Q3 2020 Earnings Call
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You were currently on hold for the Cardinal Health Inc. third quarter fiscal year 2020 earnings conference call. At this time resembling today's audience simply anyone who will shortly be appreciate your patience and please remain on the line.
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Like I can't see onto the Cardinal Health Inc. third quarter fiscal year 2020 earnings conference call.
Today's conference is being recorded.
This time I would like to turn the conference over to Kevin Maria. Please go ahead.
Good morning. This is Kevin Moran, Vice President of Investor Relations.
We hope that you and your loved ones are healthy and safe and we thank you for joining us as we discussed Cardinal health third quarter fiscal 2020 result, and expectations for the remainder of the fiscal year.
Joining me on the call today are my Kaufman, Chief Executive Officer, Dave Evan Interim Chief Financial Officer, and Jason Holler, our incoming Chief Financial Officer.
You can find today's press release and presentation on the IR section of our website at IR Dot Cardinal Health Dotcom.
During the call we will be making forward looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied.
Please refer to our FCC filing and the forward looking statements light at the beginning of our presentation for a description of these risks and uncertainties.
Please note that during the discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as gap GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedule attached to our press release.
As far as the agenda for today, Mike will start off by sharing Cardinal Health response to the coated 19 pandemic before turning the call over to Dave who will cover the financials.
Jason will briefly introduce himself and then Mike will share some perspective on our mid and longer term strategies as we navigate this time a tremendous change.
The remaining time will be available for your questions.
During the Q and <unk>, we kindly ask that you try and limit yourself to one question. So that we can try and give everyone an opportunity.
With that I'll now turn the call over to Mike.
Thanks, Kevin Good morning, everyone, joining us I hope you and your families are safe and well.
These past several weeks, we've had a heightened focus on both keeping our cardinal health family healthy unsafe.
And on effectively serving our customers.
As one of the largest suppliers of medical and pharmaceutical products now more than ever we are committed to fulfilling our mission of supporting health care providers and the patients they serve.
Keeping our distribution in manufacturing facilities functioning smoothly remains a key priority.
To do so we have implemented measures to protect and retain our frontline employees and maintain the continuity of our operations.
In early on we proactively and successfully implemented remote work policies for office employees.
That's a pandemic unfolds in different ways and on different timetables around the world. Our teams across the company are adapting to new working environments and responding to industry wide challenges with tenacity speed and creativity.
Our global manufacturing procurement and logistics teams are finding innovative ways to consistently produced and shipped medical products.
Based was significantly increased demand for mask gowns and other products, our R&D manufacturing engineering quality and regulatory teams have been working together to increase supply in creative ways.
For example, we have invested in retrofitted and redeployed equipment to manufacture additional surgical mask procedure gowns and face yields in our north American facilities.
We have also re purpose production lines to make items like hand, sanitizer and wipes for use in our facilities.
We're grateful for the opportunity to serve our communities and health care providers and we are using the full scale and breadth of our distribution sourcing and manufacturing capabilities provide essential medical supplies and pharmaceuticals to customers each day.
Demand for mask and other facial protection Downs and gloves has spiked to took 12 times normal levels in the last 90 days.
Supporting the delivery of these critical products is a priority for us and we will continue to do all we can to address these increases in demand.
I will share more about how we will continue to navigate this challenging environment to perform are essential role with health care.
Now I'll turn to Dave to discuss the financials.
Thanks, Mike.
I'd also like to recognize all of our teams for their incredible effort, serving our customers. During these extraordinary times.
And I want to express appreciation for our suppliers and partners who've worked diligently with us to support healthcare providers.
I've been proud to be associated with Cardinal health and also employees over these past nine months.
Before I dive into specific results ill share the macro level financial impact of Cobot 19.
As I think this will help put appropriate context around my subsequent commentary on third quarter results in a slide 20 guidance.
We saw modest net positive impact related to covert 19 in Q3.
We expect a more significant than that negative impact to both earnings and margin rate in Q4.
This fourth quarter impact will be primarily due to a full quarter of reduced revenues related to declines in elective procedures in the United States.
And an expected reversal of accelerated pharmaceutical sales, which I'll discuss in a moment.
Turning to our results in Q3, we delivered earnings of $1.62 cents per share.
An increase of 2% from the prior year.
Total company revenue increased 11% versus last year to $39.2 billion with consolidated gross margin up 7% to $1.9 billion.
SGN, a increased 6% to $1.2 billion.
The net result was growth in consolidated operating earnings of 8% from the prior year to $719 million.
Moving below operating earnings interest and other income and expense increased 28% to $79 million.
This was primarily driven by the decline in the value of our deferred compensation plan investments.
Partially offset by lower interest expense as we continue to reduce our long term debt.
As a reminder, changes deferred compensation reported and other income and expense are fully offset in corporate ESG today and have no bottom line impact.
We continue to place a high priority on reducing debt leverage.
Q3, we paid down approximately $90 million of long term debt and have now paid down approximately $880 million through the first nine months of fiscal 20.
Our effective tax rate for the quarter was 25.7%.
Approximately four percentage points higher than the prior year.
Which included some net favorable discrete tax items.
Average diluted shares outstanding were 294 million.
About 5 million fewer than the prior year quarter.
Reflecting the $350 million accelerated share repurchase program completed and our second fiscal quarter.
Moving on to cash flow operating cash flow through the quarter was approximately $1.7 billion.
As we focused foremost on addressing our customer needs.
Keep in mind that the timing of inventory purchases.
And the collections on the sales as well as the day of the weaken which the quarter ends all have the potential to impact point in time cash flows.
We ended the quarter with a cash balance of $2.3 billion.
And we continue to have access to an additional $3 billion of liquidity.
In the form of our commercial paper program.
Our securitization facility.
Moving on to segment results starting with pharma.
Segment revenue increased 12% to $35.1 billion due to sales growth from pharmaceutical distribution customers.
And to a lesser extent specialty solutions customers.
Segment profit was flat at $534 million, reflecting both the strong performance of generics program and the adverse impact of customer contract renewals.
In the quarter and more specifically in March.
We saw surgeon pharmaceutical sales.
We believe this was driven by accelerated purchases related to the code that 19 pandemic.
And we are experiencing below average sales early in the fourth quarter.
So not a material driver in the third quarter.
Activity and our nuclear and specialty businesses started to slow in March as elective procedures in physician office visits began to be impacted by the virus.
Well, we expect these activities to gradually rebound over the calendar year.
The reduced activity will be more impactful to our fourth quarter.
Particularly in our nuclear business, which has higher margin products and a more fixed cost structure.
Before closing out of pharma a quick note on generics.
We were encouraged to see another quarter of consistent dynamics within the generics market.
Recall, we first began to see this in the fourth quarter of our fiscal 19.
If these dynamics remain consistent going forward, we don't expect a year over year comparison to be as beneficial.
As always factors like mix and new launches could influence quarter to quarter comparability.
Okay.
Turning now to the medical segment.
Revenue increased 5% to $4.1 billion.
Due to growth and products and distribution and Cardinal health at home solutions.
Segment profit increased 15% to $178 million due to an increase in products and distribution, including benefits from global manufacturing and cost savings initiatives.
In the quarter, we saw the global pandemic effect the segments in various ways.
We've seen an unprecedented increase in demand for pp products that we both source and manufacture.
Because the search quickly outstripped inventories on hand, and available market capacity supply new pp.
We implemented a disciplined allocation procedures.
This was done in collaboration with their customers to balanced demand and available supply.
Taking into account geographic areas experiencing the greatest impacts.
Due to ongoing market wide supply constraints, we do not expect to see a similar increase in PE related sales in the fourth quarter.
Despite elevated demand.
We continued to maximize our internal manufacturing capacity can collaborate with their supplier partners to address this dramatic increase.
Conversely, given the broader declines in elective procedures, we've seen a decrease in demand for many of our higher margin offerings like customer surgical kits chorus and legacy patient recovery products.
As we look to Q4 or remind you that will be lapping to large charge, we booked in the fourth quarter fiscal 19 in the mid segment.
Recall that this related to an exclusive distribution agreement with Acorda supplier.
Turning briefly to fiscal 20 guidance.
We're pleased with our performance to date.
Our underlying business fundamentals have been strong.
As have the momentum and progress of strategic initiatives across the company.
With this performance and with only a few months of coven 19 related impacts.
At this time, we are reaffirming our fiscal 2000 EPS guidance range of $5 in 20 cents to $5.40.
We're also reaffirming assumptions provided last quarter for the medical segment and corporate.
We are however, making want to update to our pharma segment assumptions.
Given expected Q4 covert related impacts pharma segment profits could now decline as much as single has as much as mid single digits for the year.
Before handing this back to Mike.
I just want to share what a privilege to spend to be part of Cardinal health team over these past nine months.
It's through those experiences I witnessed how extraordinary this company is.
And how talented and committed to people are.
This is a special place with an honorable mission and an enviable culture.
I'd like to thank the finance team for their support hand patients.
And the full Cardinal health family.
For their dedication and navigating these past nine months.
Ill treasure the relationships of forged here for a long time to come.
Finally, and most importantly, I would like to extend a very warm welcome to Jason.
It's been great to have on board.
I look forward to working closely with them over the next few weeks help make this a seamless transition.
With that let me turn it back over to Mike.
Thank you doesn't seem like nearly enough for all that Dave has accomplished over the last nine months. He has been a trusted advisor and a skilled CFO and his leadership has contributed significantly to our executive team and the finance organization.
We appreciate his ongoing work to ensure a seamless transition with Jason Hauler, who joined US on April 27.
Dave will remain with us until May 26, at which time, Jason will officially assume the CFO role.
Jason has been getting up to speed for the last few weeks and I already appreciate his candor and contributions.
With his strong leadership background deep financial expertise and prior experiences managing dynamic environments.
It will be a true asset to our team as we navigate this pivotal time.
Jason I'll turn it to you to briefly share a few thoughts.
Thanks, Mike and thanks to Dave as well I.
I have appreciated the partnership from both of you as I get up to speed really excited to join the team.
Cardinal is and has been an industry leader that is essential to care there are still tremendous opportunities in front of us.
What really drove me to Cardinal health was both the strength of the current team as well as the positive culture and values of the organization that I share.
Look forward to meeting and interacting with many of you are they coming months.
Thanks, Jason.
In my opening comments I discussed our immediate response to the global pandemic.
It's clear that the current environment presents uncertainty and although there are many variables to consider as we look ahead I'd like to highlight three areas to watch that we believe could most meaningfully affect our business.
All then share some strategic actions, we're taking to best position Cardinal health for the future.
It is important to note that each of these three areas will be affected by the trajectory of the virus itself, including its potential resurgence and manageability.
And the timeline for developing and distributing waste a test and treated.
This in turn effects, when and to what extent the global environment returns to some relative normal.
With that backdrop, I'd like to highlight elective procedures generics availability and pricing and the potential for changes in our ecosystem.
First elective procedures.
When and how patients re enter non emergency areas of the healthcare system, including elective medical procedures and physician office visits affects multiple areas of our business.
In med the decline in elective procedures is causing significantly lower demand for some of the higher margins offerings in our portfolio.
And in pharma, we are seeing challenges in our nuclear business and to a lesser extent the physician office area of our specialty business.
Although we expect near term headwinds in these areas. We do believe demand will eventually rebound to historical levels.
It's also possible that we might see a surge in some areas related to pent up demand.
We are doing everything we can to remain prepare to meet this demand and we will continue to best position these businesses for the future.
Second generics availability and pricing.
Our sourcing teams and our partners at Red Oak are working directly with suppliers to understand any potential disruptions and resulting changes in pricing that could emerge.
Things like potential export restrictions or the impact of the virus on manufacturing capabilities in key countries may affect the availability of finished goods or raw materials.
Although we've seen some temporary spikes in demand for certain products. The team is partnered well with both customers and suppliers to help mitigate these disruptions.
Red Oak strengths and data and analytics as well as its visibility in understanding of the supply chain. Our key capabilities that we will utilize during this time of rapid change.
Third potential changes in our ecosystem.
Clearly the Corona viruses change the way we at all companies are currently operating and will operate in the future.
We are monitoring the economic conditions changes shifts and various timetables for recovery for the participants in the healthcare ecosystem, including but not limited to suppliers customers and the patients they serve.
I'll discuss how we are adjusting our strategies to best position ourselves in light of these potential changes and just a moment.
These are just three of the many areas. We are monitoring in response to these shifting dynamics, we have taken strategic actions across the company to partner adapt and invest.
Let me briefly touch on each of these and share how we are leveraging our scale and heritage to better serve the healthcare system now and into the future.
First we are partnering to address unprecedented demand as much as possible.
Surges in demand have challenged the underlying supply in the marketplace and we have worked with partners across the supply chain to help identify alternative sources of supply.
We are even partnering with non traditional healthcare companies to develop creative save solutions to increase production of critical products.
We're also collaborating with innovative companies like Patel, one of the largest private nonprofit research and development organizations in the world.
Their teams received FDA approval for collecting Decontaminating, and returning and 95 respirator masks to healthcare personnel in the US and we are working with them to provide an end to end solution.
We will continue to partner and identify additional collaborative opportunities, which will be critical as we collectively navigate this pandemic.
Second we're remaining flexible and adaptable.
David 19 will have long lasting and broad reaching implications that we are thinking about how the modify our strategies accordingly.
For example, we recognized that our sales team plays a critical role in supporting our customers and we recognize there could be changes to how these teams will interact with customers going forward.
For that reason across the company, we are evaluating how to use our capabilities talent and technologies in new ways.
In med, we will focus on furthering our commercial initiatives optimizing our supply chain and identifying product development opportunities.
In pharma, we're committed to enhancing our customer engagement experience as well supporting our customers with new offerings and helping them innovate through this time of change.
Finally, we're continuing to invest in our business for the long term.
These significant investments will be focused on our infrastructure, including our customer ordering platforms. He businesses, such as at home and specialty and our employees to name a few.
For these and other investments throughout the company, we are utilizing portions of the savings generated through our ongoing cost optimization efforts.
We remain on track to deliver on our savings goals for fiscal 20 and beyond.
Now, let me shift gears and discuss capital allocation.
We remain committed to a disciplined and balanced capital allocation approach that prioritizes reinvesting in the business I.
Maintaining a strong balance sheet and returning cash to shareholders in the form of a dividend.
Capital expenditures remain a critical priority going forward. So we expect to annually spend at least what we have in prior years.
Further we remain committed to improving our balance sheet through further deleveraging.
As Dave mentioned, we're on track to reduce outstanding long term debt by at least $1 billion in fiscal 20.
With respect to the dividends our board of directors recently approved a 1% increase.
Finally going forward, we will continue to evaluate M&A and share repurchases, but in the near term our other capital allocation priorities take precedence.
To close we are focused on supporting the healthcare system now and into the future.
We play a critical role in helping our customers combat many of the challenges. This pandemic has presented.
Simultaneously, we are maintaining a strategic focus on positioning ourselves for the future.
Finally, I'd like to reiterate my gratitude for our employees as well as for our customers and partners across the industry. It is a privilege now more than ever to be essential to care with that I'll now pause to open it up for questions.
Thank you if you would like to ask a question.
The signal by pressing star.
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As a reminder, please limit your questions to one question.
We'll take our first question.
Michael Cherny with Bank of America.
Hi, good morning, and thanks, while the color so far.
Just wanted to dive a little bit more into some of the for Q dynamics, Mike in particular, the reduction in the farm outlook for the next quarter is there any way to characterize of frame how much of this is tied to it.
Expectations or what you saw relative to pull through perspective, and then as you think about for Q you mid single digits.
Can be a wide range within mid single digits. How do you think about what has to happen in the business.
Qualitatively to get to the very different degrees of where you follow for mid single digit performance for the year.
So.
Michael is day, one I start and then Mike can add more of this.
The qualitative color to your question.
With respect to the fourth quarter.
I think the way you need to think of it on a year over year basis is that this slowdown in elective procedures is impacting our pharma business in the form of our nuclear business, which tends to be our higher margin.
Product lines with higher fixed costs. So the nuclear business itself is is the biggest impact year over year.
Recalling year over year basis, we have the ongoing headwind of the contract renewals as well. So those are those are a couple of the biggest drivers that you find.
Year over year now offsetting that is.
Is.
The continued stability in the generic market dynamic, though a much smaller number yet I would say that thats, probably the biggest tailwind.
Year over year, ITSI elective procedures the contract renewals.
Marginally offset.
Bye.
By the generic firms dynamics, Mike you want provide more color on that.
Yes, I think though owning I would add Michael is that our nuclear business, we feel really good about over the mid to long term, it's a business that we remain committed to and.
And I know what that probably as a surprise a lot of folks and it's a headwind because we will talk about a lot. It's been a business it's been growing but it has seen a significant reduction in its.
No the procedures and its marketplace. So we've seen a significant reduction and we.
Long hard about it but we feel really good about our positioning there and so we're doing everything we can to maintain the cost.
Or two to manage the cost as effectively as we can but these tend to be more technical jobs that are hard to replace and we don't want to put our for self so the position that when it bounces back that we're not ready to go and so thats why weve decided to invest in that business.
Take some short term pain as Dave said, we expect actually nuclear to be the biggest negative driver in Q4, even bigger than customer contract renewals, but we want to be prepared for that business to rebound, which we believe it will be.
Next question please.
Next question comes from Glens intelligence.
Oh, yeah. Thanks for taking the question Hey, Mike in your prepared remarks, you should have called out three areas that you were monitoring closely and I was just kind of curious to maybe follow up on on two other things that you all talked about the question is on the generic pricing trends and secondly, I think in the medical side, you said that there was an expectation that.
The recent above average demand may not be sustainable size. Just curious if you can comment on those two areas. Thanks very much.
Sure. Thanks for the question, yes in the generics area of availability and pricing we look at Q3, there with some early challenges, but our team at Red Oak did a fantastic job on the generic side.
Making sure understanding where we thought those supply disruptions fight be adding some new vendors to the program buying some inventory ahead of of the surge and we actually manage did really well and so far we're seeing that in Q4, but it's always hard to know right now with this cove and where it.
Research, where we might see some export restrictions in certain countries, where certain manufacturing a raw materials might have challenges that could create either availability issues that might cause price increases or raw material.
Increases that might create some price increases so at this point in time, I'm, not saying that we're calling out anything different than what we've seen generally but it's something we want to keep an eye on because there's just this added situation with covidien team that we think.
Could have an impact either in Q4 or possibly going forward in Q1. So we're just going to keep our eye on it and we'll be ready to react accordingly, and if we do see price increases obviously, our goal would be able to at least keep our margin per unit.
Similar going forward on the medical side when it comes to the.
He they're really biggest thing to think about is that we work through our safety stock Thats, probably that the one thing that people need probably connect is that in Q3, we saw significant surge, but we were able to essentially meet the demand of the surge because we had safety stock by early in our Q4.
We have blown through that safety stock and so now we're really only able to supply what we're able to get and replenishment and that's why we're seeing that RFP E. Sales, we did not expect to see them to be the same as we saw in the surge in Q3 that again, we had a safety stuff to work safety stock.
The work ourselves through.
Thank you next question please.
Next question comes from George Hill with Deutsche Bank.
Yes, good morning, guys and thanks for taking the questions I guess my given all the color that you've provided about the medsurg business I'm surprised the guidance there isn't changing as much I guess could you talk about the puts and takes on I think I guess felt like that the regular way medical supplies business versus like the Assuramed business.
I guess can you talk about I guess more what's going on inside the segment.
And kind of how it relates to the guidance not coming down that kind of expect the significant guidance came to Q4.
Yes. Thanks for the question a couple of things remember we have.
To really big things that are the drivers for us when it comes to medical from the positive side and number one is going to be the year over year benefit of not having that charge that we had last year. So that would be number one and then number two is going to be our.
Cost initiatives, we've been really really getting after a when it comes to looking at both our manufacturing distribution and overall cost in the medical segment. So those two are going to being a to really big positive drivers. We're also going to see strong performance in our at home business our.
Services business and as you can imagine our lab distribution business, which we don't talk about a lot generally has had increased volumes too and so we're seeing strong performances from the businesses clearly the negative as we're getting hit very hard on elective procedures and so our high.
Our margin product businesses are being the are the biggest negative driver, but I think the piece that is the key here is the excellent work that we're doing on the cost side and the performance of some of what might be considered our smaller businesses in the medical segment.
Next question please.
Next question comes from Robert Jones with Goldman Sachs.
Great. Thanks for the question I guess, just Mike going back to the pharma segment I wanted just to understand the guidance there a little bit better I know, it's probably been several years since you've quantified the new dealer business. It sounds like that's kind of a standout as far as the downdraft you expect to see next quarter. So was wondering if you could give any context.
On the size of that business today versus price several years ago. When we when we probably had a clear a sign of of the size of that business and then I guess just the one other question is the assumption on the core business you know the kind of small molecule specialty channels is the assumption that what you're seeing kind of late in the quarter early this quarter, just kind of run rate.
Through for Q or is there a little bit more complexity around how you're thinking about forecasting the core business. Thanks.
Yes, so from a core business standpoint, what we saw wasn't a surge in our Q3 I think you can see that through a lot of the data out there as Dave mentioned in his script, we saw surge in Q3, which led to upside in our pharma business in Q3, and we've seen the river.
First of all of that already through April so a few probably add the two quarters together our assumption is that.
Karma would be.
Relatively.
Consistent from an overall sales growth Stan standpoint, again, unless we see some types of surges again in this quarter that were not necessarily anticipating but the surge in Q3, we see reversing in Q4 on pharma. So that's the big really biggest driver between.
Three and four when it comes the overall.
Pharma, we did see some.
And expect to see some decline in Q4 of our specialty business because doctors' visits are down and.
When you look at both oncology and Rheumatology nephrology are seeing more office visit decreases in some of the non oncology areas where were strong. So we expect to see a little bit of that specifically as it relates to nuclear obvious about a 900 million dollar topline.
Business, it's been growing each of the last couple of years ever since we had.
The couple of year period, where there was a significant.
Reduction in the procedures done in that business, we've seen some consistent growth.
And so what we're seeing is as up as Dave mentioned this is a high fixed cost business and so when you see the procedures decline as dramatically as we did and you have a high fixed cost we're seeing a significant impact to the bottom line of the nuclear business and to try to.
Give it some size because we're not going to get into specific details on it but to give it some size we expected in Q4 to be the number one negative year over year driver, even larger than customer contract renewals now again thats an estimate at this point in time, but right now we're expecting that business to have a larger.
Negative year over year impact, but again feel good about it for the mid to long term. So we remain committed to it and as we start to see electives ramp up we're going to be ready to go to take advantage of that.
Next question please.
Next question comes from Kevin Kellyanne <unk>.
Hi, thanks, or thanks for taking my call out.
Ask about generics a little bit.
I think you said that the generics had been improving since Q4 of last year and Thats. The conflict get incrementally harder can you talk a little can you give us a little more detail on what's happening in that marketplace is it that the deflation is moderating our the spread tightening a little bit of.
What do you expect going forward with regards to the generics business.
Yes, generics as I said, just one or three key areas, we're keeping our eyes on because it's an area that with Covance 19 could see impacts related to raw material changes and cost.
Export restrictions manufacturing facilities may or may not be affected so there's a lot of potential dynamics that we have to keep our eye on but as you know our generics program really has four components, which is the cost side, which is generally.
Managed by Red Oak, and we continue to see very strong performance by that team the sell price side.
That we talk about and again, we've invested a lot of capabilities into our pricing and analytics team because our overall goal is to maintain that margin per unit, which is really the key which as we said before is why we went away from talking about individual components. Our goal is to maintain that margin per unit and then hopeful.
We continue to see volume increases, which we have.
Scene, and some new item launches, which we said from beginning of the year, we expect that those to be relatively small over the these next couple of years, that's generally running about as expected and so putting those four together, we're very pleased to say last quarter. We now expect our generics program to be a net.
Tailwind for the year versus at the beginning at Air we thought it would be a net headwind and we still expected to be.
Net tailwind for the year not quite as big potentially with some of the co bit impact, but we still expected to be a net positive for the year.
Next question please.
Next question comes from Charles Rhyee with Cowen.
Yes, thanks for taking my question.
Maybe.
Building on that can you give a sense and how you're thinking about.
Thank you sort of a net negative and obviously, we have nuclear and appeal to the headwinds that you discussed.
Your thoughts on how you expect things to recover in terms of volumes as we get into the back half of the calendar year. Obviously, we had a number of companies that have reported and have given their estimates on sort of recovery path.
And in particular, some have discussed seeing.
More than 100% of volumes kind of in let's say, though the fourth calendar quarter is this something that you you are expecting as well as you project internally and in just to clarify and just one other thing was you've talked about the card on home.
Stuff is doing virtual now do you expect a change in overall patterns of how people.
See the providers in the future and does that create a great opportunity for the at home business. Thanks.
Yeah, I'll start with that then I'll go back to the to the other we do feel really good about how our at home businesses position. This has been a trend we've been seeing for a while now we've been calling out we think that this covance 19 will just accelerate that trend and we really like the way we're positioned in that business, it's a bit.
Yes, we have been investing in significantly on our interactions with the patient how to run that business more efficiently. So we have and are expecting to have significant internal investments into that business going forward. Because we do believe it's going to be a significant growth area.
Going forward is as far as the forecast goes.
As you know its are kind of.
We work because we don't talk a lot about the following year until we get there and so we'll give you the color and obviously all the appropriate thoughts on F. Why 21 in August, but I will try to give you at least color in this elective procedures area and on the rest of the stuff we're going to continue to monitor we're lucky in the.
Sense that we have the benefit of being a June 30 year end. We can take this next quarter really evaluate the trends in generics the economic health of the ecosystem you know with all of our customers and how are they doing and how will they.
Hold up in the ongoing environment and we feel really good about who were partnered with we tend to be partnered with the folks that are more likely to be consolidate tours and consolidate season, we feel really good about that but in the terms of elective procedures.
Yes, let me start to see a fall off in March we expect our Q4's be significantly down.
Both sequentially and year over year in terms of elective procedures, we do expect to see it get a little bit better as the quarter progressive.
But we do not expect an exit rate of our Q4 that would put us back with elective procedures in.
So back to where they were our point of view is that theres still a lot of work.
To be done we think it's going to be definitely choppy and our current thoughts what we're going to refine these as we go forward and get a chance to look at it as though we would not expect elective procedures to fully recover in the first half of our fiscal 21, we would think that day.
Good.
Have.
More likely to fully recover in our second half, but we'll give more color later on and we are going to continue to look at that pent up demand component.
We hope it will be there and we think it could be there, but there's a lot of things that we need to look at to understand going forward. So I would tell you. The biggest color is we did not expect to see a full recovery until the second half of our fiscal 21 on elective procedures.
Next question please.
Next question comes from Eric pressure with no from research.
Thank you and thanks for the efforts alongside the commentary.
Question on medical and I'm thinking what you've provided on nuclear was very helpful. Did you mention too much better performing elements I know youve sized at home at around 2 billion in the past you mentioned services and lab.
Can you help us with the remainder of the business and I know that cordis and patient recovery and portions that are international maybe walk us through any commentary you can give in terms of sizing from the other businesses in how they've been impacted our expected to be impacted in the coming quarter.
Yeah, you know if this is again something we're going to continue to look at but.
As you see summarized it well, we would think that our services business are at home business and.
Our.
But will those two businesses.
In Woods would performed the best going forward in the lab business would perform well in Q4 based on what we saw in Q3 and the other biggest driver though for us in Q4, as though we're going to continue to get after our overall global manufacturing and supply chain. We're.
Seeing outstanding work by the team, there and making our manufacturing facilities.
More efficient our distribution facilities more efficient now of course, we're seeing a lot of added cost related to cobot here, they're expediting product and things like that but those guys are doing a lot of really good work. So the two biggest drivers in medical for Q4 will be the year over year impact of not having.
In the charge last year related to the Cordis exclusive distribution agreement expenses will be number two and then the other three smaller businesses combined together would be like the third largest.
Causative driver and then the biggest negative which is why.
We'll still have some challenges in Q4 is going to be related to overall elective procedures, where our core businesses with the biggest one being.
Our products business in our our kidding, our cordless business those businesses are going to see significant declines that have seen significant declines related to coding.
Yes, Eric the Matt as it is a bit of complex story for Q4, the way I distilled down as you had this charge from last year, that's neat nearly equally offset by the Lawson elective surgeries this year.
Then we have ongoing cost benefits driven by global manufacturing supply chain other initiatives those are being more or less offset in the fourth quarter by incremental cost of supply chain.
And cost to our labor force for premiums to a frontline workers.
I will emphasize one thing we have not and.
Have not use this pandemic and demand for products that is an opportunity to expand medical product margins. So it's important though that that increases not due to expansion of.
Taking opportunity to raise price or anything like that so though that it's really what Dave and I talked about.
Next question please.
Your next question comes from drilling Singh with credit Suisse.
Hi, good morning, Thanks, everyone.
I was wondering if you guys can provide any color that island. If there was any margin impact in the third quarter from the ship from retail demand in China, we have seen and Additionally, you bumped we had out of probably 19 do you see this mix the dining to pick probably levels or do you think this is going to be a new norm. The skewed isn't it talks on the trend moving forward.
That's really interesting question.
It's hard to decipher because we saw a lot of just pull forward across all channels. There was a little bit of a shift to mail order I wouldn't call. It that we've seen anything significant I still feel really good about how our retail independence, our operating there competing very effectively.
They've added more deliveries those that weren't are delivering those that are working to compete and do effective things there, they're continuing to serve their communities really well so.
We did see some 90 day at retail shift too. So it's hard to know exactly right now I think it's going to take another couple of quarters to understand how that mix will be impacted as we've said in the past mail order is a lower margin business for us. So if we do see a shift to there and we are obviously work.
And with one of the largest mail order companies.
We will see some margin erosion, but we still feel really good about where our retail independents in chains are position and at this point in time, we don't expect that to be.
A huge material driver for us in Q4, but we'll have to reevaluate that for next year. After we get some more and Intel.
Next question please.
Your next question comes from Elizabeth Anderson with Evercore.
Hi, Good morning, guys. Thanks next question.
This does this is that list is complicated by the Covidien type of my question is on Dan can you talk about Illinois that how you've seen the business performance and they're all types of prior economic downturns, how maybe qualitatively. If you can talk about it over a longer period of the recession. Thanks.
Yeah, you know it's hard to.
Compare this to anything else Theres really nothing but nothing else like this but you can go back to events like 911, you could go back to events like the 2008 and nine and even go back to regional events and generally what we see on both of our businesses is that.
Rebound well they tend to weather.
Challenges like that incredibly well over the mid to long term. So you may see some temporary disruptions or changes, but generally these businesses tend to perform really well over cycles and so we still feel that will be the case here I think this ones.
Little different in the sense of how much it has disrupted elective procedures, but again, we do feel that those will recover and we still are evaluating whether or not we might see some service related to pent up demand, but we do feel good about the resilience of these businesses over the long term.
Next question please.
Thanks question comes from Nike Goldman Sachs.
Morgan Stanley.
Yes, hi, good morning, I have one spot.
On new Clarendon. My question suggested we understand and you can think about it this way looking at 222 million business.
Quarter last year.
The guidance and EBIT guidance for pharma segment Lloyd.
EBIT guidance that 18 73 million.
I think we knew already about the contracts before so should we assume that 18 to 73 million change.
Oh and nuclear or is there anything else knew it was not included in prior guidance Thats kind of I can follow up question.
My question is really around just thinking about long term fundamentals, Mike you talked about changes in the ecosystem on some other companies.
Across the healthcare ecosystem are talking about potential.
Changes to supply chain dynamics and drinking.
Some manufacturing back do you actually they tend to pharma side.
Okay.
Segment side, so just curious as to your thoughts on that dynamic in is that were to happen.
I would carry that additional cost is going to be.
The wholesale distributor or if there's going to be a cost the channel well have to assume thank you.
Yes, I'll, let Dave start on the nuclear piece and then I'll come back and talk about the long term fundamentals, yes, let me just two housekeeping on the first question so with respect to.
The farmer fourth quarter segment, Yes, I think you kind of characterize nuclear in broad terms that would be consistent with our expectations.
There are other impacts those tucows, resulting from co that 19.
As we mentioned in his script in the fourth quarter, we do expect to see.
The reversal of the acceleration in the PD volume into Q3, so that will happen in Q4.
And we also expect there to be a modest negative impact related to specialty specialty was growing business.
Year to date was growing.
Healthy way. This this slowdown in elective procedures is really going to negate some of that fruit.
It Ricky this be that the major items.
Characterizing our fourth quarter Q to Q code that impact might up yes ill so as far as the supply chain goes as you can imagine with Covidien 19, we are.
Evaluating our overall supply chain, we were as you know working through that but with these changes we are looking at our global footprint with a new lens, we do some of our manufacturing right now for Maskin certain.
Other products in North America, we will continue to have to look at that and we've not seen any supply disruptions and those businesses.
But.
It was all of it. So we were sourcing globally I'm sure. We will continue to be a global Sourcer will absolutely take a look at China and how it plays in there it's hard to believe that China will be part of.
An overall global sourcing strategy going forward, but the percentage of the products that are made there more importantly that type of products that we make in China that we source in China, we don't have any actual manufacturing, there, but where we source.
In China were going to take a look at that and make sure that we have the type of infrastructure.
As as we go for not only in this situation, but in the future situations.
Probably is more diversified and not as dependent as us was on certain categories in China. This time, so absolutely we'll be taking a look at that your question around cost increases in the channel. It's hard to speak about how that will look going forward, but I will tell you. So.
Are we.
We've been very transparent with our.
Customers they understand and have put patients first just as we have and for us to be able to do that we've had to change where we source and how we get certain PPG products and customers have been willing to work with us on those products and worked.
With us on those higher costs and we're going to continue to have those open and transparent conversations continue to look at the supply chain going forward and determine what's the right and fairway to.
Manage this situation as it goes to cost increases either on raw materials and those types of things overall over the longer term you know I'm not too worried about new players in the marketplace and when its current terms of manufacturing I believe many of those are temporary for people that are trying to help.
About and just do the field obligation and that's that's great and we really admire and respect the people that are doing that I don't think many of them. We will stay in the business and for those that will that have the high quality type of products that were looking for we think it could give us some opportunity to look to come.
Thank you to look at our overall number of sourcing partners and the ability to drive cost. So that is going to be a key area for us in F. Why 21 is going to be managing supply chain cost and we'll come back with more color on when it's appropriate.
Next question please.
Thanks question comes from Lisa Gill with JP Morgan.
Thanks, very much hi, good morning, and thanks, Mike everyone on the Cardinal team, helping with how the company on the front line I just want to understand key thing one just kind of dovetailing with to what you were talking about do you see near term opportunities to take cost out of your system. So if you look at that.
Tim you look at where your cost like today do you see any cost cutting opportunities and then secondly, I just want understand the health of your customer how do you have any issues with collections you talked about the fact that you believe there will be consolidation and you're well positioned because here with the larger players, but how about some of the smaller.
Independent pharmacies are smaller hospitals are you seeing anything on the collection side.
Yeah, I'll update you talk a little bit about what we're seeing on the collection side in the balance sheet that I'll talk about a few of the other thing yes on the on the balance sheet side collections.
At least we so we've seen liquidity as you saw in the third quarter strong and we continue to see fairly consistent trends terms of cash flow early in the fourth quarter, we were not oblivious to the fact as Mike mentioned economic health of our ecosystem will likely have some implications.
This down the road.
We're anticipating some we expect those to be fairly modest and the grand scheme of things.
Yes, and then as again I mentioned as one of three key areas. So we will continue to look at that and from a cost cutting standpoint, though this is something that we're always doing we're always taking no look at things that.
I wouldn't call it cost cutting maybe in the sense of were just cutting costs to cut cost, it's really been about prioritizing what's important and finding better ways to think about it. So if I think about when we announce what we're doing in finance last quarter that wasn't a cost cutting initiatives that wasn't initiatives that saved a lot of money.
And reduce our overall cost, but it was really about being more efficient taking out.
So putting in the right locations using a high using robotic automation and all those types of things to really.
Drive the right types of behaviors to have.
Ongoing capabilities and use our skill sets at our at the highest levels of folks. So those are the types of things, we're really looking for like how do we do things smarter and take advantage of technology and efficiencies to get after cost I will say one thing about the Covitz situation you know when we all get.
Forced to work from home you do find.
Our ability to prioritize what is really really important and what is not so important when you're dealing with all of these types of things and you'll also find a way I think to be faster than you normally would and I've seen our teams work at speeds that are just outstanding because there is.
Such a deep commitment to patients and healthcare to get after things so the ability to which we have flipped manufacturing plants added capacity work through different types of things I do think we will find some additional cost cutting opportunities through prioritization technology and just.
Being faster as a company.
Next question please.
Our next question comes from Steven.
With Barclays.
Great. Thanks, Good morning, everyone hope you're staying safe.
So just regarding the comments in your prepared remarks about the mapping gallium masking down demand spiking up just curious if you can give us a sense or just what percent of your medical segment profits roughly came from pp aegis and the reported three Q.
Just to give us some context around that it's a profits where that potentially and actually to speak into that quickly. If some of your acquisitions. In recent years can you remind us about any seasonality in the profits of the medical segment.
Is there a factor the normally drives profit sound sequentially in fiscal Threeq you.
Versus fiscal Teekay to that was kind of the trend the last three years or so thanks.
Upshot briefly about it if I Miss anything date for free to jump in here, we don't really.
Breakout.
The percentage plus you get into a lot a definite wish definitionally issues around exactly with PPNR, but what we can tell you is that that did we did see a little bit of a surge in Q3 on that.
And we had significantly increased demand as I said to to 12 times on some.
Products, we did have some safety stock.
And so we blew through a lot of that which drove some extra incremental.
It's it's worth talking about I Wouldnt say, it's the.
No.
Lot of our other higher margin kitting and surgical businesses are going to be more important type of product lines to less than the lower margin.
Lower value PB type of items, but it was important enough to.
Mentioned from that standpoint, and so.
I would say that.
As far as seasonality you know flu can be a seasonality item for medical we have seen in the past when flu ramps up in a Q either two or three we see some increases in our med business and in some of our sales because there is tends to be.
Some hospitalization and usually also in Q2 med tends to be a little bit stronger.
As people kind of rush to get some of their year end type of insurance procedures and done and we tend to see some increase in electives and those types of procedures in Q2, which leads to a little bit stronger Q2 in general for us. So hopefully those are two pieces of helpful information.
Your next question please.
Next question comes from Hseven next year with Wolfe Research.
Hey, Thanks to the question apparel doing well I was hoping you could talk a little bit about the pharma margin rate in Q3, we had seen three quarters of relative stability on that line and then this quarter was down a little bit more than maybe I'd expected I was hoping you could talk about the drivers impacting the comparison there and also you might have touched on this but.
Any insight into how the March pull forward of volumes may have impacted the margin comparison. Thanks.
Yes, you know that margin profile gets a little complicated because there was a significant.
Uptick in the surge in in products and so we don't.
I would say this theres nothing going on that's.
Unusual in there you probably just have some mix of certain generics certain branded products that were higher in some lower because there were some shortages some mix within generic I wouldn't call out theres nothing as we've dug through the margin change that I would tell you is some type of unique change and I will call out.
I think it's just a lot of noise in the quarter because of the pull forward and some of the dynamics of what items had extra demand on them and other items that may be that and so I wouldn't call out anything unusual there.
Operator, I think we have time for one last question. Please.
My last question comes from Eric talked all with bank.
Thanks, Thanks, very much Rickys question I think you started to hit on mine, it's about medical we've been hearing that mature suppliers like cardinal with their existing customers have generally committed to GPO and customer contractual prices, whereas off contract spot prices have spiked anywhere from.
As much as sticking to 5% to 15% in some cases.
I'm just curious what is the potential to revisit contracts and pricing moving forward.
I mean, I think we're going to have a sustained demand spike in certain medical items, the pp the swaps et cetera.
Clearly a lot of supply chain integrity service and access demand going forward. So I'm just curious any thoughts on ability to maybe revisit pricing and margin certain medical items going forward. Thanks very much.
Yep. Thanks for the question a couple of things first and foremost we are absolutely committed to keeping cost as low as possible for our customers and doing everything we can to help to be part of reducing overall cost of health care and in this country. So we're always looking at our sources.
Thing strategies, and our own expense structures in order to.
Get after those types of things. So we can aggressively help our customers lower their cost either by how much. They tried the product price and the product how the utilizing all those types of things that being said there are a lot of disruptions at this point in time and so it's really hard to comment on what we see.
We have the overall long term.
We continue to want to work with our customers and we'll they've been great and we're going to continue to have very transparent conversations for us. It Cardinal that's the way we like to work with our customers, we're not afraid to tell them bad news or give them information or whatever to help them under so.
Dan how things are going because we think kv open and transparent conversations around the supply constraints and those types of things is important and they've been appreciative and working with us well. So we're going to continue to have those and where we're seeing.
Challenges in certain pp items that have super high demand and the only way you can get extra supplies to bring in alternative.
Suppliers in those might be at higher costs were going to continue to work with them on our own products that we manufacture ourselves we can control the cost structures, obviously, we're going to be able to work with them away to maintain our contract pricing and do those types of things when as you said in the spot market buys to be able to take care of patients which is what everybody.
Wants to do more than anything else Obama is going to be incredibly important.
Operator.
That concludes our question and answer session I would now like to turn the call back to my question for any additional my closing remarks.
Yeah, I just want to thank everyone for joining us. This morning on behalf of the entire Carvalho family. We hope you in your families they safe and well and we look forward to speaking to you again sometime soon thank everybody.
That concludes today's presentation. Thank you for your participation you may now disconnect.