Good day, and welcome to the Cardinal Health Second Quarter Fiscal Year 2015 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the call over to Sally Curley. Please go ahead.

Thank you, Lisa, and welcome to today's second quarter fiscal 2015 earnings call. Today, we'll 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, found on the Investor page of our Web site for a description of those risks and uncertainties. In addition, we'll reference non-GAAP financial measures. Information about the measures is included at the end of the slides. I'd also like to remind you of a few upcoming investment conferences and events. We'll be webcasting our presentation at the Leerink Partners Global Healthcare Conference on February 12 at 08:30 AM local time in New York, the RBC Capital Markets 2015 Global Healthcare Conference on February 24th at 08:00 AM local time in New York; the Cowen and Company's 35th Annual Healthcare Conference on March 30th, 08:00 AM local time in Boston, and the Barclays Global Healthcare Conference on March 10th at 08:30 AM local time in Miami. Today's press release and details for any webcasted events are or will be posted on the IR section of our Web site at cardinalhealth.com. So please make sure to visit this site often for any updated information, and we hope to see many of you in an upcoming event. Now I'd like to turn the call over to our Chairman and CEO, George Barrett. George?

Thanks Sally. Good morning everyone and thanks to all of you for joining us on our second quarter call. I am pleased to report a very strong second quarter, bringing to completion an excellent first half of fiscal 2015. I'd like to take a moment to welcome Mike Kaufmann to his first quarterly earnings call as the CFO of Cardinal Health. Mike and Jack have worked closely during the transition and I appreciate their collaboration. Mike brings tremendous operating experience to our financial team and has adjusted quickly to his new role. Total revenues for the second quarter were $25.5 billion, an increase of 15% versus last year second quarter. We were pleased to see sales growth from both existing and new customers. Our second quarter non-GAAP diluted EPS was $1.20, up 33% from last year's $0.90. Remember that our same quarter last year included a $0.16 expense related to a tax item. When we adjust for tax item, our second quarter FY15 non-GAAP diluted EPS increased by a robust 13%. At the same time we returned $438 million to our shareholders through a combination of stock repurchases and dividends during the second quarter bringing the total amount returned to our shareholders for the first half of the fiscal year to over $900 million. Based on our results for the first half of fiscal 2015 and our perspective on the back half of the year, we are now raising our guidance to a full year EPS range of $4.28 to $4.38. As I typically do, I'll provide some color on the segments, but before I do that I'd to offer a slightly different perspective on being Cardinal Health. Our health system is going through significant changes, not the least of which is a continued blurring of the lines between healthcare…

Thanks George and good morning everyone. Before we get into the earnings discussion, I just want to say that it has been an exciting few months for me since becoming CFO. I've enjoyed not only leading the Cardinal Health finance team but also meeting with many of you, our investors and analysts. For those of you I have not met, I look forward to speaking with you soon. Now on to the quarter. As George mentioned, we are happy to report strong financial performance this quarter, and to be raising our non-GAAP EPS guidance. I will first walk through the drivers for the quarter's financial performance and then provide some insight into our expectations for the remainder of the fiscal year. You can refer to the slide presentation posted on our Web site as a guide to this discussion. I will start by talking about consolidated results and then go into more detail in my segment discussions. Non-GAAP EPS for the quarter was $1.20, an increase of 33% versus the prior year. As a reminder the prior year quarter includes a $0.16 charge related to a tax item. Eliminating this item non-GAAP EPS grew 13% year-over-year. Again this quarter revenues exceeded our expectations up 15% to $25.5 billion. Total company gross margin dollars were up 8% for the quarter but the rate was compressed a bit largely because of Hepatitis C therapies launched within the last year and some shift in the margin rates related to the recent expansion of our customer base. Total SG&A increased 6% versus the prior year, primarily driven by the impact of acquisitions. Consolidated non-GAAP operating earnings were up over 10% to $639 million or a non-GAAP operating margin rate of 2.5%. In the quarter net interest and other expense was $7 million higher, due…

Thank you, sir. (Operator Instructions) Our first question comes from Bob Jones with Goldman Sachs.

I seem to have couple of on Medical, trying to calibrate things here. I know you guys had mentioned incentive comp as a headwind in the quarter. Could you maybe just give us a sense of what the margin in Medical would have been of you adjust for incentive comp year-over-year?

This is Mike and thanks for the question. Really can’t go into details of what it would be adjusted, but I will give you a little color in that the majority of the comp that you saw pushed out into the Medical segment was in the area of 401(k) and that’s because that’s based on employees and as you know, a significant portion of our employees are in the Medical segment.

That's helpful. I guess just one big question around that then is as we think about where we are today in Medical on the margins, and moving towards at some point that long-term goal of 5.75%, just wondering if you can maybe help us think about the path to get there? And then if I could just sneak in one specific one, Mike, on the commodities. I believe you said it was a tail wind of $10 million to $20 million for next year. If I go back and look at your 10-K filing, it looks like the impact from a 10% move and the example you gave in your slides would have resulted in about a 30 million impact. I'm wondering if there was some changing [ph] in hedging between June and today.

Yes, thanks for those questions. I’ll talk about the commodities first and then I can go back to giving you a little bit more color on medical margins or George can do that. And as far as the commodities go, remember a couple of different things. First of all as I said, which is really most important, what we’ve seen over the last couple of years is all of the components of our -- of the items that make up commodities for us, they do not really track in tandem with crude oil prices anymore. While historically several years ago you would see that for the most part, you don’t see that any more. So that’s a really big driver for us as we track both current and future rates on commodities. Also -- you also know that when we did have those significant issues in the past, as you could imagine we took a look at our contracts with our manufacturers and really focused on trying to rework those contracts and relationships with the manufacturers, so that we would not see these types of ups or downs going forward in the future. And so that’s really what’s probably tempering your estimates of the numbers.

And Bob if I can -- its George -- maybe just touch base a little bit on the drivers as it relates to the goal of expanding margins in Medical. Let me just carve them out. Key growth areas will be the services around our distribution platform. So the traditional supply chain activities are now a much broader range of services that we’re beginning to offer. Those typically carry higher margin. Growth in our consumables, particularly our private label consumables, our physician preference items, I talked about wound management, I talk about interventional cardiology, I talk about trauma. Growth in these are higher margins. Growth in the Home is important to us. Again this is an area where we’ve seen excellent growth and expansion of margins. So the overall positioning of these activities really drives mix. Again I think remember, for example private label products now being driven in through our home strategy. So these are all expansive to margins. And then finally positioning with the key accounts in the system. So it's really -- a large component of that is both mix of product line and in some degree mix of customers.

We'll take our next question from Charles Rhyee with Cowen and Company.

Maybe if I can follow up on Bob's question, and maybe ask in a little different way. If we were to exclude the Canadian business out of the Medical segment, can you kind of give us sense on how that is performing over the last couple of quarters? Margin improvement and -- as you have been pushing out preferred products and the physician preference items?

Yes, I can appreciate the question but I really don't want to go into that level of detail on it. Again there are a couple of discrete items that we mentioned. It's really the Canadian business that is a big factor and a pushdown of compensation are really driving the Medical segment year-over-year negative performance.

Then maybe on the Canadian side, you talked about meeting with the team and you said you like the strategy they're kind of playing out to you. Can you maybe give us a little bit more details on how you guys are planning to tackle some of the issues here? I know you talked about more Cardinal branded products. But what is specifically there that we can hope to kind of get around some of the issues?

Yes. Thanks for that question. I did get a chance to actually go up there and spend some time with the team and I've had some involvement over the years with them. I think a couple of things on their mind. First of all as I mentioned, focusing on shifting where possible our Cardinal branded products, that's a big important piece. One other thing to remember is we are really the only distributor up there in the med/surge area that has reach of the entire -- of all of Canada. And so I think the team has done some really good things around leveraging our supply chain to be able to work with manufacturers to drive more opportunities up there. They're also as you can imagine looking aggressively at their cost structure and they're doing things with their management team and I've really liked where they have been able to bring some new blood into some really talented folks that are looking at the business differently. In fact I know our new CFO up there really came from one of our customers up there and really understands the business and is going to bring some new ideas to the table.

This is George. I might just want to add something to sort of back to where you started. We're not going to start to break out and pull out the pieces of the [indiscernible] business on medical, but I would probably offer this. When we look at our all of our strategic priorities, and we're doing pretty consistent metrics around our medical business, we actually see some very good signs, and it's actually been an operating according to our internal forecast. So our growth is strategic, accounts is good, consumables growth is good. The physician preference item strategy as we've told you is sort of a more mid-term driver of the business, but we actually like some of the underlying characteristics that we've seeing. We have seen over the years that traditional med/surge distribution has seen some pricing pressure over the years. But that's something that we anticipate and expect and we like the growth that we're seeing in the home. So when we look at the components that are making up this segment, we really like the way the pieces are going. Again we're going to have to absorb the changes that we saw in this Canadian mark and I think we'll also lap this -- part of it with the market change that we had to deal with.

And we'll take our next question from Glen Santangelo with Credit Suisse.

George, I just want to follow up on some of the commentary around generic price inflation. I think you seemed to suggest that maybe you saw slightly better inflation on generics sort of year-over-year. But I think you're moderating your assumptions in the second half of the fiscal year versus the first half. Are you kind of implying that maybe some of that was pulled forward? Could you maybe just flesh out a little bit more what you're seeing in the marketplace and how we should think about the trends?

Glenn, let me start and then I'll be happy to have Mike chime in and he's obviously been very close to it from his prior role. When we talk about moderating for the back half of the year, it's largely just a model at this point. We don't have perfect transparency on pricing. We have historical models. We do the best we can to use those to guide us going forward. We have in the interactions with the suppliers. But there is not something absolutely discrete perfect trend line that tells us what to do. We just thought the numbers in the first half were reasonably strong. And so what we did was we just moderated that somewhat in the second half, and that's the way to approached. But it's difficult to come to us a perfect number on this.

Yes. I can just add a little bit of color. So as I did mention, for the quarter as it relates to generic inflation, this quarter was slightly less than last year's quarter, as there was a year-over-year decrease in the contribution. As far as Q1 versus Q2, Q1 was a little stronger than Q2 in terms of rate. And you were right, you did hear me right. We do expect the second half of the year total generic inflation contribution to our bottom line will be moderated compared to the first half of the fiscal year.

Maybe if I could just follow up on capital deployment. George, you said all along that your preference is clearly to do strategic M&A versus share repurchase, but here we are halfway through the fiscal year and you’ve kind of already blown through your share repurchase target. Should we sort of read into that, that maybe you don’t see anything on the strategic M&A front that interests you, or maybe if you can just give us an update there on how we should think about capital deployment through the balance of the fiscal year, given where the leverage sits on the balance sheet?

Thanks, Glen. No, I don’t think you should read and anything into it actually. We are always looking at the most efficient way to create a great position for strategic growth. And there are moments where those opportunities are right in front of you and there are moments where they are not, but I don’t think I would read into it. We’ve done a small -- a couple of small moves in the physician preference item area over the last year -- last few months. And we’re always actively looking. It's just a matter of finding that opportunity you think drives the value you want and you have to have someone there decide really to do it at that moment. But I don’t think I would read anything into it.

We’ll continue to opportunistic where it makes sense on the share repo, but I guess -- maybe the only other thing you could read into is that we’re being disciplined and we’re going to make sure we pick the things that match to our strategic priorities and are at the right price.

Our next question comes from George Hill with Deutsche Bank.

Maybe, Mike, quickly on generic inflation, when you talk about the decreasing impact year-over-year, should we think about the decreasing impact as lower sell side margin contribution on higher generic drug prices or should we think about kind of lower carry on inventory that inflates? What's the right way to think about the contribution there?

I really don’t think I can go into a lot of detail on that. Let's see if I can help a little bit. As you know there are different ways you can make money on generics. There is obviously the difference between what you sell it at and what you buy at. So we’re always focused on that. And then obviously there is the appreciation on inventory when you have -- do have price increases. So there are a lot of different components including how you price, penetrating current customers, et cetera that improve our programs and drive margin. So to be specific how any one single margin bucket works would be difficult. And obviously our manufacturer contracts and discussions are incredibly confidential and competitive.

I guess some -- I want to make sure I understood the question George. I don’t think there is anything mechanical that we’re highlighting here. It's just the overall pricing environment. So I don’t think that we can -- if that’s a question it's a not a unique mechanical dynamic. I think Mike's just describing the overall pricing trend.

That’s helpful. And then maybe just kind of a quick follow-up on the Medical segment again. Just -- I don’t know -- I'm wondering is there any more color you can give us on kind of what would drive the rapid increase in the 401(k) contributions in that segment of the business compared to other segments?

So the best way to think about it is, is the way we look at compensation. We look at it is all of Cardinal. And so when there is overall performance from the business, then one of the biggest pieces that get funded first is our 401(k) program. And we don’t distinguish between our employees on whether they're in the M or the P segment when overall cardinal health is performing. And so since we had a strong first-half, it caused us per our internal guidelines to increase our accruals on our 401(k) and knowing that a significant portion of our employees are in the Medical segment, then those costs just get allocated to the Medical segment for the employees and their 401(k) contribution.

Our next question comes from David Larsen with Leerink.

Hey, can you guys talk a little bit more about the operating margin in the Pharma division. So I think you called out a couple of things; pricing, new customers and Hep C. So, margin I think decline by about 8 basis points year-over-year. Can you just give any more color on sort of what the -- like the size -- the buckets for each of those items that you called out and which ones have greatest impact?

I did get into a kind of detail, but clearly those were the two largest -- over 9 basis points of decline in margin rate and the two biggest drivers were just some new customers that we mentioned. As George mentioned we had one large mail order customer that tends to come in at lower margin rates. And then as I think you’ve seen from a lot of folks in the industry, the hepatitis C drugs have been doing very well. This is really important drug class and we too have seen significant sales of those drugs in our business. And because they come in at much lower margin rates than typical our average, they are lowering our overall margin rate.

So you obviously saw a good growth year-over-year in terms of dollars, I think up 12% year-over-year. So the mail order customer, such a new customer that came in at lower margins as a percentage of revenue? Is that correct? It wasn’t a shift just to mail? And then obviously the Hep C is new revenue at a lower margin rate, right? Is that correct?

That’s right. It's a new customer, that again being newer [ph] is mostly brand business and so it comes in at lower margin rate.

Our next question comes from Ross Muken with Evercore ISI.

This is Elizabeth Anderson in for Ross. I had a question about the Hep C -- the Hep C product as a percentage of your total sales. Could you provide a little bit more color on that?

Sure, our Hep C drugs as a percentage of our total Pharma segment revenues is less than 25%.

Okay. And in addition, I was just wondering if you could give some additional color on the early wins and challenges from Red Oak? I know you said that you have sort of 90% of first 5% of contracts. But I was just wondering if there are any more specifics you could give us on that?

Sure, let me just make sure on that, first one. Just to make sure I got it right. It's less than 25% of our growth, not less than 25% of our volume of drug spend. So just to be clear, the Hep C drugs were less than 25% of our overall growth for the quarter. And then as far as Red Oak goes, I guess all I can add to it is, I just continue to be impressed with the team. The leaders there, the executive team has done an excellent job of really blending together the employee bases. You could go there, and I think George has mentioned this the past [indiscernible] is some situation, you really can't tell who CVS or a Cardinal employee was, who came from the outside? And when I was at our Board meeting just recently, a lot of the executive management said the same thing, that they're having to remind themselves some of new people who came from where. So I think from a culture standpoint that's really important. And then also -- that's been really exiting is we were able to get all the people we wanted to transfer to go there. So all the key folks from CVS moved over there, as well as the key folks from Cardinal. And that really helped us get a really quick start, because we weren't training anybody. We had literally experts who have had decades and decades of experience in the generic business move straight over to Red Oak. So that's been positive. So again culture is going well, discussions with the manufacturers have gone well, and as I said we're at above 95% of the manufacturers moved over. So let me ask George to add couple comments.

Just one additional thing, because you asked about challenges. We were very focused on simplicity, and speed and clarity for the manufacturers. So one of the biggest challenges, it's an incredibly complicated system, but if you look at all of generics and trying to do all the trade terms and conditions with every manufacturer. So as Mike said getting through this many, given the complexity and then trying to come out with a program, that was really straight forward and simple, was a great challenge and I think the team did an amazing job of doing that.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

A couple of follow up questions here. First of all on the top line growth. Mike, I think you mentioned that Hep C was less than a quarter of growth, that's about 3% contributions. So when we parse out [indiscernible] the new customer is in the Hep C, what percent of growth do you think is Cardinal specific versus just overall market growth?

I can't get into real specifics, but I would tell you that we all I think have seen if you're -- we've all looked at IMS data. We've seen some really strong comparatively to the past numbers from IMS, in around that 1% to 4% range. Specifically over the last several months we've seen strong growth there. So that's obviously a contributor to our top line growth. But breaking it down between what's industry growth, how much is new customers, how much is existing, how much, because you have brands moving to generics et cetera, it would be really tough to parse all of that out. And then there is also lot of other things going on in the environment.

Ricky I want to make sure I understand your question, but again in general terms, our prescription growth was very good. As Mike said our unit growth in generics was very good, our positioning in the market was very good. And again the IMS data, last time it was 3 point something. So there is clearly some demand growth which is good in the system. Our position in the market is good. And so that is a good combination. So I'm not sure if you're asking about Hep C and whether we're disproportionately, and I was trying to make sure I understood that question. But I say again, for us think about it just, we've got a base of customers. Those Hep C products flow through different channels and we're present in all those channels.

I'm actually trying to understand what growth is, when you normalize for Hep C, right, assuming that over time will actually settle down?

I don't think we'd probably take any piece of business out of our business and say that's normal. I think this is now part of the base of the business.

Okay. And then on Red Oak, you said that 90% 95% [indiscernible] over. So when we think about kind of the contribution that flows through your P&L, how far are you in the ramp in the generic stage? Is what we've seen this quarter and we take that and annualize it for the reminder of the year or should we see sequential improvement over the next four quarters?

Ricky we're having a little bit of difficulty hearing you. If I got it right, as George mentioned I think I emphasized as we did see a ramp faster in this quarter than we had originally expected. So I guess I would tell you that. Now to try to describe with Q3 and Q4, we obviously still expect some ramp in the second half of the year compared to the first half of the year because every day we're signing up new vendors and transitioning suppliers, but obviously with 95% of them already moved over to the new contracting, you're getting close to where you could take Q2 and you're going to see it again ramp up over the next couple of quarters.

Again this is all built into the guidance.

We’ll take our next question from Lisa Gill with JPMorgan.

George, just following up on thinking about Red Oak and your opportunities with share existing customers, can you maybe talk about the Greenfield opportunity for customers that source generic products from Cardinal?

Yes, good morning Lisa. Yes, look we believe that we’ve got a unique model here and a terrific partner we're really excited with flowing, and I think as we look at the overall market of those who buy generics, we have started to see a little bit of change as companies start to consider the most effective way for them to source their products. Some companies who historically have sourced those products directly are reevaluating whether that’s the most effective tool for them and I think in some cases we’ve been able to demonstrate to those customers that we’re a very attractive alternative as Cardinal Health. So it's hard to size that opportunity for you, but I would say it's pretty clear that there are existing players out there who today are still trying to -- I am sure evaluate the most effective way for them to source products. We think we’re very attractive supplier to those and we have picked up some business in this area, and I think those are encouraging signs.

Is there -- asking it the other way, is there a number that you can give us as far as your existing customers that source and buy generics through you today? Is it greater than 50%, is it 90%? Just trying to get some idea of just even in your existing customer base, what the Greenfield opportunity is?

Yes, we would be able to give you that exact percent. I would tell you that every customer buys at least some generics from us. It's just whether -- what percentage of the generic spend they buy from us. Sometimes it’s in a backup position or in other times they'll buy a 100% from us. So, I would tell you that we still have opportunity to be able to do that -- to grow that going forward and -- but we’ve done a great job historically in penetrating a lot of the change, independence and even our hospital class of trade on their solid orals [ph].

We’ll take our next question from Eric Percher with Barclays.

Maybe I’ll start by following up. You just mentioned you’ve been able to penetrate even independents in hospitals. I'm curious, you’ve brought on a mail customer recently that you spoke of, that is probably quite a bit smaller than your sourcing program when it comes to purchasing. So is there a value proposition even where you wouldn’t be taking over the fulfilment of the products?

Yes, absolutely. We think we offer really great solutions Eric, not only in terms of the potential to save money in terms of cost, but also in the terms of our quality of the products, the supply, the way we work with the customer. And so, we’ve a lot of components of our program that we’re going to work with each customer. Now that being said, I can’t speak for any of one individual customer and they may have various reasons why they may choose or not choose sourcing from us, but we think we have as competitive or more competitive a program than anybody else. I'm out there and then we do see opportunities going forward or working with our various customers who are not buying a 100% of the generics from us.

And then my follow-up would be on Canada, and you may have covered this when we first started talking about the issue, can you just remind me in simple terms what the issue has been? Is it competition, volume, pricing related? What is that work there?

Yes, it's been a couple of things. Generally overall I would just say it's really market pressures, and those market pressures, a lot related to reimbursement in the environment have driven a lot of behaviors as you could imagine, less purchases of capital equipment, utilization, all those types of things, pricing pressure is on there. So it's really reimbursement pressures in the market have put a lot of pressure on that business and it has forced them to relook at their model and work with their customers in different ways.

Our next question comes from John Kreger with William Blair.

George could you give us an update on how the China business is doing and what aspects of that business are gaining the most traction?

Yes, it's going well. We mentioned that we had significant double-digit growth again in China. All the components of business are growing. Our distribution platform continues to expand. We have continued to provide some wrap around services with those customers, building out those capabilities, more marketing presence, which has I think been an exciting potential. Our geographic reach continues to expand and we continue to expand the number of the direct-to-patient pharmacies, probably in and around 30 at this point. So -- and the product lines that we’re carrying is now bigger on those pharmacies. So it's not unusual for us to carry double-digit number of products in those pharmacies; all good news because it expands our touch points to the patient, reinforces our relationships with our biopharmaceutical partners. So we’re encourage by the continued growth in China and we see it as a really exciting market.

And then maybe a quick follow up. Can you remind us how the Henry Schein alliance will flow through the P&L? Did that have an impact on the quarter to support it or will it mostly….

So essentially what's going to happen is the sales that used to be reported through a part of our Medical business which was in ambulatory, those sales will ship to Schein? We will see our value coming through the gross margin line and our products flow through their channel. So that's the basic mechanics. And you would not have seen any value in the quarter completed.

And obviously our sales reps obviously moved over to Henry Schein. So revenue expenses moved over to Henry Schein and obviously the margin will generate that but that's going to be more than offset. As we said this will be accretive. So it's by the margin that we will make on our sale of products to Henry Schein.

We'll take our next question from Dave Francis with RBC Capital Markets.

Down on a couple of questions asked earlier. George and Mike, can you talk a little bit more about the drivers that you're seeing from your chair on what's creating the current pricing activity on the generic front? Is it push back from insurers or the retail folks in the chain or other folks in the supply chain that are kind of equalizing the supply demand dynamic, or is there something -- other factor at play that's causing a moderation in pricing on the generic front.

Yes, I'm not sure that it's a single factor, and again Dave, it's hard to say, to describe a trend. I think we've talked at times about the conditions that we saw that probably led to some of the increased prices. I would say systemically we're not seeing a big change in that. So it's really individual behaviors. These are all individual products. You have to remember that when we talk about the pricing movement, the biggest swings that have occurred over the last couple of years are on hundreds, not thousands of products. And so I'm really discrete to the individual supplier and their product line, and so I wouldn’t say the overall conditions of the market have necessarily changed. We're just -- based on just some data we have and we saw in the first half, we just decided that in our model we would moderate that second half. But as I said before, it is extremely difficult to project this, because it really is individual companies with individual product lines.

As a follow up, going to the capital deployment side of things, you guys have quite a few different strategic development efforts going on across both product lines and geographies. Is it possible to try and tease out from you a little bit more about where you see more specifically in the different areas that you're looking at better options than others relative to putting capital to work on the acquisition front.

It's a good question. I wish I could answer it fully for you, which of course I can't, in terms of what we look at. But let me just highlight the priority areas. Certainly where we can build scale in our pharmaceutical business and particularly around generics, it's always effective. Those opportunities don’t come up every day. But those are my high priority. Specialty continues to be an area of high emphasis. We believe that you'll continue to see the growth of specialty biopharmaceuticals and products that address unique patient populations. And so we continue to look in that area. Everything around the IDN hospital services for us is important. Many hospitals are beginning to look, particularly given some of the changes in reimbursement and even some of the news coming out of HHS this week, looking at bundled payment models. Some of the area that used to be revenue drivers in a different model could become constant, and so the opportunity to provide those services might be areas we look. Consumables -- the ability to grow our consumable and our physician preference items, clear priorities for us. The home -- activities around the home and China, those are all areas that we've talked about as high priority. You guys know the system there. Some of those areas that have many, many more activities and more players and there are others that have fewer, maybe more highly consolidated, et cetera. So those are sort of priority areas. We're looking at all of them, pretty much all of the time and the opportunities will come when they come.

Our next question comes from Steven Valiquette with UBS.

So for the medical segment, I guess as we move further into calendar '15. Are there any signs at all or any buzz still within the industry about accelerated patient volume growth for your hospital customer base related specifically to health reforms. There still seems to be some mixed views on this within the investment community for the hospital sector in particular.

I think mixed use is probably right. There are some clear signs, and CMS at this point I think is saying enrollment is close to 10 million at this point coming through the ACA. It's very difficult to tease out exactly what the contribution is in a hospital setting. In think we certainly -- as we look at our pharmaceutical business and we look at prescription centers, there's certainly some indication and it's more intuitive than anything else that there are more patients in the system. And I think it's reasonable to assume that more patients covered have some impact on the hospital side. But it's much harder to tease out, partly because we're seeing some shift in channel behavior. So it's not like you have one system. When you have moving for example from an acute care setting to an ambulatory setting, you can see a shift in volume. So it's much more difficult to tease out the exact total volume impact of the Affordable Care Act and how that floats through the acute care centers, because we're seeing sort of a natural shift in delivery of care where it's being delivered. We’re also seeing a little bit of shift of market-share among players, given some of the network design issues in the system. So it's a little bit difficult to tease that for you.

And you actually hear your customers talking about there or is it just sort of a quiet on that front right now?

No, you actually hear views from different customers. So there are some that are [indiscernible] that they're seeing increases and some that are not experiencing quite as much. So as you describe mix signals, it's probably a little bit of an accurate description.

Our next question comes from Garen Sarafian with Citigroup.

So I'm trying to get a better idea of how conservative your guidance is putting Nexium aside. So as I think about it, Pharma sales were very strong of a -- maybe incrementally lower margin from Hep C. The Red Oak contribution is ahead of schedule. There is now slight commodity tailwind. But guidance has to be raised roughly by the amount of the beat [ph] from litigation. So is the offset from Canada incentive comp that might not have been fully baked in before? Is that the right way to think about it or is there anything else to consider?

Well, one thing that I consider remember is the tax rate is an important driver. I'm not sure how the litigation piece would affect. It's really -- and that was in GAAP, not in our non-GAAP numbers. And so I'm not sure how that would effect, but tax rate is one thing to consider. Remember last year we also had a minority investment income in Q3 that we had talked about. That’s not expected to repeat in the second half which was a large number. We did expect the Canadian pressures to continue to happen throughout the rest of the half, and while we’ve said Red Oak started a little sooner, that doesn’t mean necessarily that it's going to get a lot bigger into Q3 and Q4. It just came a little bit sooner.

Again, I'm going to just jump in here for second. Again I wouldn’t comment on how conservative or not conservative our guidance is. I'd say that we’re performing very well right now in general, and so we feel very good about the first-half and actually pretty excited about the second half of the year. So our guidance was increased. We feel good about that and again, we'll leave it to others to judge whether or not it was conservative or aggressive. But we like our positioning and we’re pushing ahead.

And we’ll take our final question from Eric Coldwell with Robert W. Baird.

Can you hear me? A quick one here off topic related to foreign currency. I didn’t hear a lot about that today. I'm curious about the impact overall of course specifically in Canada, with the Canadian dollar we gained about 17% in the last six months. Two is on the impact to the medical surgical segment and if you can talk through some of the dynamics on revenue and profit dollars related to that? Thanks.

Yes so I’ll give you a little bit of information here. First of all, we did realize a smaller benefit from FX in Q2 than we did in Q1, but again it was minor. Our assumption for the remainder of the fiscal year is really some modest upside to -- with FX and that’s already built into our guidance. The thing you have to remember on FX that makes it unique is because we operate in some countries but we buy in others, you have the impact that one could be a positive, the other one could be a negative. And so the net, if you really want size, it's very small at this point in time.

Eric or the operator, do you have a follow-up?

And that does conclude the question-and-answer session, I’d like to turn the conference back over to Mr. Barrett for any additional or closing remarks.

With that, thank you all for you questions and I very much appreciate all of you joining us on today’s call. We look forward to speaking with all of you later. Thanks.

And again that does conclude today’s presentation. Thank you for your participation.