Q1 2023 Cardinal Health Inc Earnings Call
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Good day, and welcome to <unk> first quarter fiscal year 'twenty to 'twenty, three causing mental health earnings conference call today's call is being recorded.
I'll now hand, the call over to Kevin Moran, Vice President of Investor Relations. Please go ahead Sir.
Good morning, and welcome today, we will discuss Cardinal Health's first quarter fiscal 2023 result, along with updates to our full year outlook.
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 Jason Hollar, Chief Executive Officer, and Tricia English interim Chief Financial Officer during.
During the call we will be making forward looking statements. The 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 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 the discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out of 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 please ask that you try and limit yourself to one question. So that we can try and give everyone in the queue and opportunity.
With that I'll now turn the call over to Jason.
Thanks, Kevin and good morning, everyone.
Now that I've had a couple of months to settle into the CEO role I'm, feeling even more energized and excited about the opportunities in front of us.
My recent conversations with customers suppliers employees and shareholders of reinforced my perception that our company's role in healthcare and our mission to improve the lives of people every day remain as critical as ever.
Our customers and their patients rely on us to deliver the right products to the right places at the right time.
And yet there is also a collect the recognition of the need for simplification focus execution and clarification of our Companys strategic direction.
Our goal today, along with reviewing our recent results is to summarize the key near term priorities and progress to date on our plans, which I will discuss later in my remarks, However, before I turn it over to Trish, Let me share some initial perspective on the first quarter.
Overall, our performance in the first quarter demonstrated continued stable fundamentals in our largest business and tangible progress in medical.
In pharma, we tracked slightly ahead of our expectations as we delivered growth while managing industry wide inflationary headwinds. We are encouraged by the ongoing stability in prescription volumes and strong performance of our generics program.
And medical the quarters results were also a little better than expectations, we announced in September while I'm pleased with our team's efforts in the quarter to achieve these results. There is more work to be done to drive better more predictable financial performance in line with the underlying potential of this business. We are highly focused on executing our medical and from our planned initiatives, which I will.
Cover in greater detail later in my remarks.
Across the company our team is operating with urgency to drive our business forward and committed to creating value for our shareholders.
Now I'll turn it over to <unk> to dive deeper into our results and outlook.
Thanks, Jason and good morning, everyone. It's great to speak with you all today.
I'll share details on three areas.
Validated first quarter result.
Key drivers underlying our segment performance and our updated fiscal 'twenty three outlet before turning it back to Jason for final remarks.
First quarter total company revenue increased 13% driven by pharma segment sales growth.
Gross margin decreased 2% to $1 6 billion due to the net inflationary impact in medical and one month impact of the cordis divestiture, partially offset by our final generics program performance.
Consolidated SG&A increased 7%, reflecting inflationary supply chain costs and other operating expenses, such as higher costs to support pharma sales growth.
This increase was partially offset by the cordis divestiture and benefits from enterprise wide cost savings initiatives.
Operating earnings decreased 20% to $423 million, reflecting the decline in medical segment profit, primarily due to net inflationary impact.
Partially offset by growth in pharma segment profit.
Now moving below the line interest and other decreased 25% to $27 million.
Primarily driven by increased interest income from cash and equivalent.
As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates.
Our first quarter effective tax rate finished at 16, 9% approximately seven percentage points lower than prior year due to certain favorable discrete items.
Diluted weighted average shares for 273 million, 6% lower than a year ago due to share repurchases.
We are focused on balanced disciplined and shareholder friendly capital deployment.
And in mid September we initiated a $1 billion accelerated share repurchase program that we expect to complete in the second quarter.
The net result for the quarter with earnings per share of $1 20.
Now turning to the biopsy.
We generated first quarter operating cash flow of approximately $25 million.
This includes total litigation payments of approximately $390 million.
Merrily, consisting of the second payment under the national opioid settlement.
Adjusted free cash flow in our first quarter was $342 million.
We ended the period with a cash position of $3 $5 billion with no outstanding borrowings on our credit facility.
Now turning to the segments, beginning with pharma on slide five.
First quarter revenue increased 15% to $46 billion, driven by branded pharmaceutical sales growth from existing and net new pharmaceutical distribution and specialty customers.
Yes.
Pharma segment profit increased 6% to $431 million driven by generic program performance and a higher contribution from brand and specialty products, partially offset by inflationary supply chain costs.
During the quarter, we were pleased to see strong execution and continued consistent market dynamics, and our generics program, including Red Oak.
As we previously noted inflation continues to impact supply chain costs across the industry, particularly with them transportation and labor.
We saw an approximate $20 million year over year headwind from these areas, which was consistent with our expectations.
Headwind was effectively offset by year over year tailwind from our completed ERP technology enhancements and lower opioid related legal costs.
Okay, turning to medical on slide six.
First quarter revenue decreased 9% to $3 $8 billion, driven by lower product and distribution sales, primarily due to PPE pricing and volume and to a lesser extent the cordis divestiture.
Continued strong growth in our at home solutions business offset some of this revenue decline.
Medical segment loss of $8 million was due to net inflationary impact in product and distribution as well as a lower contribution from PPE, both of which I will discuss in more detail.
Importantly, these results reflect approximately $20 million in total inventory charges related to our previously announced simplification actions.
This includes the sale of our gloves portfolio that is primarily utilized in non healthcare industries.
As a reminder, this non core product line has been a source of volatility in distraction in recent years.
These actions despite the onetime costs are an example of our ongoing commitment to strengthening the medical products and distribution business through simplification.
During the quarter the growth impact from incremental inflation and our products and distribution business was in line with our expectations of approximately $150 million and we successfully achieved our inflation mitigation target of 25%.
Our mitigation efforts have continued to accelerate most notably with the implementation of the second wave of product pricing actions in July .
Nathan will elaborate on our plans for further mitigation shortly.
Now a quick update on the overall utilization environment. We've previously noted some overall volume softness in our products and distribution business, including a lower demand for PPE, which we believe primarily reflects customers higher inventory levels.
In the first quarter, we saw generally consistent overall products and distribution volumes sequentially, including with Cte.
While we do anticipate gradual improvement in volumes relative to these recent lows, we continue to expect choppiness in demand levels going forward.
Now for our fiscal 'twenty three outlook beginning on slide eight.
We are reiterating our EPS guidance of $5 <unk> to $5 40.
This includes our updated medical segment outlook, which has been adjusted for the impact of simplification actions in the first quarter and a few below the line improvement.
Based on our first quarter performance, we are confident in lowering the top end of the ranges for interest and other our effective tax rate and diluted weighted average shares for the fiscal year.
We now expect <unk> in the range of $140 million to $160 million.
And ECR between 23 and 24%.
And diluted shares between $262 million to $264 million.
Our expectations for the remaining items listed on slide eight remain unchanged.
Yes.
We are also reiterating our fiscal 'twenty three outlets for the pharma segment on slide nine.
We continue to expect revenue growth in the range of 10% to 14% and segment profit growth in the range of 2% to 5%.
Before transitioning to medical to key call outs on the pharma cadence.
First with stronger start to the year, we now expect more balanced year over year profit growth between the first and second half of fiscal 'twenty three.
And specifically for the second quarter, we expect segment profit dollars to be similar to the first quarter.
Now turning to medical we expect segment profit ranging from flat to a decline of 20%, which as I indicated reflects the impact of the simplification actions in the first quarter.
With respect to inflation and our mitigation actions. There is no change to our expectation of a net impact of approximately $300 million in fiscal 'twenty, three or a minimal year over year impact.
The macroeconomic environment remains dynamic and <unk> seen some decreases in spot rates of certain cost drivers such as international freight other areas such as commodity costs remain significantly elevated.
As a reminder, these product costs are capitalized into inventory and in the current environment of elongated supply chain is reflected in our P&L result on an approximate two quarter delay.
While we now expect gross inflation in the second quarter to be similar to what was seen in Q1, we are implementing additional actions and working proactively to mitigate these pressures.
It is important to note that we continue to expect that as we exit the year the run rate of our mitigation actions will offset at least 50% of the growth impact from inflation.
On Medicals quarterly cadence in Q2, we expect similar segment profit dollars since the first quarter, excluding the impact of the first quarter simplification actions.
As we have noted before we continue to expect the substantial majority of segment profit to come in the second half of fiscal 'twenty, three and particularly in the fourth quarter.
This sequencing primarily reflects our assumptions around inflation inflation mitigation and PPE.
With that I'll now turn it over to Jim.
Thanks, Chris.
I conclude at our August earnings call with three key takeaways I'd like to provide updates on.
Number one improving the underlying performance of the medical segment through our medical improvement plan initiatives.
The key driver to achieving our segment profit target of at least $650 million by fiscal 'twenty five as our mitigation actions for inflation and global supply chain constraints. So elevated inflation has persisted in the macro environment for longer than expected. We are on track to exit fiscal 'twenty three offsetting at least 50% of the gross impact on our business.
As I previously mentioned, 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.
Our third wave of price increases went into effect on October one and we are planning additional actions for the third quarter.
To date, we have adjusted product categories, representing nearly 90% of U S. Cardinal health brand sales excluding PPE. Additionally, we successfully adjusted language and product contracts as we've renewed to allow for greater pricing flexibility to respond to macroeconomic dynamics.
We've also executed distribution fee increases to offset higher transportation labor and fuel costs and continue to explore other opportunities for further offsets with urgency.
Outside of our mitigation actions, we expect the largest contributor to our growth to be our ability to optimize and grow our $4 6 billion.
<unk> will help brand portfolio.
This will be achieved through new product innovation and increased product availability as a result of targeted investments.
Additionally, I'm confident in our ability to optimize our cost structure and our sourcing and manufacturing footprints as we focus on driving simplification across the medical organization. The team is energized by the goals we have laid out in the medical improvement plan and has already hit the ground running on execution.
Moving to item number two for the pharma business continuing to build upon the growth and the resiliency that we've seen by executing the core and accelerating our growth areas primarily specialty.
Similarly, continuing on talent and leadership.
Cited by the appointment of Debbie Weizmann CEO of the pharma segment.
<unk> has a deep understanding of our industry landscape long standing and strong relationships with our customers and a proven track record as a commercial and operations leader across our 17 years at Cardinal Health.
<unk> appointment with part of our recently announced segment restructuring designed to reduce complexity drive productivity and efficiency gains and simplify how our customers and our manufacturing partners to do business with us.
These changes are intended to maximize the strength of our pharmaceutical distribution and specialty businesses, bringing together similar services under one team, enabling us to respond faster and more effectively to changes in the healthcare landscape, while keeping the customer at the center of everything we do.
Simply it is allowing us to reposition with both the right talent and organizational design.
In specialty we have a robust service offering both downstream with providers and upstream with Biopharma manufacturers and we continue to build upon our capabilities.
In the area of oncology, we've expanded our best in class offering for value based care. The Vista, TFS, which will continue to serve as a vital resource for oncologist transitioning to the new CMS enhancing oncology model.
The rheumatology.
Closed on our recent tuck in acquisition of the <unk> GPO and our investment in our managed services organization has expanded our capabilities in this space and contributed to new customer growth in just 30 days. This cross functional leadership team worked diligently to onboard over 250 health care providers onto our distribution and logistics platforms.
Biosimilars, we remain well positioned to distribute and provide the surrounding services as they come to market, particularly in the new therapeutic areas and sites of care.
We continue to expect increased contributions from Biosimilars in fiscal 'twenty three and beyond.
Upstream in specialty our third party logistics business continues its strong growth with more than double the launches in the first quarter compared to a year ago as well as double digit new contract wins and our continued investment towards the digital transformation of <unk> access and patient support business has enabled us to realize benefits.
From new business wins and expansion of existing clients.
And finally number three our relentless focus on shareholder value creation.
This includes maximizing sustainable profitable growth and cash flow generation as well as a return of capital to shareholders.
We continue to expect strong and resilient cash flow generation supporting our capital allocation priorities.
<unk> organic growth deploying capex to the highest value projects.
<unk> made tremendous progress in reducing our long term debt, which has created additional flexibility for shareholder return.
We were pleased to initiate the $1 billion accelerated share repurchase program in the first quarter and continue to expect one $5 billion to $2 billion in total share repurchases in fiscal 'twenty. Three in addition to our ongoing dividend of over $500 million annually.
Beyond these actions, we also announced enhancements to our governance structure, including four new independent Board members and a new business Review Committee tasked with supporting a comprehensive review of our company's strategy portfolio capital allocation framework and operations are.
Our business Review Committee, which I chair has already held multiple meetings and is working through the detailed review covering every business we.
We expect to share conclusions publicly on an investor day in the first half of calendar 2023.
In closing I recognize there is still a lot to accomplish yet I remain excited about these opportunities to drive growth.
I believe that our resilient business models robust operating cash flow generation favorable capital structure capital allocation flexibility differentiate us in this time of macroeconomic uncertainty and I am confident in our future.
Before we open up to Q&A I do want to spend a moment thinking our dedicated team around the globe.
I've had a number of opportunities to connect with them across the last couple of months and is truly a privilege to lead every day.
They are driving the execution of the initiatives that we've discussed today to deliver for our shareholders for our customers and for their patients and we are very much looking forward to the opportunities that remain ahead.
With that we will take your questions.
Thank you, ladies and gentlemen, if you would like to ask a question. Please.
Todd one on your telephone keypad.
We will take the first question from Elizabeth Anderson with Evercore.
Hi, guys. Thanks, so much for the question.
Just wondering if you could talk a little bit about.
Embedded expectations.
Back half of the year.
The first quarter and you've had some nice outperformance.
Hitting the milestones.
Milestones on key initiatives, but in terms of like how do we think about that outperformance versus sort of how you still see the progression in terms of the quarterly ramp in the back half more color on that would be very helpful. Thank you.
Sure and as your question Elizabeth specific to any particular business or you're just talking generally.
Specifically in terms of medical but I would also would be curious on the pharma side as well.
Yes.
Okay.
For medical specifically, it's the biggest driver by far will be the mitigation actions to address inflation.
As we talked our first pricing actions went in place March 1st over fiscal 'twenty. Two and then we had another wave in July of fiscal in the very beginning of fiscal 'twenty three and then another price adjustment that occurred October one.
We do expect further price adjustments.
In the third quarter of the fiscal year and then at the same time, we would expect especially in the fourth quarter of fiscal 'twenty three to start to see some of the lower cost, especially with the international freight piece finally, starting to hit our P&L as Trish highlighted in her comments.
My chain remains very elongated and so we would anticipate it's going to take.
Again at least a couple of quarters before lower costs actually come through the P&L.
But as we indicated in our comments the international freight is really the only area of any significance that we're seeing.
Cost reductions at this point, we do see some of the other commodities coming down but not to the same extent.
The other key components from a first half second half perspective for medical is just the normalization of PPE.
We talked about the higher cost PPE being on our balance sheet when volumes fell quite a bit at the latter part of fiscal 'twenty two that meant that higher cost stayed on our balance sheet longer and while we're pleased to see that feels like we've come off the lows here from the fourth quarter in terms of demand it remains so.
Something that will take a few quarters to work through and then beyond that really for all of our businesses.
Normal cost reduction and other growth initiatives over the course of the year, just just buildup within pharma the specific item to remember from a first half second half specifically in the third quarter is always just the recognition of the brand inflation, while that continues to be a small portion of our overall brand <unk>.
<unk>.
Less than 5% it does remain highly concentrated in the third quarter.
That's the biggest driver for that particular business.
Next question please.
We will now take the next question from Lisa Gill with JP Morgan.
Thanks, very much Jason.
I wanted to spend a couple of minutes on the pharmaceutical distribution side of your business. So a.
A few things one one of the things that really stuck out to me is you talked about strong performance in your generic program and having enhancing programs going forward I kind of think of.
Where we need to see in generics. So maybe can you talk about what youre seeing in the market and any incremental opportunities and then secondly, when I look at the revenue on.
Pharmaceutical distribution.
Coming in well above where the industry is can you maybe just talk about.
Where you see that over time and again, even your guidance is above where interest rates are it's like what's the key drivers there.
Let me start with the revenue point so.
Revenue for.
This particular quarter, we highlighted was driven by brand products.
With our larger customers. So when you think about the flow through of that typically brings with it a lower margin profile, but brand has been very strong in our larger customers have been an overweight of that so kind of winning with the winners we are bigger customers have been growing nicely and that has been driving our revenue quite a bit higher.
But that tends to be the lower margin product and so that's why you don't see quite the same flow through in terms of the margin dollars that's fairly consistent to what we've seen for quite some time, we also highlighted.
For the third quarter of fiscal 'twenty to.
Some new business wins that did benefit our revenue as well and with that.
It means that the first half of fiscal 'twenty, three we would anticipate our revenue having a little bit of a tailwind relative to the full year, because we will then anniversary or lap that that new business win come the third quarter of fiscal 'twenty three.
And so your first question.
Oh Im sorry, whats the question on generic yes. So it continues to be very consistent dynamics in the marketplace.
Some of the new business wins have benefited that as well.
We continue to have a very strong performance within red Oak sourcing.
The underlying utilization continues to be much more consistent and stable and predictable than what we've seen ever since the beginning of the pandemic. So it feels a little bit more as business as usual and must fluctuations and then underlying that driving.
<unk> through sourcing and driving the new business through through our system.
So those are the primary drivers.
Next question please.
The next question comes from Kevin Caliendo with UBS.
Great. Thanks for taking my questions.
I wanted to talk a little bit about the contracting I think the last time Cardinal went through a lot of contracting through Covid. It ended up kind of working against you as things reverse. So I just wanted to understand more about how you are amending these contracts.
Our customers.
Comfortable with this is there any pushback there seemingly his efforts on amongst almost all hospital companies to reduce their supply cost right now or reduce costs in general. So just wondering how how it works does it is it impacting you immediately or is this more of a cushion for longer term.
Anything there would be helpful. And then one other follow up.
I read that there was a real estate transaction done at NCI.
That was part of the business review potential outcomes was to maybe monetize some real estate can you talk about the opportunities ties to be able to do that in terms of generating.
Capital for the business.
Sure.
On the contracting first of all Kevin I'm presuming, you're talking about the medical inflationary price impacts yes, okay. So.
The wave the pricing that we've defined those are temporary in nature to get us to the contracting that youre talking about so as the contracts renew those temporary price increases are then flowed through to the permanent structure with then having adjustments within there. So that we don't have the same issue again in the few.
<unk> that we've had the experience here. So as you can imagine those contracts rollover over the course of multiple years, we've highlighted three to four years and.
We're still in the earlier phases of innings with US. However, I will tell you it's going consistent with my expectations. These are never easy conversations but to your point and how you can frame. The question inflation is everywhere and while some of this is more temporary in nature a lot of it is going to be long lasting and permanent when you.
Think about especially labor right those costs, we're never going to come down in a lot of the transportation cost feel like it's going to be a very elevated levels for quite some time. So there are some components that will be more variable, but ultimately the one thing thats clear to us is that there will be a permanent step up increase in that level of cost and depending upon exactly how.
How the fed moves here now macroeconomic factors roll into this we need to be positioned so that we have a structure that allows us to claw. This back by the time, we exit fiscal 'twenty four so again not easy, but it's a process that our customers understand that we are in the middle of the supply chain and that we have to have the assist.
To be able to offset these costs and you can just look at our public financial statements to understand that we're not making anything. In addition on this we are still funding this gap and Thats why we have this urgency on this issue and was our highest priority is as a business.
As it relates to the real estate transaction, we've had some small transactions there is nothing nothing material at all to call out.
There is always.
<unk>, we do own some some real estate. It is a component of one of those factors that we look at at this point, it's too early to talk about any type of opportunity with that.
Please.
The next question comes from Adam <unk> with Morgan Stanley .
Great. Thanks.
Can you speak a little bit to the long term strategy and what's feasible in terms of your opportunity to improve mix and increase your exposure to specialty over time and as we think about kind of specialty can you also speak to the biosimilar opportunity and your near term positioning does participate with like Humira biosimilars as well.
Thanks.
Yeah, well first and foremost.
Absolutely appreciate and understand the question. This is a key reason for our recent reorganization within the pharma segment.
<unk> structured the team to have specialty and PV altogether, reducing the complexity driving not just productivity, but more importantly, simplifying how we go to market with both our customers as well as the manufacturing partners. So this is all to recognize the importance of driving that favorable mix the market is going to.
There'll be a rising tide, but we we.
We definitely want to do as much as possible to participate as much of that growth.
There is.
We did just recently acquired banker that gives us additional exposure here, we have invested organically in all the different businesses and tools that I referenced in my script. So were investing both inorganically as well as organically and have now a structure and a leadership team.
Intensely focused on this so we feel like we're really well positioned to build to take advantage into the future.
Oh on Biosimilars.
That is absolutely a component of this as well.
We've invested into our capabilities and our team.
We participate in that today. It is a nice driver for our business not large enough that we have called it out specifically, but nonetheless, it is an area that as.
We continue to see evolution of the sites of care in the therapeutic areas.
We would anticipate that to be further opportunities for us and it fits nicely into our capabilities.
We get a lot of questions, specifically about humira and all of that is going to benefit us.
There's a lot to be.
Still played out here in terms of.
All participants.
Thrive.
Current processes for this exact specifically the payers and Pbms, how they go to market and work with the market to implement these evolutions. So a lot to be learned there, but the point is we are positioned very well to be able to take advantage of that but there is some level of uncertainty, but we do have confidence there will be a tailwind for us going.
Forward as it has been in the last few years as well.
Next question please.
Our next question comes from Michael Cherny from Bank of America.
Good morning, I have one just technical question and then a bit more on the numbers. So just first on the ASR. You said you launched it in mid September is there any way to quantify how much of the ASR you completed in <unk> relative to the timing of the.
<unk> finished and then on the guidance and I hear you on the especially the trajectory of medical per Elizabeth's question earlier, but if you think about the moving pieces and what your updated today. It seems like Theres more tailwind when it comes to tax interest expense and share count than there are headwinds on the medical guide down any thought about why reiterating the guy.
Versus not maybe bringing up the low end of the minimum.
Sure as it relates to the ASR.
Technical question, Yes about 80% is what we would expect for the immediate benefit Didnt like you appropriately referenced it was implemented in mid September so a relatively small impact to the current quarter.
As it relates to the guidance.
<unk> changes.
It's the first quarter. It's certainly early it's we're also talking about.
It's still a fairly uncertain macroeconomic environment.
We're also talking about a lot of news out there that we're always looking at in addition to our own data in terms of utilization.
As our comments highlighted.
We did not see a lot of surprises as it relates to utilization in either of our businesses either of our segments. This particular quarter.
And that was certainly welcomed given with the last couple of years have looked like but nonetheless, we continue to see.
More data points on that through a lot of external references and thats something that we continue to look at.
Mathematically I don't think there's that much difference in terms of the.
The offsets that we took both the takedown with medical driven in part by the simplification efforts, but then also theres other those other items, where we took the top end down.
Bill a reasonable range considering how early it is in the in the.
The year as well as the drivers that are all around us.
Your question please.
Our next question comes from Eric Percher with Nephron research.
Thank you I would like to return to medical and relative to the offsets that you are attempting to achieve in 'twenty three it sounds like we have three factors the pricing efforts.
Letting some of the supply chain and cost.
Flow through of normalized and then access to private label could you speak to.
What portion of the offset for fiscal year 'twenty three falls into those buckets. If you think those are the right buckets and then as you move to 24, how does that change in terms of how much is driven by each of those factors.
So just make sure I understand the question. So we have our gross inflationary impacts and then we have the mitigation actions that get us to the net you're specifically asking about the mitigation actions and how to think about what's driving those both for 'twenty three 'twenty four.
Exactly what are the most material factors in making actions and how do they change 24 versus <unk> 23.
Yes, but by far its pricing.
That is there is opportunity and of course, what we want to do is work with our customers as much as possible to reduce what is necessary to to.
Flow through in terms of pricing, but the amount that can be moved on those those items as well as others is relatively small so pricing will be the predominant.
Element there the other component is just the costs coming down naturally as well. So we have two things happening between now and the end of the fiscal year.
<unk> will continue to go up.
Period to period quarter to quarter, and our costs will at some point here, Pete which were pretty close to that we believe we indicated similar gross costs in Q1 is what we expect in Q2.
And especially into Q4 with the international free piece. That's the one area that we have some confidence is going to come down and so I know your question specifically on the mitigation items, but the growth will come down as expected to come down right now specifically because of the.
<unk> freight the other components to inflation and the other commodities, especially we're seeing them come down a little bit in some areas, but not very significantly and certainly at a pace less than what we had thought and then there's a handful of them are actually going up but overall I would expect to exit the year with a little bit lower cost run rate.
And what we have coming into the year.
Next question.
Yes.
Our next question comes from George Hill with Deutsche Bank.
Yes, good morning, guys and thanks for taking the question, Jason I'm going to come back to the Med surge segment again I was just wondering if there's kind of a way to quantify like what part of the book has the new contracting terms in place and I don't know if you can talk about kind of actions taken by peers, and then kind of roll that into kind of timing of implementation like you kind of talked about the two quarter lag.
Between.
Not really the lag, but like kind of a tightening of the supply chain in that segment of the book. So just trying to think about how long. It takes the entire book to get re contracted to the new terms and kind of what is what does the end date by which we should expect the full med surgical to kind of be operating under the new model.
Well, it's going to take at least a few more years to get to.
The essence of where youre going with that to get the full the full book there.
But it will be relatively.
Sure.
Consistent between now and then so every remember.
Not necessarily.
Massive cliff event contracts.
We've got a couple of dozen different product lines and they have different dates with different GPO and different customers. So it's a fairly consistent stair stepping towards that it's not like one big clip event. So you can think about it is every day, we have to work on this and every day.
Incredibly important that we rollover the temporary prices into permanent prices given the permanent nature of so much of this cost.
So we are considering different ways to give you a little bit more insight to that.
Im not going to go into that further yet other than to say we are having success as expected with this we feel it's the right thing.
And.
We feel very good about this plan and there is still a lot of work we need to focus on but it's the right plan is the right thing to do and we have not been surprised.
With this at this stage of the year and is at this stage of the plan.
Next question please.
Our next question comes from a J rice with credit Suisse.
Hi, everybody.
I wanted to just ask obviously, you've got a lot of things going on and seemingly having some.
SaaS with Europe .
Obligation and mitigation strategies now you have this business review committee or the garden.
I know, it's still early and getting up and running and going are the guardrails as to the things you are already doing to improve performance.
Versus what the business review Committee is doing pretty clear and did I hear you right in the prepared remarks that you think a review committee will have an update at the.
Calendar 'twenty, three Investor day, I assume that would be a preliminary.
If theres anybody to share them.
Sure. So yes, there's a charter for the business Review Committee.
Very consistent to what <unk>.
I provided in my comments of course, there is a portfolio element there is a strategy and operations element and importantly, there's a capital allocation framework.
As we communicated before we had.
These types of.
Evaluations and communication with our board prior.
We now have new board members of course, we have the business review committee as well so it's a bit more of a formalized process. We're taking full advantage of the insights and experience that all of those board members are bringing to the discussion and the business Review Committee.
As any other board committee, where we were.
Work and provide insights and device to the broad board and make it a bit more of a formal process, but the guardrails are as.
As I just described there and there is very clear what.
What we work on.
As I chair it.
The agenda I have of course also listened to the committee as to what they believe are the key.
Areas of opportunity and it's very collaborative and constructive.
So from my perspective, we're getting good insight I think that.
All of our board members, but the committee specifically is doing the best we tend to think through the lens of the investor.
And make sure that we're driving the business for evaluating the portfolio and of course, we're in a fairly uncertain time, both operationally and from a macroeconomic perspective. So we have that that filter as well that comes through our work that we evaluate but nonetheless, we as I commented already.
We are meeting frequently we are meeting with urgency and we're very focused on this as.
As it relates to the readout, yes, you heard that right.
Calendar 'twenty three.
By the first half of calendar 'twenty, three we will have that Investor day and we'll.
I'll have an update as to what is potential.
Potential to update at that point in time, and but I see this as a journey and not necessarily just just a sprint, but we are we are working with urgency to have as much completed by them as possible.
Next question please.
Our next question comes from Charles <unk> with Cowen.
Yes, thanks for taking the questions.
Just two really here just to follow up on the medical guide and I might have missed it but obviously.
Obviously, you've changed or has there been any change in your assumptions in the macro environment between July and now that is it really macro driven is how in fact, because it seems like you have control over the pricing part of things.
Is it just waiting for.
So this is the environment itself and some of the natural inflation thats floating around here to come in line too.
To get to your targets and then secondly, there's been news a lot about shortages and amoxicillin just any of your thoughts here on truck shortages elsewhere, possibly in the supply chain and any thoughts on.
The outlook there thanks.
Sure.
Yes in terms of medical it's the underlying performance that we are anticipating for the businesses is really unchanged.
The key item that we highlighted is the simplification cost that has been wrapped.
Wrapped into this but the underlying <unk>.
<unk> volume utilization.
Other performance elements are relatively unchanged, there's always puts and takes.
Not a lot of new news, therefore, it really either business.
In both businesses, we had a few.
Nonrecurring.
Items, a little bit of timing in medical but overall not not too many surprises there as it relates to any type of product shortages.
Theres always some of that in any of our business. There's a few items that are being chased within the.
The pharma segment, nothing that I would call very.
Three unusual and certainly nothing at this stage that I would anticipate being a significant impact.
Really any noticeable impact for the segment for for the current quarter or the fiscal year.
That's why we believe that.
Obviously, just the sourcing in general is an incredibly important function specifically to generics of Red Oak sourcing.
<unk> is a huge.
<unk>.
Driver for not just cost control, but for delivery and certainly there is.
<unk> been some <unk>.
Demand for some of those products like <unk> that you just referenced or respiratory challenges that we're seeing some.
Drive for in the marketplace, but again, it's something that we don't think will be either lasting or any type of impact for us.
Next question please.
And our last question comes from Steven Valiquette with Barclays.
Great. Thanks, good morning so.
You guys touched on this topic, a little bit but this quarter. We saw your largest publicly traded hospital distribution and self manufacturing med surge competitor really struggled with the delayed product reorders.
By their acute care hospital customers, who chose to deplete the.
Stockpiled Island. So I know you have a different set of skus versus that competitor for the self manufactured component, but can you just confirm that you generally are able to.
Successfully track the level of inventory sitting within your health system customers in the medical segment and the Carnival hopefully now.
Similar.
Inventory destocking trend within the.
Yes.
Health system customer base that could be a risk factor for the <unk>.
Recovery is the fiscal year progresses.
Thanks.
Yes.
Those types of comments.
Are very consistent with what we've been saying the last last couple of quarters. So we have seen destocking of our customers inventory, we are very close with them and have that dialogue all the time and that is what we we have been seeing we referenced in our comments that are.
Volume, specifically to PPE, but even more broadly was fairly consistent sequentially from Q4 of last year to Q1 of this year.
So we're not seeing significant.
<unk> in the pool, but we did call this out last quarter because it was a fairly significant reduction we saw sequentially at the latter end of fiscal 'twenty. Two so the concept we absolutely have.
<unk> referenced ourselves and have seen.
But we have seen pretty consistent demand patterns here this last quarter and while it's still very early in Q2, I can say that we haven't seen anything significantly different so far at the beginning of this quarter as well.
But there's really nothing else to add at this point.
So I think Thats. The final final question. So I'll just end with just a couple of closing comments here I'll end, where I began.
My comments this morning that I am pleased with the progress that we're making in our core business fundamentals, we are driving lasting improvements in both segments, while maintaining a relentless focus on shareholder value creation. So with that thank you and have a great day.
Thank you for joining today's call you may now disconnect.
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