Nov 5, 2007
Executives
Bob Reflogal - Vice President, Investor Relations Kerry Clark - President and Chief Executive Officer Jeff Henderson - Chief Financial Officer Dave Schlotterbeck - Chief Executive Officer of Clinical andMedical Products
Analysts
Larry Marsh - Lehman Brothers Eric Coldwell - Robert W. Baird Tom Gallucci - Merrill Lynch John Kreger - William Blair Lisa Gill - JPMorgan Randall Stanicky - Goldman Sachs John Ransom - Raymond James & Associates Robert Willoughby - Banc of America Securities Charles Boorady - Citigroup
Operator
Good day, ladies and gentlemen, and welcome to the firstquarter 2008 Cardinal Health Incorporated earnings conference call. My name isLauren, and I'll be your coordinator for today.
At this time, all participantsare in listen-only mode. We will conduct a question-and-answer session towardsthe end of this conference.
(Operator Instructions) I'd now like to turn the presentation over to your host fortoday's call, Mr. Bob Reflogal, Vice President of Investor Relations.
Bob Reflogal
Thanks, Lauren. Good morning, everyone, and welcome toCardinal Health's fiscal 2008 first quarter conference call.
Our remarks todaywill be focused on the company's consolidated and business segment results forthe quarter, which are included in the press release and attached financialtables. If any of you have not yet received a copy of our earningsrelease or the financial attachment, you can access it over the Internet at our"Investor" page, at "www.cardinalhealth.com."
Additionally, there are a handful of slides that we will be reviewing, whichcan also be found on the website. After the formal remarks, we will open up the phone linesfor your questions.
As always, we ask that you limit yourself to one questionat a time. During the course of this call, we may make forward-lookingstatements.
The matters addressed in these statements are subjects to risks anduncertainties that could cause actual results to differ materially from thoseprojected or implied. Please see our press release and SEC filings for adescription of those risk factors.
In addition, we will reference non-GAAP financial measures.Information about these non-GAAP measures is included at the end of thispresentation and posted on Cardinal Health's "Investor" page. At this time, I would like to turn the call over to KerryClark.
Kerry?
Kerry Clark
Good morning everyone. Before I get to our Q1 results, I want to mention theannouncement we made this morning about a management change in our HealthcareSupply Chain Services sector.
Mark Parrish will be leaving the company, andJeff Henderson, Cardinal Health's CFO, will serve as interim CEO of thissector, while we conduct an external search. We have a focused agenda to improve our performance in thissector, and both Jeff and I are already very involved in supporting ScottStorrer, who joined Cardinal Health in May, to lead our Supply Chain-Pharmabusiness, and Mike Kaufmann, who was appointed in February to lead our SupplyChain-Medical business.
Jeff is here with me this morning. Dave Schlotterbeck, CEOof our Clinical and Medical Products sector, is on the phone from our CMPheadquarters in San Diego and will be available for Q&A.
We have a lot to talk about this morning. So let me getstarted by providing my perspective on the quarter and the year.
Overall,Cardinal had a solid quarter, with sales up 5%, operating earnings up 9%, andEPS up 15%. Our non-GAAP guidance remains unchanged for fiscal '08, at 3.95 to4.15, which translates into EPS growth of 15% to 21%.
As I look at Cardinal Health overall, I believe, we have avery strong business model in a vibrant and growing industry. We aredifferentiated by our portfolio of technologically superior, high-growth andhigh-margin Clinical and Medical Products in one sector and our Supply ChainServices that deliver excellent cash flow in a growing market in the other.
Wealso have very strong long-term relationships with premier partners andcustomers throughout the chain of care. During Q1, we met our expectations in three of our foursegments, with strong momentum in clinical technologies and services.
InMedical Products and Technologies, the VIASYS integration continues to be aheadof plan. And we are making good progress on the turnaround of our SupplyChain-Medical segment.
However, we performed below our expectations in the SupplyChain-Pharma segment. We foresee this continuing through Q2, but we expect toreturn to target performance toward the latter part of the second half.
We see two factors influencing this performance -- first,dynamics in both our traditional and radiopharmaceutical markets, and poorexecution on our part. Let me expand on each of these.
As we said in September,we continue to see some near-term market factors dampening the traditionalpharmaceutical business. For example, the rate of pharmaceutical sales growthis slowing.
There are timing differences in branded price increases,when compared to last year. And there are fewer generic introductions andaccelerated generic deflation in the first half of our fiscal year.
Butimportantly, our topline growth and operating margins are not meeting ourexpectations, because we have not been executing as well as we should be. We had some business losses last year that we had expectedto offset this year, but did not.
This has depressed our core direct-store-doorgrowth. We did not get the planned levels of generic penetration, which isimpacting our generic sales growth.
And we have not adjusted our costs asquickly as we should have, given the impact of recent contract repricings onour gross margins. In our radiopharmaceutical or nuclear pharmacy business,which today accounts for approximately 10% of Supply Chain's Pharmaprofitability, we have been experiencing competitive pressure on Cardioliteprior to the launch of generic sestamibi next summer.
In addition, there hasbeen a slight slowdown in cardiac imaging procedures. But again, we have beenslow to adjust our cost structure as quickly as we should have.
As a result of these factors, we now forecast segment profitfor Supply Chain-Pharma will not meet the 7 to 10% target range for the year,primarily because of Q1 and Q2 issues. Jeff will help quantify each of thesefactors for you in his remarks.
However, as I said earlier, we are reaffirming our full yearEPS guidance. We are forecasting an improved picture in the second half, as anumber of factors will come into play.
In pharma distribution, we are expecting a significantincrease in generic introductions that we expect will increase our margins,particularly in Q4. It is encouraging to note that calendar year '08 isexpected to be a good year for generics with approximately $20 billion in totalbranded patent expirations.
And of course, we are improving our operations andmarket execution. As I mentioned earlier, we have made a management change inour Healthcare Supply Chain Services sector.
In the Supply Chain-Pharmasegment, under Scott Storrer's leadership, we have a number of activitiesalready underway, including cost reductions, improvements to our retail productoffering, and our selling organization, along with better account analysis toenable us to serve customers more profitably. We expect further progress on generics penetration andcontract compliance through a new program, we introduced in July, to our retailindependent pharmacy customers.
On the sourcing side of generics, we announceda proprietary joint venture with Alliance Boots during the quarter to bring theAlmus brand to our retail independent customers. This partnership will give usvaluable experience that we expect will be another point of differentiation forus going into fiscal '09.
We were also awarded substantial new business from ourlargest customer, CVS, through our recent contract renewal. In addition to CVS,we recently reviewed our contracts with Kmart, Kroger and a number of regionalchains.
We also expanded our business with several key buying groups, servingregional chains and retail independent pharmacies. All of these will improveour business in the balance of the year.
On another front, we signed an exclusive contract withSentry Data Systems to provide 340B services to healthcare facilities in theU.S. The federal 340B program enables healthcare facilities to optimizereimbursement for pharmaceuticals, when serving the uninsured or theunderinsured population.
This program is highly differentiated, and our rolloutis underway. In nuclear pharmacy services, we'll begin to see the benefitof cost reductions, and generic Cardiolite will be introduced into our channelin calendar 2008.
While fully -- difficult to fully value at this time, we areforecasting this will be a good pickup for the Supply Chain-Pharma segment. Wehave an excellent platform in radiopharmaceuticals, with a leading position supportedby more than 150 Cardinal-owned specialized pharmacies across the country.
Turning to Supply Chain-Medical. We are making good progresson turning this business around.
Topline revenue is back on track in the supplybusiness with lots of activity focused on improving our category management,our sales programs, and customer service. Our program to transfer the location of this business fromIllinois to Ohio is going well, and we're pleased with the management talent weare attracting.
Our Presource operations are being converted to leanmanufacturing, which we expect will deliver a range of short- and longer-termbenefits. Net-net, this segment is making good progress and remains in positionto return to consistent profitable growth in the second half.
The Clinical and Medical Products sector was, again, anexceptional value driver and continues to differentiate us in the market. InQ1, CMP accounted for almost a third of our total profit.
So it plays anincreasing role in our overall results. We have a leadership position inpatient safety and infection prevention products, both essential and rapidlygrowing segments of healthcare.
While I'm sure you've been reading about this in the press,let me just mention a few key points about why this is so important to ourhospital customers. Hospital-acquired infections affect one in every 20patients admitted to hospitals in the U.S.
Likewise, there are at least 1.5million preventable adverse drug events in the U.S. each year.
Hospital-acquired infections and adverse drug events areestimated to kill tens of thousands of patients and cost hospitals tens ofbillions of dollars every year. I recently hosted a round table of top hospitalCEOs, where we talked about their patient safety initiatives.
This is a priorityfor them, and many are seeing healthcare quality initiatives as a strategy toalso lower costs. Cardinal Health is an essential partner to make this happenbecause of our proprietary product technologies, especially in medicationmanagement with Pyxis, Alaris and CareFusion; and in infection prevention, withour gloves, gowns, drapes and MedMined infection surveillance systems.
So we hold an important position in a critical market to ourcustomers. For example, we protect against medication errors for more than 8billion doses administered and dispensed annually through our Alaris and Pyxissystems.
This strong position is reflected in our Q1 revenue growth for the CMPsector, which increased 25%, and profits, which rose 60%. Within the sector, our CTS segment had a great quarter.
Wesaw more than 20% sales growth in Medication Technologies, led by strong demandfor our infusion and dispensing products. Segment profit was up 91%, and grossmargins expanded significantly due to a favorable product mix and thecomparison to Q1 of last year, when we had the SE pump recall.
About 70% of Alaris contracts for the quarter were theresult of displacing our competition, including new accounts at Banner Healthin Arizona and the University of Colorado. Our Pyxis products are also displacing competitors, like atSt.
Anthony's Medical Center, where we began with a competitive displacement byour Supply Chain-Pharma segment in June and recently signed a contract forPyxis MedStation 3500 and Pyxis C2 safe products. In addition to winning new accounts, we continued to renewand expand our business at current customers.
Our proprietary softwareplatforms of MedMined and CareFusion are gaining momentum. MedMined is servingnearly 250 customers across the United States, and we are seeing a trend movingfrom single-hospital implementations of our infection surveillance service tosystem-wide implementations.
For example, Clarion Health in Indiana recently signed onfor our MedMined services for all five hospitals within their system, andErlanger Health Systems in Tennessee signed for all four of their hospitals. In October alone, CareFusion signed contracts with four newcustomers to provide bedside patient identification and verificationtechnology, including Kingman Regional Medical Center in Arizona, who has madeerror reduction a key priority.
In conjunction with our current VA Hospitalcontract, we're on the path to being the industry leader in bedsideverification with CareFusion. Finally, we have identified the first pilot site for theimplementation of a system that connects Pyxis, Alaris and CareFusiontechnologies.
This approach will help facilitate the collection, transmissionand accuracy of patient and medication information at the point-of-care. In Medical Products and Technologies, we are ahead of ourinternal schedules for the integration of VIASYS, and it showed in the resultsfor the quarter.
MPT segment profits were up 24%. MPT also benefited from newproduct introductions, most notably our Esteem Micro surgical gloves made froma proprietary latex-free material, and the new LTV 1150 ventilator from VIASYS.
We have a strong product pipeline in our combinedrespiratory business with 13 new product introductions planned in calendar2008. And we were most recently selected during the quarter to be the solesupplier of latex-free gloves to a very large, very well known health system inthe Midwest.
This is not only a significant business win, but strong validationof our proprietary latex-free technology. Our performance in CMP in Q1 and over the past 12 months isa clear reflection of how hospital customers value the high-quality, clinicallydifferentiated products and services we offer.
So to wrap up, Cardinal's Clinical and Medical Productscontinue to win in the market based on our leadership in patient safety andinfection prevention offerings. And our Supply Chain-Medical segment is ontrack with its turnaround for this year.
We are clearly disappointed in the execution of our SupplyChain-Pharma segment, but we do have a very strong core business. We have madeor are in the process of making the necessary changes to improve execution thatwill begin to bite, as we move through the second half of the year.
Now, let me turn it over to Jeff.
Jeff Henderson
Thanks, Kerry. Good morning, everyone, and thanks forjoining us.
I'd like to cover two topics during my formal remarks today. Thefirst, of course, is our quarterly results and outlook.
As Kerry mentioned, Q1was a solid quarter with our Clinical and Medical Products sector, once again,delivering outstanding results. For the second topic, I'd like to change hats and brieflydiscuss our HSCS sector, as a newly appointed interim CEO of that business.Upfront, let me assure you that this is a great business with great people.
AndI am excited about the opportunity to work with Scott, Mike and the entire HSCSteam, as we return Cardinal back to its place at the top of healthcaredistribution. Now, let's turn to the first quarter results on slide five.Please note that my comments reflect the financial results from continuingoperations on a non-GAAP basis.
Consolidated revenues were up 5%, to $22 billion. Andoperating earnings were up 8%, to $512 million, reflecting improved grossmargin and strong demand across several of our industry leading businesses.This also includes the impact of our recent acquisition of VIASYS Healthcareand reflects a slower first-half growth we are seeing in our SupplyChain-Pharma segment.
Earnings from continuing operations for the quarter were$318 million, up 3% over prior year. This compare was impacted by higherinterest expense this year and a meaningful increase in our tax rate versus Q1of FY '07.
Diluted EPS was up 15%, to $0.86, reflecting leverage we areable to deliver to shareholders via our share repurchase programs. Operatingcash flow for the quarter was $409 million.
And return on equity was 17.5%, up390 basis points over the same period last year. Now, turning to the next slide, during the quarter, specialitems totaled $23 million, which impacted diluted EPS by $0.04.
$15 million ofthe $23 million were restructuring charges, of which $11 million was related tothe transfer of our HSCS-Medical segment to Dublin, Ohio. The remaining $8 millionwas split between acquisition charges and litigation and other.
There were nomaterial impairment charges for the quarter. Now, I'd like to turn to the performance of the individualbusiness segments.
Within Healthcare Supply Chain Services-Pharmaceutical,revenue for the first quarter increased 4%, to $19.2 billion. Revenue from bulkcustomers was up 11%, and non-bulk revenue was down 2%.
Key factors influencing year-over-year Q1 revenue includenew bulk business from existing customers, branded price inflation, DSDcustomer losses from FY '07, lower pharma market sales growth, and soft demandwithin the nuclear business. Segment profit was $305 million, an increase of 6% over theprior year period, driven primarily by branded price inflation; improvedoperating leverage, as SG&A margin declined 7 basis points versus the samequarter last year; and a $14 million reduction to a specific vendor-relatedreserve.
Fewer generic launches versus the same period last year andhigher generic inflation also put pressure on overall segment profits. Segmentprofit was somewhat impacted by the previously mentioned market slowdown,customer losses in DSD, and the market environment in nuclear.
As many of you are aware, our nuclear business isexperiencing a fair amount of market volatility, as the market's largestproduct, Cardiolite, is facing patent expiration in calendar year 2008.Cardinal distributes approximately three quarters of the CardioLite doses inthe U.S., and while this is impacting new-term profitability, we expect thegeneric opportunity to have a positive impact on nuclear's profitability oncethis occurs. On a slightly different note, as I mentioned in our investorconference, effective use of capital is an important lever we use to improveeconomic returns and we continue to see progress in this area.
Tangible capitalwas down approximately 15% over Q1 of last year. And economic profit marginincreased 3 basis points to 88 basis points compared to 85 basis points in thesame period last year.
Turning to slide 8, our Healthcare Supply Chain Servicesmedical segment's revenue for the quarter was $1.9 billion, up 6% over theprior year. This represents a return to strong topline growth in our hospitaldistribution business where we’re seeing both improved penetration withexisting customers wins.
We view this as confirmation that our turnaround is on trackand investments we've made in the business are paying off. Our lab andambulatory businesses also delivered strong growth year-on-year.
Total segmentprofit for the quarter was $58 million, down 10% over Q1 '07. Profit in the quarter was impacted by operationalinvestments, particularly in customer service, higher costs within our kittingoperations, and the refined corporate cost allocation, which negativelyaffected growth in the quarter by approximately 9 percentage points.
As Kerry mentioned, our Megapar (ph) transition is on trackand there is real momentum in the business. We continue to expect to return topositive growth in the second half of fiscal 2008, particularly as we workthrough the operating improvements we are making in our kitting business.
Medical products and technologies delivered a strongquarter. Revenue increased 47% to $623 million.
Driven by the VIASYSacquisition, new product launches, increased penetration of existing customersand the favorable impact of foreign exchange. Segment profit was $57 million up24% with a profit margin dampened by the purchase accounting adjustmentsassociated with the VIASYS acquisition.
The integration of VIASYS is going extremely well. In fact,synergy capture for FY '08 is ahead of schedule, with the accelerated close ofthe VIASYS headquarters and other initiatives.
Moving on to slide number 10, Clinical technologies andservices had an excellent quarter. Segment revenue was $649 million, up 9% overprior year Q1.
Driven by continued strong demand for infusion and dispensingproducts. Segment profit was $98 million, up 91% compared to the prior year,well in excess of our guidance.
Driven by favorable mix of higher margin products, improvedoperating leverage and the benefit of our IPS selling organization. We alsobenefited from a favorable compare versus Q1 of fiscal 2007 due to a $13.5million charge in that period related to our SE pump.
From a marginperspective, segment profit margin was up 640 basis points over the prior year. During our investor conference, I discussed the keyfinancial levers we focus on to drive both growth and returns for the businessand our shareholders.
Those are balance sheet management, capital deploymentand our capital structure. During the quarter, we made meaningful progressalong all these dimensions.
Days of inventory decreased year on year, declining from 30to 28 days. Accounts were approximately $250 million in capital.
This is notinsignificant. Last fiscal year, we made significant progress with respect toportfolio optimization with the divestiture of PTS.
As you know, this is a continuing and ongoing process hereat Cardinal. And we will continue to look for opportunities to improve ouroffer and shed non-strategic businesses or under performing units.
A goodmeasure of how we are doing in our efforts to manage our balance sheet isreturn on invested capital. We are not where we want or expect to be, I'm happy toreport that non-GAAP return on invested capital versus Q1 last year is up 157basis points.
For Q1, we repurchased almost $600 million in share and sinceJuly 1st, share repurchases have totaled $720 million. During the investor conference, I also mentioned ourphilosophy for our capital structure.
Simply put, it's to minimize our cost ofcapital to improve our economic profits while ensuring we have the financialflexibility to manage the business. For Cardinal we believe a capital structure in the range of28 to 35 debt-to-total capital strikes the best balance between these two guiderails.
We ended Q1 with a debt-to-total capital ratio at the top end of ourrange at 35% and net debt-to-capital of 26%. Both ratios are significant changesfrom prior year and reflect our commitment to utilize multiple levers tomaximize shareholder value.
Finally, our non-GAAP effective tax rate for the quarter was32.3%, versus the 29.4% in the same quarter last year. This increase isprimarily due to adjustments associated with FIN 48 and the addition of theVIASYS business, both of which impacted Q1 '07.
And the one-time favorable tax impact, we saw -- I'm sorry,Q1 '08 and the one-time favorable tax impact we saw in Q1 '07 due to theoutcome of a revenue (inaudible). For that current knowledge of the impact ofFIN 48, we now expect our FY ’08 effective tax rate to be in the range of 32%to 32.5%.
At the end of the day, our financial strategy and goal is tomaximize returns. I'm happy to say, we were able to deliver a non-GAAP returnequity in Q1 of 17.5%, an increase of 390 basis points over last year.
Moving on to our outlook for FY ‘08, I want to reconfirm ourguidance for non-GAAP diluted EPS of continuing operations of 395 to 415 pershare. We believe that our ability to hold EPS guidance in light of SupplyChain Pharma's challenges speaks volumes to the strength of our diversifiedbusiness model.
As previously discussed, three of four segments areperforming generally in line with expectations. As such, current guidance forCPS, MPT and supply chain medical remains unchanged.
As Kerry mentioned earlier, we are lowering guidance for ourSupply Chain Pharma segment to below range. I want to build on that by givingyou more specifics for how we expect the numbers to play out for the rest ofthe year, in particular the factors that will make Q2 a very difficult compareversus last year.
Before I discuss Q2, I know that most of you are wonderingwhere we went wrong on our forecast for HSCS Pharma and exactly what could havechanged over the past four to five months to make us significantly change ourFY '08 profit outlook for this segment. Let me lay that out for you astransparently as I can.
First, let me emphasize what didn't change. One, we wereexpecting meaningful sell margin erosion due the impact of the customerrepricings that happened last year and that has rolled out as expected.
Two, wewere anticipating a certain level of brand and price increases for the year. Always difficult to predict exactly, which quarters thosewill land in, generally those seem intact.
And third, there were certain DSDcustomer losses that happened last year, and they obviously, impact ouryear-on-year compares in that part of our business. Those have happened butwe’ve not lost any of our large accounts this year.
Now, clearly we expected other items to more than offset theyear-on-year impact from the customer pricing and DSD losses and they haven'tquite panned out as well as we had planned. First, due to some executionproblems, we have not made the types of customer gains we would have hoped,either in terms of new DSD business or generic penetration in certain accounts.
Secondly, generic inflation, specifically on some largeproducts that came off patent last year, have been much more steep than we hadanticipated. As you know, those products were not replaced by new genericlaunches yet this year.
Third, the overall Pharma market is expected to growmore slowly than many of us were forecasting. And finally, our nuclear pharmacy business is experiencingan unprecedented level of volatility as we approach the generic event.
As we gothrough these factors, I don't want you to perceive us as making excuses. Thereality is that for several of them, we did not react quickly enough to addressmarket needs or adjust our own operational and cost issues in order tocompensate.
That has to change. Now, let's move on to our outlook for Q2 and why this willbe a difficult compare versus last year.
Obviously, the factors I justdiscussed will have a real impact on our Q2. In fact, disproportionately soversus the other quarters in FY '08.
Specifically, what that means is we expectour second quarter segment profit results in HSCSP to be 10% to 20% below lastyear. The basic drivers of this in Q2 are the following.Approximately $20 million of reduced profit from branded price increases versuswhat was a pretty robust quarter in that regard last year.
About a $20 millionyear-on-year decline due to the higher deflation on some specific generic drugsthat were launched last year and an approximately $20 million negative netimpact that relates to the sale margin declines and DSD losses we've alreadyspoken about netted against other income statement items. As we talk about rebuilding momentum in the second half ofFY '08 for SCSP, our current expectation is that profit growth will be heavilyweighted towards Q4, given generic launch timings and other factors, includingthe forecasted impact from many of our operational improvements.
Now I’d like to turn to our financial targets and goals. Imentioned much of this on prior slides but I do want to highlight a few keypoints again.
For fiscal 2008, we expect overall company revenue growth to bein range. Based on lowered expectations in our Supply Chain Pharma segment, wenow expect operating earnings growth to be in range.
And again, EPS is expectedto be in the range of $3.95 to $4.15. As always, this guidance excludes anypotential impact from the ongoing portfolio optimization reviews we referencedbefore.
Turning to slide 14, I want to highlight some of our plansto deliver improved results in HSCS in the near future (ph). First, let mereiterate that we are competing in some very attractive and growing markets andwe have a strong market position in all of the major businesses in which wecompete.
We have a strong new leadership team driving our two segments in MikeKauffman and Scott Storrer. My job is to support them to drive through ourimprovements and deliver on execution.
Now, let me step through some specific priorities in each ofthe two segments. First, in HSCS Medical, we need to continue the momentum weestablished with the hospital market, to drive an ever-improving customer offerand our own profitability.
We will continue to better leverage our scale tolower product and operating costs, including expansion of our offshoresourcing. Importantly, we need to finish driving through theoperational improvements in our presource kitting business and leverage ourstrong market position here and we need to complete the transition of ourmedical business from Agopar to Dublin.
All these initiatives are well underway under Mike's leadership. Within HSCS Pharma, we need to accelerate the initiatives wehave put in place to improve operational performance with respect to costreductions and improvements to our retail selling operation and productcapabilities.
We also need to leverage our strengthen in engineering portfolioand use that portfolio to enhance customer profitability through improvedpenetration and compliance. On the nuclear side, we will restructure our operating modelto deal with the pre-generic event volatility we are seeing in this market andlonger-term make certain we are best positioned to take advantage of theupcoming Cardiolite patent expiration.
And finally, we need to accelerate the ongoing restructuringof our overall operating platforms, maintain our best in industry cost positionand relocate resources where they can best drive customer value andprofitability. The good news is that most if not all of these initiativesare well under way.
Now we need to deliver and drive them to fruition. I amvery confident that Scott and his team can do this.
That come completes our formal remarks. I would like tothank everyone for their time this morning and open up the call for yourquestions.
Operator?
Operator
(Operator Instructions) And your first question comes fromthe line of Larry Marsh with Lehman Brothers.
Larry Marsh - Lehman Brothers
Thanks and good morning. Not great news, obviously, butcould you elaborate on your new guidance in your drug or your HSCS drugbusiness?
You talk about, I guess, below the 7% to 10% range. If I'm just sortof looking at the second quarter being down 10 to 20%, I'm wondering can youelaborate, do you think the operating profit in that business is going to be upthis year versus last year?
Or is it too soon to say? And just on top of that, why do you think you'll still hitthe 7% to 10% revenue growth in that segment or are you suggesting that thatmight be a bit below your expectations as well?
Jeff Henderson
Thanks, Larry, for the question. Let me cover those inreverse order.
I don't want to get too specific on our revenue assumptions,although we do expect it to pick up over the course of the year as some of thenew accounts that we're taking on and our increased penetration in some ofthose accounts take effect. So I feel pretty positive about the slope over therevenue growth increase over the remainder of the year.
In terms of the actual earnings growth for the segment, Idon't want to give a specific number at this point, although let me just sortof give you some further idea of how we see the rest of the year unfolding. AsI indicated, we do expect Q2 to be down in the 10 to 20% range.
We then expect a significant improvement from that in Q3.And then I would say in Q4, we expect some very meaningful profit growth forthe reasons I mentioned earlier, such as the generic launches we haveanticipated as well as the roll-out of some of the significant operationalimprovements that will really start to take effect as we approach the laterhalf of the year.
Larry Marsh - Lehman Brothers
So is it fair to say that you think you'd be upyear-over-year for that segment as you see it, Jeff?
Kerry Clark
Yes, Larry, it's Kerry. We fully expect to be up versus yearago on the year.
And just on the revenue, I'd just point out, everybody's bookof business is very different and doesn't really imply -- look at the IMSnumbers. But IMS is looking at sort of 4% to 5% really on our fiscal year basisand we tend to sort of -- we think we'll be moving in line with that with aslight upward mix because of our range of customers.
Larry Marsh - Lehman Brothers
Okay. Just one quick clarification then, Kerry.
I know backat the Analyst Day, Mark at the time, I guess, talked about the opportunity forgeneric Cardiolite introduction as early as January. It sounds like you are nowsuggesting June and are you giving any sense of how far down the profits werein nuclear for you this quarter versus last year?
Kerry Clark
Larry, just on the patent expiration could come as early asJanuary, but there's usually something called the pediatric extension which isgoing to take it in the summer and at this point we believe the pediatricextension is likely to be granted so we're really moving into next summer andwe will be totally ready to do that. You know I think the one way to thinkabout nuclear sort of on the whole scheme of things, it's about 10% of oursupply chain profitability in this time and so -- and it's sort of playing itsfair share in the reductions that we've been working our way through.
Bob Reflogal
Thanks, operator. Next question.
Operator
Your next question comes from the line of Eric Coldwell withRobert Baird.
Eric Coldwell - Robert W. Baird
Thanks. Good morning.
My first question relates to the commentarythat the company did not respond quickly enough to the challenges in SCS Pharmaby taking cost control and increasing cost effectiveness. I'm curious if you can give us some details on what type ofactivities you think are possible and very specific analysis on what you'regoing to be doing in that division to get the costs in line with the currentopportunity.
And then secondarily, if you could comment on what is thecompetitive disadvantage that you're facing in the market now that is notallowing you to win these new competitive awards in DSD that you mentioned, notpicking up new business in that segment? Thanks.
Jeff Henderson
Hi, Eric, this is Jeff. Thanks for your questions.
First ofall, the cost restructuring side, there are a number of areas both within thesector and the segment that we have taken a look at. We have taken asubstantial amount of our management infrastructure that existed in the sectorin the segment and really streamlined it through increasing spans of controls andmoving some people around and in many cases eliminating management jobs that aswe went through the change to one sector became apparent that they wereredundant or inefficient.
Secondly, we've been looking through each of ourdistribution operations to ensure, given the current book of business and theservices that we're committed to provide to our customers, that they areappropriately sized and in some cases that hasn't been the case and we willtake appropriate action to make sure they're in line with market needs. I think the third area is ensuring that our sales andmarketing resources are being allocated to the right areas.
In some cases wehave replaced some under-performing people in that regard and in other cases wereduced selling resources and most importantly I think we reallocated resourcesto for example retail independent where we have a real opportunity to increaseour penetration and drive value.
Kerry Clark
On a competitive side, you know, the honest answer is Eric;I believe we have a very competitive set of offerings to all of our customers,both at the hospital retail chains and independent level. We were working very closely to assist our customers intheir operations to make them more profitable.
We offer very competitivegeneric and branded pricing and in fact have expanded our generic offering toour customers. And we also offer front-end help in systems such asLeaderNET for managed care and CIM for inventory optimization.
So I believevery much that we have a very competitive offering and again, it's really justup to us to get out there, sell it and drive penetration through the market. On top of that, we are offering new programs.
We have the340B program for hospital customers that Kerry referenced earlier, which is avery unique proprietary technology that we've been able to offer and is gettinggood acceptance from the market and we need to continue to launch customerfriendly products like that and drive those through, whether it be hospitalcustomers or pharmacies.
Eric Coldwell - Robert W. Baird
Jeff, thanks for the comments. I guess I'm just trying tofigure out when you had a book of business that you thought you could bring inthis year and that didn't transpire, what was the feedback from the customerson those awards that you did not capture?
Jeff Henderson
I don't want to get into specific customer contracts, butit's a competitive business out there. And obviously, you win some and losesome based on the total value proposition, including pricing.
Bob Reflogal
Thanks, Eric. Next question.
Operator
And your next question comes from the line of Tom Gallucciwith Merrill Lynch.
Tom Gallucci - Merrill Lynch
Thank you. Just one or two clarifications and a question.
First,based on your comments, Kerry, regarding the timing of generic CardioLite, isit safe to assume then, Jeff, that that is not really a part of the ramp-upthat you expect later in your fiscal year and it's more of a fiscal '09 eventfor you all.
Jeff Henderson
That's correct, Tom.
Tom Gallucci - Merrill Lynch
Okay. And then the $14 million vendor reserve reversalthere, can you maybe expand on that a little bit and was it expected?
And thenjust my final question is on generic compliance, we've actually seen some ofyour competitors, it sounds like talking about better compliance and grabbingmore market share there. So what do you think you’re not doing right there and whatare some of the things you think you're going to be putting in place to grabyour fair share of that piece of the business.
Jeff Henderson
Sure. Thanks, Tom.
On the question with respect to thevendor related reserve, it was $14 million reserve. We were anticipating ithappening in Q1.
And specifically what it was is that we had a certain reservefor some inventory that was relatively short dated. And we did not anticipate,we would be able to sell it before it expired.
However, during the quarter as anticipated, our manufacturerwas able to ship us longer dated products and as a result of that, we were ableto return the short-dated product and reverse the reserve for that amount onour books. That's what it was and it was anticipated.
In terms of driving generic penetration and compliance,first of all, we have -- we have introduced a new offering into the market asof July. You really our sales force is just driving that right now into themarket and we expect to see the impact of that very shortly.
And as I said, that will start to manifest itself in thelatter part of the year. We're also reorganizing our sales force to put greateremphasis on the smaller chains and retail independents to ensure that we areachieving a level of penetration that it appears that some of our competitorsare.
And you know, there's some additional accounts coming onlinelater this year that we believe now that we have access to those accounts we'llbe able to drive generic sales and increase penetration and compliance. So wefeel quite positive about the steps that we've taken and about the opportunitythat's we have and now we need to go out and do it.
Kerry Clark
Tom, Kerry here, just one comment on the generic compliance.It's a lot of what we got back to sort of operating excellence and reallymaking sure that we are keeping on track of this and we'll just say, we're noton top of the ball as we should have been.
Bob Reflogal
Thanks. Operator, next question.
Operator
And your next question comes from the line of John Kregerwith William Blair.
John Kreger - William Blair
Thanks very much. Jeff, you just mentioned reorganizing thePharma distribution sales force a bit.
Can you just refresh our memory aboutyour customer mix in that business and how you've seen that change if at all overthe last year or two?
Jeff Henderson
Sure. In terms of changes over the last couple years, Iwould say there has been a greater shift to the large chains with CVS andWalgreens particularly giving some of the acquisitions that CVS has made andwhat we're seeing as really larger growth from some of those large customersversus some of our other customers.
I would say that over the past six months or so, we’veprobably seen some volume drops in some of our independents and smaller chainsas a result of some of the customer losses and less than optimal execution thatwe've talked about. But again, we expect that to turn around as we head to thesecond half of the year and beyond.
Bob Reflogal
Thanks, John. Operator, next question.
Operator
Your next question comes from the line of Lisa Gill withJPMorgan.
Lisa Gill - JPMorgan
Thank you and good morning. Jeff, could you just talk alittle bit about the guidance range.
Could you maybe just give us an idea ofwhat's still implied in the upper end of the range. Is it that you need allthis and maybe if you could give us some thoughts around what's happening withyour share repurchase program and how much of that is included.
And then secondly, on an area that continues to performwell, which is on the clinical technology side, maybe Kerry or Jeff, if you canjust or Dave, if you're on the call, talk about where you're taking the marketshare on the infusion pump business and also maybe talk about if there's anyopportunities around large contracts that are up, since Baxter appears to stillbe out of the market.
Kerry Clark
Hi, Lisa. Good morning to you.
I'm going to have Dave, talkto the infusion pump piece. I'll have Jeff just talk to the share repo.
Jeff Henderson
Okay. Why don't I start and then I'll turn it over to you,Dave.
First of all, the assumptions in the guidance range. First of all, we'veindicated that we expect to continue our capital deployment philosophy ofreturning about 50% of our operating cash flow to shareholders.
As you know, our board approved a new $2 billionauthorization back in August. So I think a rough assumption of about $1 billionrepo for the year, in addition to the $300 million or so that was done underthe remaining PTS proceeds is an appropriate assumption.
In terms of the major factors that could swing where we endup in the range, there's a couple of things that are always fairlyunpredictable in our business. First of all, the exact timing and magnitude ofgeneric launches, clearly if the CardioLite generic event happens sooner thanJuly 1st that could have a meaningful upside for the business.
We're not counting on that right now. You're never quitesure what's going to happen with that pediatric extension.
Our strongperformance of our VIASYS business and our ability to continue to acceleratethat integration and capture those synergies is a variable. But again, good news there so far.
Exactly what happens insome of the larger contracts that we're going after is another variable thatremains somewhat in play. Dave, you want to take the second part of thatquestion?
Dave Schlotterbeck
I will. I'd just comment that the folks at Alaris productscontinue to perform very strongly, about 70% of all of the current businessthat's being booked is from competitive accounts.
And that bodes very, very well for the future, since itmeans that being in a razor, razor blade business, that we have five to sevenyears of additional disposables that we didn't have before. So my expectation is that not only will the clinicaldifferentiation continue to make a difference in the marketplace, but I thinkyou can count on a long time period where we're going to see some very, verystrong profitability performance.
Bob Reflogal
Thanks, Lisa. Operator, next question.
Operator
Your next question comes from the line of Randall Stanickywith Goldman Sachs.
Randall Stanicky - Goldman Sachs
Dave thanks very much for the question. In case I missed it,did you guys quantify or give some sense of relative impact from the variouscomponents, to some of the challenges in the Pharma distribution business?
By that, I mean, thinking about sales mix, what you call thegeneric market conditions and then nuclear on top of the moderation.
Jeff Henderson
Go ahead.
Kerry Clark
Yeah. I mean, I think that there's a lot of different ways,Robert, to cut this.
One of the ways, we’ve kind of have sliced it a bit is, ifyou just choose 100% of the issue, about 15% of that is going to come fromnuclear. About 15% from sales reductions and market forecasts and the balancemostly from gross profit reductions, which relate to DSD as well as generics.So, I think that's about the best way we can kind of quantify it for you inthose various pieces.
Randall Stanicky - Goldman Sachs
Are there any of those pieces, I guess, do any of thosepieces have a longer leg to resolution than the others or is this somethingthat we should think about obviously some of the broader market issues areoutside of your control, but is this something that largely begins in the backhalf of the year that you look to hope to be behind you?
Kerry Clark
Yeah well, just right here on those quickly. Nuclear willcompletely flip to a positive accretive activity when we get to genericCardioLite and however those plans develop and as we mentioned, we're seeingthat as an FY '09 item.
But, so, we have to carry the burden of nuclear for a bitthis year. But again , I just before we need to understand that nuclear isreally still quite a nice business with very good margins here on about $1billion in sales.
So, it is a nice business and we shouldn’t get concern aboutit. It will have a very attractive profit accretion in the secondhalf.
The market growth numbers, you've seen them as well as I do. In the sensethat when we get out past '08, '09, the forecasts are increasing again a lot,depending on what happens with generics.
So I think a lot of what we're experience in the marketgrowth for the pharmaceuticals tends to be looking like we're in a little bitof a trough and certainly over the coming years we'll move, depends on whathappens with generics. In overall there is a lot of very positive demographicvariables that give us a lot of confidence with Pharma distribution business isgoing to be a business that we want to be in and a business that we think wecan perform with the top of the pack, but we believe we can do that.
And I think that within the rest, I think we can manage thegross margin pieces by improving our mix of products and services that we'rebringing to our customer and I think, so we have opportunities there by betterblending our product and service portfolios. I think the one that's just a little bit up in the area ofnot really sure is the focus of what's going to happen, some of the retailindependents, they tend to be the ones that will be affected by amp and likeand right now nobody is putting any of the forecasts for amp.
I think theindependent piece is one that is probably not as clear on the visibility.
Randall Stanicky - Goldman Sachs
Great. Can I just follow-up to Lisa's question just ask, andI don't know if you're able to answer it but if you thing about what soundslike some still moving parts in the upcoming quarter, what you've talked aboutbeing, obviously, a seasonally stronger back half with some generic launchescoming, current consensus numbers have a roughly 45%, 55% split indistribution.
Do you think it is likely to be more back end weighted thanthat?
Kerry Clark
I couldn't catch that, sorry.
Randall Stanicky - Goldman Sachs
Are you expecting a more back end weighted earningsdistribution that what's perhaps currently implied which is about 45%, 55% in termsof EPS?
Jeff Henderson
If you're referring to what's currently implied by general…
Randall Stanicky - Goldman Sachs
Consensus numbers.
Jeff Henderson
I would say we expect more back end weighted than what mostanalysts are predicting.
Randall Stanicky - Goldman Sachs
Are you able to put an approximate percentage on it.
Jeff Henderson
I don't want to be nailed down that closely, Randall, butgenerally, that's the trend we'll be expecting.
Randall Stanicky - Goldman Sachs
Okay. Great, thanks very much guys.
Bob Reflogal
Next question, please.
Operator
Your next question comes from the line of John Ransom withRaymond James & Associates.
John Ransom - Raymond James &Associates
Hi. Looking at your distribution business and stripping out,I don't know if this is exactly correct, but say 100 basis points or excuse me,10 basis points for the contribution of nuclear pharm, looks like you'rerunning 1.35%, 1.4% range.
And since you don't break out gross margin and G&A,assuming the mix doesn't change, is there a level of G&A that you'reoperating with that doesn't need to be there in six months? Is that somethingthat will happen quickly or is this just something we'll hold down the growthas our book of business grows?
Jeff Henderson
John, it's Jeff. Obviously given the nature of thisbusiness, focus on cost control and SG&A efficiency is something we need tocontinually do.
And you know, as I mentioned earlier, there are a number ofareas that we already have initiatives under way to address those. I would expect SG&A growth as it was in the firstquarter to be relatively flat and perhaps even down in certain quarters as wecontinue to drive efficiencies.
This is not only a reaction to the currentsituation. But quite frankly, it's a reality of our business.
This is a business as you know has relatively thin margins,just by the nature of it and we need to ensure that we maintain our bestindustry cost structure. We've held that advantage for some time.
And we needto make sure we continue to drive it through our operational excellenceinitiatives and the various other programs we have in place to leverage ourscale and continue to become more efficient. So yeah, it will happen over time but it will happen overtime as long as we're in this business, because that's the nature of thebusiness.
John Ransom - Raymond James &Associates
Okay. And then when you talk about sales forcereorganization, does that mean more structural incentives to improve the mix?Does that mean hiring new salespeople?
Does that mean reorganize how they'rereporting? I'm struggling to understand how that's going to translate into abetter mix on the sell through side.
Jeff Henderson
It's making sure, that we have the right people and theright quantities of people both focused on retail independents and our hospitalcustomer. We have the greatest opportunity to drive value added to the customerand drive our own profitability.
So couple of things happen here, we have gonethrough our sales forces and ensured and make sure that we have our bestperforming reps on the right customers. In some cases that's meant replacing some customers.
And insome cases that's meant shifting position that were focused on other customersto retail independents and hospitals, particularly the most potentiallyprofitable accounts to ensure that we're driving profitability there. Obviously, we'll continue to adjust the incentives for thosereps to ensure that they're rewarded based on the right incentives includingprofitability of their account.
Bob Reflogal
Thanks, John.
John Ransom - Raymond James &Associates
Thank you.
Bob Reflogal
Next question?
Operator
Your next question comes from the line of Robert Willoughbywith Banc of America Securities.
Robert Willoughby - Banc of AmericaSecurities
Kerry is your enthusiasm for the supply chain medicalbusiness, the rebound that you're experiencing here an indication now thatyou're happy with the business, content to keep it, or are we still exploringalternatives for that business?
Kerry Clark
Pretty much similar to the last couple conversations we hadon this, we continue to believe this is a business that has reasonably goodgrowth prospects, and higher margins than Pharma. We also see our way clear toimprovements in how we're operating our presource business, how we're operatingthe end-to-end supply chain within supply chain medical.
I think it's going to be a business that we'll be happy withthe returns and as I mentioned before, it's a very important part of our totalhospital offering, and it gives us critical scale and mass, that is franklyhaving an improvement on what we're doing Clinical and Medical Products. In other words, I think some of the good results we'reseeing in CMP is because of our broad based strength within the hospitalmarket.
So you know, as I commented to you before, I think this business hasthe capabilities to provide decent returns. I think the market dynamics forthis segment are favorable, particularly compared to some of the otherbusinesses we are involved in distribution.
So my goal is to make sure we getto what we promised on this and we're feeling on the way. We've got top linegrowth back at 6%, some business that has higher margins on a going basis thanwe see in Supply Chain Pharma.
And so we're comfortable.
Robert Willoughby - Banc of AmericaSecurities
Thanks, Bob. Operator, next question.
Operator
Your next question comes from the line of Charles Booradywith Citi.
Charles Boorady - Citigroup
Thanks, good morning. My question is on Supply Chain Pharma.First, can you tell us what your same customer growth trends are versus any newcustomer wins or customer losses?
Kerry Clark
Charles, Kerry here. I mean, I think, we have pretty stablebooks of business with CVS.
So I think, our business with CVS moves a lot inline with their same store Pharma sales, likewise for Walgreens. So I think, wepretty much track in line with those customers as their business goes.
Jeff Henderson
Charles, if your question was, you know, if you strip outwins and losses what is sort of the organic growth of our existing customers,it's about 4%.
Charles Boorady - Citigroup
Okay. And you mentioned CVS and CVS and CareMark's merger.Obviously, has led to speculation whether they might bring some functions inhouse or switch some functions from one of the wholesaler relationships to another.Are you seeing any change at all in that relationship so far?
Kerry Clark
As one of our colleagues says, we're just privileged to beable to serve CVS. I think, the key point I would say is we recently renewedthe contract and received an increased award of business.
So I think that'sencouraging of our relationship with CVS. We value them immensely and we arelooking forward to continuing a relationship with that customer.
Bob Reflogal
Thanks, Charles. Operator, we have time for one morequestion.
Operator
There are no further questions in the queue. I'll now turnthe call back over to Mr.
Reflogal for closing remarks.
Bob Reflogal
I just want to thank everyone for your participation todayand this concludes our earnings call.
Operator
Thank you for your participation in today's conference. Thisconcludes the presentation and you may now disconnect.
Good day.