Q4 2021 Cardinal Health Inc Earnings Call
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Once again, everyone. You are currently on hold for this Cardinal health incorporated fourth quarter fiscal year 2021 earnings conference call. At this time, we are still assembling today's audience and do plan to be underway. Shortly we appreciate your patience and please remain on the line.
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Good day and welcome to the Cardinal Health, Inc. Corporate it fourthquarter fiscal year 2021, Onions conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Vice President of Investor Relations. Kevin Durant. Please go ahead Sir.
Good morning, and welcome to day, we will discuss Cardinal Health Fourthquarter fiscal 2021 result, along with guidance for fiscal year 2022.
You can find today's press release and presentation on the IR section of our web site at IR Cardinal Health Dot com.
Joining me today are my Kaufmann, Chief Executive Officer, and Jason Holler, Chief Financial Officer.
During the call we will be making forward looking statements that matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied please.
Please refer to our SEC filings in 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 behind non-GAAP data unless they're specifically called out as the gap.
Non-GAAP reconciliation for all relevant period can be found his schedule attached to our press release.
During the Q&A portion of today's call. We please ask that you try and limit yourself to 1 question. So that we can try and give everyone an opportunity.
With that I will now turn the call over to Mike.
Thank you, Kevin and good morning, everyone.
I will start by comments today.
<unk> that our fourth quarter results were below our expectation and yours, primarily due to his inventory reserve adjustment of $197 million.
This reserve adjusted was driven by changing market conditions related to COVID-19 of certain Harvey Commoditize PPE products.
To meet our customer commitments during the pandemic, we carry the higher levels of inventory and certain PPE categories. During a period of significantly increased demand higher.
Higher prices and longer than normal supply chain.
Our analysis at the quarter Ed of both the anticipated customer demand and projected future sales prices for these products.
Resolve it in a sizable inventory reserve that affected a subset of our medical products inventory.
In addition, there were a few other unexpected items that effective our results, which Jason we will cover in his remarks.
Throughout the past year, we have been taking action to drive performance and we will continue to move forward with urgency.
For example, we divested the quarters business <unk>.
Extended our redox sourcing agreement with Cvs health.
Identified $250 million of additional cost savings opportunities reached.
Restructured parts of our organization to increase accountability and made important leadership changes.
We are continually reviewing our business and seeking areas to improve.
With the actions we've taken today and our plans for FY 22, we feel confident in our strategy and are encouraged by the tailwind behind our growth areas and strong cash flow generation.
In FY 21, we grew revenue 6% versus the prior year and despite an estimated 200 million year over year operating earnings headwind related to COVID-19, we grew EPS.
We continue to aggressively streamline our cost structure and surpassed our enterprise cost savings target for the third consecutive year.
We generated strong operating cash flow prioritized, returning cash to shareholders true dividends and share repurchases.
And took actions to further strengthen per balance sheet.
As I reflect from the unprecedented events over the past year. Our team has prioritized our customers maintain continuous operations partner with governmental agencies to support vaccine administration and protect patients and further improve the resiliency of our supply chain.
Before turning it over to Jason I want to highlight last week's announcement that we have negotiated a comprehensive proposed settlement agreement and settlement process designed to achieve broad resolution of governmental opioid claims.
If all conditions are satisfied this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities and depending on the level of state and subdivision participation.
Would take up to $6.4 billion over 18 years.
This is an important step forward for our company.
As we've consistently said, we remain committed to being part of the solution to the U S. Opioid epidemic and believe that settlement would be prudent way to provide necessary lead for our community and certainty for our shareholders.
With that I'll turn it over to Jason to further discuss our results in FY 22 guidance.
Thanks, Mike and good morning, everyone.
In the fourth quarter, we delivered EPS of 70 southern.
Which is Mike mentioned included a $197 million inventory reserve on certain PPE and the medical segment.
Turning to the farmers segment on slide 6 fourth quarter revenue increased 15% to $38 billion, driven primarily by sales growth from large pharmaceutical distribution, especially solutions customers.
As a reminder, the fourth quarter of fiscal 20 included reduced pharmaceutical demand related to COVID-19, which to a lesser extent contributed to the growth in the quarter.
Farmers segment profit was flat in the fourth quarter at $358 million.
This reflects COVID-19 related volume recovery, and our nuclear business offset by pharmaceutical distribution customer contract renewals.
This impact renewals was in line with our expectations and generally consistent with prior quarters. However, there was some other items, including inventory adjustments an opioid related legal costs that were higher than previously assumed.
As we've mentioned, we continue to prioritise investing for growth and optimizing our core operations.
In the fourth quarter for deployment of some of these technology enhancements resulted in incremental costs for implementation and depreciation which we also expect the next several quarters as we continue to deploy new capabilities.
Hello further discuss our investments as we look for fiscal year 2002.
As we highlighted last quarter, we continued to experienced software volumes with certain therapeutic classes within our generics program.
Our generics program continued to see generally consistent market dynamics.
With respect to other product types, including brand specialty and consumer health with largely saw volumes at or above prepandemic levels during the fourth quarter.
And medical depicted on slide 7 revenue increased 23% to $4.2 billion from the fourth quarter.
This revenue increase was driven by a net positive impact from COVID-19 on products from distribution, primarily due to a recovery an elective procedure volumes and a positive pte pricing impact.
Medical segment loss of $63 million in the fourth quarter was due to an adverse impact from COVID-19, primarily due to the previously mentioned inventory reserve, partially offset by a recovery an elective procedure volumes.
Additionally, benefits from cost savings initiatives were offset by elevated supply chain costs.
During the quarter.
There are encouraged to see elected procedure volumes effectively returned to near pre COVID-19 levels.
While our team continue to execute on our cost savings and efficiency initiatives within our global manufacturing and supply chain, we did experience elevated supply chain costs, particularly in the areas of fruits labor and commodities.
We are taking actions to help mitigate these impacts but as we look forward. We do expect some of these higher costs to continue into next year.
Now I will transition to full year results beginning with the enterprise.
Total company revenue increased 6% to $162 billion with strong top line growth in both segments.
Consolidated gross margin decreased 2% to $6.8 billion.
Despite sales growth SG&A decreased 1%, reflecting the benefits of our enterprise wide cost savings measures.
Operating earnings decreased 5%, reflecting a headwind of approximately $200 million a year over year related to COVID-19, which was split fairly evenly between the segments.
Excluding COVID-19 operating earnings would have grown in the low single digits in fiscal 2001.
Moving below line interest in other decreased 44% to $133 million driven by multiple items, including lower interest expense from debt reduction actions and.
An increase in the value of our deferred compensation plan and.
And 1 time investment gains.
As a reminder, deferred compensation gains or losses reported of interest another per fully offset in corporate SG&A and net neutral to our bottom line.
Our annual effective tax rate finished at 22.8% benefiting from discrete items.
We finished per year with EPS of $5.57.
Reflecting growth of 2% despite the net COVID-19 headwind.
Turning to balance sheet, we continued to operate with high net working capital efficiency generating robust operating cash flow of $2.4 billion for the full year.
We finished the year with a strong cash position of $3.4 billion with no outstanding borrowings on our credit facilities.
As a reminder, the day of the week in which the quarter ends effects point in time cash flows.
We continue to deploy capital according to our priorities investing $400 million back into the business in Capex to drive organic growth strengthening our balance sheet to approximately $550 million in net paydown, which occurred are primarily in the fourth quarter and returning nearly $800 million to shareholders through dividends and share.
Cases.
As for the segments full year results beginning with farm on slide 10.
From a revenue increased 6% to $146 billion driven by sales growth from pharmaceutical distribution, especially solutions customers.
Farm a segment profit decreased 4% to $1.7 billion due to volume declined from the company's generics program, including the impact of COVID-19.
This was partially offset by favorable brand sales mix.
Excluding COVID-19, we estimate the pharma segment would have grown low single digits with fiscal 21.
Turning to medical on slide 11.
Full year medical revenue increased 8% to $16.7 billion driven by a net positive impact from COVID-19 on products from distribution.
As we saw throughout the year. This increase was primarily due to the impact of PPE sales and higher volumes in our lab business.
Medical segment profit decreased 13% to $577 million due to an adverse impact from COVID-19 on products and distribution.
This was primarily due to the fourth quarter inventory reserve uncertain PPE products, partially offset by higher volumes in our lab business.
Additionally, the team delivered strong cost savings, we're putting global manufacturing efficiencies on the year.
When adjusting for COVID-19 related impacts of medical we estimate the segment would've growth mid single digits for the full year.
While our fiscal 21 results fell short of our expectations. The underlying growth we saw them both segments. Excluding COVID-19 is us confidence as we move into next year and the Pandemics effects from our businesses continue to dissipate.
Turning to our guidance for fiscal 22 on slide 13.
We expect earnings per share in the range of $5 and $65.90.
This reflects an incremental technology investments of approximately $120 million to drive growth and efficiencies across the enterprise.
Courtis divestiture and other assumptions highway will detailed momentarily.
We expect interest another in the range of $150 per $189.
We anticipate continued reduction in interest expense with the increase or the prior year, primarily a result of the fiscal 21 capability and deferred compensation not expected to repeat.
We are assuming a non-GAAP effective tax rate in the range of 23.5% to $25.5%.
We expect diluted weighted average shares outstanding in the range of $287 million to $292 million in Capex, a $400 million to $450 million.
Transitioning to the segments beginning with farm on slide 14.
We expect high single digit revenue growth driven by growth from large customers and continued COVID-19 recovery and mid single digits segment profit growth.
We anticipate COVID-19 will be an overall tailwind of approximately $100 million to farmers segment profit compared to the prior year.
While we will likely continue to see some choppiness, we expect volume recovering certain generic they're pretty classes by the end of the calendar year.
As mentioned, we are investing in technology enhancements to drive growth inefficiencies, which we expect will lead to an $80 million segment profit headwind in fiscal 22, including the Annualization of the investments made in the fourth quarter.
Adjusting for the COVID-19 related impacts on the incremental technology investments, we see pharma normalised growth in the low to mid single digit range.
We believe normalizing for these impacts provides a better approximation from the long range growth trajectory of the business.
As for other assumptions and continued expect consistent market dynamics are generics program.
We expect increased contributions from our growth areas specialty, including Biosimilars nuclear and outcomes.
We anticipate a similar contingent brand inflation rate as in fiscal 21 with continued less dollar contribution each year.
And we expect opioid related legal costs of approximately $125 million, an increase of $10 million versus fiscal 21.
For medical on Slide 15.
We expect revenue to be approximately flat in fiscal 2002, primarily due to the prior year COVID-19 comparison with low double digit segment profit growth.
With respect to COVID-19, we expect an approximate $100 million per year over year tailwind medical segment profit.
We are assuming elective procedures will remain at or near pre COVID-19 levels for the duration of the year.
We expect moderate headwinds in fiscal 2002 related to timing of selling higher cost pve products and lower lab testing utilization versus the prior year.
And we anticipate a year over year comparison benefit related to the PPE inventory reserve.
Outside of COVID-19, we expect an approximate $80 million impact segment profit due to the quarters divestiture.
Note anticipated reported impact for fiscal 22 is higher than previously communicated primarily due to exchange rate favorability and other operating improvements within the business in the prior year.
Additionally, we expect investment incremental $20 million from technology enhancements in our at home business to drive growth inefficiencies.
Adjusting for these items, we C. Normalised medical segment profit growth of mid to high single digits in fiscal 2002.
Finally, as seen in the fourth quarter, we expect elevated supply chain cost persists, particularly in the first half of the year.
We anticipate these elevated cost will be partially offset by the continued benefits from our global manufacturing and supply chain transformation, which will ramp up throughout the year.
Now a few additional comments from the expected cadence next year.
We expect profit growth to be significantly back have waited in both segments and pharma. This is primarily driven by the timing of the previously mentioned incremental technology investments being more weighted towards the front half as.
As well as stronger expected second half performance are generics program, including the impact of COVID-19.
And medical in addition to the elevated supply chain costs. We also anticipate the total unfavourable physical twenty-two COVID-19 impact of approximately $50 million to occur primarily in the first half of the year.
As a reminder, we also experienced favorable COVID-19 impact in the first half of fiscal 21, which was of a similar magnitude.
Perhaps the organization, we continue to place a high priority on cash flow generation as well as allocating capital in a balanced disciplined and shareholder friendly manner are strong cash flow and improving capital position will enable our capital allocation priorities support our company's obligations and provide increased flexibility and the bill.
<unk> to be more opportunistic and our capital deployment.
Along those lines, we anticipate the playing headquarters proceeds through a combination of share repurchases in debt Paydown, which is expected to offset the earnings dilution on a pro forma basis.
We expect share repurchases in the range of $500 million to $1 billion from fiscal 22. In addition, we expect total debt paydown of approximately $850 million, reflecting the completion of the remaining June 2022 that tower at or before maturity.
With that I will now turn it over to Mike.
Thanks, Jason to be clear we are disappointed with this finished the year and are moving forward with a sense of urgency to improve our operation and execute our strategy.
We're prioritising investment in our strategic growth areas and expect these businesses to collectively realized double digit growth in FY 2002.
And across our business, we're enhancing our it infrastructure in key areas to increase capabilities and digitization improve the customer experience and drive productivity.
While we expect to benefit from these investments this fiscal year. The majority of these benefits will materialize in FY twenty-three and beyond.
And pharma, we're investing an additional $80 million and technology infrastructure to create additional operational efficiencies improved data insights and drive cost synergies to enhance our ability to grow and generate better outcomes for our customers.
Are generic program remains a critical priority.
This week, we extended our Red Oak agreement with Cvs health for an additional 5 years, which takes the term of our generic sourcing joint venture through June 30th 2029.
This ensures that we can continue to deliver best in class, forcing capabilities for our customers well into the future.
We are also investing in data and Antonio analytics, including our pricing capabilities as we continue to focus on managing all components of our generics program and expect market dynamics consistent with the last few years.
We remain committed to supporting the retail pharmacy community.
And a recent annual retail business conference, we connected virtually with over 4000 retail independent pharmacy customers and launched 2 new digital offerings now takes Rx.
E Commerce storefront to health independent pharmacies expand their services and improve health care outcomes.
And specialty we're investing in our some nexus patient.
Where our technology solutions health biopharma customers remove barriers to patient care.
And then our third party logistics business, we're expanding our cold chain storage space to accommodate the growing number of temperature sensitive products, including cell and gene therapies.
And nuclear we received FDA approval to use our radioactive diagnostic ages lymphoseek in pediatric patients 1 month and older.
We continue to build out our multi million dollar center for third gnostics advancements in Indianapolis and are also investing to expand our pet capabilities.
We expect double digit profit growth and nuclear over the next several years.
And and outcomes. We also expect double digit profit growth as we expand our direct capacious digital footprint and implement new patient adherence programs.
Turning to medical we've been taking quick decisive action throughout the fiscal year to streamline and simplify our medical business and this work remains a top priority heading into FY 22.
We've recently restructured our organization to establish clear reminds of ownership and accountability and made some management changes, including appointing a single leader to manage use medical products from distribution as well as a single leader to manage international.
With the divestiture of quarters, we plan to significantly reduce our international commercial footprint and have initially identified 36 markets, we intend to exit.
So we can focus on the locations, where we have a competitive advantage and could generate sustain long term growth.
Where laser focused on enhancing supply chain resiliency, improving business continuity and investing in advanced planning capabilities to drive forward looking insights to better serve our customers and their patients.
In addition, our medical services businesses after phrase logistics and wave Mark continued to enable clinically integrated and digitally automated supply chains.
Or at home business continues to focus on enabling and supported comfortable home based care for patients with acute and chronic conditions.
We continue to see volume growth is care is rapidly shifting to the home.
For FY 2002, we're investing an additional $20 million in technology infrastructure to create operational efficiencies and better day to visibility.
With respect to the enterprise, we're aggressively reviewing our cost structure to continue streamlining our operations and processes and attend to reinvest a portion of these savings to fuel future growth.
In FY 2002, we plan to launch initiatives that will deliver at least an additional $250 million savings by FY 2003.
As Jason discussed earlier, we take a balanced disciplined and shareholder firmly approach to capital deployment with a focus on investing in the business, maintaining a strong balance sheet and returning cash shareholders.
In closing I want to thank our employees for their hard work and contributions that make it possible for Cardinal health to fulfill its mission of improving the lives of people every day and.
And now Jason Ray will take 2 questions.
Thank you and if you would like to ask a question. Please signal by pressing star 1 on your telephone keypad and if you are using a speakerphone. Please make sure your need function is turned off to allow your signal to reach our equipment. Once again, everyone to ask a question. Please press stall 1 on your telephone keypad will pause for quick moment to some licking.
And our first question will come from Michael Cherney with Bank of America. Please go ahead.
<unk>.
Good morning, Thanks, so much for the question.
I want a dive a little bit more into the capital deployment clarity you think about into 22, obviously you have the cordis proceeds that are coming in about 1 billion I believe.
Taxes, cheap Walgreens calls about 1 billion or stolen.
Double check that the last course transmit when you're thinking about that came about your cash position as you sit now and the free cash net and generate this year, even with the investment that you're making you think there's an opportunity to be a bit more aggressive either on the buyback given bring the stock sits in the market on M&A given that you talked about and number of.
Both parties, which I assume you should bolt on transactions.
Spot that philosophy, where you sit now given that the company is in as strong a balance sheet positions that can recall seeing in a while.
Thanks, Mike I appreciate the question and we are really excited about the work we've done around that belong to have Jason give you a little bit more Colorado.
Thanks, Mike and first of all yes, I think we had some really great cash flow. This last year. So $2.4 billion cash operating cash flow and that resulted in $3.4 billion ending cash balance, which does include the $500 million debt pay down that we completed in the fourth quarter. So as you indicated.
Weighted perfectly we're stepping into this year with a lot of flexibility even before the court is transaction closed which was just a few days ago, which does add another $1 billion to that balance.
As we highlighted in some of those comments. This morning, we do not expect to pay down the $850 million is coming due by the end of the fiscal year or before end of the fiscal year, so that will be some of those.
Uses and then of course, we guided towards the $500 million from $1 billion for the share repurchases, which is a fairly wide range is reflective of some of the flexibility that we talked about.
And as I think about.
According to proceed force cash it somewhat fungible.
Essentially that $1 billion, how we're thinking about it is accelerating from that debt pay down in a portion of that $500 million per $1 billion. So we felt real good about that as we entered into the first quarter here you reference the tax receivable.
And I don't think we provided any updated comment on that so far last quarter I would reference that we expected by the end of the calendar year.
Our expectation like I think a lot of different organizations throughout the world right. Now I think COVID-19 is impacted some of the processes and a little bit less certainty as to the precise timing we've toppled pretty good that's a that's a good approximate timeframe when when you think about receiving those proceeds perhaps late in the calendar year.
<unk>, there will be less time to actually deploy knows the balance of this year.
So it certainly still a potential opportunity to get us maybe to some of the higher end of that range, but nonetheless, there is.
There is a lot of flexibility that goes along with that as you indicated when we talked about the opportunistic uses essentially we have.
Increased flexibility here M&A is always on our list and it depends on the opportunity devaluation and what we see is delivering to a strategically and so that will be another thing that we evaluate along the year.
Thanks for the question.
Up next we'll hear from Kevin Kelly Endo with UBS. Please go ahead.
Okay. Thanks, I, just wanted to expand on that a little bit.
I guess I don't understand why you are not being more aggressive with the buybacks given the settlement looks like it's largely done the cash on hand is is greater.
The stock is going to come under pretty meaningful pressure today most likely.
What's stopping you from Philly.
Going out and buying $2 billion worth of stock are more I mean are there any credit issues or anything else that you are concerned about and.
And also on the buyback if I'm doing the math right.
It feels like you're.
The numbers don't entirely jibe to get to that 21 cents is there is it just simply the timing that it would happen. So late in the year is y.
The buyback wouldn't cover the sort of 21 cents a dilution from courtis.
Okay, Let me start Kevin and then I'll turn it back over to Jason I'll, just comment specifically on the opioids teeth and let.
Jason gives you a little bit more.
Information.
<unk> as we said we're.
Pleased to get to the point, where we are right now where we have a comprehensive settlement out there, but it does have a few more steps left in it. So we do have to wait and see if we get the states and cities and counties sign on to get enough critical mass in order to make a final decision.
And so we do have some time left on that to make sure that we understand exactly with clarity, where that's going to be but we're we're pleased with where we are as far as an initial step of finally getting something out there for people to consider and then must be now turn it over to Jason to go up a little bit more of the other detail.
Such as well yeah.
As it relates to the loose and on the court is that was implied are referenced within there. It's just a matter of the timing of what's you assume when we pay down the debt and when we would complete the share repurchases and.
There is an opportunity for that to to have a reasonable range and that that guidance range. We think reflects what we think that possibility may be.
But after keeping on a pro forma basis is that.
Extra billion dollars will be deployed in some manner and we will pay and certainly within fiscal twenty-three run right. Then we will not be dilution expected for that that divestiture as.
As it relates to yet another question somewhat as it relates to credit issues.
Nothing there I mean, we're on a guidance.
Life path to getting into our targeted leverage ratio.
Keep part that I referenced last quarter is that this remaining that that's coming due at the end of this fiscal year to the key part of getting us towards those targets.
And I indicated last quarter that I would anticipate the level of debt pay down to begin to diminish. After this fiscal year and continues to be our expectation. There's a lot of factors that Mike. This reference that could play into that and overall that remains our viewpoints and there is nothing here that is I will say overly constricted from that point.
Just a little bit of prudence until we get some of these risks and uncertainties defined and we also need to see underlying performance and cash flow over the course of the year and then as I mentioned before we do have some additional flexibility as it relates to the precise timing of the tax receivable.
Up next we will take a question from <unk> interesting with credit Suisse. Please go ahead.
Thank you and good morning, everyone I want to go back to your <unk> of impact on BB in the quarter can you elaborate a bit more on what products.
2 and is that a potential that you might have another right Darling fiscal 22, and what kind of initiated which kept putting in place to ensure that does not happen again.
Sure Yeah. So I'll go and started and so as Mike mentioned the key thing here is that there is a lot of uncertainties with the pandemic and we were first and foremost willing to put our customer commitments in front of us and that resulted in a higher level of inventory that we carried over that period of time and then.
And while there was obviously increasing demand higher prices and lower longer than normal types of supply chains.
And then we step back at every quarter, we step back and do our analysis and determine what the net realizable value of that is and then make any adjustments that may be necessary. So at Mike highlighted there were some highly commoditized product so as a subset of our PPE.
Think of it as those those products that would have more volatile type of pricing, we saw that move more dramatically over the period and given him as a subset of our of our inventory it was.
Relatively defined was a relatively large percentage reduction within that but it was contained to a certain subset and again, we're not going into all the details.
Product by product, but it was the type of product that had a little bit less than the value added and then therefore as a little bit easier to get more supply into the market and that drove the prices down quicker than other other products and.
Anything else pattern like only I reiterate that our focus has always been and will continue to be on our customer and it was important to us from the very beginning of this pandemic to acquire critical PPE for our customers and as Jason says, we did ramp up during a period of higher.
Demand and higher prices from longer supply chains.
Next question please.
And next we will hear from Ricky Goldwasser with Morgan Stanley. Please go ahead.
Hi, good morning, and thanks, all the details.
Hello Day marks.
Just a couple of follow up questions on this gains have moving parts into guidance for specifically you talked about.
The customer Neil seem thank you CBS can you won't be help us quantify what the impact, England 2022 in Australia or any other.
Re kneels can we should be considering in the next 12 to 18 months and boom.
The second question cash at the moving parts.
The investment that you're making me think about them, except for 1 time investment in 2022.
Or should we know factor I guess, it kind of attacks on Clinton bundle of investments simple.
Accounts.
Yeah, I'll I'll start talk about the renewals and then I'll have Jason make a comment on the investments.
The renewal that we're talking about the Red Oak renewal is not at all included in what Jason was talking about on customer renewables, that's considered in our overall Jeanette.
Generic program performance, which we expect to be.
And to be something that we would expect to be a tailwind next year and we feel really good about where we're headed with all the various components of our genetics program and excited to continue to partner with Cvs moving for worth on Reno with Jason was talking about it and renewals was just the normal renewals there was nothing unexpected.
Expected.
In the fourth quarter customer renewals day.
Basically came in as planned.
And so that was not anything I would consider it as we look forward, we don't see customer renewals being any different or unusual for us in FY 2002.
Yeah as it relates to the other moving pieces for farm or that are a part of that underlying guidance are growth businesses, we expect to contribute.
As Mike mentioned, we expect double digit growth for our growth businesses topline as well as bottom line in for the pharma business that would be of course specialty nuclear and outcomes.
And then we have the the the year over year Covid benefit that I mentioned would be key part of that but as Mike mentioned that the customer renewals is not something that we would anticipate to be significantly different year over year.
And then your question regarding investments.
Those those investments are a mixture of.
We've spent.
Quite heavily over the last couple several years on the capital side of getting these systems in place. We are finalizing a multiyear journey now and are starting to depreciate those assets. So there will be elevated depreciation net of course is more fixed in nature, but there is also a component of the final testing and rollout launch of these.
Some tends to be more expense versus capital and so as we're riding that will allow.
That expense will be elevated in that part we would expect to reduce longer term certainly beyond physical 22, but for the balance of this year, we would expect it to be elevated and then thereafter.
Some some portion of it will come come down later on.
Next question.
And up next we'll hear from Eric Percher with Nephron Research. Please go ahead.
Thank you I wanted to ask about the generic volume commentary around certain classes I.
Then we saw a clear increase in acute volumes from March to April on the corner. So what are the classes, where you're seeing this in any other specifics on how that's impacting the generic program.
Yeah. Thanks for the question.
So a couple of things on that we did see some sequential growth from Q3 to queue for on generic volume. So that continues to be a positive sign we do expect.
Impact from COVID-19 on all generic volume to be back at 3 COVID-19 levels by the end of the calendar year or by the end of our queue to what we're referring to here is we're still seeing again ramping up but we're still seeing some less than pre co.
Big volumes on areas like anti Infectives antibacterial antibiotics, antivirals and some pain medications that we have not seen our thoughts are ads.
Life continues to get more and more backbone normal that's the right word kids are back in school.
Cetera, we would start to see those Charles vague needed more than they probably have historically.
When needed so again expect them to be back to <unk> levels by the end of the year, but that's really what we're talking about very similar to the exact same thing we talked about last quarter and it's kind of a continuing to play out as we mentioned back then.
Thanks question. Please.
And next we'll hear from Stephen Valiquette with Barclays. Please Blake Laughler cause category, they're training up a slightly curious to understand.
Trent as well.
Mr. Melick I'm, sorry, we did catch we didn't catch the beginning of your question. So if you could try again thank you.
Yes, hi, I need at some point I happened to get paid as 2 questions on 2 costs at the same time that just met Jeff happy So.
I guess I'm curious too.
[laughter].
Curious too if you could provide more color on the elevated supply chain costs you mentioned.
For the medical segment in fiscal for acuity decided that in the press release, I guess I'm curious geographically this cost pressure being in the U S or the international as well in addition to some other color just on mechanically what's happening there and has a sale of quarters alleviate this in any way into physical 22.
Thanks, I'll I'll start with your second piece first really I don't see corners, alleviating that at least towards the guidance. We said of course, there could have been elevated costs on some of their raw materials and products and.
Course, being more international obviously, it had more FX potential fluctuations adult few quarters being a factor there as far as the elevated supply chain costs. What we started seeing in the fourth quarter is I think what you're hearing a lot of companies talking about we're seeing increased fuel costs and we're starting to see.
The cough up for instance, containers can be 3 to 10 ask what day cost to chip in prior to Covid, just do the sports being plug things like that so we're just wages et cetera. So assist those types of things that we're seeing general elevated supply chain across.
Board again to solve that in Q4, we expect that to continue in for the first couple of quarters and then as we fix things get back to more normal will be able to see some either reductions in those or will be able to take some of those costs and where possible that appropriately passive through the customers. If it's a <unk>.
More permanent type of thing so we will be monitoring that and keeping our high zone.
Alright, and our next question will come from Elizabeth Anderson with Evercore ISI. Please go ahead.
Hi, good morning to say that Eduardo on for Elizabeth.
Can you guys didn't provide some more color on the $50 million of additional cost savings opportunities and I guess, 1 area can be enterprising expect to generate the savings from.
Sure Yeah, I would say, it's very much a continuation of what we've done to date.
Certainly recall, our initial target was the $500 million and.
We've come close to accomplishing that after the just the first 3 years and that was in various areas everywhere from manufacturing our footprint worked there to our distribution work all the way up to our functional areas.
As we go forward what we're seeing this next stage is the ability to go from more of the transactional first order benefits of like right negotiation in areas like transportation and going further into really redesigning networks and getting into more augmented intelligence and things of that nature, we have 1.
Area that is allowing us unlocked additional value in this next stages. The cord. It's divestiture, we talked about the simplification of our international operating structure. That's that's an enabler for us to continue to go after additional opportunities. There and then just continue on in all fronts given that we've got good momentum in place already for the existing and.
Only thing I would add is that just to emphasize something Jason mentioned is around the use of digital to really get after.
Being able to use bots.
Hi.
RPI et cetera to get after our cost structure, we've been investing a lot of time on that are.
Team has done a nice job of building out both people resources that are businesses and functions are all in pricing this as well as making sure. We're doing work in the right locations are all other important factors that we see being able to give us some tailwinds going forward in cost savings.
Next question.
And up next we'll hear from Lisa Gil with J P. Morgan. Please go ahead.
Hi, Thanks, very much good morning.
And can tell when I understand I can think of that.
Normalization pharmatech net and beyond at every meal.
The low single digit connecting of data normalization in our mistake net profit growth over the longer term and and where opportunity to ethereum any further accelerate that growth beyond 2020, Q at probably kind of our first question and things.
Seems like specialty in nuclear they can talk about returning to that whole day I know that the smaller side the day help.
Can accelerate that that low single digit submitting a ticket normalization.
Any drive every day or how can you can you can get around that on a longer term basis.
Yeah. Thanks, Lisa appreciate it.
You hit a lot of it right. There in your question is that we did want to provide a normalized growth. So that we could share with you what we do believe.
Are achievable and longer term.
Growth rates for both of the businesses that we've provided the normalized growth on.
Specifically the farm I think you.
Said it well we do.
Continued double digit growth from nuclear and specialty in our outcomes businesses, we see all of them next year being able to grow top and bottom lines by double digits and we continue to see those businesses continue to be a bigger and bigger portion of the overall farm a segment. So.
As they continue to grow at those rates are a bigger portion of the segment, obviously, they're going to continue to have more and more impact we feel really good about the pipeline of products and nuclear and with the work we're doing in our center for advancement of Fair Gnostics, we already have a significant.
Amount of manufacturers.
Committed to joining us a net center when we open it and working together on some new both treatments and diagnostics for cancer and other areas. So we feel good about all of growth businesses and then as far as the core PDE business goes we think.
We are well positioned with some very large and important customers.
You are aware of we've got.
8 more years now on our agreement related so red Oak and we feel good about that partnership.
And that continued positive impact on our generic program and so those are some of the things I would say make us feel good about that growth going forward.
Thanks questions.
And next we'll hear from George he'll with Deutsche Bank. Please go ahead.
Hey, good morning, guys and thanks for taking my questions.
Yes, My first I would ask you what's a renewal of the Red Oak agreement or any substantive changes to the economics of that agreement and then number 2 you guys called out all contingent brand inflation in the press or I'm sorry in the presentation as the business is starting to mix back towards the brand growth.
Are you seeing any changes in the underlying economics simple framed relationships in the amount of profit exposed to a premium price inflation.
Yep 2 very good.
<unk> so first of all on Brad.
What we're seeing there is we're expecting yo overall inflation rates just be similar to the last couple of years. So we're not seeing any real changes there. It is Jason mentioned the reason he said getting less dollars. This becomes more of the <unk>.
Suppliers that were continued to inflation have moved to not contingent and we've renegotiated.
A couple of those dsa's over the last year, so that I think will no longer be contingency inflation as far as overall rates go I would say we continue to feel very good about our overall value proposition.
Very strong relationships with manufacturers and as you know.
When anytime there's changes in their portfolios, sometimes that means they should get a lower price and they have higher cost drugs coming out and sometimes they need to pay more fees when they lose in the entree or high priced items to go off patent exploration and so those types of moving parts in terms of volume an average line extension are taken into.
To account with each negotiation and the team has done an excellent job.
Working with our manufacturing partners to continue to have what I consider to be fair.
Fair market right for that and it feels.
Very good about that.
Able to be something that we can continue.
Going forward as far as the the Red Oak renewal, we won't be able to get into any specifics there, but as you can imagine it's been an excellent 7 year relationship. The team there continues to remain intact they have decades.
Generic buying experience.
The leadership there in the in the team has just a great group of individuals again with experienced that continues to bring new ideas together to the market to be able to help us continue to get the best cost in the marketplace and we continue to a partner well Cvs at board meetings et cetera continue to drive that so.
We feel that the.
Both companies took into.
In the context of all the market conditions on generics when we renegotiated we feel very good about where we are with our rhetoric extension.
Take 1 last question.
And our last question will come from Charles <unk> with Cowan. Please go ahead.
Yeah. Thanks. Thanks.
Thanks for asking me in here.
Maybe Mike.
Maybe.
Question on opioids.
The settlement here and I think there's like 150 days or so that's 40.
For the the plaintiffs too.
Except that in terms of the settlement.
The minimum participation.
That's required under this settlement for it to go into effect. So in other words it like half the participants have to at least participate and then it's my.
Understanding that the the amount that you would pay out would scaled down depending on the number of participants I just wondered what that minimum requirement is and then what happens if if you don't hit that threshold. Thanks.
Yeah. Thanks for your question so you're right has so.
The total number that has accrued assumes all 50 states cities and counties are in solid any single standard cities and counties within states.
Not elect to be part of it the number will come down based on.
Read upon proration buys by state so it will decline of states and.
And cities and counties do not participate second thing to your point it is multi steps theirs.
Point, where we get some insights to where in the states are then there'll be another point, where we will get to understand where the cities and counties in the subdivisions are and after all of that we will take a look at what we'll call. It we're calling critical mass. There is no set number so there's no minimum or global has been and continues to be to get.
100 per cent participation all 50 states in order to have the most clarity.
That may not happen as anything less than that and we as a group.
We'll have to sit down and determine if that's enough clarity and participation is highly dependent upon the states that do and don't participate. So we'll have to really step back and look at it as an overall from an overall standpoint and make a decision on whether or not to move forward..1 thing I'd like to just clarify is Mike indicated.
If not all 50 states choose are we from an arrangement to join that would mean to cash payments would be lower under that structure. It does not necessarily mean, the accrual would change.
And that would look at the facts and circumstances of the situation to determine what the proper accounting would be at that time, there could certainly be a difference there that we would need to evaluate clarified.
Clarification.
And that concludes our Q&A session for today I will now turn the conference back to my Kaufmann for closing remarks.
Yes, I want to thank everybody for taking the time to be on the call and for the very helpful. Questions. I know there was a lot of noise in this quarter, but I just wanted to end with a few thoughts to keep in mind. We did see first we did see underlying growth in FY 21 in both of our segments. If you exclude COVID-19.
Which gives us confidence as we move forward going forward with the impact from the pandemic totally beginning to dissipate our guidance is for growth next year and each segment and also if you take normalised growth.
Each segment when you normalize from noise by Covid quarters divestiture, we will grow in both segments, we have tailwind behind our growth businesses, we really expect all of our growth businesses as a group to really grow at least double digits on the top and bottom line and we have taken some significant actions such as getting after an additional 200.
Hundred $50 million in cost savings closing, the corners transaction, which will enable us to simplify our operating model.
Sending our agreement with Cvs or just a few of the examples and as the first question was in Jason's comment. We do have very strong cash flow generation, which gives us a lot of flexibility to be more opportunistic and our cat from a employment some of that thanks again and have a good day.
And this concludes today's call. We thank you for your participation you may now disconnect.
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