Q1 2022 Cardinal Health Inc Earnings Call
GAAP to non-GAAP reconciliations for all relevant periods can be found in 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.
With that I'll now turn the call over to Mike.
Thank you, Kevin and good morning, everyone.
Our first quarter results were in line with our expectations as.
As we continue to manage through the global pandemic.
Staying focused on our near term priorities and long term strategies to drive growth and momentum across our businesses.
In pharma, we continue to see sequential volume improvement and are encouraged by the profit growth that we saw in the first quarter.
We believe our pharma business inclusive of our strategic growth areas of specialty nuclear and outcomes is well positioned for growth in FY 'twenty two and beyond.
Our medical segment continues to be impacted by the disruptions in the global supply chain that we called out last quarter.
Recently these pressures have rapidly escalated and we're experiencing significantly elevated product costs due to international freight and commodities.
We believe the majority of these elevated supply chain costs are temporary we do not expect them to return to normalized levels. This fiscal year.
As a result, we are lowering our FY 'twenty two outlook for medical segment profit to adjust for these increased headwinds.
We are taking action to mitigate these impacts across the enterprise and we are reaffirming our FY 'twenty two EPS guidance of $5 60.
The $5 90 per share.
We have been on a journey to simplify our portfolio and strengthen our core businesses. So we are positioned for broad based sustainable growth as noted in the long term targets, we're announcing today.
We are prioritizing investment in our strategic growth areas and in innovative solutions to meet our customers' needs today and tomorrow.
And with our improved balance sheet.
<unk> to our dividend and now an additional $3 billion share repurchase authorization, we are positioned to return capital to shareholders.
Looking ahead, we remain confident in our strategy.
Now I'll turn it over to Jason to discuss our results.
Thanks, Mike and good morning, everyone.
I'll review, our first quarter results and updated expectations for fiscal 'twenty, two before closing with some comments on capital deployment.
Beginning with total company results first quarter revenue increased 13% to <unk> $44 billion drill.
Driven by sales growth from existing customers.
Total gross margin decreased 4% to $1 6 billion.
Driven by the Cordis divestiture and the net impact of elevated supply chain costs and medical.
As a reminder, the sale of Cordis was completed in August and impacted the quarter's results by approximately two months.
SG&A increased 1%, reflecting information technology investments and higher cost to support sales growth, partially offset by the cordis divestiture and benefits from cost savings initiatives.
Overall first quarter operating earnings track in line with our expectations down 15%.
Moving below the line interest and other decreased by $2 million driven primarily by lower interest expense from continued debt reduction actions.
During the first quarter, we exercise the make whole call provision to redeem $572 million of outstanding June 2022 debt maturities we continued.
You'd expect to repay that approximately $280 million of remaining June 2022 notes upon maturity.
Our first quarter effective tax rate was approximately 24%.
Average diluted shares outstanding were $289 million about 4 million shares fewer than the prior year. This.
This reflects prior year share repurchases as well as the $500 million share repurchase program initiated in the first quarter and recently completed.
The net result for the quarter was EPS of $1 29.
We ended the first quarter with a cash balance of $2 5 billion and no outstanding borrowings under our credit facilities.
This cash balance also reflects our first annual settlement payments into escrow under the proposed opioid settlement agreement.
Now turning to the segments, beginning with pharma on slide five.
Revenue increased 13% to $40 billion, driven primarily by branded pharmaceutical sales growth from large pharmaceutical distribution and specialty customers.
Segment profit grew 1% to $406 million, which reflects an improvement in volumes compared to the prior year quarter, which was adversely impacted by COVID-19.
This was largely offset by investments in information technology enhancements.
As a reminder, last quarter, we began deploying new technology platforms across our pharmaceutical distribution business is a part of a multiyear journey to enhance our it infrastructure.
This rollout is tracking according to plan and we continue to expect incremental implementation and depreciation costs through the first three quarters of fiscal 'twenty two.
As Mike mentioned during the quarter, we saw broad based sequential improvement in pharmaceutical demand, including generics.
We continue to expect to recovery generic volumes to pre COVID-19 levels by the end of the calendar year.
Outside of volumes, our generics program continued to experience generally consistent market dynamics, along with strong performance from Red Oak.
And during the quarter pharma saw double digit contributions from our growth businesses specialty nuclear and outcomes.
Transitioning to the medical segment on slide six medical revenue increased 5% to $4 $1 billion, driven primarily by PPE sales, partially offset by the cordis divestiture.
Segment profit decreased 46% to $123 million, primarily due to elevated supply chain costs to a lesser extent. This also reflects the impact of the cordis divestiture as well as net favorability in the prior year attributed to COVID-19.
As Mike mentioned medical segment profit was negatively impacted by increased product costs due to significant inflationary pressures in our global supply chain, particularly in the areas of commodities and international freight.
And commodities, we are seeing spikes in some key resins, such as polypropylene that are inputs into our self manufactured and sourced products with recent index prices nearly double where they were last year.
And with international freight, we're seeing ocean container costs at roughly 8% to 10 times pre COVID-19 levels.
We believe the majority of these headwinds are temporary but we do not expect them to abate this fiscal year we.
We are taking action, including through pricing and aggressive cost management.
I will discuss these impacts to our full year medical outlook shortly.
To wrap up the quarter. Despite some impact from the Delta variant on elective procedure volumes overall, our customers continue to manage effectively and total elective volumes exited the quarter near 95% of pre COVID-19 levels.
Additionally, lab testing volumes remains significantly elevated above pre COVID-19 levels, but it is not a material driver to the quarter due to the strong performance in the prior year.
Next on slide eight a few updates to our fiscal 'twenty two outlook.
We are reiterating our EPS guidance range of $5 60 to $5 90 per share.
This reflects updated expectations for the medical segment as well as lower ranges for our tax rate and share count.
We now expect our annual effective tax rate in the range of 23% to 25%.
We also now expect diluted weighted average shares outstanding in the range of $280 million to $282 million.
As for the segment outlooks on slide nine.
First we are adjusting our pharma revenue outlook to low double digit growth to reflect the strong branded pharmaceutical sales growth that we're seeing from large customers.
For medical we now expect fiscal 'twenty two segment profit to be down mid single to low double digits. This change is driven by the significant increases in supply chain cost inflation that I previously discussed which is expected to result in an incremental net headwind of approximately $100 million to $125 million on the year.
Given the anticipated timing of realizing these cost increases in our mitigating actions as well as the timing of selling higher cost PPE, we expect a sequential decline in medical segment profit in the second quarter.
Stepping back the only large operational item that we see meaningfully different today compared to our original fiscal 'twenty two guidance is the incremental impact of elevated.
The supply chain costs and medical notably, we do not anticipate any material net impact in pharma from inflationary supply chain costs.
And as noted last quarter, we still expect the cadence of our EPS guidance to be significantly back half weighted.
<unk> capital in a balanced disciplined and shareholder friendly manner, and we'll continue to allocate capital through the lens of our priorities which are unchanged.
We have made tremendous progress.
As we look forward, we see our debt paydown, beginning to moderate which will provide an increased ability to be more opportunity.
Domestic with our return of capital to shareholders.
On that note two important updates.
Okay.
Our board recently approved a new three year authorization to repurchase up to an additional $3 billion of our common stock expiring at the end of calendar year 2024.
And we now expect approximately $1 billion of share repurchases in fiscal 'twenty, two which includes the $500 million of share repurchases executed to date.
We believe that capital deployment, along with the future growth that we expect in both of our segments will be a key driver to the double digit combined EPS growth and dividend yield that we're targeting over the long term with that I'll turn it back over to Mike.
Thanks, Jason throughout the pandemic, we have responded to challenges with resilience and agility approaching every situation, where the focus of delivering for our customers. So they can care for their patients.
We are continually reviewing our business and seeking areas to improve as we navigate the dynamic macroeconomic environment.
We're taking action to mitigate elevated costs and manage through temporary supply chain disruptions and medical fees.
These actions include pricing adjustments.
Cutting additional cost throughout the organization and accelerating additional growth opportunities.
Outside of our continual focus on the customer we are directing our efforts to three main areas that will support our long term target of mid single to high single digit growth for the medical segment.
First we are simplifying our operating model.
We continue to take decisive action to reposition the business for growth.
We divested the cordis business and have begun significantly reducing our international commercial footprint.
We have announced and are in the process of exiting 36 initial markets, which will allow us to focus on the markets, where we have a competitive advantage.
Additionally, we are further streamlining our medical manufacturing footprint and modernizing our distribution facilities.
We expect these simplification initiatives to contribute to our $750 million enterprise cost savings target and position us to generate sustained long term growth.
Second we are focused on driving mix through commercial excellence.
Our Cardinal brand portfolio has significant breadth with leading brands and clinically differentiated products such as Kendall compression.
Kangaroo enteral feeding and protects the surgical gloves among others.
While we have made important changes to align our commercial organization structure and incentives. We recognize that we are underpenetrated in Cardinal health brand mix relative to our potential.
An increase in private label penetration across our U S and in channel customer base represents a significant profit opportunity with even further opportunities out of channel and internationally.
As we move past the pandemic, we see this as a significant opportunity to both deliver savings for our customers and grow our business over the mid to long term.
And third we're fueling our medical segment growth businesses at home solutions and medical services, which includes after freight logistics and wave Mark.
These growth businesses are aligned with industry trends and positioned to capture market share and growth double digit in FY 'twenty two and beyond.
We continue to invest in technology enhancements and innovative solutions that give our businesses a competitive edge.
And after freight we continue to expand our customer base and offerings.
And and at home solutions, which is now a $2 $2 billion business.
We continue to see volume growth as care is rapidly shifting to the home.
We are investing in new technologies to drive operational efficiencies and enhanced data visibility.
Moving to pharma, we have two primary objectives to achieve our long term guidance of low to mid single digit segment growth.
Continuing to strengthen our core pharma distribution business.
And fueling our growth businesses specialty nuclear and outcomes.
We will continue to strengthen our core business by focusing in three primary areas.
First supporting our diverse customer base.
Over 50 years, we've honed our distribution expertise and developed a strong customer base across multiple classes of trade with leaders in chain pharmacy direct mail order grocery and retail independent customers.
All of whom play critical roles in providing health care access to their local communities.
Along those lines.
During the quarter, we extended our distribution agreement with Cvs health through FY 'twenty seven.
Second we're managing our generics program to ensure consistent dynamics, which we continue to see and expect.
Our generics program is anchored by the scale and expertise of Red Oak sourcing a partnership we also recently extended through FY 'twenty nine.
Third we have been investing heavily in our technology to enhance customer experience and drive efficiencies.
We are approaching the end of a multi year investment journey to modernize our it infrastructure, which will yield meaningful working capital improvements and operational efficiencies.
As for our second overall pharma objective fuelling our growth businesses.
We continue to expect these three businesses to realize double digit growth over the next several years.
And as these businesses grow it will become a bigger portion of the overall pharma segment.
In specialty key downstream and upstream initiatives will enable our growth.
Oncology, we are competing differently downstream by transforming from a distribution leg orientation to a focus on supporting independent oncology practices with solutions to thrive in a value based care environment.
We are seeing commercial momentum with the Vista TFS, our technology platform that helps oncology practices improve their performance in value based care.
We have a strong presence in other therapeutic areas, such as rheumatology, which today is a $4 billion distribution market growing double digits.
We are also encouraged by the anticipated growth in Biosimilars as more products come to market such as the FDA approval for the first interchangeable biosimilar insulin product.
We are well positioned to support the next phase of Biosimilar growth as adoption increases in areas outside of oncology.
Upstream we are expecting strong growth from higher margin services supporting Biopharma manufacturers.
We operate a leading <unk> supporting hundreds of manufacturers that continues to see wins and support new products coming to market such as in the area of cell and gene therapy.
In nuclear we are expecting continued double digit profit growth, resulting in a doubling of our profit in this business by FY 'twenty six.
We continue to build out our multimillion dollar center for their <unk> advancement in Indianapolis and are investing to expand our pad capabilities.
We are partnering with several companies to grow the pipeline of novel <unk>.
For example, through our agreement with Terrapower, we will produce and distribute actinium $2 25.
Our radio nuclide involved in creating targeted therapies for several cancer types.
And in outcomes, we continue to see and expect strong growth.
This business has added new Payors and Pbms and is expanding clinical solutions for both independent pharmacies and retail chain to include solutions for medical billing point of care testing and other clinical capabilities.
With respect to the enterprise, we continue to aggressively review our cost structure as we work to streamline simplify and strengthen our operations and execute our digital transformation.
As I mentioned earlier, we recently increased our total cost reduction goal to $750 million by FY 'twenty three and we are on track to deliver those savings.
We're pairing cost reduction efforts with balanced disciplined and shareholder friendly capital allocation with a focus on investing in the business, maintaining a strong balance sheet and returning cash to shareholders.
Long term, we're targeting a double digit combined EPS growth and dividend yield.
These expectations are driven by our growth targets for our segments, our commitment to our dividend and our new $3 billion share repurchase authorization.
Now let me provide an update on the proposed opioid settlement agreement and settlement process.
In September we announced that enough states agreed to settle to proceed to the next phase at each participating state is offering its political subdivisions the opportunity to participate in the settlement for an additional 120 day period, which ends on January <unk>.
2022.
At that point each of the distributors and the states will have the opportunity to determine whether there is a sufficient participation to proceed with the agreement.
If all conditions are satisfied this agreement would result in a settlement of a substantial majority of opioid lawsuits filed by the state and local governmental entities.
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 the settlement would provide relief for our communities and certainty for our shareholders.
Turning to ESG. These priorities remain critical to achieving a healthier more sustainable world.
We recently announced goals to reduce scope, one and scope two greenhouse gas emissions by 50% by 2030 and.
And increased minority representation and our global workforce by 2030.
In closing, what we do matters.
It is our privilege to serve our customers their patients and their communities around the world and now Jason I will take it.
Please make sure your mute function is.
Once again, everyone to ask it.
A question press Star one.
On your telephone keypad will pause for a moment to assemble the queue.
And our first question will come from Lisa Gill with Jpmorgan. Please go ahead.
Thanks, very much good morning, Mike and Jason and thank you for all the comments.
Mike I just wanted to go back to your call.
That's around simplifying the operating model and the medical.
Medical supply side.
And where you talked about driving the mix the cardinal branded products. When can you remind us what percentage of sales today are cargo branded products and then two can you talk about the margin differential on those products and then my third and last question would just be that now that you have the divestiture accordance behind Zale credit behind you are there.
There are other assets within <unk> that would make sense to go back.
Thanks, Lisa Thanks for the.
Question.
Tough questions to answer because these are things we have.
<unk> historically, given obviously I can say this we believe there is plenty of room to grow some of our others, obviously, we're less penetrated.
And so we do have good targets.
By account that we're going after so we think there's plenty of opportunity in areas.
One of the key reasons, we believe in our longer term guidance for medical is the fact that we can do that as far as margin rates go generally they are.
More higher as a percentage and dollars and National brand. There are times in certain preferred brand programs, which is why we have them that we do preferred national brand, but in general as a rule of thumb our margin rates are much more significant on our cardinal sourced our cargo manufactured.
Product and then lastly around Cordis, we're always looking at our entire portfolio of business is to make sure we have the right type of.
Businesses, where we are positioned to win but theres nothing that sticks out to me in terms of certainty.
The product category of that but we are as I mentioned in my prepared remarks that we are exiting 36 countries. So not only do we look at products. When we look at products by country and countries and where we don't believe we have significant growth opportunity where there might be.
Too much risk versus benefit et cetera, we have made real conscious decisions to aggressively manage the number of countries in which is why we are exiting 36 countries to help simplify the model.
Alright, and next we will take a question from Charles <unk> with Cowen. Please go ahead.
Yes, thanks for taking the question.
Mike and Jason wanted to just talk a little bit about the the long term growth targets a little bit here.
I guess first is when we're starting the jump off point for these for the earnings and earnings growth are you starting from fiscal 'twenty, two and is that.
Five year target that we should be thinking about.
Or are we jumping off from fiscal 'twenty, one as sort of the day, we should be considering as we as we build our model for the remainder of this fiscal year.
And then lastly, those higher freight and shipping costs.
Do you assume those go away after this year as we think about.
Got it in relation to the long term targets. Thanks.
Okay, Hi, good morning, it's Jason I'll try to capture all of those points.
Your question is certainly fair as it relates to trying to define the baseline for those longer term targets as we indicated in our remarks today, we do anticipate this additional $100 million to $125 million related to the inflationary environment as temporary.
As difficult certainly to define exactly if that's short term medium term or longer term.
And at the current moment, we would expect those to revert back to some normalized level in a timeframe that is relatively short to medium term.
And so when we talk about these longer term targets, we are not presuming that type of tailwind right. So it is in a more normalized state when we provide those targets you referenced five year. So I'd say three to five years is a reasonable type of timeframe for average types of performance levels to get.
Broad perspective on the ins and the outs, but we would not expect big shocks associated with items like that the divestitures and acquisitions things of that nature would also be normalized out of that so that we're getting at that core type of performance.
And then as it relates to more specifics around the elevated supply chain costs, we highlighted though within our remarks that it's really just two key areas the international freight and the commodities.
In both cases the reason we believe that there are temporary is that they are at multiple levels higher than what we've historically seen.
On international freight, which is essentially the cost of getting a shipping container ship from overseas locations, such as Asia to the United States, We're seeing that cost up eight to 10 times versus pre COVID-19 levels, certainly we would expect that to be significantly lower at some point in the future.
Those levels are more like <unk>, what we've seen historically, so again, we would expect those to get back to a more normalized state at some point.
In the future, but again those are not tailwind to get us to these targets those targets are more normalized.
In terms of the second half.
Different.
Cadence of our results for the <unk>.
The various businesses we did.
Indicate that well with pharma, we would expect the second half to continue to improve steadily versus where we're at today just as it relates to getting back to more normalized state for underlying generic volume. So that continues to be as expected and also as expected our investments in our technology investments and we indicated would be.
Front end loaded, especially with the first three quarters, primarily as it relates to that fourth quarter. We started to implement those cost increases in the final implementation last Q4, so we start to get the full year effect of that as we exit the third quarter here.
On the medical side, we did indicate a sequential decline from Q1 to Q2 and Thats just related to the timing of realizing that supply chain costs I'm going with that.
And then also recall that we cited.
Yeah.
We have that Q1 to Q2.
Cadence.
And of course in us.
In the fourth quarter of this fiscal year, we would expect a significant COVID-19 tailwind associated with.
The comparison benefit benefit from the PPE and the prior year and then in all of our businesses. We expect ongoing stronger contributions from our growth businesses as we see the effects of various initiatives and investments that have been put.
Put in place over the course last year.
Next question.
Thank you.
I appreciate the supply chain commentary I'd like to get a little bit deeper here.
We used to have guidance on commodity impact.
Anything you can provide relative to 17.
$17 million of revenue or the cost that you incur to give us some sense there.
And then thinking about commodity and freight what is clearly passed along versus what represents a decision has to be made and what I'm really looking for is a $100 million to $125 million of increased expense what does that represent relative to the total expense that year.
<unk> pass through.
Yes. Thanks for the question. So let me see if I could how first of all we as you know called out in our fourth quarter of last year that we did expect elevated supply chain costs. So in our guidance for this year for the medical segment, we are already assumed a certain amount of elevated.
Fly chain cost some of which we had planned already to offset through cost reductions pricing actions and those types of things and that was originally built in what we saw during the quarter, particularly as the quarter went on was a significant increase in the supply chain.
Cost most notably in international freight how your containers that we've talked about as well as commodities and those we feel will create an incremental $100 million to $125 million of cost for us.
Lastly, I would say that 100 to 125 is split relatively evenly between the impact of commodities and the impact of freight costs. So they were both very very significant.
Other minor ones.
Other areas, but those were the really two big ones both of which we believe are.
Temporary because one as Jason said earlier, they're at all time highs for the most part significantly higher than where they were and.
And we believe that over time, the market will adjust and those will be able to come back down. So what are we doing about that that is a net number the 100 to 125, obviously since we.
<unk> called that out as the adjustments of medical guidance is that we are getting after it through pricing actions passing some of it through it's hard to really talk about exactly which ones you can pass through or not the market is very complicated there are contracts that we have to work through we have to work with our.
Partners, both the hospitals and the <unk>, we have to understand the supply and.
Demand dynamics of each item in the environment.
And so we are working through and understanding all of those factors, but there is some additional pricing action built into that number.
For the entire company, we are taking aggressive cost actions across the company we are.
Leveraging our improved balance sheet.
And we are also focusing on our growth businesses and pushing our teams to do more faster. There. So those are some I hope some helpful comments and then the only thing I'd add is that this increase is not.
It's related to two parts it's a.
Greater increase in both of these areas of international freight commodities, but it's also longer expected duration, we had anticipated that they would come back to more normalized levels a bit earlier. So we saw a higher spike and a longer duration and in terms of just how you model it through on revenue.
Like just draw a little a distinction with PPE we saw.
Many many times higher total impact on that product costs and so we saw a much more significant number of dollars in both cost and revenue that came through while this is still a significant it's much less meaningful from a revenue perspective and is not moving that needle nearly as much.
Next question.
And next we'll hear from Kevin Caliendo with UBS. Please go ahead.
Thanks, Thanks for taking my question.
So if I'm doing if im doing the math right. It appears.
The bad Guy that is the incremental supply chain costs.
Is larger than the good guy of the lower share count and perhaps the lower tax rate am I doing am I thinking about that right in the fact that you didn't change guidance is that just.
So youre still within the range, but maybe.
Maybe at the lower end of the range or Youre, just giving yourself a little room.
How should we think about that.
Yes, I think your math is accurate for the items that we typically provide guidance one area, that's not explicitly called out but as implied is this the underlying other corporate expenses.
And as we referenced a few times already.
Specific comments.
Broad based cost reductions.
$750 million program, which we increased by $250 million.
To the bottom line.
Okay.
Total segment profit as well as our earnings.
Sure.
Next question please.
Bank of America. Please go ahead.
Hey, good morning, I wanted to dive a little bit more into some of the long term guidance.
Compare contrast, it with the dynamics Youre seeing right now in terms of the supply chain.
No.
That being said as you think.
It's about the ways, we interact with the customers.
Interacting with your partners and supplier partners are there any ways that you can continue to evolve your business so that.
Maybe we don't see ever spot.
Spikes like this but some of the fluctuations in volatility that you have seen in the supply chain in the past I'm thinking in particular on some of the raw material cost spikes that do come up from time to time are ways that can be mitigated in a more tends to be out of your control.
Yes, I really appreciate.
So let me step back and hit a couple of days.
But for pieces and I'll finish with your question on medical but I'll take a shot here to emphasize a few others. So there's really I would say.
Three obviously components to our long term target, which are our long term target. We're talking about is having a double digit combined EPS growth and dividend yield on average as Jason mentioned in pharma.
To your point, we don't really see those fluctuations in commodities and cost affecting that business generally because if it does it generally happens in the form of the drugs, having increases which in that model are able to be passed on and work through the model and so our goal.
Oh single digit to mid single digit growth in pharma is really focused on strengthening that core PD balance getting that right mix.
<unk>, making sure we're managing the balancing through our margin initiatives and all of that as well as then.
Driving our growth businesses specialty nuclear and outcomes and we gave some color on those hopefully you've found helpful and exciting for instance, nuclear doubling in the next five years specialty continuing an outcomes continuing with double digit growth. So we believe the combination of getting that PD business.
Stabilized, which we're seeing and then seeing the growth there is really what's going to drive that and then of course, we met.
<unk>.
Use of capital being able to having our debt load.
Our commitment to our dividend and then the share repurchases on medical as you mentioned it a couple of different things that simplify our operating model focusing on driving mix and fueling our growth businesses I won't go into those details because we did it in the comments, but to your question around what kind of changes can we.
Make that health, it's really one of the things we are working on with customers right. Now is how do we change our contracts with our customers to give us more flexibility when there is sudden and significant changes in the supply chain.
That there is some mobility.
Idose things to indexes and things.
So they understand that as they come back down.
We're willing in the past the lower cost back onto them because we don't want to look at this as a test.
Fairly a chance to improve our margins, we'd like to do that through driving mix and launching more products not on the backs of our customers during our supply chain. So we are working with them to create contracting methods that will allow us to be able to pass those on.
Well is help them understand what are the metrics, we will do to be able to know for them. When they are changed the other direction too.
Alright, and our next question will come from.
Carolyn dressing with credit Suisse. Please go ahead.
Hi, This is Adam on for Joel under today, Thanks for taking the question.
Going back to your long term growth targets I'm just wondering if.
Taking into account the <unk>.
Capital allocated to the anticipated opioid settlement payments are or how we should be thinking about that potential impacts as it relates to being able to invest across some of your growth and higher margin businesses.
Yes, good morning items, Jason Yes that would incorporate that as we think about the capital deployment side of that we have for quite some time now included in an expectation of what those <unk>.
Payments would be that's all based upon our current set of assumptions of course, and if that would change materially that would change the answer but based upon what we know now.
That would be the baseline for example, the $3 billion share repurchase authorization that we have just completed is inclusive of that as well as the part of the capital outlay that we would expect over that period of time and this would be the available capital beyond that.
Next question.
And up next we'll take a question from Steven Valiquette with Barclays. Please go ahead.
Alright, thanks, and good morning, everybody.
Just a question on the medical segment, you mentioned that despite some impact from the Delta variance at the total elective volumes exited the quarter near 95% of pre COVID-19 levels.
I guess im curious if theres any updates on your assumptions for the pace of return of procedures for the remainder of our fiscal 'twenty two and it was also a positive factor that helps to offset some of the negatives that you discussed within the medical segment.
Yes.
There was a little bit.
Reduction in that based on that level.
Level of electric procedures in the first quarter, we started the quarter at close to pre COVID-19 levels and as we indicated we exited and back at about 95% and we think thats primarily attributed to the Delta variance.
So we see that trending in the right direction and with the pace of the virus. Since then we feel that we'll consider as we saw an improvement in our lab business that effectively offset that but.
The modest deterioration in the amount of elective procedures. So what we're seeing right now is that those two items tend to generally offset both good and bad depending upon the pace of the virus. So it's nothing significant that we saw in the quarter and as a result, we don't anticipate there being wild fluctuations going forward.
Next question.
And next we'll take a question from Stuart Hill with Deutsche Bank. Please go ahead.
Good morning, guys and this is the second time this earnings season has been stellar.
Jason I'd like just kind of a quick question on the long term guide, which is I guess sort of the long term how do you think about the underlying operating earnings growth contribution versus the capital deployment.
Inorganic.
<unk> contribution.
Well I think.
As you break down the long term targets when we were really talking about pharma being low single digits to mid single digit.
We're really talking about the operating earnings of that segment being in the low single to mid single medical being in mid single to high single.
To get to the double digits.
The combined EPS growth and dividend yield so.
The guidance on medical.
Pharma was really about operating earnings.
<unk>.
Okay.
I would also say that M&A is not a top priority and that that may occur.
You may have some of that here or there that is one option with capital deployment, but this was really more focused on.
Next question.
From Ricky Goldwasser.
With Morgan Stanley. Please go ahead.
Yes, hi, good morning, so on the long term.
I don't think its growth.
And then we talked about.
Growth rate being sort of on a normalized basis. So should we take that long term double digit growth.
Barker from 'twenty to 'twenty, two guidance sort of the abnormal cost.
We're seeing normalize for that and then apply that growth rate to get to <unk>.
1023.
Part of the question and then secondly, as we think about this.
Transitory cost in nature.
About 100 to 125 million costs related to the supply chain.
What's the contribution of labor cost to that headwind because when we think about labor cost I think about it as potentially more.
Chuck focus on C U E.
Someone salaries it's difficult.
To bring it back down so how should we think about that component within within the.
The additional cost.
Sure. Good morning, Ricky This is Jason I'll start.
As we talked about our long term targets.
Not expected or intended to be each and every year. There is a reason that we do highlight that as an average over that period of time. So we are not providing fiscal 'twenty three guidance with the statement that says that.
These would be the.
Primary drivers and expectations, we would have for our businesses.
And how you described it about the normalized level as an example that one 100 to 125.
We are.
We indicated that we anticipate these costs remain elevated for the balance of fiscal 'twenty. Two we are not taking a position at this point as to how much if any carries over into fiscal 'twenty. Three that is a terrific example of an important element of fiscal 'twenty three guidance that we will provide in the future that is.
Not at this point something that we feel comfortable being able to identify.
And then your question about labor is a great. One we did not call. It out because it is very consistent with what we had last quarter. So while labor inflation and those pressures are very real for us like the whole industry. We are not seeing anything new and unique this quarter versus last quarter.
<unk> and so we're not adding in any additional cost for that.
I would also highlight that even what was included in the original guidance was not nearly as substantial as the costs that we're referencing for what was included before for commodities and international freight those are clearly the most significant items that drive that fluctuation.
And items like labor as well as more domestic related costs such as.
Domestic transportation and other fuel.
And that concludes our Q&A session for today I will turn the call back over to CEO, Mike Hoffman for closing remarks.
I want to thank everybody for taking the time to be on the call today and for all of US I know the elevated product cost within the medical segment card a lot of attention here today, but I want to just reiterate that one we do believe the majority of these costs are temporary.
We are taking aggressive enterprise wide actions to help mitigate and three we did reaffirm our non-GAAP EPS guidance.
Actually in pharma, we are encouraged by the profit growth we saw in the quarter and the ongoing resiliency in this business with an additional $3 billion share repurchase authorization and our commitment to our dividend we are positioned to return capital to shareholders, while prioritizing and investment in our growth businesses simplifying our.
Model and strengthening our core businesses and together this gives us confidence confidence in achieving the new long term growth targets that we provided with that thank you again and we hope you all have a good day.
And this concludes today's call. We thank you again for your participation you may now disconnect.
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Okay.