Q4 2022 Cardinal Health Inc Earnings Call
[music].
Good day, and welcome to the fourth quarter and full year 2020 to Cardinal Health, Inc. Earnings Conference call.
Today's conference is being recorded at this time I would like to turn the conference over to Mr. Kevin Moran.
<unk> President of Investor Relations. Please go ahead Sir.
Good morning, and welcome.
Today, we will discuss Cardinal Health's fourth quarter and year end fiscal 2020 results along with our outlook for fiscal year 2023.
You can find today's press release and earnings presentation on the IR section of our website at IR Dot Cardinal health Dot com.
Joining me today are Mike Kaufmann, Chief Executive Officer, Jason Hollar, Chief Financial Officer, and Trisha English Chief Accounting Officer.
During the call, we will be making forward looking statements.
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 and the forward looking statements slide at the beginning of our presentation for a full description of these risks and uncertainties.
Please note that during our discussion today, our comments will be on a non-GAAP basis, unless there are typically called out as GAAP gap.
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 kindly ask that you. Please limit yourself to one question. So that we can try and give everyone an opportunity.
With that I'll now turn the call over to Mike.
Thanks, Kevin and good morning, everyone.
As I am sure. Many of you have seen a short time ago, we issued a press release announcing that I'm stepping down as CEO and as a board member of Cardinal Health, but we will continue to serve through August 31.
Effective September one Jason will become <unk> new CEO .
He has also been appointed as a board member effective today.
They say timing is everything and I believe as we start our new fiscal year at the time is right for me to step away. A CEO has opened the door for a new leader to take Cardinal health forward over the coming years.
I have been blessed to be part of the Cardinal health family for 32 years.
In that time, I've seen our company grow and evolve in many ways.
We are truly essential to care and I'm honored to have been part of it.
Jason has been a tremendous partner over the past two plus years and has been instrumental in many of our strategic initiatives.
He deeply understands our business priorities and industry landscape.
And the board and I are confident that he is the right person for the job.
With that I would like to turn the call over to Jason.
Thanks, Mike I really appreciate the kind words and the opportunity to work closely with you. These past few years, let me start by saying how excited I am to be taking on this new responsibility I am grateful for the trust and the confidence the board of directors is placing in me.
I'd also like to thank you Mike for the leadership and the many contributions to the company over the years I hope to preserve the culture that you've helped ingrained into the fabric of our organization and I look forward to what I know will be a smooth transition.
I also want to welcome Tricia English will be serving as our interim Chief financial Officer.
Chris Most recently served as our Chief accounting Officer, and Hasnt been a valuable member of the Cardinal Health family for over 16 years I look forward to continuing to work with her in this new capacity, while we conduct an external search for a permanent CFO .
The first step into the details of our financial performance for the quarter, Let me step back and summarize the key points this past year.
Within our pharma segment, while we experienced the effects of industry wide inflation and incurred incremental technology investments.
<unk> grew the business, 5% consistent with both our original guidance for the year as well as our long term growth targets.
Good.
The medical business was more significantly impacted by these inflationary dynamics, which drove a significant impact on our results.
However, we have strong mitigation actions in place, including pricing and will present, a plan to you today that mitigates all of the inflationary and global supply chain constraints impacts.
<unk>, an additional 8% compounded annual growth by fiscal 'twenty five.
Underlying these operating results. This past year was a significant focus on cash flow, which results in increased financial flexibility we.
We are absolutely focused on shareholder value and intend to deploy these incremental funds to additional share repurchases for fiscal 'twenty three.
While we remain in a dynamic environment and excited to share further details of our plans with you today and commit to continuing to provide increased clarity to the drivers and the key metrics underlying our performance.
So, let's now turn to some of the details driving our results in the fourth quarter, beginning with the pharma segment on slide six.
Fourth quarter revenue increased 13% to <unk> $43 billion, driven by branded pharmaceutical sales growth from existing and net new PD specialty customers.
Segment profit increased 26% to $451 million driven by generics program performance and a higher contribution from brand sales mix, partially offset by inflationary supply chain costs.
As we've previously noted this also reflects a favorable comparison due to the prior year inventory adjustments.
During the quarter, our generics program, including Red Oak saw strong performance and continued to experience consistent market dynamics.
Regarding the inflationary supply chain costs, we saw impacts in areas, such as transportation and labor, which we expect to continue into next year.
We also incurred higher cost supporting sales growth.
And with ongoing progress on opioid litigation matters, we saw a decrease of approximately $15 million in opiate opioid related legal costs.
Turning to medical on slide seven fourth quarter revenue decreased 11% to $3 8 billion due to the divestiture of the cordis business and lower product and distribution volumes.
Medical segment loss of $16 million in the fourth quarter was due to net inflationary impacts and global supply chain constraints in products and distribution.
On a year over year basis, the favorable comparison to the prior year $197 million PPE inventory reserve was mostly offset by the net inflationary and global supply chain constraint impacts a lower contribution from PPE and the cordis divestiture.
During the quarter, our products and distribution business saw an approximate $100 million impacts from net incremental inflation and supply chain constraints.
This reflects a gross impact of approximately $125 million and approximate $25 million offset from our mitigation actions, which includes our initial wave of price increases on five Cardinal health brand categories that went into effect back in March.
Elaborate on our plans for further mitigation of fiscal 'twenty, three and beyond shortly.
As mentioned it continues to be a highly dynamic medical environment and our Q4 results came in lower than we had previously expected.
Primarily reflects overall volume softness in our products and distribution business, including a lower contribution from PPE.
Stepping back demand for PPE has fluctuated significantly over the past couple of years, we saw lower volumes as we exited Q3 in the fourth quarter experienced further declines.
This primarily reflects customers higher inventory levels and to a lesser extent, some PPE category specific customer losses, driven by supply constraints during the pandemic.
We continue to have strong conviction in our overall value proposition, which includes leading brands and clinically differentiated products for context PPE represents approximately 15% of sales in our overall Cardinal health brand portfolio as Youll see on slide 20.
Moving below the line interest and other increased by $36 million to $64 million due to a decrease in the value of our deferred compensation plan investments compared to gains in the prior year as a reminder, deferred compensation gains or losses reported in interest and other are fully offsetting corporate SG&A and net neutral to our bottom line.
Additionally, in the fourth quarter, a one time write down of an equity investment impacted EPS by <unk> <unk> per share.
The increase in other expense was partially offset by lower interest due to debt reduction actions as indicated we repaid the $280 million of remaining June 2022 notes at maturity.
Our fourth quarter effective tax rate finished at 25, 4% approximately three percentage points higher than the prior year the.
The net result was fourth quarter EPS of $1 <unk>, an increase of 36% primarily reflecting the growth in pharma segment profit.
Now transitioning to our consolidated results for the year.
Fiscal 'twenty revenues increased 12% to $181 billion driven by the pharma segment gross margin decreased 3% to $6 5 billion due to the cordis divestiture.
Total company SG&A increased 1%, reflecting inflationary supply chain costs, our previously mentioned it investments and higher costs to support sales growth, mostly offset by the cordis divestiture and benefits from cost savings initiatives.
Operating earnings decreased 12%, which primarily reflects a year over year headwind of approximately $300 million related to net inflationary impacts and global supply chain constraints and medical partially offset by pharma segment profit growth.
Interest and other increased 24% to $165 million largely due to the items affecting the fourth quarter.
Of note this came in higher than our guidance, primarily due to the equity investment write down in the quarter.
Our annual effective tax rate finished at 22, 1%. The net result was fiscal 'twenty two EPS of $5 six.
So turning to the balance sheet in fiscal 'twenty, two we generated robust operating cash flow of $3 1 billion.
This includes the previously defined tax refund of nearly $1 billion and favorable timing of working capital.
Additionally in fiscal 'twenty, two we made approximately $500 million in litigation payments primarily related to opioid settlements.
In July we made our second annual payment under the National opioid settlement agreement of approximately $375 million, which.
This will be reflected in Q1 fiscal 'twenty three operating cash flow.
We are focused on deploying capital in a balanced disciplined and shareholder friendly manner. This year, we invested approximately $385 million of capex back into the business to drive future growth.
Paid down approximately $850 million in debt to reduce leverage and returned $1 6 billion to shareholders through share repurchases and dividends.
We ended the year with a cash position of $4 7 billion.
Which does reflect some timing favorability with no outstanding borrowings on our credit facilities.
As for the segment's full year results beginning with pharma on slide 10.
Pharma revenue increased 14% to $165 million, reflecting consistent drivers with the fourth quarter.
Pharma segment profit increased 5% to $1 $8 million, driven primarily by generics program performance and an improvement in volumes compared to the prior year. This.
This was partially offset by investments in technology enhancements and inflationary supply chain costs.
It'd be helpful. The tailwind from improved volumes and the headwinds from incremental investments effectively offset in fiscal 'twenty two each approximately $80 million on a year over year basis.
Additionally, we saw an approximate $50 million headwind from inflationary supply chain costs, primarily in the second half of the year.
Moving to medical on slide 11.
Fiscal 2010 medical revenue decreased 5% to $15 9 billion, primarily due to the divestiture of the cordis business.
To a lesser extent lower products and distribution volumes were partially offset by growth in at home solutions.
Segment profit decreased 63% to $216 million, primarily due to the net inflationary impacts and global supply chain constraints in products and distribution. Additionally, the favorable comparison to the prior year PPE inventory reserve was offset by a lower contribution from PPE and the divestiture of the cordis business.
Now for our fiscal 'twenty three guidance on slide 13, we expect earnings per share in the range of $5 <unk> to $5 40, which reflects the following assumptions.
First for the enterprise.
We expect interest and other between $140 million to $170 million, which assumes approximately $550 million in debt pay down for the March 2023 notes at or before maturity.
We are assuming a non-GAAP effective tax rate in the range of 23% to 25%.
We anticipate diluted weighted average shares outstanding between 262, and $266 million, reflecting our plan to complete between one $5 billion to $2 billion and share repurchases over the course of the year.
And supporting our capital allocation priorities, we expect adjusted free cash flow in the range of one $5 billion to $2 billion.
Which excludes litigation payments and any other significant and unusual or nonrecurring items.
As for the segments, beginning with pharma on Slide 14, we expect revenue growth in the range of 10% to 14%.
Driven by growth in existing and net new PV and specialty customers.
We expect segment profit growth in the range of 2% to 5% based on the following key assumptions.
We expect continued stability and overall pharmaceutical volumes, along with consistent market dynamics within our generics program.
Continuation of the inflationary supply chain costs, we have seen in the last two quarters should result in an approximate $50 million headwind primarily in the first half of the year.
The completion of ERP technology enhancements should be an approximate $30 million tailwind.
We expect opioid related legal costs, including initial costs for implementation of the settlements injunctive relief terms of approximately $80 million in fiscal 'twenty three of $20 million of tailwind.
And we see increased contributions from our growth areas, primarily specialty including Biosimilars.
Before moving to medical a couple of points from the pharma fiscal 'twenty three cadence.
Similar to last year, we expect the year over year segment profit growth to be significantly back half weighted which primarily reflects the year over year impact of inflationary supply chain costs in the first half.
Specifically in the first quarter of next year, we expect segment profit between 400 $420 million.
While we do not typically provide quarterly guidance, we thought additional color may be helpful. Given the puts and takes over the last several quarters.
Now turning to medical on slide 15.
We expect revenue to decline in the range of 3% to 6% due to lower <unk> sales and lab testing volumes.
We expect segment profit ranging from a decline of 10% to growth of 10%, reflecting the following assumptions.
We expect a similar net impact of approximately $300 million from inflation global supply chain constraints and mitigation actions in fiscal 'twenty, three or a minimal impact on a year over year basis.
This assumes an approximate $475 million gross impact from inflation and global supply chain constraints, partially offset by $175 million of mitigation actions, including pricing and evolving our commercial contracting.
While still significantly elevated relative to historical levels. We are encouraged by the recent improvements in spot rates of certain cost drivers such as international freight and some commodities.
As a reminder, these product costs are capitalized and have historically been reflected in our P&L results on a one to two quarter delay. However in the current period of elongated supply chain. It is closer to two quarters.
Our current assumption is that the impact of inflation and global supply chain constraints will peak in the first quarter of fiscal 'twenty three and gradually decrease over the next couple of years. Additionally, along with the pricing actions that went into effect at the start of the year. We are implementing additional waves of increases over the course of fiscal 'twenty. Three we continue to expect that as we exit fiscal 'twenty three.
The run rate of our mitigation actions will offset at least 50% of the gross impact from inflation and global supply chain constraints.
In terms of other key assumptions for medical in fiscal 'twenty three.
The operating environment continues to normalize we expect an approximate $50 million tailwind from an improvement in PPE margins, we plan to sell through the majority of higher cost PPE in the first half of the year and for PPD margins to normalize as we exit the year we.
We expect the PPE tailwind to be offset by similar headwind from lower lab testing volumes.
We also anticipate a headwind of approximately $50 million from re baseline incentive compensation following fiscal 'twenty two underperformance in.
And finally, we expect increased contributions from our strategic growth areas, primarily at home solutions.
On Medicals quarterly cadence, while we are assuming a similar segment profit total in fiscal 'twenty three versus fiscal 'twenty. Two we do expect the cadence to be the reverse of the prior year.
Specifically in the first quarter, we expect segment profit ranging from a loss of $20 million to profit of $20 million.
We expect the gross impact of inflation and global supply chain constraints in the first quarter to be approximately $150 million with approximately 25% of this offset through our mitigation actions.
As for the rest of the year, we expect the substantial majority of segment profit to come in the second half of fiscal 'twenty three particularly in the fourth quarter. The sequencing primarily reflects our assumptions around inflation global supply chain constraints inflation mitigation and PPE.
While there are many moving parts in fiscal 'twenty. Three we are confident in our long term outlook and are reiterating our previously announced long term targets for our businesses and for double digit combined EPS growth and dividend yield over longer normalized periods.
Additionally, we are introducing a new target for at least $650 million of medical segment profit by fiscal 'twenty five driven by the medical improvement plan that we are introducing today.
Slide 17 highlights our four areas of focus to improve medical performance.
Number one many.
Mitigate inflation and global supply chain constraints, we plan to fully address the impact of inflation and global supply chain constraints through mitigation initiatives by the time, we exit fiscal 'twenty four and are targeting to exit fiscal 'twenty three offsetting at least half of the gross impact on our business.
A second wave of price increases when new effect on July one on for more categories and we plan on the next wave commencing on October <unk>.
In addition, we've executed distribution fee increases for certain suppliers and we are actively working with customers and GPO is to just language in our product and distribution contracts as they renew allowing for greater price flexibility to respond to current and future macroeconomic dynamics.
To optimize and grow the Cardinal health brand portfolio.
Our $4 6 billion Cardinal Health brand portfolio, which includes nearly $4 billion of non PPE categories offers leading brands and clinically differentiated products planned.
Plan to grow Cardinal health brand sales by a compounded annual growth rate of at least 3%, which will generate $75 million or more of incremental segment profit over the next three years.
This growth will be achieved through two key areas of focus first R&D and new product innovation, we see opportunities in key categories, such as new nutritional delivery, where we will be launching the next generation <unk> enteral feeding platform.
Second is increased product availability as a result of investments within targeted categories, such as surgical gloves and electrodes for example in our surgical glove portfolio, we're investing $125 million for construction of a new manufacturing facility dedicated to increase supply for a leading protection brand gloves.
Third area of focus is to accelerate our growth businesses, primarily at home solutions. These businesses have growth rates in excess of our core along with a higher margin opportunity and we've been making investments to drive at least $60 million of total segment profit by fiscal 'twenty five.
At home solutions. For example is now a $2 $4 billion business that has consistently grown top line at around 10% as patient care continues to shift into the home.
And finally, our fourth area of focus is to continue our simplification and cost optimization efforts.
We expect actions that increased productivity in our manufacturing plants distribution centers supply chain and back office to yield at least $50 million of net cost savings by fiscal 'twenty five.
Going forward, we are focused on driving simplification through value improvement projects transportation management, and further optimizing our sourcing and manufacturing footprint footprint where possible.
These initiatives to contribute towards exceeding our existing enterprise $750 million cost savings goal by fiscal 'twenty three.
While on the topic of our supply chain, let me take a moment to share some additional color. When we have received a number of investor questions. We offer.
<unk>, a highly diverse global supply chain with approximately two thirds of our Cardinal health brand revenue coming from self manufactured products we.
Have invested in additional self manufacturing capability, many in our own north American facilities and today approximately half our Cardinal Health brand revenue comes from North America in total the.
To best serve our customers we continue to believe in the importance of a diverse global supply chain and we are focused on responding to any global supply chain disruptions with resilience and agility.
In summary, we believe the introduction of measurable proof points in each of these four areas of focus provides visibility to measure progress against our plans going forward.
Now, let's turn to the pharmaceutical segment, where we continue to focus on strengthening our core PD business and investing in our growth businesses primarily specialty.
In pharma distribution with our significant technology enhancements that we've been working on over the past several years substantially completed we now focus our attention on increasing productivity maximizing working capital efficiency and prioritizing the customer experience.
Our generics program anchored by the scale and expertise of Red Oak, we continue to further enhance our capabilities as we focus on share of wallet and maximizing margins.
We recently held our retail business conference where over 4000 customers attended live for the first time in three years and had an opportunity to see and experience our latest innovations.
So had the chance to register for services that would help them create an online shopping portal advisory support to optimize reimbursement and central fill compliance packaging services.
Specialty we are continuing to see downstream momentum in oncology and emerging therapeutic areas driven by our offerings, including the Vista TFS.
We recently announced a tuck in acquisition of the <unk> GPO and the divestment in their main services organization. This will further strength in specialty solutions cornerstone Rheumatology, GPO, which offers innovative office management solutions and robust specialty drug access to over 1500, rheumatology providers nationwide upstream with Biopharma manufacturer.
They are investing for future growth in our <unk> business as evidenced through our cold chain storage expansion.
Which increases our current capacity by 200%. We also continue to see strong growth in Sonexus, our patient hub, where our technology solutions, all biopharma customers remove barriers to patient care.
And with Biosimilars, we are proactively addressing common barriers to adoption by investing in education campaigns to build awareness clinical comfort and assure ensure accessibility.
We continue to be excited about the future growth in this space and remain well position of new biosimilars come to market.
In closing while there is a lot of work to be done I am excited to work with our 44000 teammates and executing our plans to grow in fiscal 'twenty, three and beyond with that I will now take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please press the star Asterix K followed by one on your telephone please.
Please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment.
If you find that your question has already been answered you may remove yourself from the queue by pressing star two.
Once again, please press star one to mask a question.
We will take our first question today is from Lisa Gill of Jpmorgan. Please go ahead.
Okay.
Understood Best of luck to you Mike Kaufmann, it's been great working with you all these years.
Alright, hopefully staying in touch and congratulations.
Jason on becoming CEO .
I really wanted to start with.
Obviously, you talked about this huge ramp getting the medical side of the business back to $650 million of profit and Jason can you talk about four different areas I really wanted to just focus on the first area and that's growing Cardinal brand products and obviously for someone like myself that followed the company for a long time.
That's kind of ebbed and flowed as far as the focus of the company can you talk about one why now you think that you can really accelerate that too I think you've talked about nutritional.
We've had others that have had problems in that area right.
Why do you think that that's a good area for Cardinal to go into.
Then secondly, when we think about.
Physician preference et cetera.
Are you hearing in the market around private label product.
To give you.
Some of the insights as to the opportunities that you see here specific to Cardinal brand products. So I'll stop there.
Yes.
Great, Let's just start off the discussion thanks, Lisa so so first of all.
Let's start with your first one thereabout about why now so.
Ebbs and flows I understand what you mean and of course, I think what you're referring to is we especially talks about the sales force right before the pandemic. We have made a significant restructuring to have that team very much focused on driving our Cardinal brand mix and then COVID-19 occurred and it went from a sales focus challenge to now a supply chain challenge in that.
Of course, our sales team as well as our customers were very much focused on PPE and getting care to COVID-19 patients and the change in the mix was not exactly the highest priority. So I think it's always been a focus of cardinal but we recognized that we needed to change our priorities align with our customers' priority over the last couple of years.
But behind the scenes, especially with the pandemic our medical team realized that we needed to invest in our own supply chain capabilities, our own products and a lot of the capacity that is necessary for the manufacturing either whether it's our own products are sourced products to ensure further resiliency. So now that we are getting a little bit more normalized and we.
We see that we have to invest in our supply chain. It not only helps to provide resiliency to our customers, but also allows us to grow high margin products, where we have the right to win and expand our margins. Further. So now is the right time as we start to move on and allow our sales team to get re engaged and focused on driving that volume but of course, we need to.
Passing the products to allow them to be successful.
You asked a specific question about nutritional.
That's just one area right, we have a very broad diverse product line. We are successful in the category today that Kane group brand as a market leader. So this is not necessarily we're getting into it in fact, that's what gets me. So excited about this item this opportunity the two items I referenced the surgical gloves and nutritional are already areas were.
<unk> leaders, we are with good margins good growth, we have the opportunity to just continue our leadership through additional products and additional capacity. So it's actually a lower with risk strategy and entering in separately.
As it relates to <unk>.
Your last question again, we have a very broad diverse products and we can manufacture we can source and we're going to use all tools available to us and use that diverse capability internal external with partners ourselves and discontinued to adapt and evolve as the market demand and when we look at the supply chain.
Okay.
Next question please.
Okay.
Thank you. Our next question comes from George <unk> of Deutsche Bank. Please go ahead.
Yes, good morning, guys, and Mike I'll Echo leases leases comments and wishing you well.
And I guess, Jason I don't mean this question does it sound insensitive, but I guess given the company's recent performance could you talk about why the board chose to not run a process to replace Mike and what are you guys kind of went with an internal promotion and just kind of I don't know if youre able to comment at all just kind of on the board's perception of company performance and how it kind of want to evaluate management going forward.
But certainly will not attempt to speak for the board, but what I will say is that my time, both here as well as elsewhere in the industry.
I am very focused very tenured on driving operational performance within within the business I have made a marked within this organization and I have been very focused on capital deployment driving cash in the company and have.
Made that impact.
When I when I think about what why I feel like I am the right person going forward here, we have a lot of great aspects within the organization. We have a wonderful culture, we have wonderful products, leading positions great growth areas, but with the pandemic has shown us is that we need to go back to some level of basics here in terms of the operational core and driving efficiency driving.
Vacation, so probably doing fewer things, but doing them better and that focus and that attention to de risking the model and driving this profit improvement plan for the medical business. The pharma business has been very resilient, we hit our both short and long term goals. This year, we need to keep doing more of the same while also continuing.
Grow those growth areas of which of course specialty is the largest one so we're in a very different phase there and then with this plan today, we're really highlighting how aggressive we're going to be with our capital deployment that when we generate that cash $3 $1 billion in 'twenty, two we're going to deploy it effectively.
Well positioned to take us through those those challenges that we've been faced with and I am going to be absolutely focused on taking the next steps here.
Operator next question please.
Thank you, we now move to a J rice with credit Suisse. Please go ahead.
Hi, it's Jonathan young on for a J just want to Echo my congrats to Jason and Mike as well.
So you mentioned the various costs have been coming down within the medical segment and understanding there is a lag between when the spot prices come down versus when it flows through your P&L should we take it that any further decline in the spot prices would be upside to the medical outlook for FY 'twenty, three and beyond and then alongside that you talked about the 3% revenue.
Or.
For the Cardinal Health brand products.
What are you assuming in terms of pricing growth moving forward and alongside that utilization. Thanks.
Okay.
To start with on the spot price as well.
Why we always talk about the net impact is because obviously there is a gross impact and the pricing and other contracting items that create that net and so as I think about that dynamic in the short term.
As you indicate and understand.
And on what it is right if it's inventory costs like the freight international freight.
<unk> right.
For the commodities that will be rolled out and that will be more of a two quarter lag, but as it relates to the domestic transportation that piece, which hasnt moved.
Very much in either direction that is a little bit more real time, so it kind of depends on what cost youre talking about.
Long term, we believe there is going to be a parity to pre pandemic levels for this so if costs, we can get lower than some of the pricing actions may change in the near term I don't think pricing is going to change under under all these pricing scenarios, we're still not covering <unk>.
Expected to cover more than half of that impact. So overall, we think in the short term, yes. The costs are going to flow more to minimizing the impact of what we have but again that would be most likely in the second half of the year.
In terms of the 3% CAGR.
Im not sure I fully understand the price.
Question, there, but but with within our Cardinal health is specifically related to that $4 billion bucket that I referenced in my comments that the underlying volume is what that's related to.
There is pricing that goes along with that but I would say, it's more on the volume side and the pricing side, that's driving that type of CAGR, it's not double dipping on the pricing actions that is presuming a normalized level of inflation in pricing and so then it would be more volume driving that incremental value.
Question.
Thank you moving to Michael Cherny of Bank of America. Please go ahead.
Good morning, Mike.
Obviously steam here, but wish you best wishes as you move on it's been a pleasure working with you over the years.
Maybe Jason to dive a little bit also into the medical transformation plan as you think about the totality of Cardinal as you step into the CEO seat.
As you think about the moving pieces that you have in the driver's seat to push back towards growth can you give us a sense as well on how much the linkage between the pharma and medical side, we'll be able to help.
Now you to hit these targets that you've laid out and how do you view the synergies, especially among this revamped medical outlook between these two segments going forward.
Yes, so when I step back and think about that plan. The area that is theres a couple of areas that.
Could be impacted.
Have connectivity there.
Probably the first one is the simplification and continued cost optimization.
Those types of initiatives.
Our wide ranging and as we implement a particular project to reduce cost. It has a lot of cherry picking between the segments and the corporate functions. When one person is a good idea we've pushed those across all of them and in some cases, we're leveraging that scale. We're doing a lot of centralization of work to standardize and offshore and back office activities.
Things of that nature, using digital tools that we can invest in those types of technologies and capabilities essentially and blow that out to the whole organization. So thats certainly a piece of it and then when we talked about the <unk>.
Growing our Cardinal health brand portfolio.
While there is not a lot of crossover selling and we do have the same customers and so those relationships those discussions can spawn into a variety of different opportunities. So thats not a huge enabler of that type of item, but it could be.
A component of it.
And I would say that thats, probably the areas that there is the most overlap.
We move now to our next question of Evercore.
Hi, guys. Thanks, so much for the question and best wishes, Mike and excited.
Thank you in your new role Jason.
Thanks for your question Justin.
You talked about I think on the last call that you had gotten instead of 50% of Skus sooner that are higher.
<unk> been able to pass through higher cost. There I was wondering if you could update that because I know you said in your slides obviously you had.
Had offset about 50% of that question patch exiting 'twenty three and I know there are there are a variety of things in there. So I was just wondering if you could update us on that.
Yes, so that referenced to 50% of Skus was reflective of the.
The expected July one.
This increases so that is effective July <unk> now since then we have now.
Discussed and are informing everyone of the October 1st increases I didn't provide that exact number but remember that's just the percentage of skus that we're touching I think the more important way to think about it is the percentage of mitigation that we're targeting so let me kind of walk through the flow and how I think you should think about it for this upcoming.
Year. So these are the anchor point I just walked through in the prepared comments in Q4 of 'twenty. Two what we just finished is about a 20% mitigation. So we indicated there was a $125 million gross impact with $25 million of pricing. So in 2020% mitigation, we expect that 20% with the July increase.
<unk> and phasing in over the quarter.
Going to increase that to 25% average for the first quarter of 'twenty. Three now we would expect that to continue to increase each and every quarter over the course of the year as we roll through various other increases I mean, these are the big ways, but there's always when the other increases along the way and our supplier fees that go along with this too.
And then 25% we expect to double by the time, we exited fiscal 'twenty three so we would expect a run rate of about 50% by the time, we exit fiscal 'twenty three and then as I indicated in my comments, we would expect to exit fiscal 'twenty four with 100% mitigation by the time you get to.
The end of 'twenty four we would expect.
That part of this inflation continues to come down so our gross impact in 'twenty four would trend lower and then our pricing would trend higher until until effectively those two numbers offset.
Thank you, we now move to Steven Valiquette of Barclays. Please go ahead.
Yes. Thanks.
Wanted to congratulate Mike on a rewarding 30 plus years of Cardinal and.
Jason here. So you, hoping you'll have 30 plus years of Cardinal as well I'm going to put you in the late seventies.
You can do it and.
And I'm not sure of the math question.
[laughter].
Just the 10% to 14%.
Revenue growth in pharma jumped out was pretty high I guess I was curious for more color on the drivers of growth within that.
For fiscal 'twenty, three obviously, it's all around the double digit topline within sure well.
Yes, yes, Okay got it I think there's a couple a couple of key points first of all it's very consistent with what we've done this past year.
And that was driven by a couple a couple of key drivers and I think you should think about the drivers as being similar because one of those drivers we've referenced a few times with some net new business that we referenced came in beginning in the third quarter of 2002, so that would be a little bit more of a front end loaded type of revenue benefit as we as we see.
Fiscal 'twenty three and then we've also been highlighting the strength in our large customers.
Both PD specialty and we're seeing some really good volume in the brand category and so as you know some of that larger customers and some of the brands volume doesn't always bring with it a tremendous amount of margin, but that's one of the reasons why you see very robust revenue growth and still profit growth well within the range of what we've indicated.
Good for both our short and long term goals, but those are the biggest drivers.
Thank you next we move to Ricky Goldwasser of Morgan Stanley . Please go ahead.
Yeah, Hi, good morning, Mike Oh, My very best wishes.
And Jason Congrats and good luck.
So a couple of follow up questions here.
So just to get a sense.
And Jason. Thank you. Thank you for clarifying the $150 million headwind.
Go ahead.
In this.
First quarter.
Firstly, the $125 million so.
As we think about it seems like.
Your guidance I think you were assuming.
The headwinds are going to get worse in the first quarter.
They'll run rate exit run rate just want to make sure that I'm thinking about this correctly.
And Jane.
We'll slowly improved throughout the year as we think about the mitigation I think your numbers imply about $38 million right.
Mitigation from better pricing in the first quarter, when youre, saying, 50% should.
Should we assume basically a donaldson thats a $75 million I just wanted to know if I can understand the reference of that 50%.
And then an additional question on the <unk>.
The Carnival brand because it seems that that's really important part.
The longer term.
<unk>.
It seems that it's about 29% revenue for the segment that comes from Cardinal Health brand.
So one how do you envision this revenue mix.
By 2020, you sign and gain.
How should we think about since the EBIT makes its 29% of revenue what percentage of the profits.
Hey.
Thank you.
Okay.
Okay, so starting with the pricing.
I think you got.
Fairly close, but let me clarify a few points.
Yes.
You've got the math right for Q1.
That would be pretty pretty close to how you should think about it. So yes. The gross impact is increasing a little bit from the $1 25 in Q4 to the 150 in Q1 and that is.
Just make sure we connect all the dots, yes spot prices, we see are starting to soften in a few areas not all layers of so I'm going to ask the directions, you, but generally speaking there is some some benefit there which.
But it's not impacting our P&L because it's got that that two quarter lag. So when you think about when the international freight specifically it started reducing dramatically about two months ago three months ago. There is a really big reduction so you wouldn't expect that.
And it didn't reduce as it's been.
Consistent reduction over the last several weeks so it's going to take some time for that to flow through so certainly Q1 is not going to see any of that benefit and that's why you see the gross impact is still increasing is because thats from five six months ago as well.
As we think about the exit and Youre trying to get the math on an on.
The pricing is the pricing doubled from that $37 38.
Probably not because what what you're missing I think in your math is that that 150 should come down over the course of the year. We are anticipating it will come down in part because of that international free so that will begin to come down and then pricing will continue to go up but by the time, we exit again.
Hit rate would be would be around that 50%, but.
Lower than the $1 50, and higher than the 37 38 from the first quarter.
As it relates to the revenue mix.
Yes, that's hard to say.
I'm not ready to answer that specifically the one thing I'll highlight is as we indicated $2 $4 billion of revenue for at home is a meaningful number when you. When you look at that so it's a matter of are you are you doing calculations on the full segment were only on a medical product and distribution at $2 $4 billion of revenue it's been growing.
Consistently at 10%, we expect to see continued growing robustly and so that will in a way.
Have a mix effect, so a percentage of revenue and the total segment that will be a bigger piece of medical products distribution. It looks like it would be.
<unk> PS.
So when you do a bit more math before we can respond more clearly on that one.
Thank you, we now move to Eric Percher of Nephron Research. Please go ahead.
So, perhaps a year or two there.
Let me move to our next question Charles <unk> of Cowen. Please go ahead.
Yes, thanks for taking the question and Mike.
Congratulations and best wishes with everything Jason look forward to working continuously.
I wanted just to maybe follow up.
Jason you talked about really using the cash and deploying it in obviously you've outlined.
The amount of share repurchase.
When you think about getting to the $650 million.
Sort of target in medical operating profit.
Can you talk about maybe sort of M&A or other kind of capabilities that you might want to add I know that we spent the last few years actually divesting assets.
But is is part of that growth.
Inorganic as well and then secondly.
<unk>.
Producer price index kind of fell below was below what people expected.
When we think about the gross impact from inflationary pressures.
Are you starting to see some of that ease as well.
Given sort of this July report thanks.
Yes.
So.
The short answer for the medical improvement plan is no M&A is not a cornerstone of that plan.
We will be looking to always.
Especially our growth businesses.
When I when we talk about that second point accelerating our growth businesses, primarily at home solutions that is very much an organic investment story, we are investing in distribution capacity that 10% growth doesn't mean that we have some constraints and we need to invest in that to ensure that that business can continue to grow profitably. So that is not a cornerstone.
In fact, I would say, maybe a little bit of the opposite a lot of what this plan is very focused on the core. It is very focused on we have increased.
Increase our Capex guidance this year from where it's been in the past that was hinted at in signaled last quarter, where we talked about some of these capacity investments that again, we feel are relatively low risk and a good return. So it's more of that type of investment that we're focused on and that we believe is a better balance of risk and return as.
We drive this this plan forward, we won't ever ignore it and it could be a pillar for I'm sorry, it could be an enabler at some point later on but it's not the focus and not necessary for what we're doing as it relates to PPI I think.
Yes, just one maybe kind of talk about a lot of the pieces, but one area that is often referenced is a key driver for a lot of our cost is just oil in general that has come down so PPI in general I don't I don't pay much attention to if you look at the price of oil at least two or three times a day. It does have an impact on a lot of <unk>.
Cost and we talked about polypropylene polyethylene poly styling. All these policies have some input costs that are petroleum based that does impacted but the supply demand dynamics are so lumpy right now that it's hard to see a one for one transition of these input costs and I think at some point that will come through.
But we're really not seeing it that much we are seeing lower diesel costs. So that's going in the right direction.
I would expect at some point will help with the transportation rates, but we're not necessarily seeing those elements where it is most striking is the international freight and that continues to be the one that is clearly running lower but its system. It take time for that to run through our P&L, but I wouldn't call that a inflation driven or input cost driven.
The cost of diesel fuel for our freighters small.
It's a supply and demand dynamics that we're all out of whack early on in the pandemic that appear to be getting a bit more in line and Thats why at this point I believe that that cost will maybe not keep going down with the peso is going down but it does feel like we're seeing more flattened down days for those costs and updates.
Else, we're going to have to get more data to be able to provide additional input.
Thank you, we now move to Kevin Caliendo of UBS.
Hi, Thanks for taking my call and again, congrats to both of you Mike and Jason.
No.
I guess my question is going back to the medical segment.
There is a lot of execution that needs to take place between now and 2025 to hit these these targets.
Are you happy with the team in place how do you how do you.
Enhance your probability of success here internally is it bringing in new people more people or do you feel the team in place can do it.
And the second part of that question is a lot of this is price increases, which you've talked about how are you competitively positioned.
Position that when it comes to price you talked earlier about losing some share in medical.
Because of PPE capacity and availability earlier, how are you now positioned competitively when it comes to pricing and as our customers asking for any offsets anywhere else I know you've talked about some guarantees and the like but I just wanted to understand the competitive positioning as well.
Okay.
Yes, I am happy with the team in place. This this is.
This is our plan.
<unk> been working on this for quite some time, we have shared elements of it conceptually with our investors with you all in the past. What this is doing is putting putting a finer point on this plan and making it more visible to commitments that we're making we are leaning into some of the investments I mentioned before especially on the Capex.
I do think that we need to continue to.
Augment some of the capabilities we have.
Oh, well very key new team members on that team that when you think about a lot the supply team.
Challenges that we're talking about Uber, especially this past year and even last quarter, we have augmented the team significantly with terrific talent industry relevant talent with most importantly products talent talent that knows the supply chain knows manufacturing that was able to make an immediate impact and final.
This plan in allowing us to take it over the line.
I would not be presenting it this way if I didn't have the confidence that we have the people behind it to actually execute it the other thing I'll say about a plan like this.
Absolutely understand the intent of your question because there are several things that need to happen here and one thing I've learned in my two years here is that it's.
It's not what's on the piece of paper.
Picking a sideways, it's the things that are unforeseen like COVID-19, unlike inflation and so with that said Thats why you see after every single one of these actions at least or $60 million plus or 59 buses because our internal plans are definitely more aggressive than us.
And we know that there's going to be some unforeseen unforeseen things that are going to make us.
Exceed some of these items so that we can hit it so yes, a lot of execution, but we have the team and we have the plan in place and Thats, where we have to start.
As it relates to your question on competitiveness.
I think I think I'd like to answer that maybe a little bit more broadly because.
Just talk about inflation.
As long as we have a cost competitive.
So we're seeing manufacturing.
Footprint than inflation that we'd incur absolutely needs to be pushed down to the final customer.
By its nature inflation in most industries in most periods of time don't get absorbed in the supply chain. There is not an especially in distribution and theres not the margin to absorb inflation and so when when the higher cost list the industry's cost.
Over longer periods of time, we would expect that to flow generally speaking, but how you get there is a very choppy type of process. That's why this is taking Q3 years. It's also.
Certainly because the contract in nature, where a lot of this is rolling over into more permanent contracts. In addition to the shorter term actions. So theres nothing about industry dynamics nothing about our competitiveness that indicates that we should be losing margin here, we have to be versatile and move our supply chain if were uncompetitive in a particular area.
But if we're competitive on a cost perspective, there is no reason, we shouldn't go back to historical margins.
Okay.
Thank you we now take our last question today from Eric Percher of Nephron Research. Please go ahead.
Thank you and my coming through this time.
Yes.
Perfect.
So Jason as you take on the new role I think a couple of questions came down to what you will do different and what I heard during the call as.
<unk> had a desire to be more aggressive on returning capital to shareholders in opioid settlement behind you and strong balance sheet, we're going to see that.
Our focus on cost management I wanted to ask if there are other elements that you think are important for us to understand and that one also asked pointedly will you reassess the portfolio and consider whether medical and pharmacy farmers need to be together long term.
Yes, So let me start.
Dart.
Whenever whenever I step into any project, let alone a rule it isn't only about defining where we are at the best opportunity to create value, whereas the opportunities where the challenges and.
What what is clear to me is that until we can get.
Better evidence.
The progress on our medical business and we're going to be challenged.
So that is why I'm. So focused on this medical improvement plan why we provided such clarity on it is that it is absolutely one of my greatest focused especially in the near term.
And when do you think about kind of.
Any type of process to fix anything it has to be first and foremost defining with the challenges and I do want to step back for a moment.
When you think about the challenges in medical I know theres been a lot of adjustments I know theres been a lot of noise, but when you think about the.
The vast majority of the issues, we do stem from one very common theme.
As related to the supply chain.
I can start and highlight all the external influences with that and blame things that have happened to us and it's very very true, but when you think about where we were pre COVID-19. This type of business. This type of industry was extremely stable our volume was predictable, especially in areas like PPE to think about going up 510 X in terms of <unk>.
And overnight and then not having a supply chain that could adjust with that.
It really impacted our ability to execute in that environment and our diverse low cost global footprint went from a strength to a challenge pretty much overnight. So now we've learned from that that's what this plan is talking about it's building and resiliency and capacity into our system. So we can be a lot more flexible we can derisk the mall.
It'll while also growing profitable categories.
This is very much a cornerstone of what was needed to be in a focus but it's not it's not just cost.
Simplification to reduce costs. It's also about driving the right volume driving organic volume driving high margin volume.
Simplifying everything about how we operate so that we can be more nimble and we can be risky.
And then again within within both segments. There is an absolute need to continue to grow our growth businesses, which you heard me say today. It was more of an emphasis on specialty at home of course, we love all of our growth businesses.
But what I'm really indicating here as Ford.
For us to achieve the $650 million, what we need are those two businesses.
To continue to grow the topline and to have a good flow through on that incremental volume that comes with it and with that then we have a high confidence that we'll be able to get the pieces of growth for both segments necessary to hit their longer term objectives. So so that is very much a growth.
Story.
It's about again prioritization and being really really focused on.
Core of both businesses. So that these two growth businesses can can build from there.
In terms of the portfolio.
It's something that I believe and continually evaluating our portfolio for all of our businesses and the company has demonstrated in the past about China and other health and more recently.
We monetize several billion dollars over the last several years through those activities and was responsible with the capital deployment thereafter.
Im not going to attempt to define the appropriate long term course of action is for for this business for the medical business, but under all scenarios, what's really really clear to me that the near term actions need to be very focused on the improvement plan and then then that will set us up for the best actions thereafter.
Thank you I would now like to turn the call back over to Mr. Mike Kaufmann for any additional or closing remarks.
Thank you before Jason ended the call I would like to say that I. Appreciate all of your congratulations and comments and enjoyed working with all of you I look forward to a smooth transition with Jason Jason.
<unk> confidence in his leadership, Jason too yes.
Yeah. Thanks, Mike I want to also thank everybody for taking the time to be on the call today and for all your questions.
In addition to the leadership succession I acknowledged that we threw a lot attitude today, including new disclosures various puts and takes and examples of incremental actions that we're taking we did all of this in an effort to provide additional visibility as we are confident and excited about these opportunities to drive growth.
But there are three key takeaways I want to make sure you have first.
We are committed to improving our results as demonstrated by the introduction of our medical improvement.
Second we continue to be encouraged by the resiliency of our pharma segment, which continues to meet both our short and long term objectives and.
And third that we continue to take actions that are in our shareholders' best interest with that thank you and have a great day.
Thank you Goodbye and gentlemen.
That will conclude today's conference call. Thank you for your participation you may now disconnect.
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