Cardinal Health, Inc. (CAH)

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Cardinal Health (CAH)

Q4 2011 Earnings Call

August 04, 2011 8:00 am ET

Executives

Jeffrey Henderson - Chief Financial Officer

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

Sally Curley - VP IR

Analysts

George Hill - Citigroup Inc

Lisa Gill - JP Morgan Chase & Co

Ricky Goldwasser - Morgan Stanley

Ross Muken - Deutsche Bank AG

Steven Valiquette - UBS Investment Bank

Robert Willoughby

Thomas Gallucci - Lazard Capital Markets LLC

Albert Rice - Susquehanna Financial Group, LLLP

Glen Santangelo - Crédit Suisse AG

Lawrence Marsh - Barclays Capital

Robert Jones - Goldman Sachs Group Inc.

Eric Coldwell - Robert W. Baird & Co. Incorporated

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

Charles Rhyee - Cowen and Company, LLC

Unknown Analyst -

Presentation

Operator

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

Sally Curley

Thank you, Tanya, and welcome to Cardinal Health Fourth Quarter Fiscal 2011 Conference Call today. We will be making forward looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of the presentation, which can be found on the Investor page of our website for a description of risks and uncertainties. In addition, we will reference non-GAAP financial measures, information about these measures is included at the end of the slide.

Before I turn the call over to Chairman and CEO, George Barrett, I'd like to remind you of 2 upcoming investor conferences and events in which we will be webcasting. Notably, the Robert W. Baird 2011 Healthcare Conference on September 7 at 10:30 a.m. Eastern in New York and the Stifel, Nicolaus Healthcare Conference on September 8 at 9 a.m. Eastern in Boston. The details of these events are or will be posted on our IR section of the website, so please make sure to visit the site often for updated information. And we look forward to seeing many of you at these events.

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

George Barrett

Thanks, Sally. Good morning, everyone, and thanks for joining us for our fourth quarter and year-end call. Our fiscal 2011 was an important year for us. A year of outstanding accomplishments, exceeding all of our key company financial goals and making great strides on both operational and strategic levels. We continue to strengthen our core businesses, build new capabilities to accelerate growth and take strategic action to position us for the short, medium and long term.

I'll begin with a few numbers. Revenue for the fourth quarter was up 9%to $27 billion. And non-GAAP EPS was $0.59, an increase of 18% over the prior year period. Full year revenue was up 4% to $103 billion, and we ended fiscal 2011 with a non-GAAP EPS of $2.67, an increase of 20%.

Our organization did an excellent job managing working capital, generating $1.4 billion in cash from operations, while maintaining -- remaining committed to returning significant value to our shareholders through a differentiated dividend payout, share repurchases and maintaining a strong balance sheet.

Now, let me provide some color on each segment's performance in the fourth quarter, and then I'll return to some discussion on our full year results. Our Pharma segment had an exceptional quarter. Revenue increased by approximately 10%, and segment profit increased by 30% versus the prior year quarter, including the contribution from Kinray and Yong Yu. Both of these acquisitions performed very well, and their integration into Cardinal Health has progressed seamlessly.

Strong performance in our generic programs was a key driver in the fourth quarter. Overall, generic revenue growth was up more than 19% versus the prior year period, and sales in our Preferred stores program were up more than 14% with increases across all classes of trade.

Cardinal Health Specialty Solutions posted revenue growth of more than 30% over the prior year quarter as a result of continued growth in our legacy specialty businesses and a ramp up of P4 healthcare. And as we announced back in May, during the fourth quarter, we expanded our P4 Pathways agreement with Aetna to add Georgia, Northern Virginia and Washington D.C. to the program we launched in February in Maryland and Florida. And we entered the New York market with the addition of Independent Health to our Pathways program.

In our Nuclear business, fourth quarter revenue increased 6.5%, and while myocardial profusion imaging doses have continued to increase, following the fiscal 2010, technicium supply shortages, volumes have not returned to pre-shortage levels.

In the positron emission tomography or PET area, we continue to support numerous clinical trials with innovators in the science of molecular imaging. And we recently launched our state-of-the-art innovation laboratory in Phoenix, that we referenced on our earnings call last quarter. This facility is the first-of-its-kind collaboration center and will expedite the development of nuclear imaging agents that diagnose and treat diseases like Alzheimer's, cancer and heart disease.

Turning to Medical. This segment achieved solid revenue growth of approximately 7% in the fourth quarter, primarily from sales to existing customers across all channels. Although commodity cost increases led to a profit decline of 24% versus the prior year quarter, the underlying performance of the segment is encouraging.

There are clear signs that our channel and category management strategies are generating new business. In the quarter, we had some key wins, including the expansion of our business with Department of Defense and several large hospital networks or IDN, which will begin to contribute later in 2012.

In our Preferred products portfolio, we signed a record number of commercialization agreements with national brands in the quarter. Our category strategy better aligned us with customers and suppliers and will be a margin driver, going forward.

I'd like to take a few moments to comment on utilization, as it did dampen Medical segment profit growth in the quarter. We've indicated, over this past year, that we were continuing to model somewhat soft utilization over the near term, and we have not seen a material change. Procedure-driven activity remained somewhat sluggish for the period, and the results in the quarter for our Medical segment were held back by these dynamics. Having said this, the Ambulatory Care channel continued its strong growth, particularly in surgery centers, where revenue grew by double digits, in spite of the utilization dynamic that I just described. We did outgrow the physician office market, which has continued to be weak.

It is worth noting that our focus across selling effort between our Pharma and Med segments is bearing fruit. If we include this new Pharma sales, it would show up in our Pharma segment, physician office growth would have been close to 10%. In the lab channel and Canada, both grew by mid-single digits.

Our Medical Business Transformation initiative is on track for our pilot launch in October, followed by our national implementation in the second half of fiscal 2012. And we continue to expect a meaningful contribution to margins from this major initiative as we get into fiscal 2013.

Now let me provide more color on the full year. Over all, we had an outstanding fiscal 2011. We grew non-GAAP EPS by 20%, even with the commodity headwind of $60 million. We improved our gross margin rate by 22 basis points versus last year, driven by rebalancing our customer and product mix. We generated $1.4 billion of cash from operations. We strengthened our balance sheet despite deploying well over $2 billion in acquisitions and share repurchases. We increased our differentiated dividend by 11% in fiscal 2011, and in May, we increased it another 10%.

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