Cardinal Health Inc (CAH) — Q4 2018 Earnings Call Transcript

Thank you, Silvia. Good morning, and welcome to Cardinal Health’s fourth quarter fiscal 2018 earnings call. I am joined today by our CEO, Mike Kaufmann; and Chief Financial Officer, Jorge Gomez. During the call, we will provide details on our fourth quarter and full-year results, and update on our strategic initiatives and FY19 guidance. Today’s press release and presentation are posted on the IR section of our website at ir.cardinalhealth.com. During the call, we will be making forward-looking statements. The matters addressed in the 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 for a description of these risks and uncertainties. During the discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as GAAP. Our GAAP to non-GAAP reconciliations for the fourth quarter and full-year can be found in the schedules attached to our press release. In addition, during the call we will provide forward-looking guidance for FY19 on a non-GAAP basis. We do not provide guidance on a GAAP basis due to the difficulty in predicting items that we exclude from our non-GAAP earnings per share. During the Q&A portion of our call, we ask that you limit your questions to one with a brief follow-up so that we may give everyone in the queue a chance to ask a question. As always, the IR team will be available after this call. So, feel free to reach out to us with any additional questions. And with that, I’ll turn the call over to Mike Kaufmann.

Thanks, Lisa, and good morning, everyone. I am glad you could join us. As Lisa mentioned, I’ll start with some comments on our fourth quarter and full-year 2018 and then spend a few minutes on the strategic initiatives we have underway to best position Cardinal Health for the future. We have many opportunities ahead to build on Cardinal Health’s strengths as a critical contributor to the healthcare industry. I feel good about the progress we are making. We encountered a couple of unexpected challenges in fiscal ‘18, and we are addressing those issues. We are on track and well-positioned to deliver long-term growth and enhance value for all of our stakeholders. Overall, for the quarter, our non-GAAP EPS of $1.01 came in higher than expected, due to a lower tax rate. Revenue for the quarter reached $35 billion, up 7%. Non-GAAP operating earnings were $465 million. For the year, non-GAAP EPS was $5 on revenue of $137 billion, up more than 5%. Non-GAAP operating earnings were $2.6 billion, and operating cash flow was $2.8 billion. Turning to the Pharma segment, I’ll make a few comments. For the quarter, we saw revenue growth from both existing and new customers. In Pharma Distribution, while Red Oak continued to have a positive impact, our generic program remained a headwind overall. Regarding brand drugs, the contribution was better than expected this quarter, but we know this is an evolving marketplace. We provide significant value to our manufacturing partners, and we will continue to work closely with them during this evolution. Both the Specialty and Nuclear businesses had a strong finish to the year. Specialty continues to be a standout, once again delivering robust, double-digit revenue and profit growth, while nuclear also performed well, generating top-line growth and an even stronger performance on the bottom line. As we enter fiscal 2019, our focus is on taking the necessary steps to address the changing industry dynamics to position the pharma distribution business for long-term growth. You can see from our guidance and comments that we do not expect Pharma Distribution to grow operating earnings in fiscal 2019. Customer contract renewals, some of which occurred in FY18, and generic deflation are expected to be the largest headwinds. Our team is actively working on several initiatives to return this business to our more typical upward trajectory. We recognize that industry pricing dynamics, both upstream and downstream, are likely to change, and they should. And we are extremely skilled at adapting to these types of changes as we have done it before. Turning to the Medical segment, while Jorge will discuss the specific items that affected the segment’s earnings, let me share a few highlights. We continue to be pleased with the performance of the Patient Recovery business. Our integration of this business is currently on track. We exited our TSAs with Medtronic for North America, Latin America, and the Global Supply Chain in late July. The team is continuing to move forward on exiting from the TSAs in other global regions in late calendar 2018 and early 2019. At Cordis, we continued to see top-line growth. We’re making progress in executing our plan to resolve the inventory and cost challenges we’ve previously discussed. Our service levels are significantly improved, and we have the enhanced inventory visibility we need to run this business more effectively. As we said in May, it is going to take some time for us to see the benefit of these actions on the bottom line. However, we remain confident that Cordis is on a path to profitable growth by the end of fiscal year 2019. At naviHealth, we have now completed the sale of a 55% interest in this business to Clayton, Dubilier & Rice. We believe that this new structure will provide naviHealth with the resources needed to better support and accelerate its growth trajectory while at the same time allowing us to focus on our larger businesses and strategy. We are excited to have CD&R as a partner in positioning this business for future growth and success. Finally, both our distribution services and Cardinal Health at-Home businesses performed well, with both growing earnings in double digits during the quarter, driven by strong demand for their services. So, in summary, I remain confident in the prospects of our Medical segment, which has expanded our reach across the continuum of care and provided us with new avenues to enhance our value to customers and patients. I am also very pleased with the progress Jon Giacomin has made in strengthening his management team, focusing on execution and changing our go-to-market strategies and culture to drive product growth. While this will take some time, he has the right team in place, and they are working hard to achieve their goals. Now, let me switch gears a little. As I look back over the past five years, we made great progress on three critical strategic priorities. First, recognizing that the overwhelming percentage of prescriptions were filled with generic pharmaceuticals, we knew that we needed a best-in-class large-scale generics program; secondly, as specialty pharmaceuticals were becoming the focus for innovation and patient breakthroughs, we recognized the importance of being a larger, more relevant player in this space with deep clinical experience and insight; and thirdly, with customers looking for cost efficiencies, we saw the opportunity to expand our medical products portfolio to leverage and complement our excellent medical distribution capabilities. Today, we have a generics business that is now a leader with our joint venture with CVS. We maintain significant volume and have a highly experienced team with industry-leading strategy and analytics skills. We have a specialty business that has grown from a $1 billion, mostly blood products business to a diversified specialty business with greater than $15 billion in revenue that competes successfully for many types of service with manufacturers and providers. Finally, we have a wide breadth of Cardinal Health products through the expansion of our historical line and the additions of Cordis and Patient Recovery. We have a high-quality, significant, and cost-effective portfolio we can offer to our customers. We are now both a strong distribution and medical products company. Today, we are squarely focused on driving the greatest value from this attractive portfolio of assets. As I hope you can see, work is well underway in each of our priority areas. Let me be perfectly clear about the road ahead. I am not wed to the past. Everything is on the table when it comes to driving long-term growth, delivering shareholder returns, and serving our customers. We have a great team, the right plans in place to move forward, and we are executing. All of us are committed to being disciplined, with a laser focus on achieving results in the months and years ahead. Looking now to fiscal year 2019. Based on the factors we’ve communicated, we expect consolidated Company revenue growth in the mid-single digits and non-GAAP EPS in the range of $4.90 to $5.15. This is consistent with what we said in May, adjusting for the impact of the lower tax rate this quarter. Jorge will give you more details in his remarks. In closing, I want to thank each of our employees for their hard work in fiscal 2018 and their continued commitment to Cardinal Health. We are fortunate to have such a talented and dedicated team. We have work to do, but we are well-positioned for the road ahead. Together, we look forward to continuing to evolve and grow our business and to further enhancing our value as a vital part of the healthcare system. With that, let me turn it over to Jorge to discuss our financials and outlook for fiscal year 2019.

Thank you, Mike, and good morning. Today, I’ll cover three topics. First, I will review some key elements of our fourth quarter results; second, I’ll share additional information on our operational and strategic initiatives; and third, I’ll discuss our outlook for fiscal 2019. To allow ample time for Q&A, my comments on these results will be focused primarily on the fourth quarter. Our full-year results can be found in our press release. On slide four, Mike already covered revenue and EPS. So, I will give you additional commentary on our financial items. Gross margin grew 7% in the quarter, driven by Patient Recovery. We saw increased SG&A this quarter, primarily due to acquisitions and incremental 401(k) plan contributions. This SG&A increase is not one we anticipate will continue as we are laser-focused on managing our expenses in a very disciplined way. I will cover specific initiatives later in my presentation. Net interest and other expense was about $107 million in the quarter. The increase versus the prior years was primarily driven by the interest on the debt issued to finance the Patient Recovery acquisition. Our Q4 effective tax rate was 12%, which was substantially lower than what we had modeled for the quarter. Let me take a moment to further explain. The Q4 tax rate was driven by a one-time tax benefit derived from the restructuring of international legal entities for Cordis. We took decisive actions over the last three months to address the tax rate pressure we mentioned in Q3 that was related to Cordis financial performance in certain jurisdictions. This one-time tax item was a result of the faster-than-anticipated progress we made in Q4. We continue to work on this front and expect to complete most of our specialties plan in Q1 fiscal 2019. Fourth quarter diluted average shares outstanding were approximately 312 million, about 7 million fewer shares than in the fourth quarter of fiscal 2017. During Q4, we completed $100 million of share repurchases, bringing our full-year repurchases to $550 million. We have about $900 million remaining under our Board-approved share repurchase program. In Q4, we also recognized a $1.4 billion non-cash goodwill impairment charge, which is excluded from our non-GAAP results. This accounting charge resulted from our standard annual impairment testing process and is primarily related to the Cordis business, including its operational challenges we discussed previously. Our continued focus on cash flow generation and working capital management resulted in fiscal 2018 operating cash flow of approximately $2.8 billion. This cash flow performance also reflected timing of vendor payments of roughly $400 million that were accelerated in fiscal 2017 and subsequently normalized in fiscal 2018. Our cash balance was $1.8 billion at the end of June with about $560 million held outside the U.S. Now, I will add some detail for second performance found on slide five. Pharmaceutical segment profit for Q4 was $416 million versus $505 million in the prior years. The decrease was in line with our expectations for the quarter in light of the generic program performance we mentioned in May. To be clear, during the quarter, we saw a continuation of stable generic market dynamics. I’d like to highlight that the trends in our Specialty business are strong. We continue to execute well operationally and commercially with strong top and bottom-line growth. Industry dynamics are positive as well. Continuing with the Medical segment on slide six. Segment revenue grew over 14%. This increase was driven primarily by contributions from Patient Recovery. The fundamentals of this business are solid. Segment profit decreased 17% or $24 million to $114 million in Q4. This decrease was driven by the performance of Cardinal Health Brand products, primarily Cordis, as well as compensation-related items. This was mostly offset by contributions from acquisitions. Now, I’d like to direct you to slide 12, which connects Mike’s commentary around strategy to economics of the initiative that we are implementing to build future growth. In May, we told you that we were beginning an operational review. Here, we list elements of this phased, disciplined action plan to simplify our business, reduce cost, and invest for growth. I will walk through some of our current areas of focus and progress we have made. Regarding cost structure, we recently implemented enterprise-wide cost reduction measures, which provide annualized savings in excess of $100 million in fiscal ‘19. We’re also beginning a zero-based budgeting journey which we expect will deliver more than $200 million in annualized savings by fiscal ‘20. This fundamental shift in mindset will allow us to thoughtfully prioritize, invest, and drive earnings growth through cost discipline now and in the future. The Cordis repositioning is progressing well with our new leadership team in place. The team is moving with a sense of urgency to implement initiatives that will enhance the efficiency and profitability of this business. In Q4, Cordis continued to see top-line growth. As we said last quarter, we expect that Cordis will be on a path to profitable growth by the end of fiscal ‘19. Also, as I mentioned earlier, we are making good progress to resolve the Cordis-related negative tax dynamic we experienced in Q3. Related to Patient Recovery, I’m pleased to report that we achieved our fiscal ‘18 accretion goal. This business continues to perform in line with our expectations and we expect fiscal ‘19 EPS accretion for Patient Recovery to be consistent with the goals we outlined previously. Regarding the pharma model, we are actually evaluating multiple upstream and downstream opportunities. We continue to have discussions with branded manufacturer partners. We are also evaluating our contracting models in light of some of the shifts in bid environment. We’re actively managing our portfolio and expanding critical partnerships. This has translated into a few key business decisions. We divested our China distribution business, established a strategic partnership for naviHealth, and expanded our relationship with Optum. We are diligently assessing additional opportunities. Finally, with respect to capital deployment, our priorities to deliver growth and long-term value are as follows: First, we’re investing into business for future growth; second, returning cash to shareholders; and third, focusing on limited and disciplined M&A. As we execute these priorities, we will maintain financial flexibility. With the right change agents in place throughout our global leadership team, we continue to implement these strategies and see the value thread of the enterprise. Some of these areas have short-term roadways to growth, while others may take some time. But we wanted to give you some context around these initiatives, because we are executing action plans now to address each of them. Next, I’ll discuss our guidance for fiscal 2019. Our full-year enterprise financial expectations can be found on slide 14. For fiscal 2019, we anticipate low single-digit percentage growth in our consolidated Company revenue. We expect non-GAAP EPS in the range of $4.90 to $5.15. On our Q3 call, we indicated we would see modest EPS growth in fiscal 2019, based on the expectation that we would finish fiscal 2018 between $4.85 and $4.95. As we just discussed, in Q4, we saw the impact of the large one-time discrete tax item. Although this item impacts our year-over-year percentage change, it does not change our view of fiscal 2019. While we may see some quarter-to-quarter fluctuations, we expect our non-GAAP effective tax rate to be between 25% and 28% for fiscal 2019, which reflects the full-year benefit from U.S. tax reform, as well as the resolution of our prior Cordis legal entity structure issues, which I mentioned earlier. Our diluted weighted average shares outstanding are expected to be between 302 and 307 million shares. Interest and other expense should be between $340 million and $360 million. We expect capital expenditures to be in the range of $360 million to $390 million. Now, for the segment assumptions on slide 15. For our Pharma segment, we anticipate low single-digit revenue growth. For segment profit, we expect a high single to low double-digit percentage decline due to headwinds related to customer renewals, generic programs, and the loss of PharMerica. However, our specialty business is expected to deliver another year of strong growth. We expect tampered brand inflation, which we are modeling to be in the mid-single digits. We expect generic deflation on the sales side to follow the pattern it did in fiscal 2018, where the environment was competitive but stable. We anticipate Red Oak will continue to provide a year-over-year benefit, but less than in fiscal 2018. Due to the uncertainty around the New York State opioid assessment, we have not included any impact from this item in our fiscal 2019 assumptions. For the Medical segment, we expect low single-digit percentage revenue growth, in line with market growth. We also anticipate mid to high single-digit segment profit growth for the year, driven by projected contributions from Patient Recovery. In closing, we have made significant progress in identifying the path toward growth in fiscal 2019. We are also diligently implementing initiatives that will position Cardinal Health for a future of long-term success. We will continue to share more about this in the coming months. With that, I’d like to open the line and invite your questions.

Good morning and thanks for taking the question. So, I want to unpack some of the generic commentary you’ve made over the course of the call. You talked about stabilizing performance in the business. You talked about Red Oak being less of a contributor going forward. As you think about the moving pieces of the competitive dynamic, where are the areas where you’re gaining upside opportunities on generics? And what are the biggest areas that are creating those incremental headwinds on a year-over-year basis as you think about how generics play forward in the market against the commentary of that competitive but stable?

Thanks for the question, Michael. I would say, as you know, there are several components to our generics program. The ones that we continue to feel very good about are Red Oak. We continue to expect that to be a positive for us, just less of a positive than we saw this prior year. We continue to see generic launches as a positive, although we see them as a pretty small set of launches this year. We continue to see overall generic volumes to be growing for us as we’ve been able to work with some customers to buy more generics from us and from recent wins. Then, the biggest offset is the generic deflation, which we continue to see the market being stable compared to where it was this prior year. But, based on all of the other factors, the net of all that for our generics program, we would still expect to be a headwind.

Yes. Hi. Good morning and thank you for all the comments. So, Mike and Jorge, I just wanted to focus a little bit on the branded inflation assumptions. You talked about mid-single digit assumptions factored into the guide. Can you clarify what cadence is it, what are you assuming for branded inflation between now and December, and then for the second half of the year? I mean, from the comments we’ve heard from manufacturers, it seems that we’re unlikely to see much in terms of inflation between now and year-end. So, I just want to better understand whether you’re assuming mid to high single digit in the second half of your fiscal year versus the assumption for the first half of the year? So, that’s the first part of the question. And then, the second part of it, and obviously you are guiding for fiscal year 2019. But, when we think about the business and we think of everything you’re doing, do you think that in fiscal year 2020 and beyond, you can return to growth in the distribution segment?

Thank you for the questions, Ricky. Regarding branded inflation, I want to emphasize that what we provide for manufacturers and what often gets overlooked in customer interactions is extremely valuable. We play a crucial role in a secure and transparent supply chain, where service levels are nearly at 100%. Both customers and manufacturers recognize the value we deliver, and I expect this to continue. On the topic of branded inflation, I want to make a few points. Firstly, it's important to note that less than 10% of our branded TSA margins depend on inflation, and we are actively engaging with manufacturers who still have a contingent portion. We will focus on minimizing risk where we can. July is usually our second most significant month for branded inflation, but it's still far behind January in our third quarter. What we observed in July was quite minimal. We've heard that branded manufacturers might be holding off until the end of the calendar year. Currently, we anticipate that our third quarter will be our strongest, as that’s when our contingent manufacturers typically increase their prices. We are in discussions with them, and while we expect branded inflation to be slightly lower than what we experienced this year, the majority is anticipated to occur in our third quarter. It may be challenging to provide updates on whether this will be neutral, a tailwind, or a headwind until we see developments in early January. To give you a rough size for context, if the branded inflation deviates only a few percentage points from our current assumption, which is slightly lower than last year’s, we believe we can manage this within our current guidance range. However, if it remains at zero or very low single digits for the entire year, that could pose a headwind. Overall, we feel we have sufficient leeway in our guidance range if the variance is minor. As for your inquiry about fiscal year 2020, I can only share insights regarding fiscal year 2019 at this moment. We have several strategic initiatives underway, in their early stages, with many variables still in flux, including the branded inflation discussion we just had. Therefore, I won’t provide any comments on fiscal year 2020 other than to say we're focused on positioning Cardinal for future success. Next question, please?

Hi. It’s James on for Charles. Could you maybe provide us with greater visibility regarding the impact of inventory to Cordis, maybe help us quantify what the write-down was this quarter, last quarter, and perhaps how much is assumed in fiscal 2019?

Yes. This is Jorge. I’ll take that question. We have not provided specific numbers around inventory write-offs, but what I could tell you is that the team has made tremendous progress in fiscal 2018, in terms of improving our demand planning system, improving our global supply chain platform. As we go into fiscal 2019, we believe we are in a much better position to manage our inventory levels across our global supply chain. So, I’d say, we are making good progress. The trends are moving in the right direction. And it’s one of the key elements of our turnaround plan for Cordis.

Okay. And one of your peers recently noted that they’ve renewed notable customer contracts, but didn’t expect that to be a margin headwind. In contrast, the repricing of Optum is a headwind for Cardinal. Can you maybe provide us with some color on some of the components of a customer contract that could account for this disparity, and are there any notable customer pricing assumed in fiscal 2019?

Yes, thank you for the question. It's important to remember that each customer is unique. Over the years, we have successfully renewed customers with minimal year-over-year margin impact, either because their prices were already very low in the market at the time of renewal or because we managed to grow other parts of their offerings to compensate. Comparing individual contracts can be challenging since each one often exists at different stages of its lifecycle, with varying percentages of brands and generics, along with other factors that can influence the mix. We continue to see customer contract renewals as a headwind for fiscal year 2019 when considering our mix, contract lengths, and potential for additional growth. Many of the renewals have already taken place in 2018, so the impact you are observing includes significant changes such as with Optum, which transitioned from a three-year renewal cycle to a longer six-year renewal. We have agreed to collaborate with them more strategically. However, we prefer not to divulge specifics about individual customer contract renewals at this time. Next question?

Thanks, everybody. So, maybe just trying to understand one thing on the quarter. So, if I look at sort of the segment results for Medical and for Pharma, it kind of implies on the corporate side, larger loss than normal. Is that sort of some of the compensation charges you were talking about? I’m just trying to figure out and net those out, and figure out what the true underlying margins were and how they net to the total for the quarter?

Good morning, Ross. Thanks for the question. Yes. When we step back and look at the performance of the segments in Q4, we actually operationally, we landed pretty much where we thought we were going to in Q4. You’re right, in the corporate segment, there’s a large expense amount that is related to the 401(k) contribution that I mentioned in my prepared remarks. So, that’s what reconciles the performance of the segments to the total performance of the Company in the quarter.

Got it. And so, then, if medical was truly a little bit step back for the quarter, I guess, how are you just thinking about the cadence? Because obviously, we’re coming up against the inventory charges in the first part of last year, but then some of the restructuring in quarters is going to take some time. You stated that Patient Recovery is kind of on plan. So, are we expecting kind of a step-up over the balance of next year and then the normal seasonality? I’m just trying to get that Medical cadence maybe a little bit more finely tuned.

Yes. I think medical in Q4 is hard to look at that and see those numbers as representative of the cadence that we’ll see next year. The other element we had in Q4 for Medical was the push down, the allocation of enterprise-wide compensation entry that happened in the quarter. So, when you combine that with the amount of inventory write-offs that we had in Q3, Q4, that brings the margins for medical in Q4 below the levels we would expect to see for that business. So, when we think about 2019, we should see a lift in those margins given the non-recurring nature of some of those items.

Thanks for the questions. I guess, Mike, just starting on the EBIT guide for Pharma to be down high single-digit to low double-digit. I know you’ve walked through some of the headwinds obviously. But, I was hoping maybe you could just give us a little bit more of a breakdown, maybe rank order off the headwinds that you’re expecting or baking into guidance in 2019? If you could just talk a little bit about generic deflation versus the lower branded and inflation expectations, the contract expiry, and then the offset from some of the cost cutting?

Yes. To be helpful, I'll outline the key factors that will impact our performance, categorized into positives and negatives. First, on the positive side, Patient Recovery will be our primary driver for growth year-over-year. Next, we expect our existing businesses, particularly Specialty, to continue growing at double-digit rates. The tax rate will also play a role, as we anticipate it to fall between 25% and 28%, down from approximately 29%. The discretionary 401(k) contributions won’t be present next year, which adds another positive. Additionally, the benefits from our cost structure initiatives will contribute significantly, with annualized savings exceeding $100 million this year, although much of that will be reinvested to foster future growth. On the negative side, the divestitures of China and naviHealth will impact our P&L, especially since China is no longer part of our business, and naviHealth’s contribution will be considerably diminished next year. Customer renewals will also be a challenge, as many of these agreements were finalized in 2018. Following this, the generics program will also weigh on our performance, along with PharMerica. Lastly, tampered brand inflation will add to the pressures we face. Specifically within Pharma, the challenges include customer renewals, generics, PharMerica, and brand pricing dynamics.

I appreciate all that, Mike. I guess, just on that last point, your brand doesn’t sound like it’s as big a headwind as some of the other issues. But you mentioned talking to some of the branded manufacturers about potentially changing fee structures. Just curious how have those discussions been received and what’s their willingness to renegotiate the way that you guys get paid?

We have been having discussions with manufacturers. In fact, not only discussions but as I mentioned, some of the ones that were contingent last year have been moved to non-contingent this year, and those have gone well. The reasons for the headwind year-over-year is essentially we’re expecting a little bit lower inflation rate. As I mentioned some of those converted. So, there is some timing of when you go off of the contingent to non-contingent. So, those are really the things driving the year-over-year headwind for Pharma. But conversations have been going well. I think what I would say about them is that I’ve not had any manufacturer that’s not recognized that if that is contingent and if they’re not going to be able to have expected inflation, then they don’t understand that we’re going to need to renegotiate for higher rates. If some of the other things being talked about in the marketplace such as changes to WAC prices occur, I think all of the manufacturers understand that there needs to be discussions, and that the way we get compensated will need to be changed. They are negotiations, so it's always hard to predict how those will go. But, as far as having the right attitude to want to work with us, having the willingness to work with us, understanding that we provide significant value, and that it’s the best way to get to market, I don’t think there is any doubt from any of the manufacturers or ourselves that that’s the right thing to do and that we would expect to work through these. Thanks. Next question?

Thanks. Can you speak to the rationale behind the naviHealth partnership/divestiture? If that business was growing nicely for you and how does this put into perspective how you’re thinking about other potential divestitures? Are there any other exits, I guess, contemplated in your guidance at this time, how do you envision your business mix evolving here? Thanks.

Yes. Thanks for the question, Erin. A couple of things. We really like the naviHealth business. But as we look to a couple of things that were important, one is there are a lot of changes in that space, and we knew there was going to be significant investment needed in that space, particularly over the next 12 to 24 months. We knew that all of that investment would be not only impact on the P&L but even more importantly an impact on our ability to focus on the things that will drive these for more value in our Medical segment. We began to explore opportunities, the potential for us to be able to, if we could in a disciplined way get back what we had invested in the business, but still retain some type of ownership with the path back as opportunity to take it back, if we wanted to over the midterm, then that might be something worth doing. We were able to accomplish that. We were able to exit the business and get back more than what we had invested, as we all as retain 45% ownership and work with a really good partner like CD&R who we think is really well positioned to invest significantly in the business over the next 12 to 24 months. This really maximizes the growth potential of naviHealth and allows us to stay focused on the big key drivers for us in Medical, which is turning around Cordis and landing the Patient Recovery business and driving the rest of our business. So, that was the overall reasons behind that. As far as the other decision on our portfolio, as you can imagine, we can’t talk about those specifically right now. But as I said in my prepared remarks, there’s nothing off the table. We continue to look at our portfolio. Each business needs to perform well. We need to feel that we’re an advantaged owner. With those types of lenses, we will continue to take a look at our portfolio.

Okay...

Next question, go ahead, Erin.

No, just on the Patient Recovery accretion goal, I guess, can you quickly just mention the accomplishments there and where we stand with that topic process of exiting the TSAs and how we should think about the financial implications of transitioning those off?

Yes. Thanks, Erin. This is Jorge. So, with respect to accretion goals, as I indicated in my prepared remarks, we delivered what we committed to delivering in fiscal 2018, and we are on track also to be in excess above the accretion that we have forecasted for fiscal 2019. So, things are going well in that part of the performance of the business. With respect to TSA exits, we just began in the last couple of weeks the exit of the TSAs in North America. It is a complicated process that is going well. It will take several weeks to bring everything in line and make sure that all the processes are working as expected. But the early indications are positive. After we complete the exit from the North American TSA exits, we will move on to OUS TSA exits, and in the fall, we’ll begin to exit the arrangements that we have in place for Europe and Asia Pacific. All the preparation work for those exits is also on track. We feel good about the ultimate outcome of those transitions.

Next question, please?

Hi. Jorge talked about $0.16 of higher cost tied to client investments in the back half of fiscal 2018. Are we through those or are those complete? And were those tied mainly to renewals? Thanks. And then, also the opioid investment, are you through that as well? Thanks.

Yes. Dave, thanks for the question. With respect to customer investments, yes, the amounts that we had contemplated to invest in fiscal 2018 were completed. There was a combination of customer renewals and other types of initiatives that we have in place with key customers.

Regarding opioids, we remain dedicated to this issue, which is very important to our company. Ten years ago, we initiated various programs under Generation Rx and have been consistently investing in this area, both internally and externally, for over a decade. I don't anticipate this commitment changing. While it's difficult to forecast the levels for 2019 compared to 2018, we will continue to invest in opioids moving forward, as it is a priority for us.

Okay. And then how many more renewals do you have in fiscal 2019, like new renewals? Thanks.

Since we don’t go through specific customers, it’s difficult for us to really give you any color on that other than of the renewal impact. A portion of it has already occurred in 2018. The rest are those that we know have come up for contract expiration or that we anticipate to renew early. It’s just us looking at our entire portfolio as we do every year. But, other than that, I can’t give any more detail. Next question, please?

Good morning, everyone. Thank you for having me. All my questions have been addressed. Jorge, could you share the timing for the realization of the cost savings programs in relation to the gross numbers? It seems like there will be significant reinvestment. Additionally, it appears we haven't discussed the gloves business recently. Have the sourcing issues been resolved, and is that segment back on track?

Yes. Thanks, George. With respect to the savings, we have a number of initiatives going on. The most important one for fiscal 2019 is in the process of being executed right now. I expect to have the majority of those savings in 2019, but not 100%. We will analyze as we go into fiscal 2020. But, the majority of those savings will be captured in 2019. There are elements around labor reduction, spending policy changes, and indirect procurement initiatives. All of those things are underway. I expect a majority to be captured in fiscal 2019, but there is going to be a piece that is going to annualize in fiscal 2020. With respect to gloves, this equation is not that different from what we have experienced in the last several quarters. As we go into 2019, I think we will be kind of lapping the effect of the increased costs that we began to see in early fiscal 2018. The team has continued to work on multiple fronts to address those cost concerns. I don’t see it as a headwind going into 2019 at this point. But, we are trying to make sure that we do implement initiatives to actually improve and go back to our prior cost positions with those products.

Okay, great. Maybe just a quick follow-up on gloves. Is there a tariff step on there or is that just a COGS issue?

It’s COGS for the most part. Yes.

Okay. Thank you.

Next question, please?

Thank you. Mike, early on when you were talking about evaluating customer contracts and you also were speaking to pricing, you said that things are likely to change and that they should change. Is the should change specific to the pricing environment or did you actually mean that to extend to the way that we’re contracting today with manufacturers and do you see risk and opportunity from that?

Yes. I think it’s both directions, but I’ll probably add a little bit of different color. I think, upstream with manufacturers, as we continue to see manufacturers make different decisions on the amount of inflation they feel comfortable with, if they’re a contingent manufacturer, then we’re going to need to work through those contracts. If manufacturers also decide to make any decisions around WAC prices and reductions there, again, in order to make sure we get compensated for the value that we provide, then those agreements also are going to have to change. I think from that standpoint, as I mentioned earlier, we feel good about the conversations we’re having. It’s a little early to say how they’re going to go because manufacturers are still assessing themselves what they’re going to do, if anything, in those areas. So, we’ll continue to monitor it and continue to have discussions. If there is a date certain that something is going to change, that would be nice, because then we’d all know that what we’re working towards. I think the conversation is such that, like I said, everybody understands that needs to be changed well, and it will. But, if it’s overnight where it’s more of a surprise, it’s probably going to be rocky for a few quarters as we work through them. So, it’s not if we’ll work through them; I am confident that we will. It just might be the timing could be a little off, if it’s more of a surprise and less of a clear target that we could aim for. Next question, please?

Thanks. Good morning, everybody. You guys are pretty good about providing guidance on a quarterly basis, if your expected trends are a little bit different than what the Street may be modeling. Given that you didn’t make any comments today about F1Q 2019 and Street is showing some modest EPS growth year-over-year. I guess, I am just curious are you comfortable with the view of some EPS growth in F1Q 2019 or maybe not even focused on the quarterly cadence of your EPS growth here relative to what the Street might be modeling right now?

Good morning. Thanks for the question. Let me start. First thing I would say is, at this point, we don’t want to be too granular about the quarterly guidance because as you know there are elements that create some difficulty in making those estimates. For example, the ETR, as you’ve seen, it could fluctuate from quarter-to-quarter and therefore could move the EPS around a little bit without actually reflecting the underlying performance of the business. If you think that you should expect to see in the quarters in fiscal 2019, obviously, Q3 will remain one of the probably the strongest quarters of the year due to seasonality, particularly on the Pharma side. On the Medical side, we should see improvement throughout the year. John and the team continue to improve the operations of Cordis, continue to transform the commercial approach, its commercial strategies for the overall Medical segment; but we should be seeing the benefits of those changes ramping throughout the year. And that’s probably what I could tell you at this point. Is that helpful?

Yes. That’s helpful. Thank you.

Next question?

Hi. Thanks very much. Mike, just to go back to your discussion a minute ago about the sort of changing economics within the pharmaceutical distribution business. From your perspective, do you sort of have a model that you envision that would sort of work in an environment where the gross to net spread is getting materially smaller?

I don't have a specific model at this moment. What is essential is that we remain very disciplined. Twelve to fifteen years ago, we underwent a change in our model and developed what we refer to as our next best alternative model, which allows us to assess the value we provide to each manufacturer. Each manufacturer has unique dynamics and performance, and their growth and adjustments can vary significantly. We will continue collaborating with each pharmaceutical manufacturer to determine the most suitable structure that benefits everyone involved. Our primary focus will be on our value proposition and ensuring we are compensated for our contributions. It is still somewhat premature to identify the exact right model. We are engaged in various discussions, including the possibility of maintaining a similar structure but with higher rates since the WACs are lower. This could lead to relatively straightforward changes. Thus, we are exploring a range of different opportunities.

Great, thanks. And then, a quick follow-up for Jorge. The guidance in fiscal 2019 for low single-digit revenue growth within the Medical segment, if you take out the acquisition benefit of Patient Recovery, what would you say the organic growth implied is on the top line?

We haven't detailed the components of our revenue growth. However, in the Medical segment, several businesses are performing well with organic growth. Notably, At-Home and Cardinal Brand, aside from Patient Recovery, are doing well. Additionally, Cordis continues to grow from a revenue standpoint. Overall, most businesses in the Medical segment are showing positive developments in terms of revenue.

Hey. Thanks very much and good morning. Jorge, at the end of the call, you made a comment on the New York State opioid assessment. I didn’t catch that. I was hoping you could clarify what you’re talking about. I do know the judge’s decision there was considered a negative precedent, but I’m not sure I’m familiar with this assessment that you’re talking to?

Yes, of course. In April, New York State established a $100 million annual assessment on all manufacturers and distributors involved in the sale or distribution of opioids in the state. According to this, an initial payment is due on January 1st, 2019, for opioids sold or distributed during the calendar year 2017. We have not included any potential impact from this new law in our guidance due to the significant uncertainties regarding its implementation. Some of these uncertainties include an ongoing legal challenge to the law, complexities in its wording, and the need for further guidance from the state. Additionally, we are uncertain about the actual payment amounts required from each entity in the market.

Okay. Thanks very much. That’s helpful.

Great. Well, thanks, everyone. Is there any more questions?

Great. I just want to thank everyone for taking the time to join us this morning. We look forward to seeing many of you at some upcoming conferences. Thanks and have a good day.