, that amount is excluded from our non-GAAP earnings. For the Medical segment, our current visibility into commodity and foreign exchange impacts is such that we now expect these items to be a net benefit to our year-on-year medical results, although there are still high volatility in these [ph] input factors due to market price variability. We are also targeting meaningful benefits from our Medical Business Transformation over the next 3 quarters. But given our slower-than-planned start in Q1, our original goal of net accretion for the full year may be a stretch to attain. Everything else remains unchanged. Finally, let's talk about capital deployment for a moment. Today, we announced a dividend increase of 16%. This decision was based on careful consideration of our balance sheet, capital deployment philosophy, shareholder feedback and desire to continue to augment total shareholder return. Our balanced capital deployment philosophy has remained largely consistent over the past 3 years. Today's announcements are a reflection of this philosophy and also recognize the need to evolve with the environment and our shareholders. For context, over the past 3 years, our strong earnings growth has outpaced our dividend growth. This 16% increase, when taken together with the 10.5% increase realized in July, brings our quarterly payout to $0.275 per share and reassess the anticipated dividend payout on an annualized level to more than 30% of our expected non-GAAP fiscal 2013 EPS. At the same time, we are reaffirming our goal to grow the dividend at least in line with our longer-term earnings trajectory from this new base. We also repurchased $200 million of shares in Q1 of fiscal '13. We will continue to proactively evaluate our capital deployment opportunities to maximize shareholder value. Finally, I do want to point out that in fiscal years 2012 and 2013, through dividends and share repurchases, we have returned or expect to return to shareholders more than 60% of our actual and forecasted operating cash flow. This followed fiscal 2011 a year in which we dedicated a fair amount of our capital deployment to selective strategic M&A. We believe this 3-year period really demonstrate our balanced and flexible approach, which is to return a substantial portion of our cash to shareholders while investing in sustainable business growth and maintaining the flexibility in certain areas to engage in selective acquisitions which fit with our strategic direction. So let me wrap up. I'm pleased with our overall performance this quarter, although admittedly we didn't arrive at the results exactly as expected. We still have some work ahead of us in a few areas. And our relentless focus on being best-in-class from a cost and capital efficiency standpoint will not let up. In today's health care environment, it's imperative that we demonstrate each and every day that we are taking waste out of our structures in a process through which we work with our partners both upstream and downstream. With that, let's begin Q&A. Operator, our first question?

[Operator Instructions] Our first question comes from the line of John Kreger with William Blair. John Kreger - William Blair & Company L.L.C., Research Division: George, can you maybe just expand on some of your utilization and volume comments in the prepared remarks? It's -- I think in the past, you guys have talked about volumes being relatively stable versus your expectations. It sounds like, at least on the Medical side, they were a bit lighter than you thought. What about on the Pharma side, how were volumes there?

Yes, why don't we start with the Pharma first. I think Pharma volumes were largely as we expected, very low-single digit increase, and Rx is up probably about as we expected. As a commentary, the Pharmaceutical part of the Health System is, in many ways, the most efficient. And so to the extent that there is sort of movement up and down in the system, I would expect the Pharmaceutical to be a little bit more predictable, and it has been. On the Medical side, it's probably been more choppy, and again, that's the word we've used before, and I probably say again, it tends to bounce up and down. If you look at, let's say, August surveys, outpatient visits were slightly up, inpatient surgeries were down a bit. And so when we look at the quarter -- overall, in the quarter, we saw inpatient surgeries being down. Outpatient were up -- were slightly up. So I would say relative to what we were expecting, office visits, for example, in September were down. So it's been really difficult to discern a pattern, but it was a bit lighter in the Medical side than we would have anticipated. John Kreger - William Blair & Company L.L.C., Research Division: And then a quick follow-up, particularly in light of the recent consolidation announcement on the ambulatory side, how do you feel about that part of your business? How is it doing? And is it still a strategic priority for you?

Yes it remains a strategic priority for us, largely, in that, we believe that the integration of the health system is going to require patients to be able to be followed throughout the continuum of care. So we now see a much -- a more highly attempt -- a greater attempt to coordinate care as patients move from acute care into ambulatory settings or surgery settings to physician's office. And you could argue the home as well. So strategically, it remains very important to us. It was a bit of a tough quarter for us on the ambulatory side primarily in that the MBT that, that transformation referred to, which required a lot of change management issues, was probably more challenging for small office practices than you might find for major acute care customers. We're asking people to make changes and they're probably less equipped. But we do expect that our renewed attention to generating business, rather than resolving administrative issues or invoicing issues, will get us back on track. So we continue to see this as a strategic area and we're doing some interesting work to grow that business.

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

So George, discuss the procedure volumes, one that caused the soft revenue in Medical or maybe softer-than-expected revenue in Medical? Your large acute care medical the 2 of you [ph] mentioned a lack of price inflation and they continue to talk about some pressure from the larger provider networks now on their ability to price. Are you seeing anything different on pricing? And I was wondering if maybe you could also comment on the progression of the consolidation that we're seeing at the provider -- on the provider level in Medical?

Yes, Robert, I would say that we were more surprised by some of the changes in utilization rather than in pricing. I think the pricing environment has been relatively consistent. It's competitive as we always expect. I think where we saw a bit more shift than we had modeled was just this balancing of volume and -- so that was a little bit less than we had modeled. But I would say, that was probably the more noteworthy issue for us during the period. As it relates to consolidation, I think we're going to continue to see a lot of movement in the medical space. As you know, there's sort of a large consolidation across different segments of health care. You're seeing it in the insurance world. We're seeing it in the health care provider world and certainly the Health System's world. So we'll expect to continue to see consolidation. For us, this is a familiar place. We're used to dealing with large integrated health systems. In many ways, it plays to our strength. And so not unexpected for us.

Just to follow up, just trying to understand the Medical segment guidance a little bit better in light of this quarter's results. So you guys are still expecting the double-digit profit growth. Is that because you know that specific costs there are going to fall away that will help that margin in the profit as we move forward? Or is there some expectations there around volumes picking up again? Just trying to get a better sense of the confidence in your guidance from here.

I'm not sure we're projecting a dramatic change in utilization or volume, but I think in particular, some of the issues around our first quarter where we really had to devote a lot of energy on making sure that the administratively, we were well aligned with customers on the changes. In a way, it took our attention away from driving new business, promoting the new products, driving our ambulatory settings. So we spent, for us as a business, probably more of our energy making sure the system was completely stable and that customers were being served effectively. And so I think our ability to get back to business will be very important for us. We also expect, I think, the continued growth of our preferred products will contribute to that margin expansion.

One other thing I've mentioned as we get towards second quarter and beyond, we do expect to get more benefit from the turnaround commodity prices. As I mentioned in Q1, that was a slight positive for the quarter. In fact, the commodity benefit was about $3 million benefit year-on-year. We do expect that benefit to pick up, at least in Q2 and Q3, which is the quarters that we're beginning to get some visibility in, although beyond that will still depend on how market prices fluctuate.

Our next question comes from the line of David Larsen with Leerink Swann.

The operating margin in the distribution division came in better than what I was looking for. And according to what we've done, it looks like it was a very good generic launch quarter. Can you just give a sense as to, do you agree with that and how you expect margins to trend sort of for the remainder of the year? Do you expect to be able to sustain that type of growth or was it really just a real good generic launch quarter relative to the rest of the fiscal year?

Dave, this is Jeff. I would say it was a good generic launch quarter. We had a number of, what I would say, smaller launches than what we experienced last year, but they added up to a fairly healthy number. And in fact, as I said in my prepared remarks, the total benefit from new generic launches in the quarter this year was actually slightly above last year, which is good and a little bit better than our expectations. But probably the bigger contributor over the quarter was really just our overall performance in the base generics business. We continue to work on penetration. We continue to improve our sourcing. We continue to see the benefits of the expansions we've made into retail independent and other generic sales we've been making. And we benefit from a lack of deflation. In fact, there was actually net inflation for the quarter. So I think all of those things contributed to our strong generics performance. I'm a little bit loathe to provide segment-specific guidance going forward, although I think a common theme you'll see this year is the continued strength of our overall generics portfolio. As we said when we gave guidance for the year, we do expect our overall profitability from generics to be higher in fiscal '13 than it was in fiscal '12. And we're doing -- everyone in our Pharmaceutical segment is doing what they can to ensure that performance continues not only this year, but beyond.

Great. So it sounds like it's somewhat sustainable.

Our next question comes from the line of Lisa Gill of JPMorgan. Lisa C. Gill - JP Morgan Chase & Co, Research Division: I just had an overall question on the acquisition environment, George. Can you maybe just talk about what you're seeing out in the marketplace right now? I think everyone is applauding your increase in the dividend. But as we think about the acquisition strategy, whether China or the U.S., how should we think about deployment in those areas? And what are the key areas or products that you're really looking to deploy from an acquisition perspective?

Yes, I think we've said relatively consistently that our goal is a sustainable growth model. We're doing everything we can, of course, with our existing portfolio to make sure that, that's happening, but we also recognize that an evolving system, we need to be very aware of the opportunities that might enhance that position for us to compete on the long term. And so we continue to be looking and looking very actively at opportunities to drive value for our shareholders through the right strategic acquisitions. We've highlighted areas, I think, for us that are important. We've talked about everything that grows our business and improves our mix in the retail space. We've done some things there over the past years to improve that. We've talked about how important preferred products are to us and so opportunities to look at moves that enhance our preferred product position. We're an important service provider to health care systems and we've done some small, sort of tuck-in moves to enhance our ability to serve health systems across the continuum of care. And so we've looked at areas in and around specialty, which as you probably know, covers a lot of territory depending on who you're speaking to and what specialty means, but strategically to us, this continues to be an important area and so we continue to look in there. China, of course, strategically, we believe, is an enormously important platform for us. So those are just some of the areas that we continue to look at, and we do believe that every great company has to be replenishing its portfolio, both through internal moves and stretch moves, but also now and again from external moves, and we'll continue to look for those opportunities. Lisa C. Gill - JP Morgan Chase & Co, Research Division: And so George, what do think is holding you back from making recent acquisitions? Is it price in the marketplace, I mean especially when you think about specialty, did the assets look very expensive? But is there something else? Is it not the right strategic fit? How should we think about what assets are available and what really fits into Cardinal Health?

Well, I hope you'll think of us as disciplined in the way we look at creating value for our shareholders. So we'll look at opportunities -- there are many businesses that may fall in a space that people regard as hot or exciting, but on deep examination, we might find that there's not enough value creation on a sustainable way for our shareholders. And so we look at virtually everything, but we'll take a disciplined approach to it. I think our perspective is, we want to make sure that if we acquire something, we add value to it. We're not just a financial instrument. We believe that we're a strategic health care provider and that -- service provider and that we'll want to make sure that whatever we acquire, that we bring something to the table. And so there are times where you find that, but the price may not be attractive for us and we'll just try to be very disciplined about our thinking here.

Lisa, this is Jeff. Let me expand a little bit further on the China situation, which is somewhat unique as you know. Since the original acquisition of Yong Yu almost 2 years ago now, we've actually signed 5 further, what I would describe as small-ish tuck-in acquisitions. Four of those have closed and the fifth is actually in the final approval processes and we expect to close later this year. All of these acquisitions, I would describe as relatively small. The total equity investment -- by the way, these are all majority portfolio and acquisitions as well, but the total equity investment totals under $100 million. Four of them are really part of our plans to expand geographically, to expand the number of major cities that we have physical infrastructure in. And I would say the fifth is in the category of rounding out our offering to the manufacturers, and specifically, it was buying a channel data management company that allows us to provide to the health care manufacturers much better insights into how their products are being distributed and utilized in the market. So those are the types of acquisitions that we continue to look at. We're being very selective. There's lots of assets in China but a relatively small number that we would actually consider buying, in part, because we want to make sure the cultural fit is right with our organization and they understand our focus on compliance and Western management, et cetera. But there are assets out there we continue to have good success in identifying them and we will continue to make these sort of acquisitions going forward.

Our next question comes from the line of Ross Muken with ISI Group.

So as we think about -- just going back to sort of specialty and then the growth areas have obviously been off of a low base and that sort of contrasts against what we've seen in Nuclear. I mean, in terms of your differentiated businesses there, I mean, how do you feel about how that strategy is coming together? Where are you putting more of your attention? Is it on continuing to sort of find new areas for Specialty? Is it sort of fixing some of the pieces in Nuclear that aren't working? Just trying to get a sense for where we should be focused.

So I would -- Ross, I would sort of distinguish the Specialty from the Nuclear space at the moment on as it relates to the way we're approaching it. Specialty is really a business that, for us, is just 3 years old, and so it's about building the platform, about building new tools, some of those technology-based, and about really exploring different business models that allow sort of this connection of the pharma company, the payer and the provider to connect. And we're actually having some very encouraging results there. So we've signed a number of new contracts, both on the provider side and the payer side. Of course, at the same time, we're building our specialty distribution. This probably tends to be a lower margin part of that overall mix, but I would say in general, we're actually encouraged by the growth there. We're early enough in our evolution to continue to really experiment with new models and we're doing a fair bit of that. Obviously, as I mentioned to Lisa, to the extent that we find the right opportunities externally, that sort of supercharge, that we would certainly consider it. But we're making some really good progress there. Our Nuclear situation is a bit different. We have inside the Nuclear business 2 different dynamics at work. One is our traditional legacy business which is in the cardiac imaging, which we're extremely good at, very efficient, really strong position in the market, very much a company that cardiac imaging centers depend on, but procedures have been down. So our key is about optimization there, it's about making sure we've got the right alignment, the right number of pharmacies and that we're building efficiencies. We actually invested in some technology to increase efficiency there. The second part of Nuclear business is really in the diagnostic space for oncology and neurology, and that's where PET comes into play. And while that's early and certainly a smaller business, we remain pretty excited about the evolution of what's happening in the pharma side. Certainly cracking the code on Alzheimer's has been challenging for everyone, but I think the opportunities in diagnostics around oncology and around neurology create opportunity for us.

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

Jeff, maybe you want to touch on the guidance a little bit. I think last quarter, you had made some comments on the segment side. On the Pharma looking for op growth, I think, in the mid-single digits. Is that still correct? And then on the med-surg side, I think in your comments you said that you still expect a benefit from the MBT here in the back half of the year, but that -- for it to be accretive, there's a little bit of stress. Does that kind of imply that we should assume op profit -- total op profit is still down year-over-year? And does that also include the impact of the med device tax?

Charles, I'm not sure I understood the second part of your question. Let me try to answer the first one and maybe you can repeat the second. I may not have just heard you properly. We didn't give specific Pharma segment profitability guidance for FY '13. We did indicate that we expected revenue to be down given the brand-to-generic conversions and the impact of the Express Scripts nonrenewal. And we also indicated that we expected a positive year-on-year contribution from our generics programs. I would say those statements are still very much intact. In fact, I'd probably say, based on Q1, we're slightly ahead of where we thought we'd be, really driven by the strength of our generics programs. So I would say, generally, our view of the Pharma segment for the rest of the year remains intact, although we're feeling increasingly bullish about where generics are coming out. But clearly, there's still lots here to go, lots of generic launches to happen or not happen, so I don't want too ahead of ourselves on that one. And Charles, maybe you can repeat your second question, please.

Yes, sure. On the Medical side, when we think about the puts and takes here with your expectations for the business transformation, how it ramps for the rest of the year versus some of the volumes, and I think the medical device tax starts ticking in next year, how should we think about overall operating profit growth or should we -- or decline relative to fiscal '12?

Now I get it. Thanks, Charles. So I would say our basic guidance for the Medical segment, which we gave in August really hasn't changed, in that, we still expect mid-single-ish digit revenue growth versus the prior year and are targeting double-digit segment profit growth versus the prior year. Those haven't changed. But some of the drivers of that have varied somewhat. For example, at that time, we did expect the Medical Business Transformation to be net slightly accretive net of the depreciation. I would say that goal now is probably a bit of a stretch and we may not be able to achieve that given the slow start we got to Q1. On the flip side, the commodity prices have moved in our favor over the past few months, particularly based -- related to latex and oil-based resins. So that will give us a bit of an offset to the shortfall on Medical Business Transformation and some pickup in the latter part of the year as I referenced earlier. Our assumptions regarding the medical device tax impact, which kicked in, in January, have remained about the same, we quantify that in the range of $13 million to $23 million. That's still the likely range, and we're working in Washington and elsewhere to try to get more clarification as to exactly how that will be applied. And our views on volumes, Q1 was a little bit lighter than we expected, particularly as it relates to procedural volumes. We would hope we would get a slight pickup from that in the last 3 quarters of the year but we're making sure that from a cost standpoint, we're ready for a range of outcomes in that regard. So those are basically the moving parts, but the basic guidance in terms of revenue and segment profit really hasn't changed.

Our next question comes from the line of John Ransom with Raymond James. John W. Ransom - Raymond James & Associates, Inc., Research Division: Just trying to understand the breakdown of volume. If you look at your Pharmaceutical distribution, would you say that your same customer volumes were up in the first quarter -- or excuse me, in the September quarter?

Honestly, that is such a hard calculation to make because of the brand-to-generic conversions. I mean, if you're looking at sales dollars, they're down, right? Just because of the sheer dynamics of the transition from branded products to generics that we're seeing. I would say, overall -- and again, keep in mind that our large retail customers, when we go brand-to-generic, may purchase a portion of their generics directly from the manufacturer, so that would impact our unit volume as well. But I would say our view of the overall industry volumes, if that's your question, is, I would say, fairly consistent with what IMS is reporting, sort of in the 2-ish percent growth range. When you cut out all that noise, that's a lot of noise, but I think our fundamental view of units is pretty consistent with IMS.

John, I'd probably add that given the distribution of our business, we probably are pretty good comparisons to the overall system. John W. Ransom - Raymond James & Associates, Inc., Research Division: Well, maybe asked another way, let's just take your non-bulk customers for a minute. If you were to look at your non-bulk customers, I mean, would you think your -- you mentioned that your revenues were up, so I assume your volumes were up and you're capturing more generics this year versus last year on the same customer non-bulk basis.

Yes, John, just to be careful, we rarely have a just bulk and non-bulk. Although, on the independent side, it is non-bulk, but in terms of our chain business, it is often a blend of bulk and non-bulk. So I just have to be just a little bit careful in using that as a barometer. I would say, our independent business -- actually all of our classes of trade, have gone reasonably well. Again, I don't know that -- and probably our generic penetration has been strong, but I don't know how best to characterize each account analysis that you're asking.

I mean, I would just summarize it, I think, generally, same-store sales when you adjust for brand-to-generic conversions and everything else, we're fairly robust with our non-bulk customers. And keep in mind that we had a significant customer win that came into effect April 1 of last year. So we're benefiting from that as well. And finally, keep in mind that our specialty volume also impacts our non-bulk rates. So all those factors helped drive that 7% increase.

Our next question comes from the line of May Zhan with Morgan Stanley.

I'm in for Ricky Goldwasser for Morgan Stanley. Can you just talk a little bit about the competitive environment, especially given the recent McKesson acquisition and just kind of give a little bit more detail there?

Well, we really have a number of competitive environments. Obviously, you mentioned the McKesson acquisition, which is an acquisition that's primarily in the office-based medical surgical supply area. We have our Nuclear business, we've got Pharmaceutical Distribution, we've got acute care. So we really, in many ways, operate in a number of competitive environments and they have their own unique characteristics. I guess as a starting point, I don't know that I would describe any noteworthy change that I could offer you versus our last conversation 3 months ago on an earnings call. Each -- and I've said this before, in many of our businesses, each customer situation has its own unique competitive set. But if you ask me, could I describe an overall general trend or a trend break as it relates to our competitive environments, other than the acquisition you just mentioned which is noteworthy, it would be hard to characterize. Obviously, in the medical surgical office-based area, the McKesson acquisition is noteworthy. Obviously, we continue to evolve our strategy in the ambulatory space and sort of believe that we have a bit of a unique situation there in that our portfolio of products and services, our presence across channels, positions us somewhat uniquely to be able to serve large health systems across their continuum of care, including physicians' office. But I would not describe a major trend break today or a particular trend that I could discern.

I was just going to say, I'm just looking at what are some of the key generic launches we should focus on for the rest of the year?

We generally do not forecast or speak to specific launches in the future. There's a lot of moving parts, as you know, May, as it relates to generic launches, and much of the discussion between us and our vendor suppliers can be proprietary. So we continue to see a solid environment. As Jeff mentioned, there have been some noteworthy launches during this past few months, including Singulair and Actos, 2 of the launches. But going forward, we generally don't provide a lot of guidance on specific product launches.

Operator, I think we've got time for one more question.

Okay. Our final question comes from the line of Eric Coldwell with Baird. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Largely covered a couple of quick technical ones. Bulk sales, can you give us the operating margin for the quarter?

Eric, we're trying to get out of the habit of providing the bulk and non-bulk rates on a quarterly basis for a few reasons. Number one, on a quarterly basis, they can fluctuate quite a bit, and it's not really representative of our longer-term trends. And secondly, it's not really the way we look at the business. That all said, I will say that both bulk and non-bulk rates were up in the quarter both versus last year, as well as versus the average of last year. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Got it. I didn't know if you were kind of pulling back some of that data given the Express Scripts change, but I guess we'll live with that for now. It looks like you made a few acquisitions in the quarter. Can you maybe tell us specifically what they were?

Yes. The only one of any significant note was the Dik Drug acquisition that we had announced last quarter. It actually closed in Q1 and that's what really caused the increase in our guided intangible amortization for the year. As you recall, that was a regional distributor based in the Chicago area that serviced primarily retail independents. That acquisition, now that it's closed and is being integrated, going extraordinarily well, I think both from a customer standpoint as well as the employees that we've taken into the Cardinal Health family. So we're extremely happy the way that's progressed. Eric W. Coldwell - Robert W. Baird & Co. Incorporated, Research Division: Okay. And then the last one is a little more strategic. CMS early in the month released detailed data on pharmacy acquisition costs and pharmacy revenues by payer type, subsequently pulled the data, I think it was literally within a day. But any ripple impact from that increased transparency? I'm just curious what you're thinking, and if you guys have had to kind of revisit any of your thoughts in terms of pricing or if your customers are revisiting thoughts on pricing now that all of the data became available, albeit briefly.

Right, right. Eric, this is George. We sort of said in the past that the implementation of a reimbursement mechanism like AMP, as designed, was likely to be problematic. That is, in fact, what's happened. The amount of variability in the data coming out of this made it unnavigable. So as a result, I think, this is going to take time to play out. So actually it doesn't really change our views because the transparency did not provide meaningful utilizable data. And so, as we expected, this would take some time to sort out and that the mechanism used here is probably not, at this point, going to be valid. And so that's not suggesting some kind of change for us.

That does conclude our question-and-answer session for today's conference. Ladies and gentlemen, thank you for participating in today's call. This does conclude the program, and you may all disconnect. Everyone, have a great day.