Q4 2023 Cardinal Health Inc Earnings Call
Good day and welcome to the fourth quarter FY 2023, Cardinal Health, Inc Earnings Conference call.
Please note. This conference is being recorded and duration of the call your lines will be on listen only however.
Or you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question.
Now I'd like to hand, the call over to Kevin Moran Vice President of Investor Relations. Please go ahead.
Good morning, and welcome today, we will discuss Cardinal Health's fourth quarter and fiscal year end 2023 results along with our outlook for fiscal year 2024.
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, our Chief Executive Officer, and Eric <unk>, Our Chief Financial Officer.
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, all our comments will be on a non-GAAP basis, unless I, specifically called out as GAAP GAAP.
GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release.
For the Q&A portion of today's call, we kindly asked to 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 Jay.
Thanks, Kevin and good morning, everyone fiscal 'twenty three was an inflection point for Cardinal health with improved performance strong execution and notable progress against both our short and long term plans we.
We delivered record financial performance, including our highest non-GAAP EPS ever reflecting 14% growth from the prior year with.
We grew pharma segment profit, an impressive 13% and generated $2 $8 billion of adjusted free cash flow.
And in medical we drove significant sequential improvement in operating performance from our segment loss in the first quarter to over $80 million of segment profit in Q4.
This year, we took decisive action to advance our three strategic imperatives building upon the resiliency of our pharma segment executing our medical improvement plan and maximizing shareholder value creation.
Consistent with what you heard at our June Investor Day. These results were achieved through our team's commitment to ruthlessly prioritize the core of our business and to better serve our customers. So they in turn can focus on caring for patients we.
We simplify how we operate by streamlining our organizational structure exiting noncore product lines and rationalizing our geographic and manufacturing footprints, we made key leadership changes and governance enhancements, adding talent in key positions across the enterprise and to our board.
We formed an extended the business review committee tasked with evaluating our strategy portfolio operations and capital deployment.
On that note, we completed our review of the pharma segment, including announcements at Investor day to further invest in our nuclear and precision health solutions business and launch our new <unk> network supporting community oncologists.
Which I will discuss more later in my remarks.
We recently closed our outcomes merger with Blackrock transaction data systems, which we see as a big win for pharmacies and an important opportunity to <unk>.
Accelerating the business as future growth.
We also deployed capital responsibly with a continued eye on maximizing value and we are positioned with the financial flexibility to continue driving value for shareholders and.
At Investor Day, we provided preliminary guidance for fiscal 'twenty four with a strong finish to the year and increased confidence as we look ahead I am pleased that we can raise our fiscal 'twenty four outlook.
Later in my remarks, I will share further details on our three strategic priorities, but first let me hand, it over to Aaron to walk you through our financial results and guidance.
Thanks, Jason and good morning.
Barry The league Q4 was a strong finish to a year in which with Jason's guidance. The Cardinal team made significant progress against our strategic initiatives.
We delivered fourth quarter EPS of $1 55, and $5 79 for the full year at the high end of our guidance from Investor Day.
For both Q4 and the year, our EPS results reached historical high points. We also delivered stronger than expected cash flow something I will touch on more later.
Let's start with the pharma segment on slide six.
Fourth quarter revenue increased 15% to $49 7 billion.
Driven by brand and specialty pharmaceutical sales growth from existing customers.
We continued to see broad based strength in pharmaceutical demand spanning across product categories brand specialty consumer health and generics and from our largest customers.
Similar to Q3, GOP, one medications provided a revenue tailwind in the quarter.
Segment profit increased 12% to $504 million in the fourth quarter, primarily driven by positive generics program performance.
Within our generics program, we saw volume growth and consistent market dynamics, including strong performance from Red Oak.
The increased contributions from brand and specialty products along with nuclear were also a positive factor, partially offset by higher investment in operating expenses, including higher cost to support sales growth.
Turning to medical on slide seven.
Fourth quarter revenue was flat at $3 8 billion an.
An improvement in trend, we saw a decrease in products and distribution sales related to lower <unk> volumes and pricing, partially offset by inflationary impacts, including our mitigation initiatives. This decrease within products and distribution was offset by growth in at home solutions.
In the fourth quarter, we delivered medical segment profit of $82 million or nearly $100 million increase from the prior year loss.
The results for the quarter were consistent with our Investor day commentary composed of approximately $60 million of more core performance driven in connection with the medical improvement plans and approximately $20 million of both seasonality and net favorable one time items.
As expected we saw an improvement in net inflationary impacts, including our mitigation initiatives and the normalization of <unk> margins, which were impacted by unfavorable price cost timing in the prior year.
Of note, we achieved our target of exiting fiscal 'twenty three with at least 50% inflation mitigation.
Consistent with the expectations communicated at Investor Day, we were encouraged to see early indicators of an improvement in trend with respect to our Cardinal health brand product sales were.
We also saw a positive overall contribution from our growth businesses, including at home solutions adopted rate and from our ongoing cost optimization measures.
So with significant profit growth in both segments, we delivered total operating earnings of $560 million growth of 24%.
Moving below the line interest and other decreased by $48 million $216 million due to increased interest income from cash and equivalents and increased income from our company's deferred compensation plan investments.
Which as a reminder, this fully offset above the line in corporate.
Our fourth quarter effective tax rate finished at 27% approximately two percentage points higher than the prior year due to certain discrete items.
Fourth quarter average diluted shares outstanding were $256 million, 7% lower than a year ago due to share repurchases, including a $500 million accelerated share repurchase program initiated in the quarter.
As we announced at Investor Day.
The net result of all of this was fourth quarter EPS of $1 55.
Growth of 48%.
Now transitioning to our consolidated results for the year.
We surpassed the $200 billion revenue Mark for the first time fiscal 'twenty three revenue increased 13% to $205 billion.
Gross margin increased 5% to $6 9 billion, both driven by the pharma segment.
Total company SG&A increased 6% to $4 8 billion.
<unk>, reflecting inflationary supply chain cost and higher investments in operating expenses, such as higher cost to support sales growth, which were partially offset by our comprehensive enterprise wide cost savings measures.
Operating earnings increased 3% to $2 $1 billion in.
Interest and other decreased 46% to $89 million.
Primarily driven by increased interest income from cash and equivalents.
As a reminder, our debt is largely fixed rates, resulting in a net benefit from rising interest rates in the near term.
Our annual effective tax rate finished at 23%.
The net result was for fiscal 'twenty, three EPS $5 79.
Growth of 14%.
As for the segment's full year results beginning with pharma on slide 10.
Pharma segment profit increased 13% to $2 billion driven by positive generics program performance and a higher contribution from brand and specialty products partially.
Partially offset by inflationary supply chain costs.
Fiscal 'twenty three year over year growth also included a modest benefit from branded manufacturer price increases, which were assuming will not repeat in fiscal 'twenty four as.
As well as a favorable prior year comparison related to higher opioid related legal costs and costs for technology enhancements in fiscal 'twenty two.
Moving to medical on slide 11.
Segment profit decreased 49% to $111 million, primarily due to lower products and distribution volumes and unfavorable sales mix and net inflationary impacts including mitigation initiatives.
This decline was partially offset by normalization of PP&E margins.
Now before I turn to fiscal 'twenty, four let's cover the balance sheet.
In fiscal 'twenty, three we generated robust adjusted free cash flow of $2 $8 billion with particularly strong cash flow towards the end of the year. We ended the year with $4 billion of cash on hand.
At our Investor day, we highlighted the cash flow optimization was an area of go forward focus for our teams and the Cardinal team delivered across our businesses. This effort will continue in fiscal 'twenty four notwithstanding that it is a tougher calendar from an inflow outflow days of week perspective.
We remain focused on deploying capital in a balanced disciplined and shareholder friendly manner.
In fiscal 'twenty, three we invested approximately $480 million of Capex back into the business to drive future growth.
Down $550 million in debt to reduce leverage and maintain our strong investment grade ratings.
We returned over $2 $5 billion to shareholders, including through the dividend that our board increased in May for the 34th year in a row and $2 billion of share repurchases.
Now for our updated fiscal 'twenty four guidance on slide 13 today, we are raising our fiscal 2004 EPS guidance to a range of $6 50 to $6 75.
This increase reflects the strong finish to fiscal 'twenty, three particularly within pharma, where we are now entering the year at a higher jump off point. We also are tightening our shares range to $250 million to $253 million, which reflects the recent share repurchases as well as our continued expectation of $500 million in base share.
<unk> over the course of fiscal 'twenty four.
As you will calculate the mid point of our newly raised fiscal 2004, EPS guidance is 15% above our fiscal 'twenty three EPS results.
There are no changes to the other corporate guidance assumptions provided in Investor day.
Interest and other between $110 million to $130 million and effective tax rate in the range of 23% to 25% and adjusted free cash flow of approximately $2 billion in fiscal 'twenty four.
Our segment outlooks for fiscal 'twenty four are also unchanged with one exception our higher revenue range for pharma driven by the continued acceleration of <unk>, which as a branded product category do not meaningfully contribute to segment profit.
Slide 14 shows our fiscal 'twenty four outlook for pharma are building grow business, we expect revenue growth in the range of 10% to 12% and segment profit growth in the range of 4% to 6%, which is now in a larger fiscal 'twenty three reference point due to our strong finish to the year.
We are reiterating our key assumptions provided at Investor day, we expect growth from our generics program with volume growth and consistent market dynamics and positive operational execution against our organic specialty efforts, we are not assuming outsized benefits from branded inflation. In contrast, some of the benefits that we did see in fiscal 'twenty three.
On the pharma fiscal 2004 cadence, we expect the year to follow typical seasonality patterns as usual, we see our fiscal Q3 being the largest segment profit dollars quarter due to the usual timing of branded manufacturer price increases.
Turning to medical I want to recognize the progress of the medical team made during fiscal 'twenty three particularly in Q4 and also acknowledged that we still have blocking and tackling to do against the turnaround to both drive demand and improve our costs.
For the full year, we are reiterating our assumptions of revenue growth of approximately 3% and segment profit of approximately $4 million for the year, while providing some additional color.
Like fiscal 'twenty, three we anticipate segment profit to be significantly back half weighted.
We expect Q1 to be generally consistent with the core performance from Q4 with quarterly sequential improvements thereafter are driven by our medical improvement plan initiatives.
There are a couple of factors for why Q1 is the low point in the year.
First keep in mind that Q1 is the seasonal low point for our global medical products and distribution business.
Due to the timing of volume and cost recognition.
Second while we continue to expect to exit fiscal 'twenty four offsetting the impact of gross inflation. Those improvements are expected to grow over time, making the impact is greater over the course of the year.
And finally, we continue to plan for slight Cardinal health brand volume growth that will largely hit in the second half of the fiscal year.
So in summary for medical for fiscal year 'twenty for <unk>.
<unk> work in front of us with each quarter, improving from our Q1 launching point to get us to the approximately $400 million guidance for the year.
Stepping back we are pleased to see growth across our businesses continuing in fiscal 'twenty four consistent with our messaging from Investor day, we are targeting a 12% to 14% EPS growth CAGR for fiscal 2426 now from the higher fiscal 'twenty three baseline of $5 79.
Now regarding our intended deployment of cash which is consistent with our disciplined capital allocation framework as seen on slide 18.
After investing approximately $500 million back into the business to drive organic growth.
Making approximately $500 million litigation payments, including our third payments under the national opioid settlement back in July .
And our $1 billion baseline return of capital, we expect to have strong flexibility as we assess further investments in the business M&A and the possibility of incremental return of capital to shareholders.
I want to reiterate that as we shared at Investor day, neither our fiscal 'twenty for guidance or our long term targets reflect potential opportunistic deployments of capital, including M&A, which is difficult to predict and tommy or magnitude or additional share repurchases beyond our $500 million base.
Baseline repurchases each year.
We will continue to evaluate both of these levers opportunistically to drive long term value.
To close the Cardinal team has a lot to be proud of with respect to their accomplishments in fiscal 'twenty three Jason and I are pleased with the progress. Our teams have made we are confident in the plans we have in place and we are excited for our team to realize the significant value creation opportunities still in front of Cardinal health with that I will turn it back over to Jason.
Thanks, Erin, let's now dive deeper into the actions we are taking to execute our three strategic priorities beginning with priority number one and building upon the resiliency of the pharma segment.
In our largest most significant business. The pharma segment has been performing well by prioritizing what matters, most focusing on the core and delivering for our customers and their patients with.
The business is positioned at the forefront of favorable secular industry trends and has also benefited from our specific actions and performance we.
We were pleased to recently raised our long term segment profit target to 4% to 6% growth solidly in the mid single digits and consistent with the segment profit growth, we expect in fiscal 'twenty four.
Our growth is enabled by a scaled stable and resilient core pharmaceutical distribution business growing in the low single digits and double digit growth from our higher margin specialty and nuclear businesses.
Within the core our generics program remains a critical component of our overall offering and performance enabled by Red Oak sourcing. In addition to its leading scale red oak's proprietary analytical tools and deep industry expertise puts us in the best position possible whenever product shortages occurred to continue servicing customers.
We're committed to providing customer focused solutions across our many classes of trade as we noted at Investor Day more recently, we hosted our 30 <unk> annual retail business conference, where we brought together nearly 4500 attendees from across the country to celebrate the critical role independent pharmacies play and caring for their communities and <unk>.
Our commitment to our customers through our newest innovations for example, we are offering modern payment solutions through our collaboration with square to help independent pharmacies seamlessly managed business operations integrate flexible payment options and reduced payment processing costs.
We've conveyed the specialty is our priority area of focus and a key enabler to our long term growth we're.
We're continuing to invest to expand downstream across key therapeutic areas, such as oncology rheumatology and other emerging areas.
We're excited to build upon our existing capabilities with the recent launch of our <unk> network, a specific suite of offerings for community oncologists supporting their growth and desire to remain independent.
To ensure the notice the network's success in development, we have recently appointed new leadership with deep industry and clinical experience and continue to build out the organization with internal and external talent.
We continue to seek input from customers and have created an advisory board.
While still early inning I'm pleased with the engagement from current and potential customers.
Upstream and specialty we're expecting continued double digit growth from manufacturer services.
In our leading <unk>, we're expanding our ambient and cold chain space to keep up with our business is strong growth.
At <unk> access and patient support we delivered on a record number of new client implementations and continue to launch new innovative products to streamline the patient journey.
We're also supporting the growth of pharmaceutical manufacturers in the cell and gene therapy space through our advanced therapy solutions offerings for.
For example, we're partnering with Drexel to bring visibility and tracking capabilities to biopharma companies by helping them navigate cell therapies through multiple stages of development and commercialization.
Overall in specialty we're confident that the connection between our downstream and upstream strategies, what we call our specialty growth cycle will drive double digit growth well into the future.
Our nuclear business, which is on track to double profit by fiscal 'twenty six as of our fiscal 'twenty. One baseline is strategically positioned for growth at the center of precision medicine.
We're further investing in this space with a phase II investment of $30 million over the next several years to expand our center for thorough gnostics advancement and support our manufacturer partners projects as they advance through the commercial development pipeline.
We're encouraged to see pharmaceutical innovation expanding the breadth of conditions that are being addressed with emerging therapies, such as cell and gene and precision medicine.
As the future of health care continues to evolve our breadth of capabilities from pharmaceutical and specialty distribution radiopharmaceuticals and thorough gnostics to Biopharma and manufacturer services enables us to offer multiple touch points for manufacturers providers and patients to realize value from these promising new treatment.
Options.
Now turning to medical and priority number two.
When we introduced the medical improvement plan last August our immediate focus was turning around the performance in the core products and distribution, where we've achieved tremendous progress over the past 12 months.
We are on track to address the impact of inflation and global supply chain constraints by the time, we exit fiscal 'twenty four.
This is the number one key to returning to a more normalized level of profitability and we are now over halfway to our target.
We continue to execute our mitigation initiatives to offset elevated inflation and make progress with our commercial contracting efforts and we are exploring other offsets with urgency such as our manufacturing excellence and sourcing initiatives.
While overall costs remain elevated international freight is generally returned to pre pandemic levels and we expect this improvement to be reflected in our fiscal 'twenty four results.
We're driving significant progress through our five point plan to grow Cardinal health brand volume and seeing improvements in our leading indicators. This includes better portfolio held for key product categories and higher service levels customer loyalty index scores and retention rates for distribution.
We're driving enhanced customer experience through investments in product availability and automation, while optimizing costs.
At Investor Day, we highlighted our two pronged approach to portfolio lifecycle management, which has enabled us to completely exit our non health care portfolio and we are in the process of reducing over 2000 skus across our Cardinal health branded product categories to simplify the business, we are focusing our investments in new product development and capacity expansion in key growth areas such.
As compression enteral feeding ending continents within.
Within our products that are core to distribution. We are seeing continued stabilization with PPE. The smaller part of our portfolio, but a source of volatility during the pandemic and growth in our pre source surgical kitting category.
In our specialty products portfolio comprised of clinically differentiated products and leading brands like Kangaroo Kendall and protects us.
We're investing in innovation to meet customers' needs and drive sustainable growth.
For example, the launch of our new King grew omni enteral feeding system. This month.
As a result of our combined efforts commercial momentum is accelerating.
During Q4, we renewed several key distribution customers and saw positive net new wins during the quarter.
These leading indicators give us confidence that moving forward, we will participate in the growth from an overall improving medical utilization environment.
Outside the core we're on track to accelerate our growth businesses.
Home solutions, we're investing in DC network expansion to keep pace with increased demand as care continues to shift into the home.
For example, we recently began construction for a new 350000 square foot Greenville, South Carolina DC. This facility the 11th in our National network will be fully operational in 18 months to 24 months and equipped with advanced automation technology and robotics to drive operational efficiencies.
And not be free we provide premier logistics management powered by our technology capabilities and expertise, we're continuing to invest in digital tools to support core volume growth and sustain our strong performance.
Finally, we're continuing to execute our simplification and cost savings initiatives, such as optimizing our global manufacturing and supply chain and our international footprint for.
For example, we exited four additional countries and two additional manufacturing sites this year.
In short, we are making progress with our medical improvement plan. While there is still execution in front of us I am excited for the business to return to more significant profitability in fiscal 'twenty four.
Finally priority number three maximizing shareholder value creation.
We're maximizing shareholder value creation through operational performance robust cash flow generation and the responsible allocation of capital.
At Investor Day, Aaron detailed our new long term capital allocation framework, which builds upon our long standing priorities with some notable enhancements.
We're pleased that with our strong cash flow profile and the significant progress we've made on our balance sheet, we have the flexibility for share repurchases each and every year.
And with the residual cash flow that we anticipate will continue to opportunistically evaluate disciplined M&A and specialty and potential additional share repurchases.
While our team has made significant progress over the past year, particularly in realigning our operations for focus and simplicity. There is still work in opportunity in front of US we continue to evaluate additional value creation initiatives, including the progress, we're making with our ongoing business and portfolio review.
To wrap up I want to acknowledge our dedicated Cardinal health employees, we're fulfilling our central role in health care, serving customers and their patients.
Thank you for your determination and advancing our key priorities and moving healthcare Board I'm excited for the opportunities still to come with that we will take your questions.
And as a reminder, if you do have a question. Please signal by pressing star one on your telephone keypad.
Our first question today comes from Lisa Gill of Jpmorgan.
Alright, Thanks, Mike.
And then congratulations on the quarter.
Your line is open.
DLP one comment.
I understand you're raising revenue by 200 basis points. One is that all DLP one and two my understanding is they are a lower margin, but they are contributing to.
To overall margin dollar is that not the case when youre keeping.
Okay.
And when I think about the pharmaceutical segment for 2024.
Yes, good morning, Lisa Thanks for the question.
Yes, the primary reason for the raise in the guidance on the revenue.
As related to the <unk> one so we did not call out anything else. We saw a strong finish to the year as it relates to that and looking forward. We see that there is nothing that we can proceed in the near term that will change those trends as a reminder, we did call out for the first time <unk>. One is a benefit to our revenue from a from a year over year.
Growth perspective.
In the third quarter. So we have kind of a there was growth before that but not as significant as it was more meaningful in Q3 and Q4. So as you look forward to fiscal 'twenty. Four you would expect that revenue growth to be stronger than the first half of the year as that's more of a contributor now of course, we don't know what that slope is going to look like into two.
<unk> four but we would anticipate as you start to lap the second half of 'twenty three that that will be.
More more muted in terms of the year over year benefit.
And I guess, what as it relates to your second part of your question I would just reiterate that these are branded products and as such they are just not a meaningful contributor to segment profit.
And just leave it at that.
Next question please.
The next question comes from Eric Percher of Nephron research.
Thanks for all the commentary on medical performance I wanted to make sure we're kind of precise on the core performance.
And the stepping off point, there would be around $60 million not $82 million.
And then can you define seasonality of onetime benefit this quarter and any expectation that those will recur as we look at that cadence for fiscal year 'twenty four.
Eric Good morning.
Good to hear your voice and happy to give you a little more context on that look we were quite pleased with the results for medical as you can imagine delivering that $82 million of results that was $60 million of what we're referring to as core performance and $20 million in aggregate combined positive seasonality.
Audi and onetime items in the fourth quarter, and I called out I call out purposely that way because it does impact how we think.
Through the cadence of quarters during fiscal 'twenty, four now before giving a little more context on the quarterly guidance I do want to go back and just observe that.
We are we are reiterating the $400 million profit target for the medical segment from the year the medical improvement plan.
A key component of that remain unchanged from our description at the Investor day, as well, but we are providing a little more color relative to how we see the year playing out.
Given the number of moving pieces on the blocking and tackling as I referred to in my prepared remarks, as we carry forward. So.
Look from a.
From a.
Full year perspective, the way I would have you think about it is this as I said at Investor Day, If you take $60 million of core performance.
And multiply that by four that gets you to $240 million of profit right. If you add $100 million of.
Incremental inflation net on top of that that gets you to $340 million in total as we talked about at Investor day that leaves about $60 million of contribution from other elements across the year. The simplification of the Cardinal health brand et cetera, that's a full year view of how to think about it now as we think about the <unk>.
Cadence, though we.
Our being clear that the progress of the profit will be back half weighted during the year just like it was in fiscal year 'twenty. Three our view is that Q1 will have similar core performance with Q4 with sequential performance. Thereafter, Q1 is the seasonal low point for <unk>.
Bed products in distribution business due to both the timing of volume as well as our cost recognition.
An important point and similarly, we do expect that.
Continued acceleration of inflation mitigation over the course of the year as well so that will push the profit from a weighting perspective back half and then don't forget that while we were very pleased to call out a.
Sign of change in trend in Cardinal Health brand. We're also clear at Investor day that the Cardinal Health brand volume growth is largely back half weighted.
<unk>.
Next question please.
The next question comes from Kevin Caliendo of UBS.
Thanks.
Maybe to follow up on that a little bit so.
If we're thinking about 82, the baseline is really 60, the first quarter is likely because of the $20 million in seasonal and one timers.
The first quarter is likely to be down sequentially, then grow off that base to get to the 400 I just want to make sure that that's what you're committing to our call.
Commenting on and then secondly.
Incrementally.
New products to the Cardinal brand products is that the increase in the back half of the year is that because of new product launches or manufacturing capabilities is it contractually like new contracts coming on that are higher weighted can you just sort of explain the dynamics of the cardinal brand products as well.
Sure I'll start and then pass it over to Jason you are correct in that the way. We're thinking about this is that core performance Q4 to Q1 will be roughly in line and if you interpret what I was just saying in response to earlier question. We do have some negative seasonality in Q1 versus Q4 and so that's.
Why the jumping off point is that core performance versus the Q4 results Jason Yeah, I'd think about the Cardinal brand volume growth being back half loaded.
Through a couple of different lenses.
First of all we do think that the underlying utilization will be for the market will continue to be relatively consistent. So we do see same store sales growth out there and we anticipate that that will continue.
And within our performance within that we highlighted that our comparison point to the prior year is becoming easier.
As we did lose some business over the last.
18 months or so that we now are lapping and our five point plan is working on our five point plan to improve that includes improving the customer experience and importantly that supply chain health, we're seeing strong progress as it relates to service levels CLI scores that gave us very good customer reach.
Tension in the quarter net new wins that were positive in the quarter that gives us the foundation that gives us confidence that we will grow with the underlying market, especially as we continue to lap prior year impact, which we think will be more impactful in the second half of the year. So all the leading indicators are going as anticipated.
And consistent with how we laid it out at the Investor day, and it gives us the visibility and the confidence that we'll be able to participate in that market growth that we anticipate.
We'll be there over the course of this next year.
Next question please.
Our next question comes from George Hill of Deutsche Bank.
Yes. Good morning, guys. Thanks for taking the question I'll take it in a little bit different direction, Jason I'd love to hear the kind of the progress that you guys have made on the Vista offerings. Since it was first announced at the analyst day, and I guess given the growth in the size of the specialty market, particularly in oncology I guess, how should we think about the ramp of that business maybe through fiscal 2014.
Beyond sort of just kind of progress in ramping contribution. Thank you sure yes, great. Thanks for the question George.
Yes, so when we think about this I think it's important to recognize that we we have the foundation in place we have a foundation in place built.
Built off of our existing specialty.
Specialty business, we had.
Plenty of programs and initiatives in place platforms, like our Investor TFS, where we're already providing capabilities to the community oncologist to.
To help support their value based care initiatives.
Of course other data insights clinical research support so we had a lot of the tools.
The network is doing is bringing that all together in the form of.
Our business with new additional senior leadership brought in place. So that's one of the key things that's happened since the announcement a couple of months ago. As we have brought in additional leadership to bring on top of the strong team that we already had in place that we're already serving these important customers and their patients. So we are building that out further with both inter.
<unk> as well as external talent. We also created an advisory board to ensure that we are working directly with both current and perspective customers more than anything to make sure that they have a strong voice as to where we go next with the development of this platform and this in this business.
We continue to listen and be out in the field doing a lot of research, but we're also building what we're already notably to be some of the key attributes of this platform and this network that they are demanding.
What's key in will be highlighted before is that these are the 500 that we're focused on here.
<unk> very strongly interested in maintaining their independence. We're also hearing a strong desire for ongoing transparency, which as health care's. Most trusted partner, we feel like we're really well positioned for so it's only been a couple of months since we rolled this out but in that timeframe. We've got the team in place better definition of what the platform needs to be built out with.
And continue to work with those prospective customers to make sure that their needs are met.
Next question please.
Next question comes from Elizabeth Anderson Evercore.
Hey, guys. Thanks, so much for the question.
Okay.
<unk> cost that you just discussed in medical the $60 billion.
And do you expect to ramp Ratably over the course of the year is that something that has gone through those ports aren't going to have gone through already.
I think a little bit more help there would be very helpful. And then secondarily can you talk about why.
What is different about that.
50% of the inflation offset this year that was not the same last year.
Are they getting more price.
But I'm just looking for any.
Additional commentary.
What might be different about this remaining 90%.
Okay, I think I caught the essence of at least part of that.
Yes.
Let me start I believe part of the question was related to the next part of the inflation mitigation the second half.
The other question is related to the corporate cost ramp.
So let me start with the second part and then throw it over to Aaron for the for the first part.
So as you think about the inflation mitigation and the next piece. There is there is it's really the same for the second 50% is it was the first 50%. So in both cases, what we've seen is a moderation of the international freight that spiked significantly above.
Two years ago, and started coming down about a year ago and got back down to pre pandemic levels, maybe six to nine months ago. So that has been started to benefit us as we especially exited.
<unk> 23, so we did start to see that of course was inventory into our our inventory capitalize those costs into our inventory. So it took a little while for that to benefit our P&L as it.
Is that cost reduced.
And along the way in parallel with that of course, we were pricing.
Mainly on a temporary basis, the first year for those increases as well as increases in other commodity costs and transportation domestic transportation increased labor and all those other costs all those other costs a plateau.
Not coming down we don't see any signs of them coming down and so we have to price permanently for those items, we price temporarily for the international freight.
And as those costs on <unk>.
International freight rollout, we need to maintain higher prices and so we are continuing to price.
Some of those temporary prices.
Our <unk> are now being rolled into the permanent prices.
And so we would expect that as those contracts renew that we'll continue to see more and more of that pricing recognize me be very clear, we're not rolling back prices, we have not increased prices beyond the point of our costs at the 50% level, we're still only being compensated for half of that overall gross impact that we've incurred.
But over the course of this year, we do expect the international freight to come down and by the time, we exit fiscal 'twenty for the prices will continue to increase as we go through the course of the year as we get more of those.
Contracts renewed permanently and then that will crossover with the lower cost and then we'll exit in that manner than deer.
Aaron on the first question sure.
I think I heard a couple of different things and so I'm going to answer the question I think I heard.
And it goes something like this so we did I did comment earlier that in addition to the <unk> of the core performance and indeed, the inflation mitigation that Jason just touched on that there were $60 million of other benefit coming over the course of the year really driven by the three other pillars within the med improvement plan.
The contribution of the gross growth businesses, the simplification and the Cardinal Health brand work.
As I was touching on that work progresses over the course of the year and we've seen more benefit towards the back half of the year I want to emphasize the simplification efforts, Steve and the team are working really hard at that every day, we just see the benefit coming more in the back half of the growth businesses are making good progress they have some seasonality as well they are.
Certainly a strong contributor to the additional $60 million over.
Over the course of the year and then Jason has already touched on Cardinal Health brand. So I won't go there.
Next question please operator.
The next question comes from Daniel gross.
Yes.
Hi, Thanks for taking the question I just had one quick housekeeping question and then I'll ask my real question. There was a slight change in the language around your <unk>.
Relation mitigation efforts from your presentation to your current presentation. You went from fully mitigating by the end of 'twenty four to just mitigating curious if theres been some change in how youre thinking about things or if it was just kind of a simplification of the language and then my real question is around the generics business.
It seems like you and your competitors have all benefited from a more favorable environment and it seems like it might have accelerated towards the end of your fiscal year. So I'm just curious to get your thoughts.
The generics market potential shortages, and how youre thinking about the benefit or tailwind of generics in your fiscal 'twenty four guidance vis vis the strength you saw in fiscal 'twenty three.
Sure.
So in terms of the language change for inflation mitigation I think you said it best it's a simplification language. The one thing I would highlight is similar to our disclosures with COVID-19.
Over time, those became more difficult to precisely measure. So now we are in disinflation mitigation was always focused on the incremental inflation, because we had spikes unusual dramatic spikes in inflation, while there is normal inflation as well. So this is just a little bit broader language to recognize that over.
Time, it's becoming harder to differentiate between the two we have a good understanding of the most significant impacts like the international freight, but when you get into labor, what's normal what's incremental it becomes more challenging and we just have a little bit broader language to recognize that it is going to be less precise than it was early on in our measurement we're still doing.
As deep of analytics as possible to get a reasonable understanding of it.
As it relates to I think well I think the key takeaway with that as we are.
We're on track right that ultimately the strategy makes sense it should be pushed down to the final customer the final user of the products and services given the business model.
And so we believe that the basic tenants are absolutely unchanged, it's just reflecting the level of precision.
On your second question as it relates to generics.
As I step back and think about performance for the pharma segment. This year inclusive of generics I think I think you can kind of think about the overall segment as well as the generics business.
A couple of things that have occurred there as the overall market.
Utilization has been very strong and our performance has been very good within that.
And as that levels that for all the reasons Aaron highlighted is that a growth rate, that's a bit higher than what normal is and certainly higher than our long term growth targets are and as I think forward to fiscal 'twenty four we expect that to normalize we expect it to still be.
Favorable growth, we indicated during investor day, the 2% to 3% type of range from a unit volume growth and we would expect to participate within that and we expect our performance to continue with areas like Red Oak sourcing to continue to drive both the cost as well as to your other related point the product short.
They have a dual mandate to drive performance for both cost as well as our service levels to customers. So while there are product shortages.
Sporadic within the overall pharmaceutical distribution supply chain, that's not a new phenomena. There is various demand driven spikes in supply driven spikes.
Our goal of course is to minimize those challenges with.
Within that to give our customers the best possible service and what we saw.
In fact in fiscal 'twenty, three was a little bit of a benefit by being able to.
To supply products.
Second distributor.
It is not the primary distributor, but we had some opportunities where we're able to provide.
When others were short on product. So overall that was a slight positive for us this year as well and we expect those types of things to be more normalized.
Fiscal 'twenty four until well positioned.
To participate in that growth I would just add one thought which is in Q4, we saw strong volume as Jason highlighted but overall consistent market dynamics and indeed, as we look forward Jason called out the unit growth, but we are also.
Guiding to consistent market dynamics for the upcoming year as well.
The next question please.
The next question today comes from a J rice of credit Suisse.
Thanks, Hi, everybody I know.
On your medical side, the July going on in Europe , a little more skewed toward inpatient that some of the others that have reported but.
We've heard this discussion about an uptick in utilization from some of the providers and I wondered.
But if I Peel back everything that's going on in medical did you see any change.
Your behavior on the part of your customers suggest.
There was an uptick in utilization and then just on the PPE comment.
You're calling it normalization of profits from here do you think sequentially from here.
We're pretty steady and as we return to a normal environment is there any seasonality around that category to call out.
Remember when we get back to a normal environment.
Yes, the utilization, we think has been fairly consistent I wouldn't call it an acceleration or anything.
Seeing.
Pretty consistent underlying same store sales type of growth. So it's sufficient within our business model and where we laid out for investor day, but I wouldn't call out anything unique there.
As it relates to PPE normalization.
A couple of points. So normalize is good for US. This is not a category that we've ever made.
Tremendous amount of money in value is an important category for our customers and so we do everything we tend to satisfy their needs.
So going forward our objective is to ensure that we get customers the products they need and minimize the volatility that goes along with that but I just don't see it being a material driver one way or the other recall that the challenges with PPE was that we had volatile price cost and volume all at once.
What you have right now is a normal normalization that's been occurring over the last couple of years of both price and cost has been coming down somewhat steadily.
They've been standing staying in.
Relative type of spreads close enough to one another that's been manageable.
And it's not volume that's been a little bit more challenging we highlighted there was destocking beginning about well over a year ago now in terms of the underlying volume there, but given the margins are relatively tight for this type of product getting those margins right and relatively low margins means that the volume.
<unk> volatility where the lack of volume growth is not much of an issue for us because there's just not a large contributor of incremental volume or incremental margin. So we're at a level that I think it's fairly stable and is our objective to keep it that way.
Next question please operator.
Our final question today comes from Brian <unk> of Jefferies.
Good morning, this is <unk> for Brian .
I had a question about your capital allocation priorities for the fiscal year 2024 generated quite a bit of free cash flow. This fiscal year and I'm just curious if there's any specifics.
With regards to where you see capital allocation.
Next fiscal year. Thank you.
Great Great question. Thank you for putting on the table for US look we were very focused on our investor day in laying out the disciplined capital allocation.
Decision matrix that we apply and we were also very pleased to see the overall cash generation for fiscal 'twenty, three and Q4 in particular.
The simple answer we're going to do what we said we were going to do at Investor day in that respect and just as a quick reminder, there are a couple of things, which are table Stakes for US, which is first we're going to invest back into the business to drive the organic growth. We spent 480 in fiscal 'twenty three we've got and we're going to spend about $500 million in capex.
Against our business plans across the business. Our second priority of course is maintaining our investment grade balance sheet.
You will recall from our Investor day that we don't have short term maturities, we have some bonds coming due at the end of the year that we will likely refinance.
But we're feeling good about our investment grade balance sheet, and then we've committed to a baseline of return of capital to shareholders continuing to grow the dividend. We've raised at 34 years in a row.
Similarly, we committed to buy back at least $500 million of shares during fiscal year 'twenty three there's the table stakes parts of how we're going to use our cash as we then move through the year as we assess the opportunities in front of us as we assess how the business is performing we have two opportunistic levers that we will also be looking at the first is <unk>.
Active disciplined and targeted M&A largely in specialty and we have opportunities there that we're looking at as well and then.
On top of that we will also continue to look at incremental return of capital to shareholder nothing additional to announce today on either of those two levers, but we want to be clear that we are going to do what we said we were going to do with respect to our disciplined capital allocation strategy.
And that does conclude the question and answer session of today's call I would now like to turn the call over to CEO , Jason Hollar for any additional or closing remarks.
Okay, great. Thanks, again for joining us this morning.
Summarize fiscal 'twenty three was a great year, a year of inflection and we are excited to continue this momentum into fiscal 'twenty four and beyond.
Thank you and have a great day.
And that does conclude the fourth quarter full year 2023, Cardinal Health, Inc. Earnings Conference call. We thank you all for your participation and you may now disconnect.
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