Q1 2021 Cardinal Health Inc Earnings Call

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Ladies and gentlemen, you are currently holding for the Cardinal Health Inc. first quarter fiscal year 2021 earnings call Wolfcamp momentarily. Thank you for your patience. Please remain on line.

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President of Investor Relations today, we will discuss Cardinal health first quarter physical 2021 results along with an update for outlook you can find today's press release and presentation on our iron section of our website at <unk> Dot Cardinal health Dot com.

Joining me today is might Kaufman, Chief Executive Officer, and Jason Holler, Chief Financial Officer Chair.

During the call we will be making forward looking statements. The matters addressed in this 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 SEC filings and the forward looking statements slide at the beginning of our presentation for a description of these risks and uncertainties.

In our medical segment outlook.

Overall, we remain focused on serving our customers and their patients as we optimize our core businesses and invest for growth to fulfill our critical role in healthcare now and into the future.

With that I'll now turn it over to Jason.

Thanks, Mike and good morning, everyone.

I will review, our first quarter performance and updated expectations for fiscal 2001.

Beginning with consolidated company results, our first quarter EPS came in at $1.51 cents growing 19% versus the prior year and exceeding our expectations.

Total first quarter revenue increased 5% to $39.1 billion, driven primarily by sales growth from existing customers totaled.

Total gross margin grew 2% to $1.7 billion. Despite higher revenue as training was flat at $1.1 billion, demonstrating our enterprise wide commitment to disciplined expense management.

Total operating earnings grew 7% to $618 million driven primarily by strong medical segment performance.

Interest and other expense decreased 52% versus the prior year to $38 million driven by lower interest expense as a result of our ongoing commitment to reduce debt as well as multiple other favorable items, such as FX and deferred compensation.

Our effective tax rate for the quarter was 23%, which includes a few small favorable discrete items.

Although discrete adjustments they cause our quarterly tax rate to deviate from our guidance range of 24% to 26% at this time, we still believe this range is appropriate for the full year.

Average diluted shares outstanding were 295 million about 2 million fewer shares in the prior year, reflecting repurchases completed last year.

We generated operating cash flow of $270 million during the quarter. As a reminder, the days a week that was since quarter end effects point in time cash flows.

We ended the first quarter with a cash balance of $2.7 billion and no outstanding borrowings under our credit facilities.

Now turning to the segments beginning with medical on slide six.

Medical revenue increased 1% in the first quarter to $4 billion driven by sales growth in our at home solutions business.

Segment profit increased 36% to $230 million, driven by cost savings, including global manufacturing efficiencies.

The following factors contributed to first quarter medical performance above our expectations.

First while elective procedure volumes were still below prior year levels, they ramped up more quickly than expected.

Given our portfolios general orientation around DLR. This volume improvement resulted an increased demand for many of our higher margin offerings, including our custom surgical kits and patient recovery products.

Second our lab business, which has grown consistently over the past few years to product portfolio expansion and favorable market trends experienced the tailwind from increased demand for COVID-19 testing products and.

And finally as Mike mentioned, our team delivered strong expense management in response to uncertainties related to co did 19 feed measures position us to operate and invest in the business for continued growth.

As we have previously discussed we continue to incurred significantly higher procurement costs for certain product categories due to global supply challenges during the pandemic.

To help mitigate these cost increases we implemented price increases on select PE products with the goal of maintaining neutral margin dollars.

TV cost increases and corresponding mitigation efforts did not have a material net impact on our results for the quarter.

I will discuss the potential effects of these dynamics from the segment for the full year when I share our updated assumptions.

Now transitioning to the pharma segment on slide five.

Revenue increased 5% to $35.1 billion, driven by sales growth from pharmaceutical distribution and specialty solutions customers.

Despite expected COVID-19 related volume declines segment profit increased 1% to $402 million driven by a higher contribution from brand sales mix.

Additionally, the farmer team remained focused on diligent expense management.

During the quarter, we saw improving pharmaceutical demand, enabling us to finish generally in line with our COVID-19 expectations for this point in the fiscal year.

Our specialty solutions business also demonstrated improvement in the quarter, resulting in strong overall growth.

Our nuclear business as expected was down year over year, but.

But experienced significant volume recovery in the quarter.

Impact of Pp pricing and we expect this increased revenue to be more than offset by the higher costs procuring PE products, which will adversely impact our margin rate.

Mike will provide more color on our PE supplier Sharon's efforts for our customers later in his remarks.

As it relates to the pharma segments, we are reiterating our assumptions of mid single digit revenue growth in low single digit profit growth.

But the majority currently expected to be paid over a period of 18 years.

Considering this accrual update in the dynamic global environment, Let me remind you of our capital allocation approach, which we are prioritizing in the following manner first.

First we are investing in key areas of our business to enable our strong pipeline of organic growth opportunities second.

Second we are focused on taking appropriate actions to maintain our investment grade balance sheet.

Any medical or work to streamline our global supply chain networking processes continues and we are seeing significant efficiencies.

We're also strategically investing to expand in high growth areas to support new technology am therapies, and the drive innovative care delivery.

For example, and specialty we are developing partnerships and making thoughtful investments that combined the technology scale and expertise of our business with new innovations in cell and gene therapy, Biosimilars and value based care models.

Or three pale continues strong growth with the recent launches in traditional markets as well as emerging markets.

Also we recently made an investment in binetti, the first commercial cloud based platform to integrate logistics manufacturing and clinical data for cell and gene therapies.

Internet at home solutions business as trends and technologies accelerate and the increasingly virtual world of the pandemic, we're focused on optimizing our product portfolio and enhancing the customer experience.

We are deepening partnerships with patients payors and manufacturers to meet their evolving needs and expand our capabilities.

We are also investing in our operating systems and digital commercialization capabilities with a pipeline as AI initiatives to lower our costs to serve and provide fully integrated medical and pharmacy billing solutions for our customers.

These work screens will make us uniquely positioned to lead in the developing interconnected health at home space.

Across the company, we are working diligently to meet our customers current needs. While also looking ahead, what they might need in the future.

While doing all of this we remain highly focused on our internal and external responses to the pandemic.

And medical we implemented multiple measures to address ongoing supply challenges for PPE product categories.

For example, we established our supply assurance program to provide consistent longrange supply for our products, including examples downs and mask.

The program has been positively receive in this collaboration with our customers will enable us to collectively navigate supply volatility and deliver critical products for patient care.

Further was there anything that was more short term in nature in terms of what you saw in the quarter and as you think about the risk weighting of the various different tailwinds headwinds you have.

So the guidance increase where do you think are the most sources for potential upside downside or or what I guess, maybe on the downside the most concerning or most risky in terms of how to achieve the various levels of that corporate expectation.

Yes. Thanks for the question I'll start then I'll turn it over to Jason.

First of all I would just emphasize we are really.

Excited about the efforts we're seeing in our medical segment. The team did a really good job this quarter, saying not only focused on driving expenses for the quarter in relation to the uncertainty of the pandemic, but also continuing to get after the longer term expense initiatives we.

Due to the uncertainties in the quarter and we saw some some really great flow through of those actions in terms of delaying some open positions and managing third party spend that may be a bit more temporary in nature and there's something that will continue to work to see if we can make more permanent.

So we have a good balance included within our within our guidance for all those items going back to P. P E. As it relates to the rest of the year that is the one area that we do anticipate having higher costs in the second quarter higher net cost in the second quarter versus the first quarter and that's just due to the timing uhm we have procured these.

Reason.

Our assumption around that what's not in there is any private party plene cases, you know individual or some other non political subdivision or state those are still out there we intend to.

Defend yourself vigorously against those but that accrual takes into account all both the states and the political subdivisions.

Okay and also if your question is just on from investors on the run rate of medical profits on a quarterly basis. Obviously this fiscal first quarter was very strong any additional thoughts on kind of quarterly run rates from here might be helpful as well. Thanks.

Hopefully when we were first thinking about this so I think that's one component also to keep in.

Mine.

Next question please.

And our next question will come from <unk> Singh from Credit Suisse.

Hi, This is Adam on for joining us today.

In terms of the cost savings, which were partially contributing to the E. P. S. For is just curious of how much are the improvement there had already been plan versus if you expedited any of those cough initiatives. Thanks.

Yeah, So as I think about the what's the step back and think about the rays for the full year guidance that is entirely due to the medical performance and you saw that we raise the outlook there as well and so within that we had two key components first of all covid as being is better.

A headwind than what we had anticipated all those still a headwind for the year and that is the the most meaningful impact, but also significant within that not insignificant as the the the underlying cost reductions that we've been referencing so both go into it but I would say cope with a little bit more of of a benefit their versus.

The cost savings, but still still very meaningful and then I would just add we've also seem very good performance of our lab business and the first quarter that we would expect to continue through the rest of the year and so some of our other components of our business for four very strong too.

And what other one other item maybe just to make sure. We references tax rate for the first quarter was a couple of hundred basis points lower than the mid point in lower than the range that we have.

That is just the timing of some discrete items that were all anticipated when we established our guidance range. So we will continue to have some fluctuations there, but that does look like and.

An impact in the first quarter that we would expect to revert more to the mean by the time, we get to the end of the year.

Okay.

Now I'll move to Kevin condo, but T B S.

Great. Thanks for the question this is actually Adam double on for Kevin.

Just wanted to go back to the lab business curious if you guys can kind of get size, how big a business that is within the overall medical segment then.

Just curious is that mainly the hospital channel or do you have a significant presence with outpatient labs and other areas of the blood test thing.

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Yeah, Our lab business has been a business that we've had for a really long time.

Always it's been a consistent grower for us both on the top and bottom line for a lotta years.

It's main customers are basically the the outpatient labs and other hospital lab type of businesses. So those are who we are supplying we have a very robust product line some of which is ourself manufactured resource items as well as we work with.

All of the National brand players and so while it's always been a business that is performed well and groan nicely for us.

With the increased in Covid testing.

Businesses had some additional growth this year. It also been a real leader in getting uhm reagents out testing equipment working with folks on helping on the swamp supply early on so at the business. We're really proud of the team there and continue to feel good about their growth this year and we actually.

Are are evaluating how much of that might continue ongoing forward as we continue to look at that business going forward, but really strong performance by the lab business.

Gotcha, that's super helpful.

With regards to the medical business overall I'm just curious if you could talk about the.

Recovering utilization there H.

Between the U S as well as some of your international footprints then yeah.

Your comments around not expecting to see.

A real drop an elective procedures, probably most likely in the U S and covid.

I'm, just curious, giving some of our lockdowns that it.

Recently been implemented in Europe, whether if there was any.

Heightened concern there.

Yeah. It's a great question I think the first thing I think we all need to keep in mind is it will probably be very choppy over the next six to 12 months. It's it's hard to know how long, but I do think it will be choppy we are even seen.

Small shuts down here and there in the us and obviously potentially in Europe in different spots as far as our the.

The majority of our product is going through R. U S channels and as I said as it relates to electives, we exited Q1 down mid single digits and expect to get at or near pre covid levels by the end of the year and while that's not a huge sequential growth we do.

Checked it to be somewhat choppy and it's it's hard to exactly predict on a quarterly basis, but we feel good about our current guidance as it relates again, assuming there is no major shutdown. If we had everybody shutting down again like in our queue for that that would create some different types of concerns but.

As long as we get see spotty types of.

License care and we've been successful working with the suppliers and our customers in this area. We think we're really well positioned to distribute and provide services, both upstream and downstream to the biosimilar players.

Generally biosimilar margins.

Our similar to branded margins it depends on the individual supplier and the product. There are some opportunities. When you are able to move share through your gpos and stuff to make some potential extra margins on that but generally on as I said in the past the real margin opportunity for us and Biosimilar is over the mid to long term.

Two it around both new Rx generics et cetera. So we're not really seeing any trends within our business that I would call out that are much different than what we're seeing in the overall like you'd be a data.

Okay, great. Thank you.

Now moving to Elizabeth Anderson with Evercore.

Hi, This is Joe on for a little bit just a quick question on Cardinal health at home could you give us a sense for kind of how you see demand trending as you progress through 2021.

Thanks.

Much faster than other oncologys, whether it be cardiology rheumatology nephrology.

Particularly for nuclear our cardio business has bounced back a little bit slower than oncology.

In which our cost reduction narrowed that may come back can you get back to full speed.

No actually it's a business that is pretty fixed cost.

Business and so we did not take any.

We took appropriate cost reductions, but I wouldnt say, we took aggressive cost reductions because we really believe in that business over the long term. We think it has a very nice pipeline of projects. We're working on with manufacturers for clinical trials. The fair Nostix area. We think is a real good growth area for us.

Be able to manage specialty drugs that way and then also with our specialty business. They can go that way so that's something that.

That we.

We feel really good about that we talk to manufacturers all the time and can work with them in either way a lot of manufacturers it depends on who the ultimate customer is intended they're trying to reach.

Which one they may choose and sometimes that they'll choose both depending on certain customers will go one way or the other ones will go the other so it's hard to specifically talk about any individual drugs, we don't really like to do that but in terms of having the capabilities I'm confident that we can do that anywhere even up until including if it's a smaller come.

Penny that's launching a drug indeed services all the way from soup.

Soup to nuts.

The third party logistics business, we have is from performing incredibly well in our specialty space. So someone that needs customer service shipping billing collections et cetera, we can do that too as far as the Covid vaccine as you know as far as phase one has been.

One of our competitors has been chosen to do that in phase one week.

We continue to have daily conversations with the folks in the government around being part of it we have the absolute capabilities to do what we've been shipping many different types of vaccines for years. So we have both ambien and cold change storage capabilities and shifting capabilities to do that.

And my belief at least from what I think probably best from making sure that the product is available.

For our customers and the fact that we're going to our customers every day is that down the line I think it would make the most sense for all the key distributors to be part of the face to have this one the products that come more readily available and we stand ready to do that when that happens.

Thank you next question.

And our last question table come from George help with Deutsche Bank.

Hey, good morning, guys. Thanks for sneaking me and Mike All apologize if you touched on this already but if you think about the guidance for the balance of the fiscal year can you quantify what your guidance implies in the core drugs business I guess as a per cent of returned to baseline from pre Covid like is the I guess does the guidance assume that we get 95 per cent back 98% back just be.

For them to call you call later on that.

Specifically.

Well I can talk specifically the pharma.

We're really feel like where.

A tracking very similar to the IQ via data and that our next trends.

Remember our year end being 230 would be at or near pre covid levels by the time, we exit the.

The year and so that's kind of how we would see it progressing over the next three quarters again with the caution of being some potential lumpiness as things happen specific Rx's does that answer your question George Yeah.