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Cardinal Health Inc  (NYSE:CAH)
Q2 2019 Earnings Conference Call
Feb. 07, 2019, 8:30 a.m. ET

Contents:

Prepared Remarks:

Operator

Good day, and welcome to the Cardinal Health, Inc. Second Quarter Fiscal Year 2019 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Lisa Capodici. Please go ahead.

Lisa Capodici -- Vice President, Investor Relations

Thank you, Bryce. Good morning, and welcome to Cardinal Health Second Quarter Fiscal 2019 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 second quarter results, full-year outlook, and an update on our strategic initiatives.

You can find today's press release and presentation 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 all relevant periods can be found in the schedules attached to our press release. In addition, during the call, we will provide an update to our fiscal '19 outlook 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 and non-GAAP effective tax rate. During the Q&A portion of today's call, we ask that you limit your questions to one with one 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 will turn the call over to Mike.

Michael C. Kaufmann -- Chief Executive Officer And Director

Thanks, Lisa, and good morning, everyone. I'm glad you could join us. Let me begin with some comments on our second quarter of fiscal 2019, and then I'll provide a brief update on the progress we're making on our strategic initiatives to drive future growth. With the first half under our belt, I'm very pleased that we are on track with executing our plan. Overall, the second quarter came in ahead of our expectations, led by the Pharma segment.

EPS for the quarter was $1.29 and revenue of $37.7 billion was up 7%. Operating earnings were $637 million and operating cash flow was $372 million.

Based on the year-to-date performance, we are raising our guidance range for non-GAAP EPS for the full year to $4.97 to $5.17 from our previous range of $4.90 to $5.15. Jorge will walk you through the details and our current assumptions.

Our confidence in raising our guidance for fiscal '19 is based on the tangible results we are beginning to see from the hard work being performed across the enterprise, as we execute on our top priorities.

Turning now to the Pharma segment, few comments. Overall, this business continues to be powered by our partnerships with strong growing customers and the critical role we play in supporting their mission day in and day out. Serving more than 26,000 pharmacies on a daily basis and 10,000 specialty physician offices and clinics, we are integral to their businesses and to their success meeting patients needs. Further, I am proud that our team continues to develop innovative new ways to enhance the value we provide to customers.

As to performance, revenue for the segment was up 8% to $33.7 billion. As anticipated, our generics program remain the most significant profit headwind, and overall generic market dynamics remain consistent with prior quarters.

On the positive side, we benefited from improvements in brand volume. Within this environment, driving down our costs and increasing efficiency remains critical, and during the quarter, we saw positive impact from the cost reduction initiatives we have under way. An additional highlight was our Specialty business, which continued its strong momentum during the quarter, outperforming our expectations. Specialty once again delivered excellent revenue and profit growth, driven by higher volume as well as mix.

In the Medical segment, revenue for the quarter of $4 billion was about flat with a year ago, reflecting the China and naviHealth divestitures. Importantly, we are making good progress on the major strategic initiatives we have under way to drive better results and longer term growth. Patient Recovery continues to achieve integration milestones, including most recently exiting our last major TSA in Asia Pacific in late January. Looking ahead, we remain excited about the longer-term growth potential of this business.

At Cordis, our stabilization program is also on track and the steps we've taken are beginning to have impact.

Service levels and fill rates are up, while backorders and inventory expenses are moving down. The team continues to optimize the product mix and streamline our geographic footprint. We remain confident that Cordis will be on a path to profitable growth by the end of the fiscal year.

Finally, our Services business and Cardinal Health At Home were once again standout this quarter, reflecting ongoing strong demand for both. Services continues to expand its niche, providing value-added technology and logistics support to our partners, while the At Home business is capitalizing on a number of larger healthcare trends.

All-in-all, the Medical segment team is executing and making solid progress. Further, as we look ahead, given our expanded offering of medical products and services, coupled with our strong distribution network, we see opportunities to drive long-term growth, especially in Cardinal Health brand products.

Let me now turn briefly to our strategic priorities, beyond my earlier comments on Patient Recovery and Cordis. Overall, we are making good progress and remain laser focused on how we can deliver the greatest value. With respect to our cost structure, as you know, back in August, we announced a significant cost savings program, and as Jorge will discuss, we are well positioned to exceed both our near-term target of $100 million in annualized savings for fiscal year 2019 and our longer term goal of at least $200 million.

In addition, the team continues to actively review how we operate and seek further opportunities to reduce costs. We have a significant number of work streams in flight looking at both what we do and how we do it.

As it relates to our Pharma model, we continue to actively discuss evolving industry dynamics and evaluate new models with both our upstream manufacturer and downstream provider partners. This includes continuing to push with differentiated pricing models with providers and less contingent margins with manufacturers.

And finally, regarding capital deployment, Jorge will provide a few updates. I would just note that we continue to execute a very disciplined and thoughtful strategy to fund the future growth of the business, return cash to shareholders, and maintain our healthy balance sheet. Supporting all of this work, of course, are our people. And I'm thrilled that we continue to strengthen and enhance our leadership team.

Since our last call, Victor Crawford joined us as CEO of the Pharma segment, and he has brought highly relevant skills and insights as we navigate our evolving industry landscape. In addition, just this week, Brian Rice joined us as our Chief Information Officer to lead our Global technology and Customer Service teams. Brian brings deep experience leading global IT and business services, and we look forward to benefiting from his expertise and perspective.

In summary, while we still have a lot of work to do, there is much to be excited about. As I look back over the past year, we have made significant progress, improving execution, sharpening our portfolio, getting after cost and strengthening our leadership team.

Going forward, our core distribution businesses will continue to be essential to the healthcare system. We will continue to adjust our Pharma distribution business to improve profitability and leverage our Medical distribution business with our significant portfolio of Cardinal Health products.

At the same time, we will invest in our current growth platforms, such as Specialty, At Home and our Services businesses.

Let me wrap up by extending my thanks and appreciation to our entire team for their hard work this past quarter and for their dedication in continuing to advance our strategic initiatives.

We look forward to building on this solid foundation over the balance of the year with the ultimate objective of delivering the greatest value for our customers, shareholders, employees and the communities we serve .

And with that, let me now turn the call over to Jorge.

Jorge M. Gomez -- Chief Financial Officer

Thanks, Mike, and thank you all for joining us this morning. We are pleased with the second quarter performance. We are seeing progress in many areas, as some of our strategic priorities begin to translate into results. Today, I will focus on three areas. Our Q2 results, our full year outlook and updates on a few of our strategic priorities.

Overall, performance in Q2 was better than anticipated due to a few factors. Several businesses exceeded our expectations. We saw volume favorability in the Pharmaceutical segment, better than anticipated expense trends and a favorable ruling regarding the New York state opioid assessment.

Of note, there was also some positive -- positive impact from a timing perspective with corporate expenses and other areas.

Total company revenue increased to $37.7 billion, up 7% versus prior year. Total company gross margin was down 7% from last year to about $1.7 billion. Operating earnings were $637 million. Our effective tax rate in Q2 was 28.5%, a 2.3 percentage point increase versus prior year driven by tax reform and discrete tax items.

Our EPS for the quarter was $1.29, a 15% decrease versus last year. During Q2, we saw a 3% improvement in SG&A due to the divestitures of the China distribution and naviHealth businesses as well as the early benefit from our ongoing cost optimization efforts, which I'll discuss when I cover our strategic priorities.

Interest and other expenses increased 18% versus prior year to about $97 million in Q2. This was driven by the change in the value of our deferred compensation plan. As a reminder, this mark-to-market adjustment has an equal offset in SG&A expenses, and the net impact to the bottom line is zero.

Q2 average diluted shares outstanding were approximately $300 million, about 16 million fewer shares than last year, largely due to the approximately $600 million of shares that we have repurchased year-to-date.

Our Q2 operating cash flow was $372 million, bringing our year-to-date operating cash flow to $736 million. We ended the quarter with a cash balance of $2.2 billion, with about $695 million held outside the US.

Now I'll turn to segment results. Pharmaceutical segment revenue increased 8% to $33.7 billion, driven by sales growth from Pharmaceutical distribution and Specialty customers. This increase was partially offset by the divestiture of the China distribution business.

Q2 segment profit was $443 million versus $514 million last year. As anticipated, this decrease was primarily driven by the negative impact from generic program -- generics program performance, and to a lesser extent by customer contract renewals, a China divestiture and opioid litigation expense. These headwinds were partially offset by the strong performance of Specialty as well as by Pharmaceutical distribution brand volume and initial benefits from our cost optimization work.

Now, I'll briefly provide an update regarding the New York State Opioid Stewardship Act. As many of you know, in December, a federal district court ruled against this law. As a result during Q2, we reversed $5 million we had originally accrued in Q1. We also reversed the $29 million we accrued for all of calendar '17 and for the first half of calendar '18, which was excluded from non-GAAP as we said previously.

Additionally, we did not need to incur the assessment amount that we originally contemplated for Q2. We continue to monitor this matter, and we are following the appeal filed in January by the State of New York.

Continuing to Medical, segment revenue was down slightly to $4 billion, driven by the divestitures of the China distribution and naviHealth businesses offset by growth from existing customers. We saw strong top and bottom line growth in Cardinal Health At Home and Services.

Segment profit decreased 14% to $188 million, this decline reflects increased costs, as well as the divestitures I just mentioned. The increased costs related to Cardinal Health brand products and include raw materials prices SG&A expenses related to TSA exits and global supply chain improvement initiatives . These costs were partially offset by the non-repeat of the prior year Patient Recovery inventory step up charge.

Regarding raw materials, we're beginning to see some encouraging data points in the spot market. However, remember that changes in spot prices take time to flow through our P&L, due to the lack in manufacturing and supply chain costs accounting rollouts.

As part of the broader work to drive efficiencies across the Medical segment, we're streamlining the global supply chain for the full portfolio, including Patient Recovery and Cordis as Mike mentioned.

Regarding Patient Recovery, we're pleased with the performance of the business and the progress made to date. Overall, the integration work is progressing as expected. Our team continues to work through some of the typical challenges seen in large integrations, and this work will continue over the balance of the calendar year.

We anticipate exiting the remaining minor transition agreements by mid-fall as planned. Finally, we continue to be on track to meet our accretion goal.

A quick update on Cordis, we continued to make progress on our federalization (ph) plan and metrics continue to improve. We have seen an improvement in service levels and nearly 20% reduction in SKUs and significantly better management of consigned inventory.

Now I'd like to share a few updates regarding our full year assumptions. With half of our fiscal year complete and based on our expectations for certain industry dynamics and business trends, we decided to raise our non-GAAP EPS guidance to a range of $4.97 to $5.17. It reflects in narrowing of our range from $0.25 to $0.20.

We made a following additional changes to our full year assumptions. First, we expect mid-single digit revenue growth, primarily driven by the Pharmaceutical segment. Second, so our tax rate may fluctuate by quarter as we saw in Q1 and Q2, we expect a tax rate in the range of 25% to 27% for the full year. Third, we revised our diluted weighted average shares outstanding to the range of 300 million to 302 million shares.

For the segment assumptions, with the strong revenue increase we saw in the first half, we expect Pharmaceutical segment revenue to grow in the mid-to-high single digits. This is mainly driven by brand sales to large customers.

One item of note, in January, brand inflation increases came in within the range we were expecting. As we have discussed before branded inflation represents a very small portion of our total brand income as income from DSA fees accounts for nearly 95% of our total brand compensation.

Finally, for the Medical segment, we expect revenue to be approximately flat, a key factor impacting this change in our assumption is foreign exchange.

Let me now provide an update regarding a few of the strategic priorities that we have discussed throughout the year. Regarding our cost optimization work, we now expect to exceed $100 million of annualized savings for fiscal'19, we also expect to exceed the aggregate $200 million in savings by the end of fiscal '20.

We continue to empower our employees to reset spending practices across the enterprise, and this work will increase productivity, support our priorities and fuel growth initiatives.

Moving on to the strategic uses of cash, during the quarter, we deployed capital primarily to fund capital expenditure needs of the business and our quarterly dividend. Yesterday, our Board approved a regular quarterly dividend, which will be payable to shareholders on April 15th.

Most importantly, we continued to increase our level of scrutiny and selectivity regarding capital allocation across all categories.

In closing, we are delivering on our commitments year-to-date, and we are pleased to deliver a Q2 performance that was better than anticipated. As a result, we were able to increase our full year expectations. We are beginning to see our strategic work and our operational performance aligned, and we will continue to build on this momentum.

With that, I'd like to open the line and invite your questions.

Questions and Answers:

Operator

Thank you. (Operator Instructions) We'll take our first question from Ross Muken with Evercore. Please go ahead.

Ross Muken -- Evercore ISI -- Analyst

I'd love maybe a little bit of more color on sort of the Specialty Solutions outperformance, maybe just a bit of -- sort of background on maybe a couple of the pieces that are kind of contributing, and it seems like that business has been sort of outperforming now for some time. And maybe just give us a feel for, in the context of -- I think the space trying to get better economics on those sort of relationships both on some of the manufacture service but on the base distribution, how you've sort of done in terms of essentially getting fair value for the services you're providing in that business ?

Michael C. Kaufmann -- Chief Executive Officer And Director

Hey. Thanks, Ross. Appreciate the question. I would say that the performance in Specialty is really cuts across several different areas. First of all, our offering downstream to our physician offices and clinics. We continue to see good traction there, continuing to win some volume in that space, and so that's been generating some of the better than expected performance for us. We've also been able to see benefit from just a pure growth of the Specialty business alone. Our manufacturer partners continue to launch new items, grow their share and that's obviously benefiting us.

We've also had strong cost control in our Specialty unit like the rest of our units, they are getting after their activities and really focusing on what are the value-added activities. And then lastly our upstream services, we continue to gain traction in our hub, our 3PL business continues to win share. And so really it's across the board, I wouldn't say it any one thing particularly that stands out, it's just more across the board, solid performance by the team.

Ross Muken -- Evercore ISI -- Analyst

That's helpful. And maybe just a follow-up. It seems like inflation kind of came in at least on the branded side in line. I mean, in lieu with all of this sort of noise coming out of the government and Azar's sort of latest proposal. I guess how are you thinking about sort of the inflation environment for the rest of the year? And what you're going to see maybe for the foreseeable future ?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah. That's a great question. I -- at least for this fiscal year, I would tell you that really the -- the January is really the month that we expected to see all of the inflation. So we have very, very little built-in for the rest of the year. So that is not something that we would call out as a risk for the second half of the year, it was really a big focus on January for us, would it come within that range that we were expecting. It did come in within that range of inflation that we were expecting, and we were able to work with our manufacturing partners there and really got about what we were expecting. So for the rest of the year, it's really not a factor. As far as next year, it's just a little too early for us to comment on that, there's so many moving parts related to that, and some of our agreements will be obviously expiring and looking at renegotiating. And so we're going to be looking at trying to move more to non-contingent as we can, since we're well over 90%, in fact, we're nearly 95% at this point in time, that we will look to move more there as we can, but again, nothing the rest of this year of any materiality.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Robert Jones of Goldman Sachs. Please go ahead.

Robert Jones -- Goldman Sachs -- Analyst

Great. Thanks for the questions, I guess, Mike, maybe just a pickup there. If I look at the implied back half guide specifically for the Pharma segment, the revenue trending above original expectations that you raised the expectations for the full year there, but you left the EBIT expectations the same, so obviously implying slightly worse EBIT in the back half than maybe what you were previously thinking. Just I was curious if there's any changing dynamics or things in the marketplace that you're seeing today that maybe you weren't seeing when you laid out the original fiscal '19 plan, that might help explain the -- maybe implied lower EBIT margin expectations in the back half?

Jorge M. Gomez -- Chief Financial Officer

Bob, good morning, this is Jorge. Let me try to help you with that. First thing I would say is we -- with the first half of the year behind us, we feel good about our guidance, we feel so good that we decided to raise our total guidance for the year.

If you look at the overperformance in Q2, you probably want to think about it in three buckets, and certainly from an operational perspective, some of our businesses did better. We talk about Specialty, strong volume in Pharma distribution was good in the quarter, and some of the business units within the Medical segment performed well. And so that has given us confidence to deliver results in the second half of the year. The trending is good from an operational standpoint.

In Q2, we also had one-timers or non-repeatable items or items that in fact don't have any impact to the bottom line. So for example, the ruling in New York about the opioid assessment. This is something that we had accrued for in Q1, we've reversed that amount and then some amounts that we had contemplated for Q2, we did not have to accrue.

And then finally, there are some sizable items related to -- for example deferred compensation, deferred compensation had a positive impact in SG&A, but a negative impact of the same magnitude below the line with a net zero impact to the bottom line. So that is -- this is something that has no bearing with respect to its trajectory going into the second half.

And we had some corporate expenses timing between Q2 and Q3 that, again, they have no impact to the overall year. So when we look at the benefit in Q2, all the Rs and Os, the trajectory of the business is we decided to raise guidance and based on all of those factors, this guidance reflects our best estimate for the second half, which by the way, as I said before, that we feel good about the trajectory of both of our businesses within the context of the guidance we're providing.

Robert Jones -- Goldman Sachs -- Analyst

Great. That's helpful, Jorge. And I guess maybe just a follow up on the Pharma segment. Not necessarily new news, but you guys highlighted the generic program is remaining a very large headwind. I just wanted to better understand what's at play there. Is this just because you're lapping strong contribution from last year, or is there some changing dynamics in the generic marketplace that is weighing on the generics business?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah, thanks for the question. I wouldn't say that it's anything new in fact, what I would say is that our generic program performance remains essentially consistent quarter-to-quarter. Remember, it's made up of several different things. We're seeing sell-side deflation remained consistent quarter-to-quarter. Obviously, we've said in the past, we'd like to see that improve, but it is at least remaining consistent. We have also our buy side, Red Oak continues to perform as expected.

And then we have launches and penetration all of again, which are about as expected, but that sell-side deflation as we noted at the very beginning of the year, we felt that the pressure from the sell-side would offset the positives we see in launches, penetration and costing, and there would be a net headwind for the year, and that's continues to be what we're seeing. So I wouldn't say there's anything new. But when we look at it in total, the program continues to be our largest year-over-year headwind.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Charles Rhyee with Cowen. Please go ahead.

Charles Rhyee -- Cowen and Company -- Analyst

Yeah, hey, thanks for taking questions. I want to go back to sort of the your early (ph) comments about the Specialty segment. The performance here that you talked about and certainly performance in the overall revenue Pharma segment, kind of mirrors what we're seeing across the peer group as well. Is there anything sort of characteristic you'd say that's changing in the market overall as well that is kind of -- that we're kind of seeing this occur more broadly based?

Michael C. Kaufmann -- Chief Executive Officer And Director

Nothing that sticks out to me. I mean, it continues to be a strong growing market. So it's one of the fastest growing components, obviously, of the Pharmaceutical segment. So I just think pure market growth, the manufacturers are doing a good job of driving growth on their drugs and we're benefiting from that growth from them. And then as I said, we continue to see improvements on our both our downstream penetration with accounts and growth of new accounts. And then upstream, we've had some businesses that we've talked about that we were working on and growing for instance, our hub, which is still relatively a new business, continues to improve its performance. And our third-party logistics business continues to win in the marketplace with the investments we've made in that business.

So I wouldn't say anything specific other than it is a -- just overall, a strong growing market, and we participate in many different areas in it.

Charles Rhyee -- Cowen and Company -- Analyst

Okay. And then maybe a follow-up for Jorge. I think last quarter you said, you're expecting the second quarter, consolidated operating profit to be more sort of in line with 1Q. I think you've touched on some of the factors that have the -- that led to the outperformance here in the second quarter. Was there anything other -- were there any other drivers that you'd point out and maybe you can help size some of these for us? Thanks.

Jorge M. Gomez -- Chief Financial Officer

So I already kind of lifted all of the items that resulted in the overperformance as I said before about good, good underlying trends in most of our businesses and then we had some one-timers related to corporate -- or timing issues related to corporate expenses, deferred compensation. I think I covered all of the items that really explain what happened in the quarter relative to our expectations. We are really pleased with how the business has performed this quarter.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

We'll take our next question from David Larsen with Leerink. Please go ahead.

David Larsen -- Leerink -- Analyst

Hi. Can you talk a little bit about Cordis. I think you said that there is more effective management around consigned inventory. Did revenue for Cordis grow, and what exactly is leading to that tighter management of the inventory? Were new technology systems deployed, were new folks hired? Thanks a lot.

Jorge M. Gomez -- Chief Financial Officer

Thanks for the question, Dave. Cordis in the quarter was not, was not a driver for us. We continue to make progress. The plant, the sterilization plant that Jon Giacomin and team are leading is yielding good results from an operational perspective. Our metrics in that, in that business continued to improve. I think overall, the commercial health of that business is, it has been, has been good for a number of quarters now.

And with respect to specifics around infrastructure and technology is what we have discussed before, we had been working pretty intensively in terms of having better data, better demand planning systems, processes around consigned inventory, have been put in place, and we're beginning to see the overall results of all of this work.

So given all of that, we continue to expect that Cordis will be on a path to profitability -- profitable growth by the end of fiscal '19.

David Larsen -- Leerink -- Analyst

Okay. And then did revenue grow for Cordis?

Jorge M. Gomez -- Chief Financial Officer

As I said before, the trend in the business has been, has been positive for the last several quarters and the commercial health is good. There is -- as I indicated in my prepared remarks, overall in the Medical segment, FX was -- foreign exchange was a -- was a small headwind in the quarter and that impacted kind of all of our businesses across -- across the Medical segment.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Ricky R. Goldwasser -- Morgan Stanley & Co. -- Analyst

Yeah, hi. Good morning, and congrats on a very good quarter. When we think for the second half of the year, if we normalize, you have I think a little bit of a lower tax rate and lower share count, and when we normalize for that, second half guide seems to indicate a very wide range down -- on EPS down 4% to up 3%. So when you think about kind of like that range, what are you watching for? What are the risks that could lead you to kind of that down 4% that could materialize in the next couple of quarters, because you know branded inflation is, so you have a pretty good sight of you to that. So what are the other things that could materialize in the second half for you?

Jorge M. Gomez -- Chief Financial Officer

Thanks Ricky for the question. Listen as I said before, we have been looking at that -- it's our cadence of the quarters with first half behind us, we feel much better about the cadence, about the ramp from first half to second half. There are always items that could create some changes, and starting with probably the easiest ones that you have seen a few times fluctuate the tax rate, we have narrowed the range of the tax rate, but it could be -- from quarter-to-quarter, it could fluctuate.

We continue to watch other drivers of profitability in each of the segments. In the case of Medical, I indicated that for example, costs, especially around raw materials is, we are seeing good signs in terms of the spot price -- spot market prices, but that is something that we continue to watch. So there is a lot of puts and takes, and when we put all of those together, like, we believe that the second half is a reasonable good ramp for us and the range is reasonable.

I think the most important point is overall, we're raising the bottom of our range, we're raising the top, we're narrowing the range, and that is a good indication that net-net, all of our risks and opportunities are trending in the right direction and we feel a lot more comfortable about the rest of the year.

Ricky R. Goldwasser -- Morgan Stanley & Co. -- Analyst

Okay. And then one follow-up, when you talk about revenues, you talked about obviously the Specialty to Medical, the strong brand volume in the Pharma. Can you just explain to us and what is driving the strength in brand volume? Because we're not necessarily seeing in IMS script, so what's driving that better performance on the branded side ?

Michael C. Kaufmann -- Chief Executive Officer And Director

I think it's more customer mix than anything. We're partnered with some very strong customers in the marketplace that I think are growing nicely through a combination of mostly organic growth with probably some small M&A themselves there. And we're just benefiting from being partnered with strong partners, I think is really what it is more than anything else.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Michael Cherny with Bank of America. Please go ahead.

Michael Cherny -- Bank of America Merrill Lynch -- Analyst

Good morning. Thanks so much for the color so far. Jorge, I want to revisit some of the delta at least in terms of the two quarter performance. You talked about some level of timing related to corporate expenses. That being said, with the original commentary, you grew sequentially EBIT by about $96 million, usually, there is a typical sequential step up in this quarter. But if you think about what was different in this quarter, how much of it was timing-oriented versus how much of it was structural in terms of some of the restructuring programs and business optimization that you're pursuing?

Jorge M. Gomez -- Chief Financial Officer

Yeah, Michael. Thanks for the question. I won't be able to tell you exactly the relative magnitude of each of the pieces, but I would tell you the items that were timing related or that had no impact to the bottom line are sizable. So good performance from a lot of our businesses, but those two items, timing of corporate expenses is a pretty sizable item. So that is one of the key reasons why we are not letting that flow through in the guidance for the rest of the year.

Michael Cherny -- Bank of America Merrill Lynch -- Analyst

Understood. Thanks. I'll get back in the queue.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Lisa Gill with JPMorgan. Please go ahead.

Lisa C. Gill -- - JPMorgan Securities -- Analyst

Thanks very much. Good morning. Mike, I just want to go back to your comments around quarter three, you talked about refining the geographic footprint. I think when we're together last month, you talked about going from roughly 60 countries to maybe around 45. Can you give us more color on, is that the right number to think about that you're going to go down to 45 countries for Cordis? I understood you said profitability by the end of '19, but can you also just leave in your thoughts around Cardinal brand products, we saw an increase in cost here in this quarter, but are there opportunities when you think about the countries now that you're overlaying in Cordis, have you made the investments you need to make, so that when we think about going toward the back half of this year and that profitability is that driven by your branded products ?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah, thanks for the questions. Let me try to catch on each one of those. First of all, I think Cordis, there is probably two things we're doing to try to simplify the business. One is, not only reducing the number of countries, and your -- numbers, you mentioned are approximately right, but we're looking to continue to reduce that number, and we're being very specific and detailed as we evaluate each country to make sure that at the end of the day, we're looking at what is the true growth potential in that country, what are all the other potential hidden costs and risks that might be in that country compared to our current footprint and ability to grow, how might we be in that country in a different way, do we have to have our own commercialization or can we just work with distributors? But I would fully expect to see us continue to reduce our footprint a little bit there.

Also, the other thing that we've done is we've taken a really hard look at our SKUs. And so far we've reduced about -- our SKUs by about 20% in Cordis, because we had a lot of slow to no moving SKUs, which again drives potential inventory risk also manufacturing cost. And so we're trying to focus our customers on the SKUs that matter for us and move them from some slow to no moving type of SKUs that were out there and move them to the right mix of SKUs to help our cost structure. So those are two big things that we're doing in Cordis.

And as Jorge said, the commercial health of the business continues to be strong and we have seen some FX some headwinds, but overall, commercial strength continues to be strong. We continue to try to be very careful about the way we're going after some of our SG&A right now, while we maintain that top line and clean up some of these other things like inventory visibility and that.

As far as our Cardinal Health branded products, I would say that we're really -- I'm taking a holistic approach on those, to look not only at the breadth of that line, where we manufacture it, how we manufacture it, i.e. our overall global footprint, so also taking a look at those countries, where we sell those products and are we doing it in the right way, so we want to play in the countries, where we believe there is future growth and where we can win. And obviously, look at other opportunities up to and including exiting countries, where we don't think it has the rate growth trajectories or the opportunities for us to win.

Lisa C. Gill -- - JPMorgan Securities -- Analyst

Okay. Great. And then I guess, my -- just to follow up, will just be Jorge. I know everyone keeps coming back to try and understand the cadence of earnings. Just so I understand this correctly, when you last told us that things would look sequentially similar between the two quarters, you were not anticipating New York State opioid being reversed, you were not anticipating that, the expense timing around some things and some of the benefit being pulled forward to December as well as deferred comp. So those are kind of the three things that when you look at that, that was the big difference between when we spoke last and what you actually reported in the quarter, is that the right way to think about it?

Jorge M. Gomez -- Chief Financial Officer

Correct Lisa, that's exactly right. Those are the unexpected pieces that all came in our way.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Steven Valiquette with Barclays. Please go ahead.

Steven Valiquette -- Barclays Capital, Inc. -- Analyst

Great. Thanks. Good morning, everybody. So just another question from me and coming to the commodity spot pricing and timing, et cetera. I mean it sounds like you're really not raising the guidance today for that metric, you cited the other three buckets of outperformance for fiscal 2Q. But it's coming back to our discussion around this last quarter, as you guys mentioned, it's hard to calculate the overall inflation, but you do have an example in the 10-K that again a hypothetical 10% increase in key commodity input should be about a $0.10 hit to overall EPS. Now some of these trends are softening in your favor, you mentioned the data points and everything else. I guess, I'm just curious within the current guidance range, could less commodity inflation risk still be an EPS driver into the magnitude of $0.10 plus within the guidance range. Just curious for the back half of the year, how much commodity inflation could move EPS is really what the question is?

Jorge M. Gomez -- Chief Financial Officer

Steve, good morning. Thanks for the question. So commodities and raw materials costs continues to be a headwind for the rest of the year. What I -- what I indicated earlier is, that is trending in the right direction. However, there is always a long lag between the time we see those positive changes in the spot market and when we see the benefits in the P&L. So that I think, I think the most relevant part about that statement is that it's one of the reasons why we are comfortable with raising guidance, because although, it continues to be a risk based on the spot prices we are seeing today, we don't believe at this time that, they could get worse for the rest of the year. And so that's how we're thinking about that piece.

Steven Valiquette -- Barclays Capital, Inc. -- Analyst

Okay. So just to be clear then, so the guidance range today does incorporate a little bit of the better outlook on commodity inflation?

Jorge M. Gomez -- Chief Financial Officer

Yeah. (multiple speakers) No. It is, it is -- our view on the trending (ph) on commodities is one of the factors that is contemplated in guidance.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Eric Percher with Nephron Research. Please go ahead.

Eric Percher -- Nephron Research -- Analyst

Thank you. Mike, with respect to the HHS proposal last week and all this is starting to think about what a world of discounts might look like. There's a question raised around how the actual flow of funds may occur and maybe if there is a role for distributors to play. I think for your peers we understand some of their assets and relationships that enable them to play, could you tell us a little bit about how Cardinal might be able to play a role?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah, absolutely. First of all, this announcement around the Safe Harbor changes was not unexpected. And as you can imagine, we like many other support efforts to lower prescription drug costs for patients, and we are truly committed to engaging with the administration and the entire system to figure out how best to do that. That being said, I would, I guess, I would -- to your answer I'd probably put it in two buckets. I agree there are opportunities for the industry as a whole to help facilitate solutions to get you know rebates possibly down to the patient. And the best way to think about it is we just like our competitors, maintain sophisticated chargebacks systems already with the manufacturer and with our customers. So every day, we are managing thousands of transactions between customers and suppliers. And so while this would definitely be at a more detailed level if we needed to do something down to the patient in the script, it is something that as a company and as an industry, we believe that we could get after. And it's something that I think that the whole industry understands well, the importance of the role that we play in healthcare, in general, and the important role that we play for manufacturers to be able to do this. So I do think that we are as well as positioned as anybody to continue to help in that.

And then I know some people have some concerns, would it change the overall list prices and other things like that in the marketplace? And I think well, if it did, we do feel confident in our value proposition that we've talked about multiple times that we work with manufacturers, they understand the value of our proposition and we constantly work with them around that, and that we'd be able to adjust our overall pricing mechanisms with manufacturers to remain whole on the dollars that we're receiving.

Eric Percher -- Nephron Research -- Analyst

I appreciate both of those comments. So I understand that chargeback piece, is there any role that Cardinal plays today at the point of sale?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yes, in some ways we do. Obviously, we work with customers, for instance, in the area of medication therapy management, what you'd call that point of sale, are we connected with our customers pharmacy systems? Yes, through inventory management, through medication therapy management and through other connectivity of communicating with our pharmacy customers on a daily basis. Yes, we have connection with them specifically to -- related to this particular issue. I think we have enough connectivity that we can work with them through other solutions and through opportunities with the industry to drive benefit.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Brian Tanquilut with Jefferies. Please go ahead.

Brian Tanquilut -- Jefferies -- Analyst

Hey. Good morning, guys. Jorge, just a question on margins. As I think about the Pharma segment, obviously, you've had some -- you're still trying to lap some repricings, but how are you thinking directionally about margin trend past the next quarter in the Pharmaceutical segment? Thanks.

Jorge M. Gomez -- Chief Financial Officer

Thanks for the question. So clearly, as we go into Q3, as all of you know, Q3 is our best quarter in terms of a Pharmaceutical segment margin profit. And so that's going to be normally higher than Q1, Q2 and even Q4. Other than that, I don't see any significant change with respect to margin trends in the Pharma business. Obviously, a lot of the cost initiatives that Mike was referring to, a lot of the pricing initiatives that we have going on. We are always trying to expand margins in that business and cross all businesses.

So I don't expect to see any, again, other than the seasonality in Q3, related to brand inflation, i.e. for this year within the guidance range we've provided. I don't see any major fluctuations in margins for -- for the Pharma segment.

Brian Tanquilut -- Jefferies -- Analyst

All right. Got it. Thank you.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from John Ransom with Raymond James. Please go ahead.

John Ransom -- Raymond James -- Analyst

Hi, just following up on that last question. I think we've all -- I mean, we've been in a three-year journey of margin decline in Pharma Dis in high single-digit, low double-digit declines. Are you now saying the current -- so let's say that your sustainable revenue growth is in the 7% range. Are you now saying after lapping this year, you think you can hold margins flat and generate a high single-digit revenue growth in that segment? Or are we still looking at margin pressures on an absolute basis, because of all the things you talk about?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah. At this point in time, it's, -- we're not going to get into FY '20 guidance. All I can really say is that we feel good about who we're partnered with, with our customers and continue to feel that we're partnering with the right folks, and we'll win as they win in the marketplace. And -- but as far as margin rate, the impact of our generics program year-over-year, it's just a little bit too early to say whether that will continue to be a headwind or what size that will be next year as we continue to evaluate all the components that we have mentioned, we're going to have to have obviously our thoughts around what the sell side deflation rates going to be as well as launches penetration in buy side. And so still a little too early on that. I can't tell you that we're going to continue to be focused on being aggressive on cost and being trying to focused on the areas that we believe we can grow and stay laser focused on those.

John Ransom -- Raymond James -- Analyst

Sure. And just the other thing. I appreciate the comments. Just following up on another thread, let's just say hypothetically that the manufacturers look at the Safe Harbor changes and decide to move to a low-net price model, and we see something like on branded drugs 30% compression in gross to net.

And the actual dollars or the actual revenue dollars for Cardinal would be -- on the branded side would be compressed. Just help us understand the process by which you'd have to go back and recut. I'm assuming hundreds of contracts between your manufacturers and your customers. And was there any sort of Safe Harbor provision in your contracts or is this just going to be sort of lengthy, protracted, recontracting cycle, if we see a big bang change in industry pricing.

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah, great question. There are couple of things, I think obviously, we can't speak to the manufacturers, but there's obviously a lot of things they have to look at. There are a lot of implications in reducing WAC prices for them that make it a very complicated and somewhat difficult thing to do for them when it comes to related to returns, and how they would price customers, whether differentiated pricing and all those types of things, it gets very difficult. But assuming that just using as a hypothetical if they did. I think there's two things I would keep in mind. First of all, remember, one of the most important things to keep in mind is that our downstream pricing is also attached to WAC or list price, and so that only will our overall dollars that we earned from manufacturers be initially reduced on day one, but the overall dollars that we passed to customers would be reduced on day one, two. And so there is a natural hedge against the overall size of that, that reduces some of the impact to distributors.

And then also, secondly, as you can imagine, with all the talk around this for the last 12 months or so, we have been working with manufacturers to change the way our contracts are structured, if there was a significant change in WAC to be able to renegotiate contracts quickly. And for the ones that we're still in contracts with, they know our expectations. And more importantly, they know our value. They continue to believe -- I believe in the overall wholesaler value proposition, they know through our discussions and through our work on our next best alternative that there is no better way to get their products to market on a fair price and cost.

And I believe what this industry does. And I believe that the Pharma manufacturers do too, and they want us to be healthy. And so while it's not something you solved in a week when it changes, it is not something that I would see as a longer term headwind that our conversations have been very positive on both our value and our ability to change our agreements to reflect the dollars that we currently get.

Lisa Capodici -- Vice President, Investor Relations

Operator, next question?

Operator

We'll take our next question from Kevin Caliendo with UBS. Please go ahead.

Kevin Caliendo -- UBS -- Analyst

Hi, thanks for taking my call. Just one quick follow-up to that, you said earlier that you thought in the contracting renegotiations that on a dollar-to-dollar basis, it would be the same. Are you thinking like literally in dollars? Or are you thinking about ROIC, meaning your inventories would be a lot less, your amount of capital outlay, such that your returns would look the same, but maybe not the actual dollars or are you actually thinking that the dollars themselves in terms of the recontracting, you would think, still remain the same ?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah. I still believe that the dollars would be the same. I think that your comment around ROIC, there might be some changes to that as you take a look at overall the whole model and those things are always considered when we work with manufacturers, when they ask us to carry more or allow us to carry less inventory, we work with manufacturers. But generally, we see this is something, where we're really truly focused on the dollars that we received as the value for the services we provide, and we would expect that those dollars would be matched be very similar over the long term as where they are today.

Kevin Caliendo -- UBS -- Analyst

Second question, you mentioned earlier you don't expect any more brand increases -- brand price increases for the rest of the year. I'm assuming you were talking about your fiscal year. Generally speaking, what about the calendar year? I'm not asking for 2020 guidance, I'm just talking about, do you expect a typical June or July one sort of price increases as well, do you think there's going to be anything different with that? Or are you expecting that for the full calendar year that January was going to be a much larger percentage in terms of magnitude and depth or breadth of price increases?

Michael C. Kaufmann -- Chief Executive Officer And Director

Yeah. That's a Fair question. First of all, to be clear, it was our fiscal year I was talking about, and that we would expect relatively immaterial increase, not -- it wouldn't be zero, but we don't expect a significant amount of increases between now and June 30th, the majority was in January, and it occurred within the range we expected. So that was just more to help you understand, we don't see a lot of risk, if it were, absolutely zero between what we have been and what's left to do.

Regarding the whole year, I don't want to get into a lot of forecasting, but this past year, what I can say is that, at the beginning of the year, we did expect more July increases than we actually ended up seeing. So at the beginning of the year, we did expect the old traditional of a little bit in July, and then some spread out and more in January instead, what we saw was less than July and the rest of the year and more pushed to January.

So while the overall dollars were less year-over-year in January or in total for the year, there was a higher percentage in the month of January. And so it's hard to say for right now, but it's probably a reasonable assumption going forward, but again, it's just -- it's hard for us, and we'll continue to listen to the administration and talk to our manufacturer partners to understand their thoughts around timing of price increases.

Lisa Capodici -- Vice President, Investor Relations

Operator, we have time for one more question.

Operator

And we'll take our final question from Eric Coldwell with Baird. Please go ahead.

Eric W. Coldwell -- Robert W. Baird & Co. -- Analyst

Hey, thanks. Good morning. So Mike, every distributor has shown really nice revenue upside this quarter, you guys $1.7 billion ABC, 1.6 billion, McKesson over $1.1 billion, that's summing up to about $4.5 billion in the quarter, about $20 billion annualized -- $18 billion annualized. So I guess my question is this, everybody says their growth is because of their big customers doing well, it's sort of unique, but it's really not unique, it's the whole sector of the big three. Something has to be happening here, because we have generic deflation, brand inflation is running at a decade low. I don't think most of us are really seen it in the volume numbers. So I guess my question is this, there has to be a hook I'm worried that maybe this is your big clients are actually starting to decimate the small independents, you might have a different angle on that, but I'll open it up with that.

Michael C. Kaufmann -- Chief Executive Officer And Director

It's a very fair question. It's hard for me to comment on everybody's customer base. Remember, there are a few pieces due to some acquisitions by folks acquiring other chains and other businesses in the industry, that's having some impact on various people's growth. Also the other thing to keep in mind, and we can't get into details specific to our customers, but remember, at least in Cardinal's case, which I can comment to is, some of our customers buy certain products direct, and they may change some of those products from buying direct to buying through us. The amount, their timing of their inventory builds could have an impact, you could have extra day of sales or so in a quarter, it's hard for us to know exactly when they've done that and not done that, so there's probably a few things like that moving around the numbers.

I wouldn't say that it -- I would say that it's totally at the expense, for instance, as your comment around retail independents or anything that, we continue to see that class of trade, have similar trends to the past and continue to be healthy. But this is just -- a lot of potential moving parts which is hard for me to comment on everybody's reasons.

Eric W. Coldwell -- Robert W. Baird & Co. -- Analyst

Do you think that some of the changes with price transparency, the California rule, et cetera, is it somehow driving your customers to maybe buy inventory in December that they might have historically bought in January or February? Is there some angle there that we should be investigating ?

Michael C. Kaufmann -- Chief Executive Officer And Director

It's hard to say how each one of the customers evaluate their balance sheet and what they want to do. It's often hard for customers due to the limited space and stuff they have in their stores to do a lot of extra buying, but to say that I can tell you that they had zero impact, I can't tell you that. So it might have had a small impact, because there is as you mentioned a little bit more visibility to some of -- when price increases are going to occur. So that could be a potential, which is why I mentioned that you'll see potentially quarterly fluctuations on sales, because of -- particularly when you have customers that warehouse Pharmaceuticals like we do have several of our large customers warehouse them that depending on the day, the month, their views like you said on price increases, service levels, those types of things that can cause fluctuations.

Operator

I'd now like to turn the conference...

Michael C. Kaufmann -- Chief Executive Officer And Director

Okay. Go ahead.

Operator

I'll now turn the conference back to Mr. Mike Kaufmann for any additional or closing remarks.

Michael C. Kaufmann -- Chief Executive Officer And Director

Great. Thank you very much. I want to thank all of you for joining us today. As I think you can see the team continues to move forward in executing our plans and positioning Cardinal Health for the future growth. I'm proud of the work the team is doing. And as we take steps to further enhance Cardinal Health's competitive position in the marketplace, support our customer base and drive shareholder value. And we look forward to reporting on our future progress. Take care, and have a great day, everybody.

Operator

This concludes today's call. Thank you for your participation. You may now disconnect.

Duration: 67 minutes

Call participants:

Lisa Capodici -- Vice President, Investor Relations

Michael C. Kaufmann -- Chief Executive Officer And Director

Jorge M. Gomez -- Chief Financial Officer

Ross Muken -- Evercore ISI -- Analyst

Robert Jones -- Goldman Sachs -- Analyst

Charles Rhyee -- Cowen and Company -- Analyst

David Larsen -- Leerink -- Analyst

Ricky R. Goldwasser -- Morgan Stanley & Co. -- Analyst

Michael Cherny -- Bank of America Merrill Lynch -- Analyst

Lisa C. Gill -- - JPMorgan Securities -- Analyst

Steven Valiquette -- Barclays Capital, Inc. -- Analyst

Eric Percher -- Nephron Research -- Analyst

Brian Tanquilut -- Jefferies -- Analyst

John Ransom -- Raymond James -- Analyst

Kevin Caliendo -- UBS -- Analyst

Eric W. Coldwell -- Robert W. Baird & Co. -- Analyst

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