Cardinal Health, Inc.
Q1 2011 Earnings Call Transcript

Published: 28 Oct 2010

[Operator:]

Good day, ladies and gentlemen, and welcome to the First Quarter 2011 Cardinal Health, Inc. Earnings Conference Call. My name is Janeda, and I will be your operator for today. [Operator Instructions] I would now like to turn the conference over to your host for today, Mr. John Frank, Director of Investor Relations. Please proceed.

[Company Speaker:]

Thank you, Janeda, and welcome to Cardinal Health's First Quarter Fiscal 2011 Conference Call. Sally couldn't be with us today due to a death in her family, which is why I'm providing the introduction to today's call. Today, we will be looking at 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 the SEC filings and the Forward-Looking Statement slide at the beginning of our presentation found on the Investor page of our website for a description of those risks and uncertainties. In addition, we will reference non-GAAP financial measures. Information about non-GAAP financial measures is included at the end of the slides. Before I turn the call over to Chairman and CEO, George Barrett, I would like to remind you of a few upcoming investment conferences and events in which we will be participating and webcasting. Notably, the annual meeting of Cardinal Health shareholders on November 3 at the Cardinal Health headquarters in Dublin, Ohio; 2010 Credit Suisse Healthcare Conference on November 10 at the Arizona Biltmore in Phoenix; Lazzard Healthcare Conference on November 16 at the St. Regis Hotel in New York; Cardinal Health Investor Day and Analyst Day on December 7 at the Hudson Theatre in New York. The details of these events are or will be posted on the Investor Relations Events section of our website at www.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 the call over to George. George?

[George Barrett:]

Thanks, John, and our thoughts go out to Sally and her family during this difficult time. Good morning, everyone, and thank you for joining us on our first quarter's call. Our fiscal 2011, or Q1 fiscal 2011, is up to a very good start. We reported revenues for the first quarter of $24.4 billion and a non-GAAP EPS number of $0.64, up 19% over the prior year period. And while we had a slight decline in overall revenues on a year-over-year basis, we generated a healthy expansion in gross margins and held SG&A essentially flat to the prior year. Our strong operating performance in the quarter was driven by excellent results in our Pharmaceutical segment, offsetting an expected difficult year-over-year comparison in our Medical segment. Overall, we continued our momentum coming out of fiscal 2010, strengthening the core of our business so we have a strong foundation from which to grow, with particular emphasis on margin expansion, disciplined management of working capital, growing generics at an accelerated rate and enhancing the customer experience. Our customer work is beginning to produce results as we look at our record of contract wins and renewals in the Medical segment and a continued strength with our retail independent customer base. We have a very strong balance sheet and continue to manage it carefully. And during the quarter, we demonstrated our commitment to a balanced capital deployment strategy. We increased our quarterly dividend payment. We completed the acquisition of Healthcare Solutions, and we repurchased $250 million in shares. Our operating initiatives are on track, and we continue our progress in positioning our company to deliver sustained growth. Now let me provide some additional color on each segment separately. Performance in our Pharmaceutical segment, and in particular, our Pharma Distribution business, really drove the company's overall operating performance in the quarter. Segment sales were down 1% versus the prior year period due to a drop in sales to existing bulk customers and the impact from the previously disclosed loss of two large-revenue customers last year. We will begin to lap those losses in the second half of fiscal 2011. Despite the slight decline in revenue, segment profit was outstanding, up 42% versus the first quarter of last year. And our segment profit rate increased by a robust 41 basis points. Our improved profitability was driven primarily by outstanding performance in our Generics business, various initiatives focused on improving margins and solid performance in our branded manufacturer agreements. We continue to build our capabilities and services to support our branded pharma partners. And as a result, these relationships are strong. As I mentioned, we had an excellent performance across our generic activities, both on the sales and sourcing side. Let me take a moment to provide a little more color on our progress in these areas. Our generic penetration continues to be a focus, and the team is executing exceptionally well in our source program across our retail independent customers and with our retail buying groups. The SOURCE program is our most comprehensive generics offering and includes nearly 4,000 generic drugs that make up, esentially, all of the retail pharmacies' product needs. SOURCE revenues was up a robust 34% in the quarter versus the first quarter of last year. We have improved our execution on generic launches and have continued to enlist customers in our First Script auto shipment program. Success with these generic programs is resulting in value for our customers, for our suppliers and for us. We also continue to make progress in our efforts to rebalance our business mix. Growth in our Retail Independent business continues to track ahead of the market, reflecting the emphasis we've placed in this channel in the past 18 months. And our churn rate at the end of the first quarter, which captures both controllable and non-controllable account losses, was the lowest it's been since we began measuring churn many years ago. Turning to Nuclear. The raw material shortages we experienced through most of last year did resolve in the first quarter, and supply began to return to more normal levels after a long and difficult period of time. Both the Chalk River reactor in Canada and the Petten reactor in the Netherlands were at full production by late September. Demand has not yet returned to pre-shortage levels, but we do expect to see this build over time. We have plans in place to help facilitate this ship with our customers in the coming months. In many ways, our relationship with our customers strengthened during the material shortages as we worked closely with them to ensure that the needs of the most critical patients were met first. We continued to expand our position in molecular imaging. And in our positron emission tomography or PET unit, we are now working on clinical trials for 17 new compounds. We've made excellent progress in the three quarters since we launched this initiative, and we are well positioned to support this PET bio tracers through post commercialization. We will plan to give you a more complete view of our nuclear strategy at our Analyst Day in December. We've made substantial progress on launching our new specialty division called Cardinal Health Specialty Solutions, which brings together all of our specialty capabilities within the Pharma segment, including specialty distribution, third-party logistics and cold chain management, drug development consulting and program management, regulatory and compliance services, risk mitigation strategies, medical billing and claims processing, sourcing and purchasing services and clinical pathways and treatment protocols. We achieved an important milestone this quarter, closing on the acquisition of Healthcare Solutions or P4 as it is known in the oncology community. Our P4 integration is on schedule, and as indicated previously, we expect it to be substantially complete by the end of the next quarter. We are building a world-class management team in our new specialty division, in addition to retaining the leadership of P4, including founders

[Jeffrey Henderson:]

Good morning, everyone, and thanks for joining our call today. Like George, I am very pleased with the results of the quarter and the momentum we have carried over from fiscal 2010. Q1 is an excellent start to our year. Let me add to George's remarks by expanding on some financial trends and drivers in the first quarter. I'll also provide some color to the full fiscal year outlook, including some of our key expectation from a corporate and segment standpoint. Let's start with the consolidated results for the first quarter, summarized on Slide 4. Despite a slight revenue decline, we delivered 6% gross margin growth and with the benefit of relatively flat expenses, leveraged out into 15% non-GAAP operating earnings growth. Non-GAAP operating expenses were up less than 1% as expense efficiencies largely offset the business expenses added to the net impact of acquisitions and divestitures. The Non-GAAP tax rate was 37.1%, largely in line with our expectation for the full year, but above last year's rate of 35.4%. We benefited from the $450 million in share repurchases we have executed over the past two quarters, including $250 million in Q1, resulting in a significant reduction in share count to just under 352 million diluted shares outstanding. Importantly, we continue to make real progress on our two key financial metrics