Q4 2020 Cardinal Health Inc Earnings Call
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Once again, ladies and gentlemen, you're holding for the Cardinal Health incorporated fourth quarter full year 2020 earnings conference call again, we are assuming to these audience and being very shortly could you. Thank you for your patience patients and please remain on the line.
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Please standby we're about to begin.
Good day and welcome to de Cardinal Health incorporated fourth quarter fiscal year 2020 earnings Conference call. Today's conference is being recorded at this time I turn the conference over to Mr., Kevin Marine. Please go ahead Sir.
Good morning. This is Kevin Moran Vice President of Investor Relations. Thank you for joining US today, we hope you and your loved ones are healthy and safe.
During the call, we will discuss Cardinal health fourth quarter in fiscal 2020 results along with guidance for fiscal year 2021.
Joining me are might Kaufman, Chief Executive Officer, and Jason Holler, Chief Financial Officer.
You can find today's press release and presentation on the IR section of our website or 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 could differ materially from those projected or implied.
Please refer to our SEC filing and the forward looking statements slide 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 there specifically called out as gap.
GAAP to non-GAAP reconciliation for all relevant periods can be found in the schedules attached in our press release.
During the Q and a portion of today's call. We please ask that you try and limit yourself to one question. So that we can try and give everyone an opportunity.
That I will now turn the call over to Mike.
Thanks, Kevin.
Good morning to everyone joining us.
Before Jason and I discussed our results and outlook, let me share a few reflections.
My nearly 30 years as part of the Cardinal Health family I have seen this company in this industry expand with new products services and markets evolve with technology regulatory and model changes.
And adapt when faced with external challenges.
Each of these moments, we have demonstrated grip and agility now more than ever we will lean on that legacy to navigate current challenges and perform our critical role in health care.
In fiscal 20, we delivered on our commitments and demonstrated these trades.
We grew operating earnings exceeded our EPS guidance range surpassed our enterprise cost savings target and strengthened our balance sheet.
All while continuing to execute our long term strategic priorities in a rapidly changing environment.
We made strategic portfolio decisions, including divesting our remaining equity interest in Navajo as well as investing in partnering in the evolving growth areas of specialty at home and services.
We achieved these results as we adapted our operations to address the unique challenges presented by Covance 19.
We successfully transitioned our office employees to a remote work model and we continuously maintained operations in all of our distribution facilities nuclear pharmacies and global manufacturing plants.
Through all of this we kept our primary focus.
Delivering critical products and services to our customers and at the same time prioritizing the safety of our employees.
As I look toward the coming year I recognize that the global industry dynamics, resulting from the pandemic, we'll continue to challenge areas of our business.
I am confident that our team will continue rising to these challenges as we drive our strategic priorities forward.
Ill provide some comments later about how I see these priorities evolving in fiscal 2001 and beyond.
But first I'll turn to Jason to discuss the fourth quarter fiscal 20, and our outlook for fiscal 21.
Thanks, Mike Good morning, everyone.
Im pleased to join you. This morning on my first call since assuming the CFO role.
And I look forward to engaging with you more in the future.
I will provide a few comments on the fourth quarter and detail our results for the year before turning to our fiscal 2001 guidance in key assumptions.
Starting with the quarter, we delivered better than expected EPS of one dollar and four cents driven by improved operating performance as well as lower interest and other expense.
Turning to the segments beginning with pharma on slide six revenue was flat for the quarter.
As expected in Q4, we saw reduce pharmaceutical demand as a result of the accelerated Q3 sales related to coded 19.
Pharma segment profit decreased 20% to $359 million.
As anticipated challenges related to the pandemic caused volume declines in several areas, particularly in our nuclear business and our generics program.
Similar to prior quarters segment profit also reflected a headwind from pharmaceutical distribution customer contract renewals.
In medical Q4 revenue decreased 13% due to adverse impact of coated 19 related cancellation and deferral of elective procedures.
This impact is primarily within products and distribution.
Medical segment profit increased 24% to $120 million in the quarter driven by cost savings initiatives and the beneficial comparison to a supplier related charge in the prior year, partially offset by the adverse impact of Cobas 19.
As expected PE volumes for the quarter were down sequentially, but above pre Tobin 19 levels.
This reflects the demand driven sellout of safety stock in the third quarter as well as sustained increases in demand and associated global supply challenges, which we will discuss later in my remarks.
Across both segments Cobot 19 was a significant headwind to our business in the fourth quarter.
In dollars of notes with December 2020 maturities.
Additionally, we generated nearly $900 million in the quarter from the sale of investments.
Now I will transition to the full year consolidated results.
In the midst of a challenging environment, we saw strong topline growth with revenue, increasing 5% to $153 billion.
Total company gross margin grew 1% to $6.9 billion.
SDMA increased 1%, reflecting higher costs to support sales growth.
Operating earnings returned to growth in fiscal 20, finishing at $2.4 billion. Despite a net headwind related coded 19 of approximately $100 million on the full year.
Interest and other expense decreased 23%, primarily due to a lower debt balance and a net benefit from lower interest rates.
We finished the year with $2 billion of operating cash flow as a reminder, the day of the week in which the quarter ends the effects point in time cash flows.
We ended the year with a $2.8 billion cash balance with roughly half a billion dollars held outside the U.S and nothing outstanding under our $3 billion credit facilities.
From a capital allocation perspective, we took additional actions in fiscal 2000 to strengthen our position for long term growth.
We invested $375 million of Capex back into the business focusing on enhancing our infrastructure and fueling strategic growth opportunities.
We paid down $1.4 billion, a debt and we returned over $900 million to shareholders through dividends and share repurchases.
Our effective tax rate for the year was 25%.
We finished the year with earnings per share a $5.45.
Up more than 3% versus prior year, which exceeded our guidance range.
Transitioning to the segments on slide 10.
Pharma performance exceeded our expectations for the full year.
Segment revenue grew 6% to $137 billion, driven by sales growth from pharmaceutical distribution customers and to a lesser extent specialty solutions customers.
Segment profit decreased 4% to $1.8 billion, reflecting the adverse impact of pharmaceutical distribution customer contract renewals, partially offset by a favorable mix of brand sales in specialty solutions growth.
Importantly.
Although we saw lower volumes in the fourth quarter related to cope with 19, our generics program experienced overall consistent market dynamics during the year and was a net tailwind in fiscal 2000.
And medical performance was strong.
Although revenue decreased 1% to $15.4 billion due to the adverse impact from Cobot 19 segment profit increased 15% to $663 million.
This was driven by cost savings initiatives, particularly within our global manufacturing and supply chain and the beneficial comparison to a supplier related charge in the prior year, partially offset by the impact of Cobas 19.
Across the company in fiscal 2000, we demonstrated positive performance despite significant global challenges.
As these dynamics continue into fiscal 2001, we are focused on building upon our operational momentum through the underlying strength and resilience of our business.
Before I share our outlook for fiscal 2001, let me first provide a few updates regarding the assumed covered 19 trajectory going forward.
These can be found on slide 13.
After significant dialogue with both external and internal thought leaders as well as with our upstream and downstream partners. We now believe the general recovery regarding covered 19 will be a flatter more elongated curve than initially anticipated.
We are assuming a more significant impact from the ongoing deferral and cancellation of elective procedures and physician office visits in the first half of the fiscal year with an eventual recovery to pre cobot 19 levels as we exit fiscal 21.
On average, we believe elective procedures will be down relative to pre pandemic levels in the high single digit range and physician office business will be down in the mid single digit range for the full year.
Additionally, while we are working diligently to address global PE supply challenges. We are assuming demand will continue to outpace available supply for the balance of fiscal 2001.
We are incurring higher cost procuring certain PE products for our customers during the pandemic and this will be a headwind for us in fiscal 2001, especially in the first half of the year.
Keep in mind, our outlook is subject to considerable uncertainty and at this time does not assume additional widespread shutdowns like we saw in the spring.
We are closely monitoring key variables such as the trajectory of the virus itself.
Patient psychology, and returning to sites of care, our customers capacity and the overall health of the economy.
Using these assumptions as our backdrop, we anticipate earnings per share in the range of $5.25 to $5.65 for fiscal 21.
This range assumes an estimated incremental net headwind related to coated 19 of a similar year over year magnitude as experienced in fiscal 20.
We expect interest and other expense in the range of $190 million to $215 million, which reflects interest expense savings from fiscal 20 debt paydown as well as anticipated debt paydown in fiscal 2001, but at least $500 million.
We are assuming a full year non-GAAP effective tax rate in the range of 24% to 26% as a reminder, this assumption does not contemplate the potential effects of any unusual or open year audit adjustments favorable or unfavorable which we have historically included in our non-GAAP tax rate.
Given we have multiple years of us tax audits open we could expect greater than usual variability in our effective tax rate in the near to medium term.
We anticipate dilutive shares in the range of 292 to 296 million and finally, we expect capital expenditures of $400 million to $450 million.
For the segments, beginning with farm on slide 15.
We expect mid single digit segment revenue growth and segment profit growth in the low single digits, we're anticipating consistent market dynamics within our generics program and a similar contingent brand inflation rate in fiscal 21 as in fiscal 2000.
We also expect opioid legal costs of approximately $100 million consistent with the prior year.
In medical although we expect low single digit revenue growth, we expect high single digit profit decline due to higher costs associated with procuring PE for our customers and the impact of less elective procedures.
Excluding the adverse impacts of Cobot 19, we would expect medical segment profit growth to be in the mid single digits, Mike will elaborate on our strategies to address the challenges facing the segment related to cobot 19, and our plans to continue to improve the segments underlying performance.
Before I turn the call back over to Mike in my brief remarks last quarter I Express my excitement about the team our mission and the tremendous opportunities in front of us.
Those initial impressions seven further confirmed my first few months.
I'm confident we can collectively navigate current and future complexities to perform are essential role in healthcare and realize our future opportunities with that let me turn it back over to Mike.
Jason as quickly learned our business our strategy and our ongoing transformations across the enterprise and on behalf of our full leadership team. We are grateful for his early contributions and partnership.
Turning to our future in fiscal 21 and beyond we are focused on optimizing our core businesses and investing for growth.
I will share how we are doing both across the segments.
First in pharma.
We are building momentum on a solid growth trajectory.
We continued to enhance our infrastructure deploying technologies across the segment to streamline our operations improve our processes and strengthen our ecommerce platforms.
We also continue to invest in generics, including our best in class sourcing capabilities through Red Oak as we drive all aspects of the program for sustained momentum and performance.
Along with these work streams, we are fueling growth in key areas of the segment through strategic investments to diversify our capabilities and enhance the customer experience.
In specialty we are beginning to operationalize the investment we mentioned in Q1, two established a new distribution center outside of Nashville, Tennessee.
This facility includes a state of the art cold chain complex with deep frozen technology and enable us to drive operational efficiencies as well as support further growth in this area of the industry.
In connected care, we're identifying and investing in innovative digital capabilities that will improve interactions with patients payers pharmacies and providers.
We're also investing in an expanded innovation center for fair Nostix opportunities in our nuclear business, which will drive longer term profitable growth.
Turning now to medical we have multiple initiatives underway to drive longer term growth in this segment, but first and foremost we continue to prioritize our response to customers and their patients as we navigate the pandemic.
The unprecedented and sustained increases in demand for certain product categories are creating supply challenges and cost pressures for us and for our customers that will likely negatively affect our results.
In response, we have and will continue to expand our self manufacturing capacity and sourcing capabilities.
Our sourcing and marketing teams have reviewed more than 700 leads for alternative sources of PB supply.
However, only a small number of these leads have satisfied our rigorous vetting process and we are developing sourcing relationships where economically feasible.
In addition to short term pricing actions to mitigate increasing cost. Our teams are also building a longer term strategy for supply assurance.
Regarding our commercial strategy.
Although our pace has been and we'll continue to be affected by co bid 19, we're confident in our talent and ability to execute this important work stream.
We are moving forward with an enhanced focused on supporting the needs of our diverse customer base.
We believe this work stream will ramp up with the gradual increase in elective procedures as its progress is dependent upon our customers readiness to engage in incremental product and services discussions.
At the same time, we continue to optimize our end to end global supply chain.
We are making thoughtful modifications to our logistics planning manufacturing and procurement initiatives and this work is on track to deliver significant efficiencies.
Also we continue to evaluate our footprint and make selective investments in our capabilities and infrastructure.
Additionally, we are continuing to grow and evolving areas like our AD home and services businesses through investments that further enhance our strong strategic positions.
For example in at home, we are investing in technology that improves our interactions with the patient and drives efficiencies to create significant value in future years.
Let me now turn to the enterprise.
Our commitment to efficient operations will enable us to optimize and invest.
To that end, we have multiple initiatives in flight that will deliver savings in excess of our multi year $500 million target as well as technology and process improvements that drive future growth.
Turning briefly to capital allocation.
Our priorities of investing in the business strengthening our balance sheet through debt paydown in returning cash to shareholders through our differentiated dividend remain unchanged.
To close although fiscal 20 presented significant global industry challenges, we delivered on our commitments and our team responded with the grid that I've seen time and time again at Cardinal health.
I'd like to thank our employees, especially our frontline teams for their dedication to our mission.
What we do matters and together, we will manage the complexities ahead continued to deliver products and solutions to our customers and their patients and drive growth. So we can perform are essential role in healthcare now and into the future.
With that I'll pause to open it up for questions.
Thank you, ladies and gentlemen, if you'd like to ask your question. Please signal by pressing star on your telephone keypad. If you are using a speakerphone. Please make sure you hear me function is turned off to layer signal to reach our equipment. As a reminder, we ask that you. Please limit yourself to one question again press Star One ask your question at this time.
Thank you all first go to Michael Cherny with Bank of America. Please go ahead.
Good morning, and thanks much for the question. So I just wanted to dive a little bit more in into medical.
Mike as you think about the pathway for around the medical side clearly I think everyone. On this call is probably piecing together the various different data points are getting across a whole host of utilization driven companies. How do you think about the swing factors that would lead to upside or downside in terms of your current outlook and how that could factor through into the potential for upside downside.
To the profit growth outlook that you have.
Yes, thanks for the question Michael.
First of all we're really excited that we were able to see med grow this year and if you.
Yeah.
Adjusted for Covidien next year, we're excited that we have med growing in the mid single digits next year too. So we feel really good about of the trajectory I would say the the main driver of being better or worse than where we expected is probably cobiz 19 itself and the various impacts it could have.
On our business first of all if there's either major regional or the overall large shutdowns again of elective procedures, that's going to have a very negative impact on us or if it actually recover faster or if we swing back to some pent up demand, which that's not what we're projecting that could be.
Some upside for us so as Jason mentioned in his we're really expecting the average high single digits across the year and elective procedures being down for the year high single digits, we expected to start.
Higher obviously, we're exiting we think from our external.
Information and looking at our somewhere in the mid teens to high teens exiting Q4 with elective procedures being down and so we would expect to enter this year that way and then exit F wide 21 at close to pre co bid level. So thats kind of trajectory that we see but again different than that that.
I would be to make the biggest potential driver in medical you always have the potential driver of tariffs FX and commodities were not expecting anything big among those but as you've seen in past year any one of those could swing one way or the other and create upside or downside, so thats probably why.
I would say would be the biggest potential drivers of variability of medical.
Okay.
Next question.
Thank you we'll next go to Glen Santangelo with Guggenheim. Please go ahead.
Oh, yes, thanks for taking my question.
Jason I just wanted to follow up on some of the comments you made with respect to the co that impact on the fiscal 21 guidance I think you said you expect.
Third 100 million of the headwind in fiscal 21, consistent with with fiscal 20 is that and another 100 million or is that an incremental hundred million above I'm, just trying to figure out a fence.
Roughly 25 cent impact, you're calling out or 50 cent impact you're calling out.
Thank you, yes, it's an incident. Thank you. Thank you for the question is an additional incremental headwind of a similar magnitude of what we saw in 20 and just to give you a little bit more perspective in 20, we saw that fairly well balanced between the two different segments between met in pharma and 21 because of some of the reasons.
I just talked about that a little bit more impactful for medical we would expect there to be a bit of an overweighting of the impact on medical versus pharma.
Okay. Thanks for question.
Thank you, we'll next go to Mexico, Elizabeth Anderson with Evercore.
Hi, This is tomato on for Elizabeth just another question on the medical side. Just is there anything you've been seeing turns of volumes on the alternate site and acute care settings.
Sort of as Doctor visits and elective procedures starters and a bit.
Thanks.
Yes.
Again, I'll just emphasize what we've said here, we do expect to enter this year somewhere in mid to high teens down on elective procedures, that's really more focused on acute then alternate sites.
You know when we look at our insights we don't have as good of data and information quite on where that's at and it's not as big of a driver for us in medical as the acute business is so we do expect to enter somewhere in that mid to high teens of negative versus prior year, but.
Exit the year, Ed pre co bid levels with it obviously that improving during the year.
Great. Thanks question. Please.
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Thank you we'll next go to Charles Rhyee with Cowen. Please go ahead.
Oh, yes. Thanks for taking question Hey, guys just wanted to ask actually so little bit more on medical but really want to focus on the the at home business and obviously this is a business you guys got into several years ago.
And at times, you, you've you've spoken about it clearly with.
Cool that.
You would imagine I'd imagine that.
The home business has really accelerated that you kind of here that in the home health sector as well can you give us a sense more albeit what the makeup of this business as you kind of metrics around the size of this business now within medical sort of growth rates relative to the overall business and some of the dynamics that are impacting does that might be.
More positive or or more of a headwind because of other pen relative to the rest business I'd imagine maybe this has pp requirements are our hindering your or maybe not just wanted to get more sense on this on this segments. This is like it looked it could be a bigger contributor going forward. Thanks.
Yes. Thanks for the question. It's interesting we did take a look at that business, we really havent seen much impact on that business from the pandemic because if you think about it it's people that are at home and so they don't really have a need for PPD, there because they're essentially treating them. So.
Selves and so we continue to just deliver products to the home. So thats a business that continues to grow well for us we see it is one of our strategic.
Growth areas, we're absolutely going to continue to invest in it and we do see care moving more and more to the home, but we really didnt see much from the pandemic effected in either negatively or positively and also be helpful. It's about a 2 billion dollar topline.
A business that again, we feel great about.
[laughter].
Any kind of growth rate kind of estimates you can provide us relative to the total business.
That's a business that over the last several years has been growing somewhere in a high single to low double digits, depending on the year in some of the various introductions of products and we would expect that to be able to continue to grow like that going forward.
Great. Thanks, Thanks, a lot.
Yeah. Thanks Charles.
Thank you we'll next go to Lisa Gill with Jpmorgan. Please go ahead.
Thanks, very much good morning, Mike just curious if you have any update on the opioid side.
The next quarter cases, they're supposed to comment October, but and any update there I know you increase the spend tied to $100 million I'm, just curious if you're getting any closer.
You know, it's it's always a great question I would tell you that we continued to make progress.
On it while the co bid was happening so conversations continue to happen between us and the various attorney General's in the states, but as far as anything that I can give you I wouldnt say any major updates other than that we continue to make progress and have.
Productive conversations the spend area of 100 million an f. why 21 is essentially what we spent an f. why 20, so we're not expecting any incremental.
Additional spend.
In those fees.
Thanks for the question.
Thank you we'll next go to Ricky Goldwasser with Morgan Stanley. Please go ahead.
Hi War Hi, good morning.
Couple of questions here on the farmer segment outlook.
So when you think about to their Anthony Pettinari last quarter, you talked a lot lot about nuclear how the highly nuclear program in the quarter and importantly, how do you think about.
Great and.
In the embedded in your guidance.
Then.
Lean on your slide when you talk about brand inflation you talk about continued last dollar contribution each year can you maybe given any more color on that.
Sure.
Let me start with nuclear nuclear was the business in our peace segment that was by far the most significantly impacted it's a very.
Hi, fixed costs business and so as you can imagine when you're procedures go down you still need drivers you still need pharmacists, you still and you have a raw material that you're getting less products off of because it is radioactive and so its deteriorating so that business.
Was down significantly as we expected, but it did rebound a little bit better just a little bit better than we expected as well as elective procedure starting to come back a little faster faster they probably track closest to elective procedures on the P. side.
Is the nuclear business. So we continue to believe in the long term for that business. We continue to make investments in their thera nostix opportunities with manufacturers and we still really like that business, but it was one of the biggest tailwinds in our pharmaceutical segment as far as the brand component goes really what we're saying there as we expect inflation.
To be the same.
As it was this year roughly what because some of the fee for service arrangements and mix has changed a little bit there'll be less of the brand margin that is contingent to inflation.
This year than than Weve, Nf why 21 that in EFT, why 20, which it's already at.
95% or so is.
Matt.
Already noncontingent, so we exceed that getting even a little bit higher in next year the.
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Okay.
So I'll end it there.
Okay can I get your thoughts on on the Internet access here, if you exclude and annually.
No significant impact can you talk a little bit what type of.
In closing I would expect.
For the rest of the business in fiscal year 21.
So just to be clear I think I might have said the word.
Head tailwind on nuclear I met headwind for Q4, so I apologize for that I think are by probably knew that but.
As far as growth are you talking about specifically the nuclear our overall for the pharma segment.
So once you exclude that can you.
And most.
Negative impact what type of course, just kind of trying to quantify it in an interest rate.
Yes, the we would see the pharma segment more tightly aligned to physician office visits are probably going to be the biggest driver I would say that what we've been seeing in some of the acute via data and various sources like that we feel like that that's a business that we expected.
To be averaging down in the mid single digits for the year and similar to the way I described that we think it will be down mid single digits compared to pre co bid early in the year with it also exiting at pre co vid levels at the end of our fiscal year, what kind of a steady improvement over the year.
Thanks for the questions next question.
Thank you we'll next go to Eric Coldwell with Baird. Please go ahead.
Thanks, Thanks, very much I was hoping you could detect some of the comments on the generics program challenges cited or or headwinds cited in for Q.
Trying to get a better sense of what the total dynamics, where there was it more about volumes due to mix impacts and health care access during during the last quarter or was it more about something specific to cardinal youre procurement or Youre. Your channel successes, thanks very much.
Yes. Thank you no I wouldn't say there was anything unusual in there nothing that I would call out other than the Cove it impacts.
Related to just the volumes so it's hard to know to your comment around whether it's driven by insurance coverage or those types of things that piece has been kind of hard to.
Figure out but overall our.
The generics piece being down a little bit more.
In Q4 is really just related to covert volumes.
And Mike could you give us a sense on what you're seeing about.
The deflation dynamics in that market by site sell side pricing et cetera.
Yeah, what we saw was really pretty consistent dynamics throughout the whole year as we had mentioned the low a while back we started see some improvement of our Q4 of F. wind 19, and that just continued during the whole year. So it so.
Date improved it bounced around up and down a little bit quarter to quarter, but generally it stayed pretty consistent during the whole year and we're just projecting that to be just a little bit better next year than this year, but relatively pretty consistent and next year. We expect our overall generic program to be a net tailwind.
Which it was this year, but a member at the beginning year, we thought being that headwind. So we were able to flip it around this year and we expect the now to be a net tailwind for us in flight 21.
That's helpful. Thanks very much.
Oh.
Thank you and we'll next go to Robert Jones with Goldman Sachs. Please go ahead.
Great. Thanks for the questions. Mike I know you clarify that the 100 million is incremental for next year, but I was hoping maybe you could talk a little bit about the cadence how we should think about layering that into into the numbers as we think about the progression from quarter to quarter and then any more comments just around where that.
Headwind might lie in next year's numbers versus this year as we think about new dealer lower utilization the GP procurement just anything around the buckets will be helpful.
Yes. This is Jason let me, let me start here as it relates to the cadence as Mike indicated we see in the fourth quarter of 20 that we're exiting the mid to high teens for elective procedures being down and of course in our guidance. We have high single digits down. So you would as an average.
For the year and so you could see that that will trend then from from that high mid to high single digit to essentially at pre token levels by the end the year, giving you that average at the high high single digits. So yes, there is going to be some choppiness along the way, but we do anticipate that it's a relatively steady march back towards.
Pre tilted levels by by year end, so thats certainly means from a from a math perspective that we would anticipate it being front end loaded more of an impact in the front half I also made a comment in my remarks about the the cost side related to PE being also more more anticipated for the first half of the year. So for those reasons we.
Like there to be in Overweighting, and first half versus second half.
And as as it relates to where we foresee those impacts again most of the 21 impact relative to 20 is going to be in more medical and so as.
As you highlight areas like like nuclear Thats going to be again, a steady improvement we would anticipate over the course year, that's tied to the physician office visits but more of that impact in 20, we'll see in medical and specifically in the product and distribution of that business and.
Related to both the cost as well as the underlying volume related to both the physician offices and and the elective procedures.
Great. Thank you.
Thank you and we'll next go to George Hill with Deutsche Bank, but.
Hey, good morning, guys. Thanks for taking the question Mike I was wondering if you provide a little color on your conversations with your upstream and downstream partners around utilization just because if you listen to some of the talk from the MCR shows there generally expecting utilization to increase in the back half of this calendar year. It sounds like you're still calling for a significant decrease we just.
Of any extra color on the conversations you've had to help us bridge the gap. Thank you.
Yeah, you know we've been.
Talking to outside consultants been talking to our customers senior execs. Their AD you can imagine to a lot of folks to try to put together our thought process I believe it's really well informed but.
It's hard for anyone to know for sure, but our take is that we won't see any of our businesses med or pharma back to pre co vid levels until we're exiting our fiscal 2001. So you know in that May June timeframe of next year.
And.
And again as we said start out on electives in mid to high teens working its way up and then on physician office visits in more of the mid single digits down and working its way up so that that is based on a lot of discussions with folks and.
And I don't think we're hearing it was a lot of early comments around pent up demand and potentially going above 100%, but as we talked to people when they think about the ability to drive throughput the steel the psyche of folks willing to go back to the hospitals et cetera, we're not really hearing people talking about that.
That pent up demand.
On the coming through like we did before so thats why we think we're just getting back to kind of pre co good levels.
Thank you.
Thank you we'll next go to Eric Percher with Nephron Research. Please go ahead.
Thank you Mike can you help us understand the dynamics of pp, maybe on the contracting side. It sounds like you're definitely taking on more expense being thoughtful are manufactured yourself is there an agreement amongst the market that pricing is not going up or are we seeing increases in pricing that over.
Time will be passed onto the marketplace.
Yeah. That's a great question as Jason mentioned in his script, when we think about the headwind in medical around.
Coded part of it is related to actual volumes of elective procedures and part of it is related to.
Cost increases on certain categories of ERP. So to your point, we are seeing price increases on PPI some of them incredibly significant on key categories and so we've seen those now for a couple months. So as you can imagine we've been having to procure some inventory at high.
Higher cost and one of the things that we never want to do if we can help it is is to pass on price increases to our customers. We really view our job is being able to drive down.
Cost for them and help them do that but in order to balance the ability for them to be able to actually have products to protect their workers and for us to be able to procure them. We have had to acquire some product at higher prices and we are working with our customers to adjust our pricing to them.
Appropriately this is not an area, where we look to profit from this this is something where we would look to try to just maintain our a margin dollars any area and so we want to work very collaboratively with our customers, but there has been will be a need for at least the poor.
We have time for us to work with them to adjust some pricing in certain areas of ERP.
Thank you.
Thank you we'll next go to Steven Baxter with Wolfe Research. Please go ahead.
Hey, Thanks for the question.
I wanted to ask about cash flows pretty volatile line item for you as working capital Swann.
Hoping you could talk little bit about whether 2020 was maybe more of an appropriate.
Normalized level for your cash flow and also anything you can share about your expectations for fiscal 2021, and whether we should be thinking about directionally with EPS or whether there's other factors, which keep in mind. Thanks.
Yes sure. Thanks for the question and it appropriately highlight that there was some volatility within the fiscal year 20, as well as we saw in Q3 very strong cash flow as a lot of that volume surged benefited us and we sold out of inventory and a little bit of the carryover effect than for Q Q4. So when you look at the two quarters together I think there.
Relatively indicative of what you should expect I think the one thing to keep in mind.
We've been very consistent about that day of the week in which the quarter in the year ends is very important to us and for fiscal year 20, It was more adverse.
Compared to many other years and just in terms of calendar fell. So at this 2 billion dollar level I think it's a little bit low from a calenderization perspective and.
I think next year next fiscal year, 21 will be a little bit more normal in that regard and all other things being equal I'd expect it to be a little bit better, but then of course it all comes down to other factors that may impact the underlying cash flow.
Thank you next question please.
Thank you and next go to Steve Valiquette with Barclays. Please go ahead.
Hi, This is jump in young on for Steve I guess, just in relation to the mid teens down volumes that you're seeing on the medical side is that what is currently being experience kind of what you saw in June and July and I guess is there any a benefit that you're building in the late Q and elevated flu season or the.
Hey, rankled potential of any covenant that thanks.
Yeah, right now from a flu season standpoint, we're just in the expecting a normal flu season, we've not built in anything different from that as far as vaccines go.
We are we're obviously like everyone very hopeful that a vaccine will become available we're very.
Excited that that could happen, we know that we have the absolute capabilities to be part of the solution of getting vaccines, the folks and and would expect and hope that we would be part of that but even if we were we don't see that is a.
Big upside in terms of earnings if there was a vaccine to distribute so I think from those two standpoint, that's how I would see those two.
Oh in July you mentioned July what we're seeing in July really is just basically on track to what we said with our expectations that we would.
Enter the year like we said on electives.
In that mid teens to high teens, and then grow and there's nothing in July that would indicate that the current assumptions that we have built into our plan aren't playing out.
Thanks.
Thank you, we'll next go to Kevin Kelly Endo with GPS.
Hi, Thanks for taking my call.
Taking a little bit around the cash flow question, and if we subtract out the dividends and your Capex expenditures.
You don't have a lot built in for share buybacks, you have 500 million or debt being repaid the math there. It would suggest there's still an excess of four or 500 million maybe maybe more.
To play with if we think about sort of where the company is at this point with the cash on hand in the balance sheet being in better shape than it was a year ago, what would be the optimal use of that is or is there M&A opportunities is there potential you would start to buy back stock news talk a little bit about about what you might do.
With that any excess cash.
Sure. Yes. This is Jason let me, let me start with that.
And I think your your math is fairly accurate. There. This does give us some flexibility and I think thats, where I would start is just recognizing that we are in a little bit more uncertain of than environment. As is typical and so this this guidance does give us a little bit more flexibility to be able to react to any type of such.
Issues that may occur.
One thing you mentioned as the debt pay down of 500 million I did highlight at least $500 million in my script. So Thats. An example of we'll see how comfortable we are with that type of capacity and then determine where to go from there and we have about 1 billion for coming due in 2022 in terms of the next tower of debt insights, there's something that we havent our sites.
We want to you want to think about.
And then we have a little bit of repo built into our share guidance and the exact timing and amount that is something that we will continue to evaluate based upon all the other all the other factors.
Yes. So next question.
Thank you and our last question will come from Joel interesting with credit Suisse go ahead.
Thanks, Thanks for squeezing me in debt, so when thinking about BP I know you've talked before about rationalizing your manufacturing footprint.
We talk about how the increased costs in that business area and how cold it maybe impacting your talk process with respect to your overall global footprint.
Yes, that's a great question.
It clearly has.
Changed our thinking a little bit on our global footprint. Many of the plans that we had planned are still moving forward because a lot of our products that we actually manufacturer ourselves are.
The higher end all our type of surgical types of products and so we're continuing down that line, but as far as our PDP production I would say, we're looking at a couple of different things. One is we're evaluating the countries from which we're sourcing to make sure that were not overly dependent on any single country and so that we will.
We will look at that because for example, a lot of gallons were produced in China and going forward, we want to make sure that we have a more diverse supply chain not only overall, but for individual items. So thats one have been and we'll continue to increase our own capacity for the production of certain products.
Like mask, which is an area, where we've made investments in have increased our productivity and then we will take a hard look at to US we would love to be able to do more production in the US. However, we need to make sure that were doing.
Their need.
Airware manufacturing on product.
We continue to evaluate that but continue to ramp up and then also we're going to evaluate the inventory levels that we keep.
Going forward around levels of safety.
Yeah that our supply chain.
Paul.
Right.
Well first of all thanks for all the question.
Joining us this morning and on behalf of the entire Cardinal Health family, We hope you and your families stay safe.
Well and we look forward to speaking again.
Since you sometime soon.
Thank you and ladies and gentlemen that does conclude today's call. We do thank you for your participation you may now disconnect.
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