Cardinal Health (CAH)

Q4 2010 Earnings Call

August 05, 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

Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

John Ransom - Raymond James & Associates

Robert Jones - UBS

Helene Wolk - Bernstein Research

Steven Valiquette - UBS Investment Bank

Garen Sarafian - Citigroup Inc

Robert Willoughby

Lawrence Marsh - Barclays Capital

Thomas Gallucci - Lazard Capital Markets LLC

Vinit Sethi - Greenlight Capital

Eric Coldwell - Robert W. Baird & Co. Incorporated

John Kreger - William Blair & Company L.L.C.

Richard Close - Jefferies & Company, Inc.

Presentation

Operator

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

Sally Curley

Thank you, Noelia, and welcome to our conference call today. Because we will be reviewing our fiscal fourth quarter and year-end results as well as our fiscal 2011 outlook on today's call, our prepared comments may be a little longer than usual. Therefore, we plan to extend the call to end at 9:45 a.m. Eastern to allow plenty of time for Q&A.

Also 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 our presentation found on our Investor page on cardinalhealth.com for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures, and information about these measures is included at the end of the slides.

Before I turn the call over to our Chairman and CEO, George Barrett, I'd like to remind you of a few upcoming investor conferences in which we'll be participating and webcasting. Notably, the Morgan Stanley Global Healthcare Conference on September 13 in New York, the Robert Barrett Healthcare Conference on September 14 in New York, and the Stifel, Nicolaus Healthcare Conference on September 15 in Boston. The details of these events will be posted on the IR section of our website, so please be sure to visit that site often for updated information. We look forward to seeing you at one of these or other upcoming events. Now I'd like to turn the call over to George.

George Barrett

Thanks, Sally. Good morning, everyone. This morning's call offers me the opportunity to reflect on our first year, as what I'll describe for the last time, as the new Cardinal Health. It has been an important year for us in many ways, and this morning, I'll give you my observations about the year we just completed as well as my perspective on the year in front of us. I'll devote most of my commentary to the state of our transformation and our overall positioning, and let Jeff cover in detail, the numbers for the quarter and for the full year.

I will, however, start with a few numbers. We ended fiscal 2010 with non-GAAP EPS of $2.22, down slightly versus fiscal 2009 and considerably better than we anticipated back in August of last year. Full year revenue was up 3% to $98.5 billion. Our organization did an outstanding job managing our working capital, and we generated $2.1 billion in cash from operations. Overall, these were significant accomplishment, given the considerable strategic changes and investments we made on the business.

Some of you have asked me during the course of the year, how I feel about the extent and rate of our progress. As you know, we entered the fiscal year with a commitment to take action to improve our performance, our strategic positioning, our internal culture to shift our center of gravity more decisively out to the customer and, of course, our trajectory.

We also knew there were some systemic issues that we would have to weather, some mechanical challenges like the large year-over-year negative comp in generic launches. Having said all that, if you'd ask me a year ago, whether or not I'd be pleased with where we are today, the answer would clearly be yes. We've made enormous progress on our road to position the company for renewed growth, and we've moved the needle considerably faster than we had anticipated. This is still a journey, but I believe we have a lot to be excited about.

Certainly, it was not a year of perfection. We hate to lose a single customer and we lost very few. But in the earlier part of the year, we did fail to renew a few key customers on the Hospital side, as well as one on the Retail Chain side, and that was disappointing. We stabilized our margin rate in Hospital Supply, however, would have liked to have seen it moving up. And while we made enormous progress in our efforts to simplify the lives of our customers, we know we can do even better. Nonetheless, our customers are telling us that we're on the right path. Our employees are telling us that as well, that they believe in where we're going and are energized by the journey.

As we told you at the beginning of the fiscal year, our focus in FY '10 was on strengthening the core of our business, and we have done just that. In our Pharmaceutical segment, we renewed many of our largest chain customer contracts well into fiscal 2012. We also renewed and entered into new agreements with a number of very important large branded manufacturer partners. All of this is critical to stabilizing our Pharmaceutical segment base and putting us in a position to move margin in the right direction.

Pharmaceutical segment profit declined 3% for the full year. This performance was considerably better than we anticipated, driven by strong execution on key initiatives, some of which I'll cover in a moment, disciplined cost management and aided somewhat by the positive impact from some unplanned generic launches. We've placed a great deal of emphasis on our retail independent pharmacy channel, and after a patchy couple of years, we return this part of the business to full year growth for the first time, since fiscal 2008.

Just a couple of weeks ago, we held our 20th annual and largest ever Retail Business Conference for our retail independent pharmacy customers. Well over 4,000 stores were represented at the event in Denver. We launched a number of offerings designed to help pharmacists run their businesses more efficiently, including Order Express, which provides retail pharmacies with a more convenient and user-friendly online buying experience. Feedback from customers has been very positive.

We made great strides in our generic sourcing initiative, and we developed a highly attractive generic offering for our customers. As a result, we exceeded our full year improvement target of 10% in generic penetration or what we refer to as share of wallet. And our focus on driving sales force effectiveness through initiatives like our Sales College has provided us with additional traction and speed. We recognize that our sales reps are crucial to delivering an even higher level of service to our customers, and we continue to invest in their ongoing training and skill development.

We also reevaluated our Pharmaceutical segment portfolio and made a number of key decisions. We felt that the Medicine Shoppe network could be enhanced by providing an alternative model for our franchisees that moves them from a royalty-centric model to a more flexible fee-based model. We decided to divest Specialty Scripts and Martindale, and we made a meaningful move into the fast-growing area of Specialty Pharmaceutical Services. As we discussed previously, our goal was to enter the Specialty Service area in a differentiated way, and we're convinced that the acquisition of Healthcare Solutions or P4, as it is known in the oncology community, provides us with that platform.

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