Q2 2021 Cardinal Health Inc Earnings Call
[music].
Thank you for standing by your on hold for the Cardinal Health, Inc. Second quarter fiscal year 'twenty 'twenty one earnings.
Cool.
At this time, we are gathering additional participants and should be underway. Shortly we appreciate your patience and ask that you continue to hold.
And.
[music].
Please standby we're about to begin.
Good day and welcome to the Cardinal Health, Inc. Second quarter fiscal year 2021 earnings Conference call.
Today's conference is being recorded at this time I'd like to turn the conference over to Kevin Moran Vice President of Investor Relations. Please go ahead.
Good morning, and welcome.
Today, we will discuss Cardinal health second quarter fiscal 2021 results along with an update to our FY 'twenty one outlook you.
You can find today's press release and presentation on the IR section of our website at IR Dot Cardinal health Dot com.
Joining me today are Mike Kaufmann, Chief Executive Officer, and Jason Hollar, Chief Financial Officer.
During the call, we will be making forward looking statements and.
Matters addressed and 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 SEC filings 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 they are specifically called out as GAAP.
GAAP to non-GAAP reconciliations for all relevant periods can be found and the schedules attached to our press release.
During the Q&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.
With that I'll now turn the call over to Mike.
Thanks, Kevin and good morning, everyone.
I'll start our discussion with a few high level thoughts on our progress. So far this year and then Jason will review, our second quarter results and our updated fiscal 'twenty one outlook.
I'll close by sharing updates regarding our growth areas.
We continue to make progress on our strategic plan as we navigate the rapidly changing global environment.
Overall second quarter operating results came in better than our expectations led by the medical segment.
In addition, we saw some favorability, including timing below the operating line, enabling us to deliver EPS growth of 14% and the quarter.
Due to our solid first half performance and our improved visibility into the remainder of the fiscal year.
We are increasing and narrowing our EPS guidance to a range of $5 85.
And to $6.10 per share.
And the second quarter, we saw varying effects of the pandemic on our business.
Our medical segment saw a net positive impact related to COVID-19, as our lab business and PPE products continued to experience and strong demand.
And in pharma and although the pandemic continued to adversely impact volumes, mainly and generics and nuclear imaging areas like specialty and consumer health are recovering and performing very well.
Across the company, we remain focused on doing our part to support ongoing pandemic relief efforts.
And pharma, we partnered with the CDC to act as a network administrator, enabling retail independent and small chain and long term care pharmacy customers to participate and the vaccination effort.
And in medical and we partnered with the state of Ohio to support vaccine distribution through our after freight logistics business.
Regarding PPE, we are utilizing our supply assurance program to manage costs for our customers and provide consistent long range supply and key product categories.
We are seeing improving supply and some of these product categories, such as gowns and masks, but continue to see a challenging market with exam gloves.
Looking ahead, we remain committed to supporting our customers patients government and communities through the ongoing challenges of the pandemic and we are ready and willing to help in any way possible.
Before I provide some updates on our strategic growth areas I'll turn it over to Jason to share more details on our second quarter and outlook for the year.
Thanks, Mike and good morning, everyone.
Beginning with total company results second quarter, EPS was $1 74 <unk>.
Reflecting a 14% increase driven by discrete tax items and strong medical results.
Total second quarter revenue increased 5% to $41 5 billion drew.
Driven primarily by sales growth from existing customers.
Total gross margin was flat at $1 8 billion.
SG&A increased 2% to $1 1 billion due to it investments.
The net result for the quarter was consolidated operating earnings of $628 million, a decrease of 3%, which reflects a modest net negative impact for the enterprise from COVID-19.
The pharma segment was adversely affected by COVID-19 during the quarter and this was partially offset by a net positive impact and medical I will discuss the segment impacts shortly.
Interest and other expense decreased 33% versus the prior year to $34 million driven primarily by lower interest expense as a result of prior year debt reduction as well as an increase and the value of our company's deferred compensation plan and investments.
Our non-GAAP effective tax rate for the quarter was 13%, which reflects the impact of certain discrete items.
Now a quick note on the GAAP tax impacts during the quarter.
Primarily due to a self insurance loss and our fiscal 2000 and federal tax return, we will carry back and recover previously paid federal taxes at rates that were in effect at that time.
As such in the quarter, we recorded a net GAAP tax benefit of $420 million associated with the recovery of prior taxes.
Additionally, we have recorded a corresponding receivable of approximately $1 billion, which we expect to receive within the next 12 months.
Turning to cash flow and the balance sheet and generated robust operating cash flow of $1 $2 billion during the quarter.
As a reminder, the day of the week, and which quarter and effects point and time cash flows.
We ended the second quarter with a cash balance of $3 7 billion and no outstanding borrowings under our credit facilities.
We remain focused on taking appropriate action and maintain our investment grade balance sheet.
Our next debt maturities and June 2022, with approximately $1 $4 billion coming due.
By the end of fiscal 'twenty, two we intend to reduce long term debt by that amount. So the exact timing and method may vary as we continued to evaluate the economics associated with early retirement of debt.
Now turning to the segments beginning with medical on slide five.
Medical revenue increased 7% and the second quarter to $4 3 billion driven by a net positive revenue impact from COVID-19, and solid execution by our team.
As we have previously discussed we saw higher selling prices and volumes regarding PPE and higher volumes and our lab business, partially offset by reduced surgical products demand, resulting from deferred and canceled elective procedures.
Segment profit increased 21% to $236 million driven by a net positive impact from COVID-19, and cost savings, which includes global manufacturing efficiencies.
The net positive segment profit impact from COVID-19 was primarily due to higher lab volumes as well as increased contributions from PPE that were offset by the previously mentioned elective procedure impact.
As it relates to lab, we continued to experience a tailwind from increased demand for COVID-19 testing products, while difficult to predict we expect this demand to remain elevated for at least the balance of fiscal 'twenty one.
Regarding PPE, we saw both higher volumes and timing favorability related to our cost mitigation efforts.
As previously mentioned, we have incurred significantly higher procurement costs for select PPE products during the pandemic and we expect the timing of selling the higher cost products to vary as we continue to manage our supply assurance program for our customers.
On elective although procedure volumes continue to be choppy and still below prior year levels second quarter volumes were generally consistent with our first quarter exit rate down mid single digits versus our pre COVID-19 baseline.
Finally, as and the first quarter, we continue to see savings, resulting from cost containment measures during the pandemic.
And outside of COVID-19 impacts we continue to realize benefits from our efficiency initiatives like our global manufacturing and supply chain transformation, which we expect will continue to deliver strong savings.
Transitioning to the pharma segment on slide six.
Revenue increased 4% to $37 $2 billion, driven by sales growth from pharmaceutical distribution and specialty solutions customers.
Pharma segment profit decreased 11% to $413 million. This was driven by COVID-19 related volume declines and our generics program and nuclear business and was partially offset by a higher contribution from brand sales mix and the quarter.
Our specialty solutions business continues to demonstrate resilience.
Downstream with providers and upstream with Biopharma manufacturers and again achieve strong overall growth and the quarter.
Also our generics program when excluding the previously mentioned volume impact of COVID-19, and continuing to see generally consistent market dynamics.
Next on slide eight.
And we'll review the updates to our fiscal 'twenty one outlook.
Due to our solid first half performance and better visibility into the back half of fiscal 'twenty. One we are raising and narrowing our EPS guidance range to $5 85.
To $6 10 per share, which at the midpoint represents 10% year over year EPS growth.
This improvement is driven by strong performance and our medical segments as well as updates below the operating line.
Regarding updates to other corporate assumptions and.
Now expect interest and other and the range of $165 million to $185 million.
With the improvement primarily driven by the impact of our deferred compensation plan adjustments.
As a reminder, deferred compensation adjustments are fully offset and corporate SG&A and net neutral to our bottom line.
We are lowering our non-GAAP ETR range for the year to 23% to 25%, which reflects our year to date effective tax rate of 18% and higher expected effective tax rates and the back half of the fiscal year due to the timing of discrete items.
We also now expect dilutive weighted average shares outstanding to finish the year and the range of 294 and for $295 million.
Regarding the segment outlooks on slide nine.
For medical due to the previously discussed drivers, we now expect segment profit percentage growth and the low to mid twenties and revenue growth for the year and the range of high single to low double digits.
Regarding the pharma segment, we are maintaining our current guidance ranges of mid single digit revenue growth and low single digit profit growth.
To conclude some comments on our enterprise COVID-19 assumptions for the back half of the fiscal year as we begin to lap the initial impact of the pandemic and the prior year.
We continue to expect utilization to be choppy and to exit the fiscal year at or near pre pandemic levels.
And for the enterprise and fiscal 'twenty, one we continue to expect a year over year net negative impacts from COVID-19.
Less than originally anticipated due to improved medical expectations I will now turn it back over to Mike.
Thanks, Jason I'd now like to take a moment to elaborate on how this unprecedented time as reinforced our critical role and health care and how we see this role evolving as we look toward and beyond the second half of the fiscal year.
I said last quarter that we aspire to be healthcare's, most trusted partner.
And create the greatest value for our customers.
Shareholders communities and employees.
We create this value by efficiently operating resilient business models deploy.
Deploying capital with discipline and investing for growth.
All while prioritizing the health safety and development of our teams.
First as we've seen throughout the pandemic, we operate resilient business models that can address today's challenges and adapt for the future.
For example, as Jason highlighted our lab business continues to enhance its offerings throughout the pandemic.
Through our Cardinal health brand portfolio, and our distribution relationships, we supply instrumentation reagents, and consumables and enabling both independent and acute laboratories to support the health of patients.
We are also enhancing our core medical and pharmaceutical distribution and product capabilities as we continue to adapt these models for the future.
We are making strong progress in both segments and our supply chain work streams and generating near and long term efficiencies.
For example, we began work this quarter on a new 1 million square foot Medical segment replenishment Center near Chicago debt, we expect to be operational and the fourth quarter.
This facility is the second of its kind and the last year and as part of our multiyear plan to improve the customer experience.
Consolidate our network and increased capacity to meet customers' request for pandemic storage.
We are also making strategic investments and our it infrastructure to enhance our customer experience and digital capabilities.
At the same time, we are investing and our differentiated portfolio to drive strategic long term growth in key areas and not only support but also anticipate our customers' needs.
Our investments and the areas of specialty at home medical services nuclear and connected care will enable us to capture benefits from favorable industry trends and to develop specialized customer solutions utilizing our breadth and scale.
Recall I noted at a recent conference that these five businesses represent 25 billion and total revenue and together they have a double digit historical three year revenue CAGR.
Let me highlight a few of these areas and greater detail.
And medical services, which includes our after freight logistics and <unk> businesses, we are investing and technologies to drive continued innovation that we will meet the evolving needs of our customers.
For example, with our recently announced total view analytics tool and our after freight business.
We are using data to help our customers drive insights and savings and their health care supply chain logistics management.
And and wave Mark, which as a reminder is a software as a service platform optimizing supply chain and clinical workflow processes for acute care.
We have seen growth and both our installation and our pipeline as we continue to go live with additional customers.
Wave Mark has also recently initiated partnership opportunities to explore solutions to help lab managers and supply chain leaders manage the increased demand for critical test kits and lab supplies.
As our nuclear business continues its recovery related to the pandemic. Our team remains focused on long term plans to further strengthen our leading industry position.
We continue to build out our center for fair, the optics advancements and and the Atlas and are excited about the pharmaceutical innovators coming on board.
From supporting manufacturer development of Radiopharmaceuticals to commercialization and distribution, we are working together to change the way patient care is delivered.
In addition, our recent customer loyalty survey results were excellent showcasing our differentiated value proposition and the market.
Our efforts over the past six years to transform our selling model and strengthen our world class service levels and launch new products and services are deeply appreciated by our customers and we are excited about the mid to long term future of this business.
And finally and connected care, we're making additional investments and technology solutions and actionable data tools to take advantage of the double digit growth, we are seeing and to enable more meaningful cost effective and outcomes driven connections between payers and manufacturers pharmacists and patients.
<unk>.
Demand for these solutions continues to increase with our services currently reaching 60000 pharmacies 'twenty.
23 million patients and 60 Payors.
We are sending more than 400 million tests annually to support medication management and and the last quarter. We have designed developed and implemented tools to help our pharmacy customers administer the COVID-19 vaccine with more than 2500 locations already engaged.
We will continue to share progress at each of these growth areas and and our core capability initiatives as they materialize over the coming year.
Before I close I want to thank the team here at Cardinal Health, who continue to do a tremendous job adapting and responding to the changing needs of our customers as we navigate the pandemic.
Finally, I will reiterate debt, what we do matters to our.
<unk> shareholders employees and communities as.
As we move forward, we are using our breadth.
Scale and expertise to provide products and solutions that create value and improve lives with that I'll pause to open it up for questions.
Thank you if you would like to ask a question you may signal by pressing star one on your telephone keypad, if you're using a speaker phone. Please make sure. Your mute function is turned off to allow your signal to reach our equipment. Once again star one for questions well take our first question from Michael Cherny with Bank of America.
Good morning, and thanks for all the color so far.
If I can dive a little bit into the pharma headwinds as you think about the outlook for the rest of the year. How do you think about the trajectory and the visibility on nuclear and then also the headwinds on generic and when they could.
Could recover for you.
Yes. Thanks for the question Michael appreciate it I guess.
Really a couple of things to keep in mind, we're really pleased with the resiliency of our pharma segment, both in the pharma distribution as well as the specialty and nuclear business.
We do continue to see really COVID-19, and being the main.
Driver.
And any headwinds we're seeing there it's good so far that a lot of the things that might affect the segments such as brand inflation.
Inflation, that's kind of off the table from what we've seen in January we feel like we're executing really well on our initiatives and also from a cost savings standpoint, we're on track and then generics, which is always one of the it could be one of the swing factors, we're not seeing anything and consistent there.
From what we've seen in the prior quarter. So a lot of those swing factors are really off the table and we look at the rest of the year for pharma, but what we really see as COVID-19 being the main swing factor the things I would say there is debt.
We saw a lot of choppiness in the quarter, we would expect it to continue to be choppy for the second half of the of the year, but we still are expecting to exit at or near pre COVID-19 levels and as we said our guidance continues to be low single digit growth for the segment.
And if I could just add one point Michael This is Jason and your point about nuclear and we did see it the headwind year over year be a little bit less and what we saw on the first quarter. So kind of follows continues to follow a little bit of what we're seeing with electives and a little bit more than than other elements of the underlying volume so not a lot of new news there but.
Slight improvement sequentially.
Thank you we will take our next question from Robert Jones with Goldman Sachs.
Yes.
Okay, great great. Thanks for the question, Yes, maybe on the medical business I think we all understand and a COVID-19 having significant impacts across the segment.
But I was hoping maybe you could help us with what youre, assuming in the back half and medical and particularly on the EBIT line.
Based on the results to date and the updated guidance you'd have to see kind of mid 'twenty declines and the back half versus the front half and I know theres a lot of moving pieces related to COVID-19, but and I think at a high level, Mike I would think as you maybe see some of the drivers of the front half potentially fade you would obviously see the legacy kind of surgery.
Covered product lines pick up.
Just trying to get a better sense of what youre, assuming that could really drive this kind of back half decline versus what you've seen in the front half.
Yes. This is Jason on the main started off like you said, we're really pleased with our first half performance.
And certainly two good quarters here now as well as on top of last year's double digit growth as well and then still guiding to low to mid <unk> for the year, we feel very good about to the point about the trends first half versus second half as we stated in the remarks, and we did see some Q2 favorability as it relates to our cost mitigation efforts on.
On certain PPE products.
That's an element that was a component in addition to the volume strength that we saw and lab and the volume strength that we saw on PPE that drove medical to actually have a net tailwind associated with COVID-19 and the quarter and so thats. Just one thing that we will continue to vary quarter to quarter. As we go forward. The other item that we talked about last quarter as well.
<unk> is that we continue to be very aggressive with our cost control over the first half of the year here a lot of uncertainty and the underlying volume and so we wanted to make certain that we had a lot of flexibility going into the second half of the year and then the third point I'd make is just that we do continue to make long term investments and our business as we have highlighted is our number one.
Capital deployment priority is to invest and our strong pipeline of organic growth opportunities and so we always trade off our level of spend in that regard as well.
Thank you and we'll take our next question from Jonathan <unk> Singh with Credit Suisse.
Hi, Thank you you mentioned a few things youre doing to help the day vaccine rollout I realize these programs and and up themselves out and going to move the needle for the overall company, but just curious as to how this look might set the company up for future opportunities for you guys to participate in future phases of vaccine distribution.
Thanks I appreciate the question.
Yes, we've been continue to be involved and staying.
Up to date and everything as it relates to the vaccine as we've said we are working with the state of Ohio, helping them distribute the vaccine and we're also partnered with the CDC is acting as a network administrator and so we continue to do that and there are some other areas.
Wherever we can.
Having some small touch and that area at the end of the day I believe that and our belief is that this is one of the most important events and the country's history and debt, bringing the full scale of the distribution capabilities of all the distributors to the market is going to make the most sense over the long term.
And to be able to.
To fully distribute and get the vaccines to folks and so we continue to make sure that we're doing all the things to make ourself ready to be able to participate and help out however, we can.
Well take our next question from Eric Percher with Nephron research.
Thank you can we dig into the PP&E price dynamics, a little bit I think.
And last quarter, you talked about the ability to pass on pricing and this quarter I expect and we were going to see some input cost increases. So can you help square that with the wholesale or do you just mentioned and and maybe more broadly.
Price versus Cogs Q1 to Q2, and then what's assumed second half.
Sure Yes. Thanks for the question and let me just kind of step back and talk about PPE in general and and try to loop and that piece as well because there is certainly the overall demand dynamic here, obviously continues to be quite strong and we are seeing certain components get a little bit more and balance between supply and demand but.
Certainly.
Cost remains elevated across all categories, it's probably even more extreme in terms of that supply and demand imbalance remaining and exam gloves. So we continue to see that demand is far outstripping supply, which has created some just some supply chain and consistency not only so now we're dealing with just the timing of supply, but we're on.
So dealing with all the different timing elements of the cost increases and price increases so it just becomes a bit of and uncertain.
A combination of different influences that have driven some of these cost increases to be delayed then until later quarters. So overall, our key objective remains the same to make sure. We're mitigating all of these cost increases and working with our customers with the supply assurance program, but the timing is going to vary as we said last quarter and we will.
To manage that as appropriate and yes, the only thing I would add is.
Debt, while the PPE is clearly a driver of our lab business really was a big driver for us this quarter and the medical segment and we continue to be.
Excited about its growth and.
And its ability to continue to.
Maintain that growth or at least for the remainder of fiscal 'twenty. One is our current assumption.
Thank you and we'll go next and I think Mike Gill Jpmorgan.
Thanks, very much good morning.
I just wanted to take to get them understanding on how youre thinking about utilization.
As you go into the back half EPS.
Fiscal year.
One are you seeing an impact with less cough cold and flu and then secondly, you talked about.
Alright segment, and the quarter, having an impact in generics.
Are you seeing and is it more of a trend you said branding what kind of came in line or what the positive is that that new prescription volume continued to be down at least based on the data we've seen with <unk>.
And is there anything going on with your buying group just how do we think about utilization and any other comments you can give us on how to think about it.
Okay, Alright that farm and distribution component of your business and the back half.
Yes, Thanks Lisa.
Couple of things I would say I guess first of all it's important and though that sequentially there.
Really not a lot of difference between what we saw and volumes between Q1 and Q2 for our pharma business and also I would say that the all the impact that we're seeing on volumes and generics is really.
From our view just related to COVID-19, so we're not seeing any other dynamics such as buying groups or other challenges like that impacting our generics program. It's really just the volume as it relates to COVID-19. So.
And as we said that we expect that to continue to be choppy, we saw a lot of up and down over the last six months, we would expect that for the for the second half of the year, but do expect to still get back to at or near pre COVID-19 levels by the end of the year as it relates to flu as you know this has become.
Less and less of a driver in general for us it can be.
B, a small driver and as far as the flu goes we've hardly seen much at all so in terms of vaccine distribution has been a little higher but all of the other type of ancillary products such as the timbre flus and those types of things.
And they have been down obviously, but again, it's incredibly tiny driver for us and was not something that is.
Is driving any of the.
Concern or any challenges that we might be looking at and pharma, which again, we are focused on COVID-19.
Thank you and we'll go next to Glen Santangelo with Guggenheim.
Yes, thanks for taking the question Hey, Jason and I was just wanted to ask a quick question about <unk>.
Share count guidance on your interest expense guidance. It looks like you raised the share count guidance, but you lowered.
And the interest expense guidance and I. Appreciate the comments you made with respect to the deferred comp adjustments, but I was just curious if you can.
And with all your capital deployment priorities and the near term.
And secondly to that as a potential opioid settlement at all and consideration and your capital deployment priorities for the balance of the year.
Okay.
Great.
So in terms of interest and let's start there.
Yes, Youre right.
<unk> consists of my comments the deferred comp element is driving the guidance change and as I highlighted that's entirely a flip flop between interest and other and corporate SG&A. So theres no net EPS change associated with that and of course interest rates.
Although low we have a substantial part of our capital structure fixed. So we just don't see a lot of variation as it relates to to where rates have been.
And.
So then I am sorry, there are three parts was the second part share count. Okay. So then the share count we would.
Still within the guidance range of what we had before it is slightly at the high end to your point as you can see and the.
First quarter, we didn't do any share repo, we didn't do any in the second quarter as well, but the high end and I share count would imply no repo the low end of this new range would be.
Yes.
Moderate modest amount of repo, so thats whats baked within that that assumption as it relates to the capital deployment and certainly we havent changed our priorities of course, we work within those priorities and just to reinforce that we continue to invest and our business first and foremost as we're really confident with that strong pipeline of organic.
Growth opportunities and you saw that this quarter with the medical.
Global manufacturing and supply chain work, we're making some great progress there and we want to continue to feed those activities and the other point that I referenced.
And my commentary is consistent with our second priority, which is to maintain our strong investment grade balance sheet. So I did highlight that we intend to reduce our debt by about $1 $4 billion as it comes due at the end of our fiscal 'twenty, two and we think thats consistent with that priority and then of course, we return.
The cash to shareholders, primarily through the dividend and as our third priority after that it is repo and other bolt on strategic M&A.
But we'll continue to look at that Opportunistically as we get more confidence on variables such as opioids is certainly one of the elements. We look at all the time and that is our confidence increases we make more progress understanding with the framing of that looks like and we will continue to evaluate if we can be more and more aggressive on any of those other components, but we continue to balance.
All of those each and every day.
Thank you we'll take our next question from George Hill with Deutsche Bank.
Hey, good morning, guys and thanks for taking the question I kind of wanted to go back to Eric's topic, a little bit on PPE pricing I was wondering if you guys would be willing to kind of call out.
The positive impact of pricing and the first half of the year.
And Mike I guess I'd be interested and your commentary on how long pricing stays elevated do we think this is the new normal or at some point and the future are we going to have to worry about PPE price deflation.
Yes, So let me let me start at least with the first part we're not going to break out explicitly the pricing separately for the first of all it's just really important to highlight that the pricing is meant to cover that cost increase and so that's what we're balancing there. We did however, say and our last guidance update and Q1 that the vast majority of.
That revenue guidance increase for medical was due to pricing, which was due to that cost that was increasing with this update it's definitely more balance more more weighted towards volume increases and the lab business as well as volume increases and PPE and then to a lesser extent any type of price changes so.
I would just go back to the last guidance increase and it gives you a better understanding of what that PPE pricing dynamic is being driven by yeah. The only thing I would emphasize just to make sure that it's clear as this as the cost of the PPE comes down our revenue will come down but again, our goal has always been to maintain.
Margin dollars and work with our customers on an assurance program and so you Shouldnt think about declining PPE costs necessarily.
Being a headwind for us other than revenue and.
As Jason said, but the timing of when you have the actual sale price and the cost is a flow through of that can create a little bit of lumpiness and the recognition.
Thank you we'll go next to Ricky Goldwasser with Morgan Stanley.
Yes, hi, good morning, So two questions here one of the pharma distribution segment, when we look at the implied growth for second half.
EBIT is growing faster and getting revenue now clearly there are some easy year over year comps for instance.
The same period.
Last year.
But as we think.
And I know, it's too early to think about 'twenty 'twenty, two and really if we think about different drivers that expectation to generic.
Volumes are going to come back and you clearly can't which is higher margin.
Is it is it is it sustainable for us to think that and we can look to model.
EBIT and continuing to growth faster than revenues for the distribution segment and my other question with Jeff. Thank you can give us a quick update on opioids and anywhere and we stand.
Sure as far as I'll just cover the opioids quickly.
As I've said in the past it continues to be as you know complex negotiations a lot of moving parts, but we're continuing to make progress there.
As far as on the pharma guidance goes or thoughts there obviously, we can't talk about at this time 22, but you are right on those components first of all we would expect if we exit at or near pre COVID-19 levels at our nuclear business would continue to.
And improve.
Sequentially as it goes forward and we.
Have a lot of confidence and that business is as you know I highlighted in my comments around not only how they are performing well and the current situation, but also the investments we've made.
To be able to see growth and that business over the mid and long term on the <unk> and the optics space and then again as far as generics go yes. The main reason that we have seen that our generic volumes are off as because of Covid and so rest of the program continues.
Should be as we expected we continue to see that program.
All the various components that we have and it is.
Essentially working as we expected with just COVID-19 being the driver so again as Covid.
Begins to be less and less of an impact we would expect to see our volumes and our generics program to grow yes. The other thing I'll add is relative to the nuclear comment Ricky as it relates to the revenue and margin balance there I think youre on the right point that as we talk to especially in Q4 of last year when the volumes were Dick.
Klein and quickly nuclear is a high margin business. It is also a high fixed cost business. So it creates a very high contribution margins that we saw.
And certainly create.
A headwind and that fourth quarter, and so as we anniversary that and this fourth quarter, especially if our guidance is accurate with the at or near pre COVID-19 levels by the time, we exit the fiscal year than you would expect there to be for that piece of it and improvement in earnings relative to revenue.
One of the key components that probably needs to be plugged into your model to make that whole thing makes sense.
Thank you we'll take our next question from Charles <unk> with Cowen.
Yes, hey, thanks for taking the questions just on.
On the pharma side can you talk about Biosimilars and to.
And to the extent that they've had an impact.
Commentary from some of your peers would suggest that it's starting to become a more meaningful contributor just wanted to get a sense within and the pharma segment, how much that's having an impact and and then yes, that's basically and thanks.
Jeff.
Biosimilars continues to be an area. We're also excited about.
We are seeing positive cause.
Contributions from Biosimilar, just doesn't it's not at the level to be calling it out as necessarily a driver at this point in time, but it's something that we do continue to participate and we're very well positioned to be able to help manufacturers and customers with biosimilars and we do see that as something.
And that should be a tailwind for us as we look forward going forward.
Thank you we'll take our next question from Steven Valiquette with.
With Barclays.
Great. Thanks, and good morning, everybody so.
I think on the pharma segment, we're all just kind of looking at the trend line where the.
Segment operating profit grew 1% year over year back and the fiscal first quarter, but then they were down 11% here in fiscal <unk>.
And you mentioned that the nuclear pharmacy headwind was actually a little bit less and the December quarter.
And I think you said and Q&A and then for the generics youre not seeing anything and consistent there and what you saw on the prior quarter. Despite the COVID-19 impact on generics.
And I guess just the question is is there anything else you'd call out that may have gotten a little bit worse sequentially.
And that segment or is it just maybe there was something else that made the comp a little bit tougher and the December quarter that we overlook just want to get more color on.
The decline in profit and fiscal tick universe.
And physical one.
Yes, and as Mike mentioned earlier, we saw very consistent type of performance and a number of categories sequentially Q1 to Q2, and we talked about the COVID-19 impacts we talked about generics and general the consistent market dynamics. So you do need to go back to look at the Q2 of the prior year.
And where that's where the generics program overall was fairly strong and we've talked at that point about not only volume, but some mix impacts that were going on at that time. So I.
And I think it's very much a comp as well as and consistency within quarter to quarter sequential.
Thank you and we'll take our next question from Elizabeth Anderson with Evercore.
Hi, guys good morning, and I can go.
And to ask about and different sector.
In terms of your home health business can you talk about how that has been performing and the corner and maybe your expectations as well and the rest of Covid and beyond.
Yes, we continue to be very pleased with our at home business, we're continuing to see growth and.
And overall.
Number of customers that we're serving the types of product lines that we're working with and driving our mix all of those types of things getting after our cost structure, we are making some large investments and our it systems that will be going online here, so little increased SG&A.
And as we drive to improve our systems, there to be able to improve the customer experience and as we grow be able to do it more effectively but it's a business that we continue to remain very positive on and we believe the trends are continue to be in our favor and that business and being one of the leaders in that space.
I think enables us to invest and various activities and opportunities to continue to grow that business.
Thank you and we'll take our next question from Eugene Kim Wolfe Research.
Thank you and good morning.
I would like to get some color on cost savings benefit and the medical segment.
And can you maybe quantify that benefit and you saw for the quarter and share how much of that savings are more temporary in nature and also if you are expecting those temporary savings to come back and the back half. Thank you.
Yes, so within the quarter, we called out two key items. One is this topic cost savings as well as on the Covid impacts and they were both.
The most significant items that are driving our year over year performance. So in terms of the order of magnitude you should think of that as a large driver of this performance and consistent with that other driver.
And how we breakout our our cost savings is that they would by their nature be largely permanent anything thats temporary and only because of COVID-19 or COVID-19 related matters, we would put into the COVID-19 bucket. So we do see this as continuous improvement and deepens, our DNA and that we aren't just squeezing.
Cost temporarily but truly transformational foundational elements.
Within our SG&A expenses within our global manufacturing and our supply chain and as such we would expect it to be permanent yes, and the only thing I would add to that as Jason mentioned earlier remember that because of some of the strong performance, we've had and medical and in the business and the first half there are some areas in medical expenses.
And where we are investing in the business as we've talked about from a capital standpoint, I just mentioned on it but.
And the at home and we're also looking at some other areas. So we are ramping up some of our expenses that and the area of making investments and growing the business over the mid to short term. So we would expect them to be a little higher and the second half, but to our $500 million five year goal of those are seen as permanent expenses to.
Come out, but what we're talking about is ramping back up the type of investments.
Based on how we feel strong strongly about the performance of the business for the full year.
Thank you we'll take our next question from Eric Coldwell with Baird.
Thanks, and good morning, we've been hearing a lot about stockpile as a service or storage as a service in medical and perhaps even in certain areas.
Pharma or therapeutics mission critical items that are often and short supply I'm. Just curious it sounds like you are doing some similar things here and I'm curious what the model looks like with that business is this.
Is this more like a three plc or how exactly does that work when does the customer buy the products from you.
How are you compensated for the facilities the capital cost of storage et cetera. Thanks.
I think a couple of things first of all the last thing you said is important as debt, we would intend to be a properly.
Compensated for that and make sure it with any investment and we're working with customers to make sure that the services that we provide we're getting compensated for not only from our income statement, but appropriately looking at our balance sheet and the return. So that's important to know to give you specifically on how work that's a little more complicated because I.
We're going to see inventory changes across the entire supply chain I think obviously, one going to see some supply changes and the way the probably the manufacturers work and the amount of inventory, they're carrying to be able to get through these types of things the location of our supply chain and where the percentage of what we self.
And factor versus what we source, we continue to increase our capacity for instance to manufacture our own drapes and gallons and so the ability to ramp that up store inventory and managing it that way would be one and then as I mentioned, we are building some larger distribution center. So we have the capacity to do that.
And on our and both to make sure our service levels are where our customers expect them to be but also in certain cases.
Kerry that inventory for customers, but and I also believe that customers are looking at what they warehouse adult warehouse and that mix of what they warehouse maybe more towards these.
PPE related items versus other ones and that can create some different opportunities for us to work with them. So I do think the entire supply chain will adjust over the next couple of years as it relates to inventory, but the important thing to note is that as we work with our customers on this we would and suppliers, we would expect to get compensated from both in order to.
And that type of service.
Thank you and we will take our final question from Brian <unk> with Jefferies.
Hey, Good morning, guys, Mike just a question on on the vaccine distribution side I know you said your take.
And taking care of small chain pharmacies and the independence. So is there any sort of sizing that you can put there or in terms of like what your clients are thinking in terms of the percentage of overall vaccinations that they will get as a group.
Yes at this point and time.
As you know it's state by state it changes on a weekly basis. So I don't really have any good insights on.
How to help you on that I would.
And would tell you that we continue to be there for our customers work.
Continue to help them be ready to do it it's not a driver at all for our financial statements one way or the other so from a financial driver.
Not material, but it is.
It'd be really hard for me to even give you anything there because of the choppiness of the of the amount of vaccines that we're seeing state by state.
Yeah.
Thank you that will conclude our question and answer session. At this time I would like to turn the call back over to Mike Kaufmann for any additional or closing remarks.
Yes, I really want to thank everybody for joining us this morning, and on behalf of all of US at Cardinal Health I Hope you and your families are safe and well and we look forward to speaking to all of you again soon.
Thank you that concludes today's call. We appreciate your participation.
[music].
Sure.