Q3 2022 Cardinal Health Inc Earnings Call
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Good day and welcome to the Cardinal Health, Inc. Third quarter fiscal year 2020 earnings Conference call.
Today's conference is being recorded.
At this time I would like to turn the conference over to Kevin Moran Vice President of Investor Relations. Please go ahead.
Good morning.
I will discuss Cardinal Health's third quarter fiscal 2022 results along with an update to our FY 'twenty outlook.
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 Hoffman, Chief Executive Officer, and Jason Hollar, Chief Financial Officer.
During the call we will be making forward looking statements. The matters addressed in these 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 our 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 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 if 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.
Our third quarter results reflect continued inflationary impacts and global supply chain constraints as.
As we continue to manage through the current macroeconomic environment. We remain focused on both near term priority and long term strategies to drive growth and momentum across our businesses.
At an enterprise level, we're maintaining our focus on our three strategic priorities.
Optimizing our core businesses.
Vesting for growth and innovation.
Floyd capital efficiently.
In pharma, despite the quarter being a little lower due to higher operations costs, we remain encouraged by the trajectory of the business.
We saw resiliency and overall pharmaceutical demand.
Strong performance in our generics program and.
We continue to expect pharma to realize mid single digit profit growth in FY 'twenty two.
In medical our core U S medical products to the distribution business continued to experience unprecedented inflationary impacts and global supply chain constraints.
We continue to take actions to mitigate the effects of these global challenges on our business, including taking pricing actions.
<unk>, our commercial contracting strategies and investing in additional supply chain capacity.
While we remain confident these actions will deliver value and are encouraged by the other areas of our medical business and our opportunities for long term growth. The current environment remains highly dynamic.
Our updated outlook for FY 'twenty to reflect Argos current expectation.
I'll elaborate on the actions, we're taking to drive performance, particularly in medical after Jason reviews, our third quarter results and updated outlook.
Before turning the discussion over to Jason It's important to note that the opioid settlement agreement was finalized during the quarter. It became effective on April 2nd.
This is an important and significant step forward for our company.
We feel this settlement is the best way to deliver relief to communities across the United States and allow our company to move forward with thousands of losses behind us.
46, or 40% are eligible states all six eligible territories and over 98% of litigating political subdivisions are part of the National agreement.
This comprehensive agreement will settle the vast majority of the opioid lawsuits filed by state and local governmental entities.
Additionally, we recently reached an agreement with the state of Washington is participating subdivisions to result, opioid related claims on similar terms to the broader settlement.
Bringing the total number of states with which we have settled the 47 49.
While the settlements do not cover all opioid related claims. These comprehensive agreements are a significant milestone towards achieving broad resolution of governmental opioid claims. It included jumped a pre lease terms designed in part to increased transparency for the supply chain for these products and demonstrate our commitment.
But to the safety of the pharmaceutical supply chain.
With that I'll turn it over to Jason.
Thanks, Mike and good morning, everyone.
Beginning with total company results third quarter revenue increased 14% to 45 billion.
Driven by sales growth from existing and net new pharma customers.
Total gross margin was $1 7 billion.
A decrease of 7% due to the elevated supply chain cost and medical and the cordis divestiture, partially offset by generics program performance.
Consolidated SG&A increased 2% to $1 $1 billion, reflecting higher operations expenses than previously anticipated investments, partially offset by the cordis divestiture and cost savings initiatives.
Third quarter operating earnings decreased 21% to $545 million, primarily reflecting the elevated supply chain costs and medical.
Moving below the line interest and other increased by $8 million.
Which reflects onetime gains and other income in the prior year, partially offset by lower interest expense from debt reduction actions.
Our third quarter effective tax rate finished at 21% 11 percentage points lower than the prior year due to certain discrete items affecting both periods.
Average diluted shares outstanding were 277 million, 6% lower than a year ago due to share repurchases.
During the quarter, we initiated a $200 million share repurchase program, which was completed in April and brings our year to date repurchases to $1 billion.
The net result for the quarter with EPS of $1 45.
The decline of 5%.
In the quarter. We also recorded a $474 million noncash pretax goodwill impairment charge related to the medical segment, which is excluded from our non-GAAP results.
This accounting charge reflects an increase in the discount rate used in our goodwill impairment analysis.
Third quarter operating cash flow was a use of $419 million and we ended the quarter with a cash balance of $2 4 billion.
And no outstanding borrowings under our credit facilities.
Looking ahead to the fourth quarter. In addition to expecting strong operating cash flow generation. We received the previously defined tax receivable of approximately $1 billion in April .
Timing, including the day of the week in which any period ends effects point in time cash flows in fiscal 'twenty. Two is unfavorable you affected by this dynamic.
Additionally, we expect approximately $550 million in total litigation payments. This year, primarily related to opioid settlements, which includes the initial payment for the national settlement already made.
Now turning to the segments, beginning with pharma on slide five.
Revenue increased 17% to <unk> $41 billion, driven by branded pharmaceutical sales growth from existing and net new pharmaceutical distribution and specialty customers.
Segment profit decreased 5% to $487 million driven by higher operations expenses and previously anticipated investments in technology enhancements, partially offset by generics program performance.
During the quarter, we incurred higher costs supporting sales growth, including some initial customer onboarding costs and inflationary impacts in areas like transportation and labor.
Importantly, we also completed the launch of our planned technology enhancements.
As Mike mentioned, we continue to see resiliency and pharmaceutical demand.
And our generics program continued to experience generally consistent market dynamics, including strong performance from Red Oak.
Turning to medical on slide six.
Third quarter revenue decreased 7% to $3 9 billion.
Due to the divestiture of the cordis business and lower products and distribution volumes, which includes the impact of global supply chain constraints.
Segment profit decreased 66% to $59 million, primarily due to net inflationary impacts and global supply chain constraints in products and distribution.
During the quarter, our U S medical products and distribution business continued to experience significant inflationary impacts across the global supply chain, particularly in the areas of international and domestic transportation and commodities. Additionally.
Additionally, increased pressures from global supply chain constraints affected the volume of some of our higher margin Cardinal health brand products.
So a lesser extent the third quarter decline in segment profit also reflected a lower contribution from PPE as well as the cordis divestiture.
PPE, we saw unfavorable price cost timing in the quarter as well as lower volumes as we exited the quarter.
We were encouraged however by the resiliency and surgical product demand related to elective procedures, which was generally consistent with recent quarters and improved from a year ago.
And we continued to see strong performance from our lab business.
We continue to take actions to address the inflationary cost challenges and manage through the temporary supply disruptions, including pricing adjustments cutting costs throughout the organization and investing in our supply chain network, which Mike will elaborate on momentarily.
Now transitioning to our updated fiscal 'twenty to outlook on slide eight.
We now expect EPS in the range of $5 15 to $5 25 per share, reflecting updated expectations for medical and a few of our corporate assumptions.
With the favorability seen to date from discrete items, we now expect our annual effective tax rate to be in the range of 22% to 23%.
We expect diluted weighted average shares outstanding of approximately $281 million, which reflects the $1 billion of share repurchases completed to date.
And with one quarter to go we expect capex of approximately $400 million.
We continue to expect interest and other in the range of $140 million to $160 million.
As for the segments on slide nine.
For pharma no changes to our outlook, we continue to expect low double digit revenue growth mid single digit segment profit growth and as previously indicated strong fourth quarter segment profit growth.
But the combination of our planned technology enhancements, we will now be lapping elevated expense levels from the initial deployment a year ago, which has been a year over year headwind last several quarters.
We are also lapping a few onetime items that we called out last year, which will create a favorable fourth quarter comparison, and we expect strong underlying performance in the quarter.
For medical we now expect revenue at the low end of our previous range down mid single digits and segment profit to be down 45% to 55% in fiscal 'twenty, two which includes a net incremental headwind of nearly $300 million due to inflationary and global supply chain constraints.
Additionally, based on volume trends the update from our previous medical outlook, primarily reflects a lower contribution from PPE.
Now, let me spend some time sharing a few high level thoughts on fiscal 'twenty three from our vantage point today ahead of providing our usual guidance in early August .
And pharma.
<unk> is tracking consistent with our long term target of low to mid single digit segment profit growth.
With respect to a couple of other notable pharma puts and takes for next year. We do anticipate higher operations expense was based on recent inflationary trends, particularly in the first half of the fiscal year.
Additionally, with the Finalization of the global opioid settlement, we anticipate lower opioid related legal costs, partially offset by higher costs for implementation of the settlements injunctive relief terms.
Together, we expect these litigation items to be a modest net tailwind in fiscal 'twenty three.
For reference we are currently estimating opioid related legal costs of approximately $115 million in fiscal 'twenty two.
We expect a further reduction in opioid related legal costs in subsequent years.
In medical we are highly focused on the inflationary impacts and global supply chain constraints affecting our U S medical products and distribution business.
At this time, we expect a similar to modestly higher net impact from inflation and global supply chain constraints in fiscal 'twenty three is in fiscal 'twenty two.
Embedded in this are two key assumptions.
First with visibility generally limited to the first half of the year. We are assuming key cost drivers such as international freight and commodities have flattened and we will begin to decrease slowly over the course of the next fiscal year affecting our results on a one to two quarter delay.
This would result in a greater absolute impacts from inflation and global supply chain constraints in fiscal 'twenty three due to the <unk> of higher costs in the second half of fiscal 2002.
Second we would also expect a greater impact for mitigation initiatives with various ways for price increases going into effect throughout the year.
In total these two assumptions result in a similar to modestly higher net impact from inflation and global supply chain constraints as in the current year.
As we exit fiscal 'twenty, three we anticipate a run rate, where our pricing actions will offset approximately half of the gross impact.
So these inflationary impacts are persisting for much longer than originally anticipated we remain committed to mitigating the effects in our medical business over time, we continue to believe the majority of these impacts will prove temporary once global supply chain pressures eventually abate.
Our pricing will adjust accordingly.
Below the line, we anticipate a year over year headwind in our fiscal 'twenty three effective tax rate with the discrete favorability seen in fiscal 'twenty, two not expected to repeat.
And with our strong balance sheet, we see the potential for accretive capital deployment through a similar level of share repurchases over the course of the year supported by the $2 7 billion of authorization remaining on our existing share repurchase program expiring at the end of 2024.
In summary, while there is obviously moving parts for fiscal 'twenty, three or any particular year. We continue to believe our previously announced long term targets for our businesses and for double digit combined EPS growth and dividend yield are achievable over normalized longer periods with that I'll turn it back over to Mike.
Thanks, Jason let me elaborate on the actions, we are taking to drive medical performance and maximize our differentiated strengths.
First we're taking pricing actions evolving our commercial contracting strategies and focusing on driving mix across our global business.
We have implemented a series of initial customer price increases on nine Cardinal health brand product categories.
We've also implemented fee increases for certain medical national brand suppliers offset some of the elevated supply chain cost.
We provide the most efficient and effective way for manufacturers to reach our customers and believe these increases helped compensate us for the increased cost of providing this value.
We have and will continue to be transparent and fair with customers and suppliers and focused on delivering on our service.
As it relates to our products and distribution contracts, we are focusing on future pricing flexibility from factors beyond our control.
To drive changes in mix, we're investing in new and innovative products to increase the breadth of our Cardinal health brand product portfolio.
One example of increased breadth is our recent launch of the first surgical insights treated using Avery Dennison patented better hold see HG adhesive, which reduces risk of surgical site contamination, it's still removes easily after surgery without harming a patient skin.
Another example is our recently announced collaboration with <unk> the industry leader in feeding development for newborns and premature infants to design as our next generation and trading system.
A smaller more intuitive and easier to integrate into the NICU PV protocols.
We are also investing to increase supply capacity, particularly within our protection surgical glove line, where we have increased our existing capacity by over 30% with a focus on long term growth we.
We expect to invest over $125 billion to expand our manufacturing footprint with the construction of the new facility dedicated to increase supply of our protections brand gloves and drive innovation in this important product portfolio.
Second we are simplifying our operating model and optimizing our international footprint.
A year ago, we announced our intention to exit 36th market and those exits are now complete.
We have also decided to exit another 10 markets, where we see limited opportunity for long term growth.
Once complete these actions will reduce our international commercial footprint by 50%, allowing us to focus on approximately 45 remaining markets, where we are best positioned to serve.
We are also optimizing our distribution network by consolidating less efficient facilities at the larger modern more efficient district centers to deliver improved service to our customers.
For example, we recently announced plans to build a new approximately 600000 square foot medical distribution center in Central Ohio, replacing a smaller facility nearby.
This new facility along with others, we have planned will improve service and quality deliver operational efficiencies and better support fluctuation and volume and labor.
Additionally, our lab business has consolidated manufacturing and warehouse space into a new larger 100000 square foot facility.
This move Centralizes, our high growth lap kitting services and supports significant expansion of our direct to consumer kitting capabilities.
Third in addition to investing in our core medical business, we continue to invest in our growth businesses at home solutions and medical services, which are aligned with industry trends.
And at home solutions, we continue to see strong demand as care continues to shift into the home.
We recently partnered with connections to optimize digital supply chain planning increased medical product visibility and supply chain agility.
We're focusing initial implementation of connections. This rapid response platform with at home solutions with an expected completion date this summer.
Furthermore, we've invested in a new warehouse management system across our add on solutions network, which we expect to roll out next week.
This new infrastructure will improve labor planning based on demand increased operating efficiencies to deliver on our commitments.
And streamline and standardize processes across our network.
We're initiating a multiyear strategy to grow our warehouse footprint for at home solutions in target markets and we will announce details for our new warehouse opening later this calendar year.
And in our higher margin technology enabled medical services businesses after freight logistics and wastewater we've invested in additional technology capabilities to expand our offerings in both businesses.
Turning to pharma.
We continue to make progress on our two primary objectives.
First strengthening our core pharma distribution business.
We have completed all deployment of our multiyear investment to modernize our pharmaceutical it infrastructure in order to standardize operations.
Drive efficiencies and enhance the customer experience.
These investments, including the automation of business procedures, and real time line of sight transparency for our employees and customers will result in operational efficiencies and a more connected pharmaceutical distribution supply chain.
We expect to benefit from the conversion in FY 'twenty three and beyond.
Second we are fueling our growth businesses specialty nuclear and outcomes.
In specialty we continue to experience momentum in our oncology physician office business driven in part by the Vista TFS, our technology platform for value based care in March we further expanded our domestic Ts offerings with the launch of decision path a digital solution to help oncology practices.
Lower cost and.
Improved patient care and drive success in transitioning to value based care.
Created by Skus, our internal innovation engine decision path is built into electronic health record workflow, allowing oncologist easily compare cancer treatment options, both by clinical indications and costs at the point of care.
And with Biosimilars, we are well positioned to support the next phase of growth over the next several years as biosimilars expand into new therapeutic areas and sites of care.
We believe the next phase of growth in the Biosimilars market will predominantly come from products with a greater retail or specialty pharmacy presence.
As more retail products with interchange ability come to market, our significant scale and capabilities designed to support retail pharmacies uniquely positions us to support and empower those pharmacies as they navigate the important operational complexities of managing multiple biosimilar launches against major rep.
<unk> products.
Are some extra digital services portal offers tailored solutions to help patients get on and stay on therapy.
Patients, who interact with our some extra portal experience shorter time to therapy for new patients and no gas therapy for existing patients.
Digital re enrollment via the patient portal increased approvals within the first 30 days by 10% and delivered a retention rate greater than 90%.
In our third party logistics business, we have 166 manufacturer contracts this fiscal year.
So far we have successfully launched 27 manufacturers and we expect five to eight additional launches by the end of the fiscal year.
And specific to cell and gene therapy, we continue to win opportunities and have plans to launch slides manufacturers in the coming years based on FDA approval and manufacture readiness.
In nuclear we continue to see the benefits of our investments and third the optics.
Our center prepare gnostics advancement and enter the Atlas continues to be in high demand with a number of new innovators and products. We are collaboratively doubling in FY 'twenty two versus the prior year.
Our outcomes business continues to add new payers pbms pharmaceutical manufacturers and expand clinical solutions for both independent pharmacies and retail chain.
We have combined our reimbursement consulting solutions and outcomes, Quebec platforms into a single unified platform that offers reimbursement assistance decision support and scheduling to identify and complete clinical opportunities.
Across 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.
We're pairing these cost reduction efforts with balanced disciplined and shareholder friendly capital allocation according to our priorities.
Looking ahead, we're confident in our ability to achieve our long term targets.
Now, let me give a little color on injunctive relief as part of the National opioid settlement.
Injunctive relief relates to controlled substances anti diversion efforts and includes enhancements to governance independence.
Independence and training of personnel.
Due diligence for new and existing customers.
Ordering limits for certain products and suspicious order monitoring.
In addition, we ended two other settling distributors will engage a third party vendor to act as a clearinghouse for data aggregation and reporting which the distributors will fund for 10 years.
These relief measures are intended to create additional transparency and while there is additional cost these initiatives demonstrate our commitment to being part of the solution to the U S opioid epidemic.
In closing, what we do matters, we aspire to be health care's, most trusted partner by delivering the products and solutions, our customers need advancing healthcare and improving lives.
And now Jason and I will take your questions.
Thank you if you would like to ask a question. Please take note of that person star one on your telephone keypad. If you are using a speaker phone. Please make sure. Your mute function is turned off to allow your signal.
Again press star one to ask a quick.
We'll go ahead and take our first question from Charles <unk> with Cowen.
Yes, thanks for taking the question guys.
Mike.
Obviously, it looks like there were a number of items here in the fiscal third quarter, particularly in the pharma segment and you highlighted that we're going to be lapping a number.
These.
As in the fourth quarter.
And then youre maintaining the.
The fiscal 'twenty to guide in that segment can you just remind us.
What those items are that we're lapping now I know the technology investments you mentioned as one but could you kind of help us size. Those so we get a better sense is that the right kind of jump off point in the pharma segment as we look into 'twenty three.
And part of that you mentioned higher sort of operational expense.
Can you kind of maybe highlighted inflation isn't like wage inflation, you kind of mentioned that.
That should mostly just in the first half of the year.
Can you can you touch on why that might only be a half year impact them and not just a new baseline. Thanks.
Okay.
Yes, Yes. This is Jason let me go ahead and start there is a number of questions. There. So hopefully you can catch them all so in terms of the enhancements what we mentioned at the beginning of the year and it's still very consistent with what we've seen rollout is about $80 million of incremental cost that we saw in 22 versus <unk> 21, and we indicated.
That would be spread somewhat evenly over the first three quarters of the fiscal year. So you can kind of think of roughly about one third from corners, what we've been experiencing all year first two quarters, we had other actions that drove growth above and beyond that headwind, but that was.
With the inflation included in the third quarter drove that 5% reduction.
As it relates to the fourth quarter. The other unusual items beyond that lapping so theres very little year over year change as it relates to the enhancements in the fourth cornerstone that that headwind goes away in Q4, we also referenced last.
Last Q4, Q4, 'twenty one that we had some unusual items that were adversely affecting us so that becomes a year over year tailwind for us. This Q4 and then in addition to that we indicated here on the call today and just before US that we are also seeing some some volume underlying operational improvements that are <unk>.
<unk> for the fourth quarter and then.
We also continue on at that point as it relates to inflation, what we saw here in the third quarter was was elevated a little bit higher than what we had expected and is consistent with the range of our guidance, but nonetheless, it's an item that does impact our Q3 and we expect.
It didn't impact Q4, and then carryover or comments from the first half of fiscal 'twenty. Three are just presuming that that cost will continue on at a similar elevated level and be a year over year headwind such that by the time, we get to the second half of fiscal 'twenty, three and would then lap it at that point in time.
Okay captured all of your questions there.
Alright, well go ahead and take our next question from Eric Percher with Nephron research.
Thank you.
I recognize you've had some unprecedented headwinds throughout the guidance has appeared to assume stabilization or improvement in so we've seen.
Step downs as 100 to $125 $51 75, and now 300, it sounds like for 'twenty three youre trying to let us know that we're going to see lapping and it doesn't get better though there are actions being taken can.
Can you give us a feel for what actions you would take if it turns out that things continue to get worse and have you thought about the.
Profitability at elements of the business, what might need to change or even whether the business might be better positioned for a rebound if it's a multi year rebound.
Under someone else's ownership.
Yeah, I'll take that and then Jason can fill in if I Miss any of the components of that thanks. Thanks for the <unk>.
Question. So yeah, what we had said last quarter, we expected $2 50 to 300 of incremental cost and now we think it will be nearly 300. So that's adjusting the inflation component of.
But up to 300 and then you also heard Jason comment in his comments that we saw some as.
As we look forward into Q4, we see some.
PPE cost timing and PPE volume.
Impacts for us in Q4 that will also be an incremental negative for 'twenty. Two so that's what's in our updated guidance to go to the new 45% to 55% down versus where we were before so that's the change that <unk>.
The items that changed there again, there were some small stuff, we mentioned in farm and all of that.
We believe it's manageable within the guidance for pharma, so no call out any change in guidance for pharma, but that's the drivers for what we chose in medical as far as looking forward to 'twenty three what we were trying to indicate is that we.
We do believe as we annualize if you think about the inflation increased over the year and it sits in our.
Inventory for a while so using the $300 million. Obviously, we believe that will annualize to a greater number next year and so inflation actually on an absolute basis. The total impact of inflation will be greater next year in 'twenty three than it was in 'twenty two.
That's what we're talking about there, but on the flip side. We also already have implemented price increases some in March and additional ones as I mentioned that go into effect here essentially July one that as we look at those in additional price increases that we would intend to take during the year.
We also will see a greater positive impact from price increases next year. So while inflation on absolute will go up the positive that we will get from increased pricing will also go up and the two of those will net to a similar to slightly down overall net impact.
Next year in 'twenty three so that's how we're thinking about it next year as you can imagine we're going to continue to focus on those items and where we have opportunities.
Based on the market based on the conditions and costing we will take more price to market and what Jason also said it would be helpful. Our goal is that when we exit the year next year.
We plan to have at least 50% of those inflated items offset through either pricing actions that we will have taken either both the manufacturers and the customers or we will obviously have seen some of those costs come back down. So we do plan to exit at that level. So thats.
Financially I guess, an overall summary of that to your question around the medical business. We still continue to feel very good about this business as I look at this business overall, yes, our medical products and distribution business is having some challenges no doubt about it obviously with.
Lowering guidance three times, but when we look across the rest of the portfolio whether it be at home after freight laugh with wave Mark we continue to see very strong growth from all of those businesses and we feel really good about those we feel good about the actions that we are.
Putting in place as always will always constantly look at our portfolio and make adjustments as necessary, but we feel good about where we are with medical at this point in time.
And we'll go ahead and move on to our next question from Michael Cherny with Bank of America.
Good morning, and thanks for all the color Mike I wanted to dive in a little bit more about the comments you've made tie into next year on medical as we think about both.
Fiscal <unk> numbers and the implied fiscal <unk> guidance is that the right annualized nation and jumping off point as we think into next year and along those lines with the pieces that you have given us.
Where do you see the dynamics I know, it's early but around all these pieces coming together towards some level of EPS growth relative to the long range plan and Jason hinted that you will be below that but will be should we expect to see EPS growth next year.
Yes, So let me start with that this is Jason and the.
The 23 elements that we're providing here for medical entirely focused on the inflation component that is clearly going to be the most significant item that we are focused on for both the current year and what we know will impact us. This.
This next year.
Not this is not a full comprehensive guidance and this is not meant to be complete with all the moving pieces as Mike indicated we're very focused on all of those growth businesses that he mentioned, there's going to be other operational elements that we'll be working through and then we'll provide more color on as it relates to inflation in that $300 million impact this year.
<unk> is by far the most significant item and when we think about our long term targets. The reason we use the phrase normalized is items like that $300 million do need to be adjusted.
But as it relates to other moving pieces for fiscal 'twenty three that we'll come at our normal guidance update next.
Okay. We'll go ahead and take our next question from Lisa.
Hi, Lisa Gill with Jpmorgan.
Okay. Thanks, very much good morning.
Staying on the medical supply side of the business I just wanted to better understand just a couple of things Mike you talked about the opportunity now to mitigate some of that by taking some price increases is there any reason I mean, we've been talking about all of these headwinds.
For several quarters now is there any reason why one you haven't been able to do that historically.
Why now you will be able to do it and then secondly can you maybe just talk about the competitive landscape is there anything in the competitive landscape.
Prohibited us from taking.
Mitigating price increases during this time.
Yes. Thanks for the question. So first of all I would talk about it in two box two buckets and as a reminder, one on the branded medical products when we see price increases from those manufacturers.
Are able to pass those through because it is like.
Like you used to on the pharma side of a cost plus type of models, so whatever that cost as we pass it on so what we're talking about.
Specifically here is the impact on Cardinal branded products, whether it be the Cardinal brand or Kendall security Kangaroo all of our brands that we have as we see.
Input costs going up whether that be transportation ocean freight commodities et cetera. Those are the types of things that are impacting and so again as I think about the entire medical segment remember it is highly focused in this one area as we look across the rest of the segment, we see really good progress on.
Of our initiatives.
The various activities that we have going on specifically related to this to your point around taking pricing as you know taking pricing in this marketplace.
It's complicated first of all you have to work not only with the actual customers themselves, but you also need to work with.
With the GPO and make sure that you are communicating what you intend to do when Youll do it you have to give notice.
Remember in many cases these are contracts that we have that could be multiyear contracts in place at a fixed price. Because this is an industry that has historically not seen large fluctuations in pricing, it's been relatively stable and while you might see little things here and there. It's generally been very stable and so the industry is.
Shell has been comfortable with doing longer term pricing, obviously that model need to change going forward based on what we've seen in this hyperinflation environment that we're in that not only has occurred but seems to be lasting at least a little bit.
Longer and so this is about working with customers on redesigning the contracts working with the GPO is working directly with the customers. We have been having those conversations. So we did take price increases on five categories effective March one, we recently added or more categories.
This represents thousands of Skus in fact, it's almost half of our Cardinal health branded portfolio. We have now taken price on and to your point when we compete on product that's not just against the other distributors and in fact in most cases, it's against many other folks in the marketplace.
Including some of the branded suppliers. So we do have to understand what they are doing in the market and understanding how that lands. We raised price, we still remain competitive and the best option for our customers.
And our next question comes from Ricky Goldwasser with Morgan Stanley .
Hi, good morning.
So a couple of questions here.
Sure first of all Mike if we just step back I think you talked in your prepared remarks about investing and building a new facility.
In the medical segment.
But if you really think back and when we think about sort of the two segments that you have are there any synergies between drug distribution and medical segments.
<unk>.
What is really the rationale.
To own a business on the medical side that has been underperforming.
Very long time.
Yeah. Thanks for the question I appreciate it.
Couple of things as we've said before we do see some synergies between MSP, we go to market together with our GPO selling teams, we shared corporate overhead together, we work on our innovation and technology group together, we've worked together on back office types of thing.
<unk>.
Clearly acute care customers are common to both segments.
We don't see as much synergy between the large distribution businesses, obviously, because we maintain separate warehouses and theres different needs for the customers. There in terms of specific go to market strategies, but we do see it a lot with our.
Complementary businesses, our at home business works with our pharma distribution business are off to freight business works with them. So we do see working together there so that being said, we do see opportunities, but as I've always said, we are we will always look at our portfolio. We will always look to see what is the best opportunity to.
Create shareholder value and so at this point in time, we feel good about where we are and where we're headed but theres nothing off the table. When it comes to looking forward in order to create value for shareholders.
And our next question comes from Elizabeth Anderson with Evercore ISI.
Hi, guys. Thanks, so much for the question I was wondering if you could talk a little bit more about that medical utilization assumptions embedded in sort of <unk> and then your comments regarding 2023, both maybe on the surgical side and at home volumes. Thanks.
Yeah right now what we're seeing is we're seeing elective procedures be pretty similar to what we would say pre COVID-19 now that's a hard raise use anymore and it's probably one we'll begin.
Getting away from because trying to measure something thats now over two years old with lots of puts and takes with new items and changes in the marketplace and everything else. It's it's a little hard to compare to something that old at this point in time, but roughly what we would say is that elective procedures.
Q3, we're pretty similar to the prior couple of quarters prior to.
Similar levels to pre Covid, we expect about the same for Q4 and are not really expecting any differences in 'twenty three as far as that goes.
Either direction, we're not expecting that there is a big buildup.
Unmet needs that are going to fly through the system or vice versa that we should see.
Significant reduction now obviously that could change if there is a flare up with COVID-19 or something like that but right now we don't see.
Anything at this point in time that we would forecast for the rest of this year and next year as it relates to differences in elective procedures.
And we'll take our next question from George Hill with Deutsche Bank.
Yes, good morning, guys and thanks for taking the question.
Jason the best search business I'm going to stay on this one did about $60 million in EBIT in Q3, and Thats kind of the mid point into Q4 guide, but as we think about your fiscal 'twenty. Three comments, we know that inflation is building and the impact tends to lag.
I guess is the right way to think about med surge in fiscal 'twenty. Three is that this is kind of the jumping off like the back half of fiscal 'twenty two almost overstates the operating earnings run rate of the business.
I guess I'm trying to get a sense of magnitude magnitude of how far down. It can go in fiscal 'twenty, three and to what degree can pricing initiatives kind of offset that.
Yes.
Gary I can probably be a little bit more helpful is on the timing associated with that the impact of that inflation from a from a year over year perspective will be.
More on payable in the first half of the year do you think about what we had in fiscal 'twenty to Q1 had much less of an impact actually hitting the P&L. We had seen the costs start to come start to build in terms of what was procured by what actually hit the P&L escalated much more greatly in the second quarter and has increased from there.
<unk> in Q3, Q4, so that comparison from a year over year perspective will be unfavorable for those elements all things being equal by given the magnitude of what we're talking about I would expect that to be the more one of the more significant items, especially in Q1, and then as we get to the back half of the year as I indicated.
And in my comments and Mike reiterated a few moments ago.
With the expectation that we are able to offset about half.
The run rate at the end of the fiscal years, we jump into 24 that would imply especially over the second half of the year that that would be trending more favorably and then we would have a much more of a tailwind associated with those items.
There are always other moving items within each year in our guidance as you go back and look at all of our commentary. This year there have not been too many significant items referenced other than inflation. So this one singular item is going to be the key driver of the year over year results for the medical business next year.
There will be other color of course back to the growth businesses and other changes in underlying assumptions and this will be driving the underlying performance for the segment very significantly from a year over year perspective again in general similar magnitude, perhaps modest headwind associated with it based upon those underlying.
<unk>.
And our next question comes from a J rice with credit Suisse.
Hi, everybody. Thanks.
Just.
On the medical.
I don't think you've given in a while how much of the revenues there as cardinal branded products at this point roughly and then as Youre talking about the offset that will come from pricing.
Rice increases.
Offsetting about 50% by the end of next year or fiscal year.
Are there any other things that are meaningful that.
That could be impactful I mean, I don't know if diversification of sourcing.
Maybe toggling back and forth in the Cardinal branded products.
Anything else beyond just pushing through price increases or do we are we basically waiting for the backdrop to improve from a macro perspective.
Yes, we don't.
We've not given any.
Actual mix percentages in terms of how much of our volume is Cardinal health brand versus others. So I can't do that at this point in time, but what I will say is that there is opportunity for growth. There. We know that that's an area that we're excited about and continue to put.
Things in place like working on our incentives for our sales force expanding our product line to have more items to drive mix to which you heard in my comments on our project, one with Avery Dennison and <unk>.
Hell. So we're both looking to expand the line as well as drive the mix through our sales reps and continuing to work with customers. So while we don't give it it's an area, where we do see some real opportunity going forward to grow as far as other things to your point. So number one is going to be pricing the customers thats going to be initiative I also.
Ensure that we are taking.
The changes to our manufacturing partners to increase the fees or cost as we said have gone up the service that we provide the manufacturers we believe is.
Their best option to be able to get to market and get to the customers that we service we want to obviously be fair with them. It would be a great and trusted partner, while we do need to make sure we're charging fairly for our services. So we have and are taking <unk>.
Fee changes to those manufacturing partners that we have on the medical side in order to help compensate us for the great service that we drive there we continue to look at our cost side of the business as we continue to feel good about our $750 million.
Cost takeout and we're continue to look at opportunities to be even more aggressive on that and we'll continue to do that going forward and then our growth businesses and focusing on those growth businesses.
Whether it would be at home or off the freight our lab, we're continuing to make investments as I noticed noted around what we're doing with our lab business and a new facility to grow that we've got some rollout of some new systems in opt to freight and in our at home business that are going to both improve our cost and increase our offerings. So those are the way.
Is that we're going to be getting after over the next year and over the following years to grow this business.
We will take our next question from Eric Coldwell with Baird.
Hey, Thank you.
Good morning.
Wanted to go back to the first question I think it was Charles asked the.
Pharma comp in <unk> 'twenty, one you identified some good guys from last year, you have not given.
More specifics today on what those are I think.
We're all pretty hectic with earnings and everything else a lot changed in the last year can you just remind us what those items were in the fourth quarter of 'twenty one that we are.
We are bad guys and how much they were so we know what the year over year. Good Guy comp is going into this quarter and then are there any new good guys things. The street wouldn't know about that you know we're going to hit in the fourth quarter to get you to your pharma profit margin target. Thanks very much.
Yes, the primary item that we referenced last Q4 was inventory adjustments, we do not provide any specific number I think we might have referenced modest and so it was a reasonable number.
You can look at the growth rates, there and how that was impacted and to provide a range.
The key again is that we no longer have the headwinds of that two.
<unk> thousand $30 million per quarter that we've seen over the first three quarters related to the enhancements and then we have had some incremental volume through we referenced some net new customer volume within the pharma business that just started to ramp up in the third quarter and is more significant in the fourth quarter and those would be the.
The most significant items that drive that year over year.
And we'll go ahead and take our next question from Steven Valiquette with Barclays.
Great. Thanks.
So regarding the elevated operating expenses in the pharma segment exiting 'twenty two and into the first half of fiscal 'twenty, three I guess, its still not clear which elevated.
Cost categories, Youre able to pass through to customers.
Which ones you are absorbing in your own margins when thinking about fuel costs other transportation costs higher labor expense et cetera, So I guess just to confirm in which cost categories.
Are you seeing the greatest increase in operating expenses that you are not able to pass through to the pharma customers. Thanks.
Yes, I would say in general though.
Georgia. These are not items that we can pass through there are opportunities on fuel surcharges for sure as those remained elevated to pass those through.
But I would remind you there was a couple of other things. Some of these costs were also focus more on the third quarter such as we did rollout just a few weekends ago. The final rollout of our multiyear Piedmont project. So we've had some rollout cost and some making sure that we do that right in the quarter.
We on boarded some new customers during the quarter and Theres. Some initial costs. There that we also incurred during the quarter. So I would say the bucket is there is small amount that's passed through to the customers. There is another part that's a little bit I would say temporary in the third quarter because they were unique to some work we're doing in the quarter.
<unk>. The majority is elevated transportation costs that we do see more permanent for at least for a while until they begin to come back down across the portfolios are not able to be fast on that being said when we look at the level of those the amount of cost we're taking out of the business.
That's why we're still comfortable with reiterating our overall guidance for pharma that while they are somewhat elevated in the third quarter. There is something that we would expect and are continuing to address going forward to manage to both our guidance for this year as well as still feel confident about.
Our longer term guidance as it relates to pharma and.
And just to be really clear on this point, we're not talking about any type of product cost inflation, that's flowing through to the farm business that is very much.
Captured in the pass through.
And it appears there are no further questions at this time, Mr. Kauffman I would like to turn the conference back to you for any additional or closing remarks.
I just wanted to thank everybody for their time to be on the call today and I. Appreciate all the questions I'll just reiterate that we are taking action to mitigate these inflationary impacts on global supply chain constraints and we're focused on driving improved performance across all of our businesses take care and I hope to talk to all of you soon bye bye.
This concludes today's call Goodbye participation you may now disconnect.
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