Cardinal Health Q3 2010 Earnings Call Transcript

Cardinal Health Q3 2010 Earnings Call Transcript
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Cardinal Health (CAH)

Q3 2010 Earnings Call

April 29, 2010 8:30 am ET

Executives

Jeffrey Henderson - Chief Financial Officer

George Barrett - Chairman, Chief Executive Officer and Chairman of Executive Committee

Sally Curley - VP IR

Analysts

Ricky Goldwasser - Morgan Stanley

John Ransom - Raymond James & Associates

Charles Boorady - Citigroup Inc

Thomas Gallucci - Lazard Capital Markets LLC

Helene Wolk - Sanford C. Bernstein & Co., Inc.

Lisa Gill - JP Morgan Chase & Co

Steven Valiquette - UBS Investment Bank

Richard Close - Jefferies & Company, Inc.

Glen Santangelo - Crédit Suisse First Boston, Inc.

Presentation

Operator

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Good day, ladies and gentlemen, and welcome to Third Quarter 2010 Cardinal Health Earnings Conference Call. My name is Karma [ph], and I’ll be your coordinator for today. [Operator Instructions] I would now like to turn the call over to your host for today, Ms. Sally Curley, Senior Vice President of Investor Relations. Please proceed.

Sally Curley

Thank you, Karma [ph]. Today we will be making forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the Forward-looking Statement slide at the beginning of the presentation, found on our Investor page of the Cardinal Health website, for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about these is included at the end of the slides. A transcript of today’s call is also posted on our investor website.

Before I turn the call over to Chairman and CEO George Barrett, I would like to remind you of a few upcoming investor conferences in which we will be participating; notably, the Bank of America Conference on Tuesday, May 11; the Citigroup conference on Wednesday, May 26; and the Sanford Bernstein conference on Thursday, June 3. The details of these and other events are or will be posted on the IR site of our website, so please make sure to visit that often for updated information.

Finally, as always, I'd like to ask you to please limit your questions to one with one follow-up in order to allow for others to also ask questions.

Now I'd like to turn the call over to George Barrett. George?

George Barrett

Thanks, Sally. Good morning, everyone, and thanks for joining us on our third quarter call. Let me start by saying that I'm very pleased with our performance during the March quarter, and our continued momentum throughout the first nine months of fiscal 2010. We continue to execute well on our strategic priorities as we reposition our business, and this is resulting in stronger bonds with our customers, better financial performance, and growing enthusiasm from our employees around our overall mission and greater optimism for the future.

For Q3, revenue was $24.3 billion, up 1% over the prior period. Non-GAAP EPS was $0.61, down 8%, while non-GAAP operating earnings decreased by 7% over the prior Q3 results.

Our overall operating performance was better than we originally expected. And I'm pleased with the progress we are making to deliver sustainable growth and value to both our customers and to our shareholders.

As a company, our results reflect solid performance in both segments driven by several key highlights. Significant ongoing improvement in our Generic business, of particular note is a further increase in generic penetration rate, or what we refer to as share of wallet; continued stellar performance under our branded manufacture agreements; strong performance in Nuclear, particularly given the ongoing global supply shortages; solid growth on our Medical segment’s preferred products; and excellent revenue and profit growth in Canada from new suppliers and products. We have also been very successful with our working capital improvement and had another a very strong quarter of operating cash flow.

Now let me comment on each segment separately, starting with Pharmaceutical. Continuing a strong momentum in Q3, our Pharma segment delivered strong performance and improving margins. Segment sales increased slightly versus the prior-year periods. The sales growth was in line with our expectations, dampened by the previously disclosed loss of two customers in the first half of this fiscal year. Segment profit improved, increasing 7% in the quarter versus Q3 of fiscal 2009. This was driven primarily by an increase in overall margin rates due to excellent performance in our generic initiatives, continued solid performance under our branded manufacture agreements and disciplined expense management within the segment as a whole.

As I mentioned earlier, we continue to see good progress in our Generics program, both on the sales and sourcing side. We have developed a highly attractive offering for our customers and they are responding enthusiastically. Last June, we set a target for ourselves to increase our generic penetration rate by 10%. We have already exceeded that annual improvement goal. And our customer loyalty scores further validate that we are on the right path.

We saw a healthy 10% increase in overall Generic sales this quarter, driven by continued progress in our retail independent customer base. And Generic sales for our Medicine Shoppe customers in the first nine months of the fiscal year have exceeded full year 2009 Generic sales.

We believe that improving sales effectiveness is key to further increasing share of wallet with our existing customers as well as capturing more new business. Our sales college [ph], launched earlier this year, take the best-practices approach to building these capabilities. It provides comprehensive on-boarding training for all new sales reps, as well as ongoing training for all reps and managers in an integrated curriculum model, positioning us to serve our customers with an even higher degree of satisfaction.

Additionally, several months ago, we began a purposeful cross-selling effort in the Ambulatory Care channel with our Medical segment sales force. While still early, this effort is beginning to deliver benefits to both our customers and to Cardinal Health.

It has been an unusual stretch for our Nuclear business, and I'd like to take a little extra time today to discuss this part of our Pharmaceutical segment. I'm extremely proud of what this team has done to manage an incredibly difficult raw material shortage. While supply constraints had an impact in overall volume, the team continued to take care of our customers and deliver solid bottom-line growth.

In response to the supply shortage, the nuclear team engaged several of our own Six Sigma operational excellence black belts to maximize the available product through just-in-time delivery, working closely with our customers to adjust patient schedules and calibrate delivery times, to help meet the needs of the most critical patients first. And where appropriate, customers have substituted a different imaging modality using thallium, a compound that we also supply.

Our people have been working around the clock to compensate for these extraordinary circumstances, and our customer loyalty scores, already at a high level, have actually increased during this difficult time, a testament to the trusted-advisor role that our team has earned with their customers.

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