Q2 2023 Cardinal Health Inc Earnings Call
[music].
<unk>.
[music].
Hello, and welcome to the second quarter FY 2020 Free College Gardner House, earning conference call. Please note. This call is being recorded and for the duration of the call your lines will be on listen only.
Or whether you will have your pocket you did to ask questions at the end of the cold. This can be down by pressing star one on your telephone keypad I Wouldnt know I note, although to your host Mr. Kevin Moran VP of Investor Relations to begin today's conference. Thank you.
Good morning, and welcome it.
Today, we will discuss Cardinal health second quarter fiscal 2023 results 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 Cardinal health.
Joining me today are Jason Hollar, our Chief Executive Officer, Tricia English, our interim Chief Financial Officer, and Aaron All who will take over as our Chief Financial Officer, Beginning February 10.
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 description of these risks and uncertainties.
Please note that during our discussion today, our comments will be on a non-GAAP basis, unless specifically called out of that 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 limit yourself to one question. So that we can try and get everyone in the queue and opportunity.
With that I will turn the call over to Jacob.
Thanks, Kevin and good morning, everyone before we dive in I'd like to take a moment to welcome Erin.
As our incoming Chief financial Officer, we're excited to have Aaron onboard he brings a breadth of financial and operational experience to our organization, including a background in distribution and he's already hit the ground running in his first few weeks I am confident you will be a valuable addition, as the leader of our finance organization contributor to our Executive Committee and a seamless fit with our company.
Sure.
Thank you Jason Good morning, I'm excited to be part of the team here at Cardinal, particularly it's such an important time not only for our company, but for the entire healthcare industry.
<unk> made a cardinal health was the broad portfolio.
Overall culture and a leadership team that is motivated to win.
While still early days for me I can already tell that while there is work to do Jason and the team have a plan and there are significant opportunities for value creation in front of us.
Look forward to interacting with all of you further in the weeks and months to come as I continue to ramp up.
Thanks, Erin now lets begin with some high level perspectives on the second quarter overall, our Q2 results demonstrated continued momentum against our plans.
In pharma, we've seen ongoing stability in the macro trends and underlying fundamentals of the business.
The quarter, we saw particular strength in overall pharmaceutical demand and strong performance from our generics program.
We've seen increasing contributions from specialty products.
Which is a key strategic area of focus.
And we continue to effectively manage through the inflationary headwinds affecting industry supply chains.
In short Q2 was another data point of pharma as a resilient and growing business.
In medical we remain highly focused on our medical improvement plan initiatives overall, despite some puts and takes medical Q2 results were consistent with our prior commentary and we were pleased to see a return to profitability in the quarter. We continued to take actions to drive more predictable financial performance in line with this business as underlying potential.
At an enterprise level, we continue to see benefits below the operating line from our capital deployment actions and favorable capital structure.
With the first half of fiscal 'twenty three behind US we are pleased to raise our full year EPS guidance and outlook for the pharmaceutical segment.
Our team remains focused on executing our three key strategic priorities of executing on the medical incremental land building on the growth and resiliency of the pharmaceutical segment and maintaining a relentless focus on maximizing shareholder value I will update you on these priorities in a few moments.
Before I turn it over to Trish to review our results from the quarter and revise outlook I'd like to thank her for stepping in as interim CFO over the past six months.
Richard has brought leadership and continuity to the organization and will be instrumental in ensuring a seamless transition with Erin thanks Trish.
Thank you, Jason and good morning, everyone.
Begin today with our consolidated second quarter results.
Total company revenue increased 13% and gross margin increased 3%, both driven by the pharma segment.
Consolidated SG&A increased 4%, primarily reflecting inflationary supply chain costs.
And updates from our enterprise wide cost savings initiatives offset some of this increase.
Operating earnings of 467 million were in line with the second quarter of last year. This reflects growth in pharma segment.
Offset by the decline in medical segment profit, which was anticipated.
Moving below the line interest and other decreased nearly 30% to $18 million driven primarily by increased interest income from cash and equivalents.
As a reminder, that is largely fixed rate, resulting in a net benefit from rising interest rates.
Our second quarter effective tax rate finished at 23% approximately $3 five percentage points higher than prior year, primarily due to net positive discrete items in the prior year period.
Diluted weighted average shares were 263 million, 6% lower than a year ago due to share repurchases.
And the second quarter, we completed our $1 billion accelerated share repurchase program and initiated a new $250 million program, resulting in a total of $1 billion to $5 billion deployed year to date.
We continue to expect $1 5 billion to $2 billion in share repurchases in fiscal 'twenty, three which reflects our continued focus on maximizing shareholder value.
The net result for the quarter was earnings per share growth of 4% to $1 32.
Now turning to the balance sheet.
We generated second quarter, adjusted free cash flow of $439 million, bringing year to date adjusted free cash flow to $781 million.
We ended the period with a cash position of $3 $7 billion with no outstanding borrowings on our credit facility.
As a reminder, we continue to expect to pay down the $550 million.
March 2023 notes at maturity with cash on hand.
Now I will cover our segment performance beginning with <unk> on slide five.
Second quarter revenue increased 15% to <unk> $48 billion, driven by brand and specialty pharmaceutical sales growth from existing and net new customers.
Pharma segment profit increased 9% to $464 million.
This was driven by a higher contribution from brand and specialty products and generic program performance.
Really offset by inflationary supply chain costs.
During the quarter, we saw strong overall pharmaceutical demand, including from our largest customers reflecting their strength in the market.
To a lesser extent, we also saw year over year contributions from the net new customers that we've previously mentioned and more robust seasonality with cough cold and flu products as others have noted.
Regarding our generics program, we are pleased with the solid execution and consistent market dynamics, we continue to see.
This includes strong performance from Red Oak sourcing not only controlling costs, but also in maximizing service delivery for our customers.
Within our supply chain, we continue to effectively manage through the industry wide inflationary cost in the areas of transportation and labor.
And the second quarter. These inflationary impacts were generally consistent with our expectations.
Similar to last quarter. This headwind was offset by year over year tailwind from our completed ERP technology enhancements and lower opioid related legal costs.
Okay trading some medical on slide six.
Second quarter revenue decreased 7% to $3 8 billion driven.
Driven by lower product and distribution sales, including PPE pricing and volume.
Continued strong growth in our at home solutions business, partially offset this decline.
Medical segment profit finished in line with our prior commentary decreasing 66% to $17 million.
This was primarily due to lower product and distribution volumes and that inflationary impact partially offset by an improvement in PPE margin.
During the quarter the net impact from inflation was in line with our expectations and we achieved inflation mitigation of over 30%.
This sequential improvement from the first quarter was driven by the continued acceleration of our mitigation efforts, including the implementation of additional product pricing actions in the quarter.
And our last two earnings calls we have discussed overall volume softness in our products and distribution business.
And the second quarter, we saw generally consistent overall volume on a sequential basis, including our Cardinal health brand products.
With respect to PPE, we did see some slight improvement in volumes on a sequential basis. Additionally, we've made significant progress in selling through our higher cost inventory on our balance sheet, leading to normalized PPE margins in the quarter.
Now for our updated fiscal 'twenty three outlook beginning on slide eight.
We are raising our EPS guidance by <unk> at the lower end and 10 cents at the higher end to a new range of $5 20.
So $5.50, which represents 6% year over year growth at the midpoint.
This update reflects improved outlook for the pharmaceutical segment and for interest and other.
We now expect interest and other in the range of $115 million to $130 million with the improvement primarily driven by the increased interest income on cash and equivalents.
Our expectations for the remaining items listed on slide eight remain unchanged.
Turning to slide nine and the pharmaceutical segment.
We are raising our outlook for revenue to a new range of 13% to 15% growth for segment profit to a new range of four to six 5% growth.
Both of which primarily reflect our strong first half performance.
As we look to the second half in pharma, we anticipate the year over year profit growth to be fairly balanced between the third and fourth quarter.
Turning to medical we continue to expect a revenue decline of three 2% and segment profit ranging from flat to a decline of 20%.
With respect to inflation and our mitigation actions, we continue to expect a net impact of approximately $300 million.
In fiscal 'twenty, three or a minimal year over year impact.
On the cost side, while still at elevated levels, we've seen a general stabilization across most areas along with improvement in international freight.
As a reminder, these product costs are capitalized into inventory and in the current environment of elongated supply chain.
Got it in our P&L result on an approximate two quarter delay.
Importantly, we continue to expect to exit the year with a run rate of at least 50% inflation mitigation.
And finally, no changes to the expected cadence of medical segment profit we can.
Continue to expect segment profit to improve sequentially and be particularly weighted towards the fourth quarter.
This sequencing primarily reflects our assumptions around the net impact of inflation and to a lesser extent a gradual improvement in overall volumes and the continued implementation of our cost savings measures.
For the enterprise are key factor continues to be the overall utilization and demand environment in.
In pharma, we expect continued strength in overall pharmaceutical demand in the second half, albeit at a more moderate rate than we've seen to date.
In medical we expect a gradual improvement in overall volumes, including with Cardinal Health brand.
Therefore, if the trends from the first half of the year continue we would anticipate segment profit more towards the upper end of our range in the pharma segment and more towards the lower end of our range in the medical segment.
With that I'll now turn it over to Jason.
Thanks, Chris I'll provide a few updates on our three key strategic priorities for fiscal 'twenty three.
First executing our medical improvement plan initiatives.
Importantly, we remain on track with our mitigation actions for inflation and global supply chain constraints. The number one key to returning the business to a more normalized level of profitability.
I'm pleased with the incremental progress achieved in the second quarter as we mitigated over 30% of the gross impact to our business in Q2.
Taking a step back over the past nine months, we have made a series of widespread temporary price increases across nearly all of our Cardinal health brand product categories.
<unk> also executed supplier distribution fee increases to offset higher transportation labor and fuel costs and continue to explore other opportunities for further offsets with urgency.
We will continue to monitor cost trends work with our industry partners to make pricing adjustments that are reflective of current market conditions.
As we have taken a transparent approach working collaboratively with our partners. We continue to make progress on this front by successfully adjusting product contracts as they renew.
We are also including language that allows for greater flexibility to respond to future macroeconomic dynamics.
We continue to expect to exit the year with a run rate of at least 50% inflation mitigation and to fully mitigate inflation by the end of fiscal 'twenty four.
Outside our mitigation actions, we are focused on optimizing and growing our Cardinal health brand portfolio.
<unk> indicated the market demand environment medical has been relatively stagnant over the last couple of quarters.
Additionally, some of our higher margin Cardinal health brand categories remain Underpenetrated, which we are addressing through targeted investments to increase product availability, new product innovation and our continual focus on commercial excellence for.
For example, we recently expanded our sustainable technologies manufacturing facility and Riverview, Florida.
Doubling the size to roughly 100000 square feet. This facility will enable us to better meet increasing demand for single use device collections reprocessing and recycling services support.
<unk> future growth, while also delivering supply resiliency.
Annabelle solutions and cost savings for customers.
We're also investing to accelerate our growth businesses, primarily at home solutions, where we've seen strong growth fueled by the secular trend of care shifting into the home.
Our new Central Ohio distribution center equipped with robotics and automation technology will be fully operational as soon as we continue to expand our footprint to match the sustained growth of home health care, we are seeing in the industry and our business.
And in our higher margin medical services business <unk>.
<unk> recently expanded its offerings with total view tracking a new capability offering health care providers real time shipment tracking to enhanced supply chain visibility and resiliency.
Second moving to the pharma segment, where we're building upon the growth and the resiliency of the business. We're focused on executing in the core and accelerating our growth areas primarily specialty.
The first couple of months, we've already seen efficiency and effectiveness gains from our recently combined pharmaceutical and specialty distribution organization.
We've seen strong growth across specialty distribution, including within acute health systems and alternate care.
Additionally, our recent acquisition of the <unk> GPO and investment in their managed services organization has been positively received by customers.
Further recent segment organizational changes, we also created a new sourcing and manufacturer services organization, enabling a more holistic approach to enhance our strong pharmaceutical manufacturer partnerships. This includes strategic sourcing along with the high demand area of manufacturer services.
Q2, we saw double digit growth for manufacturer services, where we continued to invest to build upon our capabilities such as our leading specialty <unk> and sonexus, our access and patient support portal.
And in the area of cell and gene therapy. We are excited about the work we are doing in this emerging space across all of our service offerings, expanding our capabilities and the opportunities we see in the future.
We are investing in automation and enhancing technology across our supply chain today in order to drive operational productivity for the future.
We're striving to deliver a flawless end to end customer experience supporting our strong and diverse customer base. For example, our recently announced collaboration with volunteer will offer customers a solution that connects diagnostic and clinical data with real time purchasing and consumption data.
By leveraging AI and machine learning, our customers will be empowered to make better purchasing and inventory management decisions for their businesses and patients.
We are privileged to serve and partner with leaders across the various classes of trade such as retail pharmacy chains mail order in grocery as well as retail independent long term care and health systems, all of whom provide essential health care access for their respective communities.
And lastly, a brief update regarding our relentless focus on shareholder value creation at.
In addition to the shareholder value creation initiatives, we've already announced such as our governance enhancements and simplification actions. We continue to place a strong emphasis on responsible capital deployment, including the return of capital to shareholders through share repurchases.
Our business Review Committee continues to work through the comprehensive review of our company strategy portfolio capital allocation framework and operations.
We plan to hold an investor day in G&A for New York City, where among other topics. We will provide an update on our company's long term financial outlook detail, our growth strategies and share any relevant conclusions from the ongoing review.
Before I wrap up I want to touch on our New ESG report, which was released just last week.
This expanded report outlines the steps, we're taking to operate in a more sustainable and equitable world through our established ESG and diversity equity and inclusion initiatives.
We continue to make progress against our long term targets and are committed to regularly updating our stakeholders.
We believe that we can simultaneously drive ESG improvements in support of our ongoing business transformation.
In closing while there remains work to do I'm encouraged by our team's progress to date and excited about the opportunities ahead.
I want to thank our dedicated Cardinal health employees, who are driving the execution of these critical priorities and who keep our customers and their patients at the center of everything they do with that we will take your questions.
As a reminder, if you'd like to ask a question. Please press star one.
One on your telephone keypad to.
<unk> Your question. Please press star two.
The first question comes from the line of Lisa Gill, calling from Jpmorgan. Please go ahead.
Alright, thanks, very much and thanks for all the details Jason just on the medical side, one of the things that stuck out to me as you talked about the improvement and you talked about.
Needing improvement in volumes.
As we think about that can you maybe talk about your expectations around surgical procedures. If when we look into calendar 2023 at the back half of your year and secondly, as part of the issue on the hospital side been staffing issues and as they start to resolve that when things get better for Cardinal as well.
Yeah, Hi, Lisa I think you are connecting all the right points there.
That's what we hear from our customers and broadly from our peers in the industry is that there continues to be some constraints as to getting to the free level of demand there and we do think thats a component of what's what's impacting the lack of growth that we're seeing within within medical.
Possible to tell definitively but thats.
Anecdotal feedback that we're hearing.
To help provide a little bit of color around the impact and that's why we.
Chris had made some comments within her commentary there highlighting that we do anticipate a gradual improvement over the course here, so not significant but getting back to closer to more normalized level of growth as a reminder, when we provided our outlook.
Our medical improvement plan, we highlighted 3% CAGR total volume growth over the three year period, and we anticipated that about half of that would be market growth about half that would be our own innovation and capacity expansion plans for our products. So you are talking about a couple of percent type of growth that would be more normalized.
That's kind of a differentiator between.
Or more of a mid point of our guidance to what would be more on the lower end and Thats why tricia provided that type of clarity.
So it was the right way to think about that that kind of half of it. Jason you feel you have some level of control because it's new products that you're bringing to the market and the other half is youre going to have to wait to see if those volumes come back or do you feel like you really truly have visibility around the whole, 3% that you're talking about.
Yes, no I think you could have a generally right now remember that a lot of the part that we have control over is new product innovation and capacity expansions and Thats always a element of the three year plan I would expect to be weighted a little bit more towards the later end because it takes time to spool up those investments and getting those products into the market. So we didn't.
<unk> indicated was a linear type of plan and volumes.
Careful too that we've got a period here the last two to three years. So it's been incredibly choppy in terms of the volumes obviously down during the beginning of the pandemic and has come back.
For the most part.
Last couple of quarters have been very predictable very consistent types of volumes, but that's even that's a bit of an anomaly from what we've had over the last few years, so presuming that that maintains.
And that's the range that we should be thinking about but if we get back to an increased level of volatility which at this time, we don't foresee, but it's certainly a possibility as well okay. Thanks next question.
Thanks.
The next question comes from the line of Elizabeth Anderson, calling from Evercore. Please go ahead.
Hi, guys. Thanks, so much for the question I was wondering if you could talk about the a little bit more about the pharma improvement in the back half of the year and specifically like as you've had time to sort of think through the pharma reorganization.
Continued.
Cost cutting benefited statutes, improving the operating profit growth is starting to get pricing in certain places where you had before if you could help us kind of understand that mix and then secondly on the interest expense guide it looks like the back half guide has a big sort of step up versus what you did in the first quarter or the first two quarters of the year in terms.
Interest expense. So is that just sort of changes in cash balance in terms of the net the net.
Net interest contribution or is there are there other factors going on there. Thank you.
So I'll start with your second question there because you know that it's really about cash balances. We don't anticipate there being significant differences in the interest side. Let me just kind of step back we have a very fixed interest expense for our debt. Our interest expense side is quite predictable and no. It's really the interest income is the <unk>.
That we've seen favorability in year to date, and our cash balances were higher than anticipated over the first half of the year. We do have the $550 million notes coming due here in March that we anticipate to pay down and Theres just the seasonal aspect of our cash flow as well. So we would not anticipate the same lower levels or I'll say improved interest income.
That reduces our interest expense in the second half like what we saw in the first half, but you should take away that we continue to have a very advantaged balance sheet, especially as it relates to the fixed variables mix of our debt.
As it relates to pharma, it's really more about volume than anything else.
We're not seeing a lot of other key variables underlying.
The dynamics within the generics business continues to be very consistent.
We continue to see very broad based volume strength.
Q2 was certainly a very strong quarter as it relates to volume and we saw a broad based I referenced in my comments between Tricia.
Brand specialty as well as generics is a lot of volume drivers within that and as we think about the growth in the second half of the year, it's very consistent with what we had indicated at the beginning of the year. So our second half expectations remain consistent with what we had indicated before a little bit less growth than what we've seen.
In the first half and that's just a reflection of again for his comments that we anticipated being closer to more normalized level of growth in the second half, but if we maintain the same level of strength that we've seen in the last couple of quarters.
Opportunity again, the high end of that and then just one other comment there about.
The Q2, why it was so strong as youre thinking about it from a year over year perspective. We also just have the added points that we did introduce a new customer in the third quarter of last year and that has been a nice tailwind for us last last four quarters, but this will be the last quarter until we start to lap that so that's part of the driver from a year over year perspective.
And then not not significant but there is an element of cough cold and flu.
A nice little tailwind for the quarter, but at this point, we don't anticipate that being.
As a driver for the full year in fact, this could be a little bit of a headwind as it relates to Q3, specifically because it looks like the season is ending earlier than normal.
Those are all the key moving pieces.
Got it thank you so much.
The next question comes from the line of Michael Cherny coding from Bank of America. Please go ahead.
Good morning, and thanks for taking the question. So just to parse through your numbers a little bit I just wanted to get a sense you've had strong outperformance year to date.
Based on typical timing <unk> and what you are calling for relative to growth rates.
It seems like Theres more opportunity for upside on your EPS I know you talked about medical based on just what you see now coming at the low end of the range, but can you give us some of the other potential concerns or headwinds built into this number. It's mathematically you could argue that your EPS baseline should be higher and annualized it you'd get there too so I want to make sure I am.
Stand all of the I guess takes against the positive quotes that you updated your guidance.
Yeah. Thanks, Michael first of all overall I think it's a balanced outlook that we have I think a couple of the key drivers of the first half second half I. Just went through on Elizabeth's question interest expense is going to be higher we expect to be higher in the second half. So thats one of the components you are thinking about from a <unk>.
Yes driver.
And then pharma as a key driver as well it's still solid.
Both in the middle of that range that we had the beginning of the year not at the same pace of growth that we had in the first half, but still growth and also just kind of step back a little bit we had a similar level of growth about 5% growth in the prior fiscal year. So now we're on 18 to 24 months of pretty consistent stable much more predictable type of growth that we have.
Seen that business as we step farther and farther away from the pandemic and we think overall that's balanced of course in the second half of the year.
Meaningful step up in the medical segment performance and Thats of course, being driven more than anything by the the pricing on inflation in the.
First instance, we would expect of course stepping down as it relates to the international freight, but all of the other drivers I think are fairly consistent with what we outlined.
Question. Please.
The next question comes from the line of Erin.
Right Coning from Morgan Stanley . Please go ahead.
Thanks, So you haven't really participated much in COVID-19 treatments or vaccines, obviously with the contracts that are out there, but as those open up to the private market could that provide an opportunity for you as we're looking into next year and maybe thinking about some of the other anomaly kind of into next year, what are some things that.
Youre thinking about in terms of opportunity across that core pharma segment.
As well in terms of drivers already say a continuation of the same in terms of specialty driveways and otherwise.
Sure. Thanks Aaron.
Overall first of all as I think about fiscal 'twenty three it's a fairly normalized level of performance that we have.
Our current outlook again growth for the reasons I highlighted as a little bit stronger than the first half and what is in our longer term targets and we've seen that very broad strength that I would not expect to continue long term at that pace, especially when we consider that that incremental new customer, but longer term I think what this year reinforces that we're on track for those.
Long term growth targets, specifically to your question around Covid therapies and vaccines.
You have it.
Inclination is correct, we participated very little on any of that over the pandemic frankly, we've had more of a headwind than a tailwind because of the volume impacts on our underlying utilization of course, we're all the way through that at this point in time and have been so for about a year. So we are at a very normalized level at this stage as it relates to commercialization I think all data points <unk>.
Is that beginning in the summer time of course after our fiscal year. So certainly no impacts for 'twenty three.
There would be some opportunities for 'twenty four and beyond however, I'd highlight that the types of products and vaccines, we're talking about historically outside of the pandemic have not been significant drivers of profitability. So it's something that should be a tailwind, but I would not jump to the conclusion that it will be a significant as what we've seen in the marketplace for others given how.
The government had isolated that and procured for that so something we'll keep an eye on and clearly something we will be providing some context for further as we understand it better and as we get closer to that point in time and the one final point on that even though the commercialization is scheduled for the summer. There is certainly a lot of dialogue and uncertainty is.
Exactly how much is stockpiled within the government and how long will it take for that to work through so while it may go commercial it could take us some time to actually see a pull in terms of non governmental sources.
Next question please.
The next question comes from the line of George Hill, calling from Deutsche Bank. Please go ahead.
Yes, good morning, guys and I. Appreciate you taking the question I guess, Jason My question is probably a derivative of Mike's question, which is kind of given the guidance for the year and the expectations for the back half it would seem that the street is probably too high.
So I guess, maybe could you talk about the big moving pieces just as it relates to the back half of the year and should we think about the current guidance is probably a little bit on the conservative side or or or.
Or are there real areas of weakness, particularly in medical that we should be worried about in the back half of the year as it relates to where the company plans to deliver results kind of versus what the street is.
Sure I'll try George I'm afraid, it's going to sound very similar to what I said to Michael again.
Good about the balance that we have here I feel very good about the progress to date, we have growth implied growth in the middle of the range for pharma in the second half of the year. So if volumes continue at the more recent pace than we would have some opportunity.
On medical a lot has to occur still for us to execute upon our plan, it's very consistent with the plan.
We have good step up expected to continued sequential improvements.
This guidance.
Rides us sequential improvement for each and every quarter throughout the year, we would anticipate the next quarter next two quarters to have sequential improvement as it relates to the ongoing pricing for inflation the ongoing cost reductions a gradual improvement in volumes, but importantly, the big step up will be in the fourth quarter as we.
International freight, which is a very high confidence element now given that we're we're now less than six months by the end of the year. These lower costs are almost certainly going to flow start to flow through our P&L here in the fourth quarter is still at levels well below the pricing, we're getting but nonetheless, that's a pretty well.
All known part of that equation. So a lot of accidents still in front of us, but the plan remains entirely intact.
So when you talk about first half second half youre, implying there is some different somewhere and I think the the primary difference is related to the growth within pharma is still growing and maybe one other point to remember Q4 of last year for pharma was a very strong quarter, we had very strong growth there.
It was a good quarter and Thats, one that we still anticipate there being growth on top of that this year as well in that low to mid single digit range. So we feel good about where we're at there's opportunity in pharma. There are some things we got to watch out on medical and we continue to execute all the below the line items very consistent to our expectations.
Next question please.
The next question comes from the line of Andrea Alfonzo. According from UBS. Please go ahead.
Thank you so much question, Jason I appreciate you taking the question.
Just on the net side again you've discussed.
The first tranche of the price increases on the Medicare side, it's going to be taking with customers I guess, we'd just love to get a qualitative update on GPO and customer activity in general.
And should we expect you know as we think about the cadence for the second half that that would those are more fully manifested in the numbers for Q.
So just as a corollary to that you've highlighted some investments around private label with the current constraints in the purchasing environment for hospitals have have you observed changes in just the general appetite here for private label. Thanks, So much for the question.
Terrific.
Happy to do so so on pricing.
I would think about pricing as being a fairly stair step process beginning back with our first temporary price increase in March of 'twenty two.
So what we have and when we first shared was the 20% mitigation of inflation soon after in the fourth quarter of last year than that 1% to 25% in the first quarter of this year and then now we're saying it's over 30%. So you can see that.
Fairly consistent stair step and Thats, how I think about the pricing side.
Les on the temporary price increases going forward and more on the rotation to more renewals as they come up and that's just a natural function of where we're at in this process as we get farther away from the initiation of those temporary price adjustment. So the continuation of more of the same how you get to a widening of that 30% to 50 <unk>.
By the end of the fiscal year is the cost starting to come down.
So.
And again Thats largely focused on the international freight.
So pricing I would expect to just continue blocking and tackling all the way through to the end of fiscal 'twenty four is where most of the prices will adjust and thats why we indicate that we wont get to full mitigation until about that point in time.
As it relates to private label I think it's an interesting related question to pricing.
Yes, we want to work with our customers all of our customers are dealing with challenges beyond inflation in this category. They have actually a much bigger challenge is another category and.
The desire on our part is to work with them that there is a possible win win to find value in other ways, whether that is into more private label.
It's of course, we're doing everything we can to offset the increase of the increases to start with to mitigate the inflation through other non pricing means and of course part of this is also working with the supply base and we indicated that we're working on the distribution fees as well so that the supply base does their part we do our part and our customers are going to have to absorb this.
As well so it's a whole industry has to address this and thats. The collaborative approach that we're taking with it.
Question. Please.
The next question comes from the line of Charles Frye coating from Cowen. Please go ahead.
Yes, thanks for taking the questions guys.
Two real quick ones, maybe on the model first Tricia I think you talked about <unk>.
Farmer.
Distribution, we should think about the <unk>.
Looks like you're kind of saying the contribution should be kind of even through the back half of the fiscal.
Fiscal year here, it's a little different than I think when you look back in normal seasonality anything specific that you'd call out to two.
Why that might be this year.
Yes, let me take that so that comment was the growth rates, we're going to be even year over year. So youre exactly right. Charles that there will continue to beat expectations of normal seasonality that largely comes from the brand inflation, albeit much lower than what it had been historically.
We're still talking less than 5% contribution but that is all in the third quarter. So sequentially. We would still expect the third quarter to have that element associated with it tricia's comments were specifically related to the the year over year growth rates being relatively equal between the two quarters.
Alright, okay.
I Might've misheard and then maybe if I could just follow up on you keep you keep talking about the at home and sorry to keep talking about at home solutions and how Thats a good growth driver in the past you kind of give it a little bit of a break out of the size of the business is there any kind of additional color you can give us here.
Upsizing of this business how much it's grown relative to the rest of the segment.
Sure. Yes, you can also go to our segment footnote. This is one of the two businesses. We every quarter provide incremental revenue information on and.
That business I think last year was $2 $4 billion of revenue and I believe for both the first and second quarter. We grew it by around 9%, but again you can you can look at the segment footnote to get the precise numbers each and every quarter.
Great. Thank you.
The next question comes from the line of Steven Valiquette, calling from Barclays. Please go ahead.
Great. Thanks, good morning, everyone.
On page five in the slide deck, you talked about.
Michael just generics program is one of the positive key variables. So I just wanted to get a little bit of color.
Just to confirm kind of what youre, referring to is the biggest component within that.
Thinking about your dining room.
Referring to just better generic volume in generic compliance rates with customers or is it just better buying through Red Oak and also has been really a much stronger new first time generic launch calendar as well, but just curious.
What's the biggest piece within your comment about just generics program. Thanks.
Sure, Yes overall, the biggest component for this particular quarter in most quarters that we've seen more recently has been volume.
Yes.
To use the statement consistent market dynamics.
Referencing essentially the margin per unit, yes, theres ongoing deflation, but buy side sell side continues to be relatively imbalanced and so when we see a year over year driver, it's driven often by volume into our mix and we continue to see very broad strength across all the products whether it be generic.
Brand specialty and so this particular quarter, we saw that as well.
Not the biggest driver, but when I talk about cough cold and flu a lot of those products have gone generic they're more mature products. So they do tend to carry with it a little bit lower margin price points things of that nature, but that would be a component as well, but again I'm only I'm only highlighting that given how many questions. We get on the topic not that it is a significant driver.
But overall the short answer is volume and mix.
Okay got it okay. Thanks.
The next question comes from the line of Eric Percher cutting from Nephron Research. Please go ahead.
Thank you question on nuclear Sarah Gnostics can you remind us where your investments are targeted in 'twenty, three and where and when do we see ROI on those investments and then given the developments around all comers treatment. What are you looking for relative to approve.
<unk> or policy change on testing that could lead to more significant step up in demand in that business.
Sure So the gnostics business launched.
Sometime last six to nine months and we're starting to see now more of that contribution over the last couple of quarters. So it's in the ramp up phase. So we are seeing positive returns already on those investments.
This is a.
Business, a business case and the name of the nuclear business that is both wonderful and also at times a little bit frustrating is that the business is.
As a long term business. It means that we have good visibility long term, but also means that we have to wait until we can we can get that benefit their gnostics has been something we've been working on since well before I arrived here in the organization three years ago and it's one that we're now seeing the fruits of all of those investments and efforts from that team.
As it relates to the second part of your question Eric.
I get lots of questions around trying to link our business, our nuclear business to specific approvals specific.
Drugs and therapies and how we can attach that I would say that the beauty of this business and the success of this business is that is not directly linked to a very specific particular outcome.
Broad.
Expertise capabilities.
We're not dependent on any one particular area and does that diversification and of which we're seeing with the <unk> expansion being even more accentuated because we get to work with so many more manufacturers and partners that it just creates a broad opportunity for us to grow across the spectrum. So our business case for continued growth.
R R.
<unk> of achieving a doubling of the profit in this business from fiscal 'twenty, one to 'twenty six is predicated on a lot of singles and doubles not triples, and home runs by attaching to a blockbuster type of drug.
So beyond that we don't talk about individual.
Drugs individual.
<unk>, our products and so I would like I said I just don't think that that's the real draw for this business is the breadth that we have and the broad capabilities.
Thank you.
The next question comes from the line of Brian <unk>.
Putting from Jefferies. Please go ahead.
Thank you you have partly on some on for Brian . So you mentioned expecting stabilization of supply chain headwinds, particularly in freight transportation can you just discuss any sense you might have around the cadence of that improvement moving forward.
Oh, I wish I had more clarity.
I would say that it's a lot more stable than it has been over the last few years and we have to break apart freight into the components. So within international freight that I believe was an anomaly that is unlikely to occur anytime soon if ever again.
We need to be prepared for it we have diversified our supply chain further as a result of living through that.
Where those costs are.
Is it still elevated in certain areas right. So the main China.
America channels are much much lower but there is now a lot of sourcing through other parts of Asia that are higher than historical levels, but nowhere near the peaks. So we're clearly seeing a at least an 80% reduction of what those were at the peak.
And certainly much closer to pre pandemic levels. So as it relates to international freight it's not my big worry at this point and it's one that we have to continue to keep an eye on and manage.
The more.
The more elevated remains the domestic transportation.
It is also down from its peak, especially as it relates to anything related to diesel fuel oil. So thats also office peak and were seeing certain pockets of improvement, but it's still very elevated compared to pre pandemic and there I have less confidence that it's going to materially reduce from here. There's a lot of inputs that go into transportation other than.
Diesel fuel you have the equipment and the drivers all of which are higher cost and they are not expected to come down anytime soon so I expect domestic transportation to be higher longer perhaps forever and it's why we need to have permanent pricing is because of that component, but on the international freight side that is why we are not.
Pushing for faster price increases right now is because we believe that will be coming down on our P&L. This next quarter and as we get through fiscal 'twenty for those two lines the price line and the cost line will finally intersect and we can see that that will be fully mitigated.
Next question please.
And our final question comes from the line of a J Rice pudding from credit Suisse. Please go ahead.
Yes, Thanks a lot.
No.
Growing specialty has been a priority for the company and this management team has set out.
And you've mentioned that again today that you are having progress there I guess can you just maybe tell us where.
You are seeing success in the specialty.
Area.
Is the plan progressing about as expected as we've talked about over the last year or so.
It is.
Is that an area of outperformance for you how would you describe that.
Sure, Yes, it's absolutely meeting our expectations.
There was a call out in terms of the broad volume that we had this last quarter. So we had strength across a number of many different categories and customers. We also called out double digit growth within our manufacturing sourcing and manufacturer services group, which is a key component of the upstream element of specialty so.
The business is strong it's large it's growing nicely.
We have I think like the rest of the industry in Biosimilars is nice.
A nice tailwind that we're seeing not large enough to call out as an individual driver our three PL business, especially with the regulatory approvals being a little bit more normalized.
<unk> is well positioned.
And.
We're continuing to invest in areas that will be growth growth opportunities in the future whether that be cell and gene or just where value based care is going where we have our <unk> TFS.
That form so we're investing organically and of course.
Within our inorganic we've had a nice success with our venture GPO and the investment in the <unk> that I think has given us some additional opportunities to think about in the future as well so not any one item to highlight but there is a strong breadth across many different pillars of the specialty business that we feel.
Good is a very strong foundation and platform for future growth.
So I believe that was our last question. Thank you.
Yes, I'll wrap it up here real quick.
Yes, Yes, Donald's question. So I will hand, you back to your host to conclude today's conference.
Yes. Thanks, I appreciate that and just to summarize real quick I'm pleased with the continued stability in pharma as we just discussed here today as well as the progress that we're making in the medical business. We are committed to executing on our key priorities, including 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 host please stay connected on the line.
Yes.
Goodbye.