Q1 2025 Cardinal Health Inc Earnings Call
Hello, and welcome to the first quarter of fiscal year 2025, Cardinal Health incorporated earnings Conference call. My name is George and I'll be your coordinator for today's event. Please.
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Speaker Change: Although I had the call over to your host today, Mr. Matt <unk>, Vice President of Investor Relations speak of today's conference.
Speaker Change: Please go ahead Sir.
Matt: Welcome to this morning's Cardinal health first quarter fiscal 'twenty five earnings conference call and thank you for joining US with me today are Cardinal health CEO, Jason Hollar, and our CFO Eric <unk>.
You can find this morning's earnings press release and Investor presentation on the Investor Relations section of our website at IR Dot Cardinal health Dot com.
Matt: Since we will be making forward looking statements today, let me remind you that the matters addressed in the statements are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied please.
Matt: 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.
Matt: Please note that during our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release.
For the Q&A portion of today's call. We kindly ask that you limit questions to one per participant so that we can try and give everyone an opportunity with that I will now turn the call over to Jason.
Jason Hollar: Thanks, Matt and good morning, everyone overall, Cardinal health delivered a terrific start to fiscal 'twenty five with strong operational and financial performance led by pharma and specialty solutions.
Jason Hollar: The ongoing strength and resiliency of our largest and most significant business was evidenced delivering 16% segment profit growth, reflecting the teams advanced preparations and excellent execution and managing through the previously communicated large customer transition.
Jason Hollar: We continue to operate in a stable industry environment with positive utilization trends underpinning our growth.
Jason Hollar: We saw particularly strong and broad based pharmaceutical demand this quarter across brand specialty consumer health and our generics program.
We are pleased to again support our customers with commercial distribution of the COVID-19 vaccines and preparation for the fall immunization season.
Jason Hollar: And as I alluded to the team executed our customer transition plans with urgency realigning operational processes to address inefficiencies facilitate the ongoing growth of the business and support new customer implementations.
In <unk>, while the Q1 financial results were below our expectations due to some unanticipated health and welfare costs that Aaron will cover in detail. Our team continues to make progress against the <unk> improvement plan, which is unchanged and take actions to enhance our supply chain resiliency.
Jason Hollar: We're confident in our plans to accelerate the performance of the <unk> business over the next two years, while also continuing our near term value creation focus as we outlined last quarter.
Jason Hollar: Across our other businesses nuclear at home and not be free we continue to be encouraged by the strong demand and underlying performance. We are seeing as these businesses continue to expand and benefit from positive industry trends.
Jason Hollar: In summary, we're pleased to be in a position to raise our enterprise guidance for fiscal 'twenty five after the first quarter. Our business is strong and we're confident as we look ahead with that let me turn it over to Aaron to review our results and updated guidance in more detail.
Thanks, Jason and good morning, Q1 delivered an excellent start to Cardinal Health's fiscal 2025 with outstanding results from our pharma segment, accompanied by solid operational performance from JMP D and the businesses included in other.
Aaron: As an enterprise, we grew operating earnings by 12% and EPS by 9%. Despite the recent customer transition.
Aaron: At the same time the team are definitely manage through an anticipated negative working capital unwind over delivering on our Q1 cash flow expectations and enabling us to continue to both invest in the business and execute on an early accelerated share repurchase program.
Aaron: With a solid start to the year I am delighted to share the headline that we are raising our EPS guidance to an EPS range of $7 75 to $7 90.
Aaron: And raising our adjusted free cash flow outlook for fiscal 'twenty five to a range of $1 billion to one 5 billion.
Aaron: More on that shortly.
Aaron: Let's review the results starting with slide four.
Aaron: Total company revenue decreased 4% to $52 billion better than we expected.
Aaron: Adjusting for the customer transition total company revenue increased 15% versus the prior year, reflecting our strong organic revenue growth across the rest of our business we.
Aaron: We also started to successfully onboard the first of the new customers that make up the over $10 billion of incremental revenue in pharma that we've referenced in our guidance for the year.
Aaron: Total company gross margin increased 9% driven by positive trends in both brands and generics in the pharma segment.
While we tightly controlled discretionary spending during the quarter on the face of our financials SG&A grew by $91 million or 8% versus prior year.
Aaron: Approximately half of this increase was driven by incremental health and welfare employee costs.
Aaron: This included substantially higher employee plan utilization costs, both numbers of claims and cost per claim as well as a onetime catch up charge, resulting from our third party actuary on whom we rely notifying us of a mistake in the calculation of our health and welfare plan liabilities from prior years.
Aaron: Even with that impact we delivered operating earnings of $625 million.
Aaron: 12% higher than last year.
Aaron: Moving below the line interest and other increased 15 million to.
Aaron: To $27 million.
Aaron: Primarily driven by lower interest income due to the anticipated lower cash balances.
Our first quarter effective tax rate finished at 23% up two percentage points due to the non repetition of some positive discrete items in the prior year.
Aaron: As a result of our share repurchases Q1 average diluted shares outstanding were $245 million, 2% lower than a year ago.
Aaron: The net result for Q1 was EPS of $1 88 growth of 9%.
Aaron: Now turning to the segments, beginning with pharma and specialty solutions on slide five.
Aaron: First quarter revenue decreased 5% to $48 billion.
Aaron: Due to the impact of the customer transition.
Aaron: Excluding that revenue increased 16% driven by brand and specialty pharmaceutical sales growth from existing customers.
Aaron: This included five percentage points of revenue growth from <unk> sales.
Aaron: During Q1, we saw strong pharmaceutical demand across product categories brand specialty consumer health and generics and from our largest customers.
Aaron: Segment profit increased 16% to $530 million in the first quarter, driven by a higher contribution from brand and specialty products, including a favorable impact from the earlier seasonal launch a COVID-19 vaccine distribution.
Aaron: And positive generics program performance.
Aaron: This more than offset the profit impact from the customer transition.
Aaron: In specialty we saw strong broad based performance across specialty distribution and Biopharma solutions.
Aaron: Notably specialty networks contributed to this performance as expected and we are pleased with the progress on the integration.
Aaron: With COVID-19 vaccines recall last year. The Fda's original approval for commercial distribution came on September 11th and our demand peaked in October.
Aaron: This year, we've seen distribution peak within the first quarter.
Aaron: While the demand for COVID-19 vaccines in the second quarter is difficult to predict trends tell us that we should continue to expect a modest headwind for the full year with the tailwind we saw in Q1 more than offset by lower year over year COVID-19 vaccine sales in Q2.
Aaron: This overall impact is consistent with our prior guidance for the year.
Aaron: Our generics program continued to see volume growth, coupled with consistent market dynamics, including strong performance from Red Oak.
We also need to give our teams significant credit for planning ahead, and executing quickly on our plans to optimize our cost structure and operations following the customer transition.
Aaron: We found incremental opportunities to improve our overall business as a result of the flexibility created by the contract transition.
Aaron: So overall, we are very proud of our pharma team navigating a large complex change to the business, while delivering a tremendous quarter, a 16% segment profit growth in pharmaceutical and specialty solutions.
Aaron: Turning to the <unk> segment on slide six.
Aaron: Revenue increased 3% in Q1 to $3 1 billion.
Aaron: Driven by volume growth from existing customers.
Aaron: Our solid operational progress made in the quarter was obscured by a $17 million year over year increase in the previously mentioned health and welfare costs and resulted in the <unk> segment profit decreased to $8 million in Q1.
Aaron: As previewed last quarter. Our results were also impacted by increased manufacturing cost <unk>.
Aaron: Including some start up costs related to expanding domestic manufacturing to enhance our supply chain resiliency, which we expect to also impact Q2.
Aaron: On the positive and improvement in net inflationary impacts, including our mitigation initiatives and growth from existing customers, mostly offset the decline in the quarter.
And we also again saw year over year growth in Cardinal brand volumes during the quarter.
Aaron: Finishing with the business is reported in other <unk> on slide seven.
Speaker Change: First quarter revenue increased 13% to $1 2 billion due to growth across all three businesses at home solutions nuclear precision health solutions in optic freight logistics.
Speaker Change: I am pleased with the underlying performance of all three of our businesses and other as they collectively grew segment profit in the quarter by 8%.
Speaker Change: Driven by the performance of <unk> freight logistics.
Speaker Change: <unk> had another strong quarter as demand for health care logistics technology and services continues to grow.
Speaker Change: Now turning to the balance sheet.
Speaker Change: We ended the quarter with a cash position of $2 9 billion.
Speaker Change: Which includes $200 million youre.
Speaker Change: Earmark for the November debt maturity with an additional $200 million to be paid through the time deposits held in prepaid assets and other on the balance sheet.
Speaker Change: Adjusted free cash flow was a use of $1 4 billion for the quarter better than our expectations and as guided reflected the large contract unwind and the unfavorable quarter and day of week timing, we previewed on our Q4 call.
Speaker Change: During the first quarter, we continued to deploy capital according to our disciplined capital allocation framework.
Speaker Change: We invested $90 million in capex back into the businesses to drive organic growth.
Speaker Change: We returned approximately $500 million to shareholders through the share repurchase and dividends, including a $375 million accelerated share repo program.
Speaker Change: We continue to invest in specialty by reaching an agreement to acquire integrated oncology network for $1 $1 billion deal, which has not yet closed Jason will elaborate on that shortly.
Speaker Change: Now for our updated fiscal 'twenty five guidance on slide nine beginning with the enterprise.
Speaker Change: After the strong start to the year, we are raising our fiscal 'twenty five EPS guidance to the range of $7 75 to $7 90.
Speaker Change: 20, <unk> increase at the midpoint from our prior guidance of $7 55 to $7 70.
Speaker Change: Primarily reflecting our improved pharma segment profit expectations were.
Speaker Change: We are raising our adjusted free cash flow guidance to a range of $1 billion to $1 5 billion.
Speaker Change: We are also adjusting our guidance for our individual segments as seen on slide 10.
Speaker Change: For pharmaceutical and specialty solutions.
Speaker Change: We are improving our revenue outlook to a decline of 2% to 4%, reflecting the strong broad based pharmaceutical demand trends, we've seen so far including increased expectations for <unk> sales.
Speaker Change: Our full year COVID-19 vaccine expectations are unchanged.
Speaker Change: Normalizing for the customer transition fiscal 'twenty five revenue growth at the midpoint would now be between 18% to 20% our.
Speaker Change: Our expectations for incremental volume from new customers and customer expansions is generally unchanged from what we outlined a quarter ago over $10 billion of revenue in fiscal 'twenty five.
Speaker Change: Our segment profit following the strength of the first quarter, we are raising our pharma segment profit guidance for the full year to 4% to 6% growth, which I'll note is consistent with our long term target despite the contract transition.
Speaker Change: In terms of pharma segment profit cadence given the earlier COVID-19 vaccine season, along with the contract exploration. We continue to expect Q2 segment profit to be slightly down year over year with growth resuming in our third and fourth quarters.
Speaker Change: Turning to <unk>.
Speaker Change: We are updating our <unk> segment revenue outlook to 2% to 4% growth to reflect the recent notification of lost lower margin VA government distribution contracts, which will partially offset some of the new distribution volume. We are onboarding in fiscal 'twenty five we do continue to expect 3% to 5% Cardinal health brand revenue growth.
Speaker Change: For the year.
Speaker Change: Our segment profit we are updating our fiscal 'twenty five guidance, primarily to reflect the impact from the health and welfare costs I reference.
Speaker Change: We are still in the fight to hit a $175 million in segment profit for the year.
Speaker Change: And the <unk> team is executing on additional initiatives to recover the gap arising from Q1 results.
Speaker Change: Nevertheless, given the unanticipated health and welfare impacts and other externalities impacting the business, we think it pragmatic in the near term to adjust our G&P segment profit outlook to a range of $140 million to $175 million.
Speaker Change: I want to emphasize that while the timing and impact of specific incremental actions identified by the team to support the <unk> strategy and profit growth may be pressed to fully impact our fiscal 'twenty five those efforts continue to support our focus on $300 million as our profit goal for fiscal 'twenty six.
Speaker Change: Regarding GMT segment profit quarterly cadence, we continue to expect profit to be back half weighted with sequential improvements each quarter driven by the ongoing commercial and operational improvements in the business as well as seasonality.
Speaker Change: We continue to expect Q2 to be impacted by higher manufacturing costs, along with some carryover from the higher health and welfare plan utilization we saw in Q1.
Speaker Change: In other we are reiterating our prior guidance of 10% to 12% revenue growth for the full year and approximately 10% segment profit growth.
Speaker Change: One note on others cadence, we are expecting an industry wide raw material shortage of moly 99 to impact the nuclear business volume and profitability in Q2.
Speaker Change: As a result, we expect Q2 segment profit growth for other to moderate to the low to mid single digits for the quarter.
Speaker Change: However, we expect these volumes to generally return in subsequent quarters as delayed procedures are rescheduled.
Speaker Change: With those details on the table, let's return to the enterprise guidance for a second on the positive side, we have the combination of a raise to our pharma full year guidance, which is reflective of our anticipated offset in Q2 from the earlier COVID-19 contribution.
Speaker Change: And anticipated efficiencies in corporate for the rest of the year.
Speaker Change: Those positive trends are partially offset by a wider full year profit range, we are providing today on <unk>.
Speaker Change: The combination gets us to our <unk> raised guidance at the midpoint following our first quarter.
Speaker Change: Before I wrap up a couple of comments on capital deployment.
Speaker Change: Our disciplined capital allocation strategy continues to be our north star invest.
Speaker Change: Invest in the business protect our investment grade credit rating provide baseline return of capital and assess additional M&A and return of capital opportunities.
Speaker Change: Of note, even with our announced investment and return of capital plans, we expect to be at the bottom end of our targeted leverage range of two five times by the end of fiscal year 'twenty five.
Speaker Change: As I hope you can tell from our fiscal year 'twenty, four and Q1 fiscal 'twenty five announcements our eyes remain firmly focused on delivering shareholder value creation over the long term.
Speaker Change: To close we started fiscal 'twenty five strong I am, especially pleased to see the performance in our pharma segment.
Speaker Change: Raising segment guidance in our largest and most significant business to our long term target while managing through quite a large change is further proof of the strength and resilience of this business.
Speaker Change: All of our businesses I am excited for the value creation opportunities in front of us and look forward to updating you on that in coming months with that I will turn it back over to Jason.
Jason Hollar: Thanks, Darrin the strong first quarter results build upon the momentum we've established over the past couple of years by ruthlessly prioritizing simplification and core operational execution to serve our customers and their patients with essential products and industry leading service.
Jason Hollar: There are also a testament to the actions we've taken to solidify our core foundation and increase our exposure to higher growth and higher margin areas.
Jason Hollar: Pharma and specialty solutions.
Jason Hollar: Been consistently focused on execution in the core and expanding in specialty.
Jason Hollar: This quarter, we made further progress on both fronts.
Jason Hollar: We delivered strong operational performance across our distribution network.
Jason Hollar: During the quarter, we achieved multi year highs in productivity and our service levels reached their highest level in over a year.
Jason Hollar: Key part of our ability to maximize service delivery for customers is our generics program.
Red Oak continues to effectively execute its dual mandate managing both cost and available supply, which supports a positive volume growth in performance that we've seen and continue to expect.
Jason Hollar: On the businesses commercial front, we've seen successful renewals and extensions of key customers and a couple of recent customer on boardings that are gone smoothly due to our team's continual customer focus.
Jason Hollar: And specialty we've seen strong continued momentum both downstream and upstream we're thrilled to have reached an agreement to acquire integrated oncology networks as we announced in September.
Jason Hollar: Together Cardinal health in Ion we will continue to push forward in our joint mission to improve cancer care in underserved communities.
We will drive innovation through them Avista and specialty networks platforms to offer community oncologists, who seek to remain independent suite of clinical and economic offerings to improve patient care and enhance practice performance.
Jason Hollar: Integrated oncology network adds immediate scale to our offerings.
Jason Hollar: It's 10 state footprint ions more than 100 providers deliver broad, reaching care and medical and radiation oncology urology diagnostic testing and provide other ancillary services.
Jason Hollar: That brings to the Vista additional proven in house MSL solutions, such as revenue cycle management payer relations and formulary management.
Jason Hollar: When combined with <unk> Tech solutions focused on supporting the clinical and operational needs of independent community Oncologists and specialty networks PPS analytics platform. We can offer a powerful combination for independent physicians to lower costs improve outcomes and drive success in value based care.
Jason Hollar: While we are pleased with the suite of services and capabilities. We're building, we will continue to invest organically and actively evaluate additional inorganic opportunities to further accelerate our growth strategies across the specialty therapeutic areas.
Upstream with manufacturers, our Biopharma solutions and advanced therapy solutions businesses continued to develop new offerings.
Jason Hollar: For example, we launched our advanced therapy connect provider ordering solution in the quarter.
Jason Hollar: The streamlined provider portal enables treatment centers to access their contracted cell and gene therapy products in one place to ensure a seamless patient care and efficient product availability.
Jason Hollar: Turning to <unk>, where we're continuing to execute our <unk> improvement plan initiatives.
Jason Hollar: Our team is operating with urgency driving positive operational progress across key priorities implementing significant distribution wins, taking actions to drive our Cardinal health brand pipeline strengthening our offerings and mitigating the impact of macro challenges, while enhancing our supply chain resiliency.
Jason Hollar: During the quarter, we secured key distribution renewals and remain on track to implement some notable new distribution wins during the year.
Jason Hollar: Overall utilization trends remained stable and we're seeing consistent growth across our customer base.
Jason Hollar: With Cardinal Health brand are leading indicators remain healthy service levels have continued to trend positively back orders remained near multi year lows and were maintaining industry, leading customer loyalty index scores for U S distribution.
Jason Hollar: We're constantly striving to provide our customers and their patients with the right products at the right place and time on that note demand for the newest Kangaroo Omni enteral feeding pump has continued to build in fiscal 'twenty five with onboarding of thousands of patients in the U S and Canada in Q1.
Jason Hollar: We look forward to expanding patient access to this pump globally throughout this fiscal year with launches into EMEA and APAC regions. Additionally.
Jason Hollar: Additionally, we are preparing to launch of our next generation Kendall compression device in the back half of the fiscal year.
Jason Hollar: The next generation platform is designed for optimal outcomes to prevent deep vein thrombosis and pulmonary embolisms by enhancing blood circulation.
Jason Hollar: We're also adapting our operations to the macro environment, while leveraging the diversity of our global supply chain.
Jason Hollar: During the quarter, we significantly expanded domestic syringe production at two U S based manufacturing facilities in response to industry wide disruptions and tariffs.
Jason Hollar: We're managing through external challenges such as the impacts of the east coast Port strike and southeastern Hurricanes with minimal disruptions to our service.
Jason Hollar: And as we've exited the quarter, we've seen a decline in international freight costs from our recently elevated levels.
Jason Hollar: We're continuing to take an aggressive approach to managing our cost structure and evaluating opportunities to accelerate planned initiatives in support of our goals.
Jason Hollar: In short with the significant progress we've achieved to date, we remain confident in our turnaround plan and the opportunities for <unk> on the horizon.
Jason Hollar: Turning to our other businesses in.
Jason Hollar: In nuclear and precision health solutions. The business has continued its double digit revenue growth with above market growth in the core categories and <unk>.
Speaker Change: As Aaron indicated we are anticipating that an industry wide shortage will have an adverse impact on second quarter volumes for many of our core low energy products, we've been working closely with suppliers to maximize available doses to minimize disruptions as much as possible.
Speaker Change: With pet, we're investing to increase our cyclotron capacity and geographic reach to meet increasing demand for diagnostic imaging agents, such as GE healthcare's visible used for early detection of Alzheimers and dementia.
Speaker Change: Slide the core we've continued to see significant demand for <unk> products, which again grew revenue over 20% in Q1, most predominantly in the areas of oncology with products such as Felix is elusive.
Speaker Change: And at home solutions, we're also continuing to see double digit revenue growth and deliver a leading customer experience. We've seen strong growth across key categories, such as CGM and urology, which supports our ongoing focus on driving positive operating leverage the benefits of our investments in additional distribution capacity and increase automation are beginning to.
Speaker Change: Take hold in Q1, our primary operational metrics have achieved the highest levels on record for service quality and efficiency, we expect to continue investing in the growth and capability of this business.
Speaker Change: And and not be freight logistics for continuing to invest in tech forward platforms, such as our total view insights and evolve our capabilities to unlock decision driving insights and value for our customers.
Speaker Change: For example, our recent product launches include enhancements to our limited liability shipment product that provides coverage on critical shipments and makes it easier for customers to view spending trends and tracking on these shipments were always working to add incremental value and capabilities to satisfy the needs of our customers.
At an enterprise level the actions, we've taken to strengthen our balance sheet over the past several years, along with our team's relentless attention to optimizing our working capital has positioned us with significant financial flexibility, we're continuing to invest in the business return capital to shareholders and prioritize the right strategic choices to act.
Speaker Change: Celebrate our long term growth.
Speaker Change: We are in an active M&A environment, and we will continue to pursue inorganic activity to those areas that fit with our strategic priorities of investing primarily in specialty as well as the other growth areas of at home nuclear and not be free.
Speaker Change: Before I wrap up I'd like to acknowledge all those affected by the devastating southeastern Hurricanes. Our priority is always the wellbeing of our employees and our customers.
Speaker Change: I'm proud, but not surprised that how the cardinal team has navigated challenges to continue delivering for our customers and their patients.
Speaker Change: To close we had a great start to fiscal 'twenty five and are excited to continue building upon our momentum. Thank you to our team for their many tireless efforts fulfilling our role as healthcare as most trusted partner with that we will take your questions.
Speaker Change: Thank you very much Mr. Hauser.
Speaker Change: Ladies and gentlemen, as a reminder, if you wish to ask a question. Please press star one on your telephone keypad. It also please limit yourself to one question each please.
Today's first question will be coming from Lisa Gill, calling from JP Morgan. Please go ahead.
Lisa Gill: Hi, Thanks, very much and good morning, I, just really wanted to focus on the drug distribution.
Lisa Gill: Which had really great results and just a few questions first when I think about the vaccine. Thank you for calling out that the revenue component.
Speaker Change: Jason or Eric can you talk about the margin is that materially better or is there something else that was driving that margin improvement when we think about the quarter and then secondly, when you called out the revenue improvement around specialty what we've heard from some of the managed care company and as that changes and IRI as potentially driving incremental volumes, especially around specialty.
And those changes.
Speaker Change: Increase as we think about calendar 2025, so I'm just curious as to how youre thinking about volumes there margins there. So just overall.
Speaker Change: My two questions in a single question with just really be around that segment first being how do you think about the vaccine and contribution to the margin and then secondly, how do we think about what's happening on the specialty side. Thanks, so much.
Yes, Thanks Lisa.
Speaker Change: I'm glad you asked that question first because that's I think very much. The highlight of this quarter is what's driving the pharma segment. We gave a lot of color in the script, but let me go a little bit deeper and just put some additional commentary to behind it.
Speaker Change: It was a strong quarter for the pharma segment and you referenced a couple of key components and I'll get into those but let me just kind of back up and talk about the key drivers overall, because what youre going to hear from me is there is not any one thing in particular.
Speaker Change: In particular that drove the success this quarter there were a bucket it into three key buckets first of all and I think it's the essence of your question is we did see very strong and very broad demand utilization across various customers across various product classes of trade.
Speaker Change: It really all corners of the pharma business was strong from utilization perspective.
Weather.
Speaker Change: We're talking about brand or in consumer health or generics you call out specialty within specialty we saw strength in distribution as well as Biopharma services and solutions and so we have.
Speaker Change: Across that spectrum, some really good strength, specifically with COVID-19.
Speaker Change: Yes, the volume was stronger this quarter because the FDA approval of course was about a month earlier than last year. So September 11th last year Middle to late August. This year. So we had the peak of Covid volumes clearly was in Q1. This year. It was clearly in October in Q2 of last year so that.
Speaker Change: Is a difference however, I would highlight that the actual contribution to year over year earnings for the pharma segment was a small tailwind slight tailwind associated with Covid, so higher and better than what we thought for the first quarter, but not a significant driver of those year over year results. It was the other breath and.
Speaker Change: The strength of the utilization that was a bigger driver.
One last comment on the Covid vaccines is while we see the timing difference for Q1 and Q2 for the full year, we still anticipating debating the same a modest headwind year over year, but that will be all of that headwind will be in the second quarter. So that's the first point the primary point strong volume across the board second point is the volume.
Speaker Change: We did see we did see some favorable mix. So the types of customers plots the trade was more favorable.
Speaker Change: I would highlight that that's really on the back of that broad strength in underlying utilization and then the final leg of the stool is the fact that with that volume we had fantastic service levels multiyear productivity enhancements.
Speaker Change: Enhancements.
Speaker Change: In a quarter in which we had a lot of change a lot of transition of customers, we performed incredibly well, meaning that that volume that we did have we were able to deliver it efficiently and to some degree we will actually even deliberate right having good service levels improved service levels in this quarter strong levels that allowed us to actually execute upon that.
Speaker Change: So those are the drivers it's more than just vaccines is more than just specialty.
Speaker Change: Within your question around <unk>, and perhaps there may be some dynamics there we did see specialty growth faster than the overall when you look at our overall enterprise growth.
Speaker Change: Our pharma growth ex the large customer transition that was 16% when you look at specialty in the same way it was a little bit higher than that so we did see some strength there, but I wouldn't say that this was driven by that it was a component of that underlying growth.
Speaker Change: Next question please.
Speaker Change: Yes, Sir.
Speaker Change: Question will be coming from Michael Cherny of Leerink.
Speaker Change: Partners. Please go ahead.
Michael Cherny: Good morning, Thanks for taking the question, maybe I'll try a similar approach to Liza one question, but a couple of pieces tied into it I just wanted to bridge the gap on the 300 basis point uptick in pharma guidance for the year is there any way I mean.
Speaker Change: Jason I heard you talk a lot about utilization improvements, but any way you can give us a sense of what were the biggest drivers that led to the full year improvement and specifically within there you mentioned the COVID-19 headwind being modest year over year I, just want make sure sustained level of modest and then anything you can say on <unk> economics.
Speaker Change: That played any role in the guidance uptick or not thank you.
Speaker Change: Great. Good morning, happy to talk and provide some perspective on.
Jason Hollar: The updates to guidance pro forma and of course, starting where Jason left off we are really pleased with the Q1 performance leading to the raised for our guide to actually to our long term target of 4% to 6% and profit growth for the year, it's really driven by the strength and the resiliency of the business in Q1 that we see continuing.
Jason Hollar: As we carry forward now part of this is just execution you heard Jason referenced the strong broad based demand rent that certainly assist in the range to our guidance. It's also the case that as we walked into Q1, we were very focused on how are we going to execute as part of the customer.
Transition.
The good news is is that while we've managed the team manage that very well both from an income statement perspective and from a working capital perspective.
Jason Hollar: The impact that we were anticipating in Q1 was offset by significant simplification, we got more done there than we had anticipated, especially networks contributed new customers. You heard me say, we started to onboard those as well until the pieces are really coming together, helping to give us more confidence than as we carry forward through the year as well how the offset of that.
Jason Hollar: <unk> will.
Jason Hollar: We'll continue now our guidance assumes.
Jason Hollar: Consistent market dynamics in our generics portfolio, we saw strengths in Q1, and generics and we anticipate those consistent market dynamics are continuing.
Jason Hollar: Guidance also continues to see increased contributions from brand and specialty products I won't repeat what Jason just had to say about that category. COVID-19, We did guide at the start of the year and indeed, our guidance continues that it will be a modest headwind for us through the year notwithstanding that was a modest tailwind for us.
Jason Hollar: During Q1.
Jason Hollar: On the revenue side of the house, we of course, we did call up our overall guide there and Thats driven in part by strength from the existing customers and strength from new customers and the GOP ones are.
Jason Hollar: Continuing to contribute and grow more so than we had originally expected and thats about four percentage points of the revenue increase now from a cadence perspective on the guide anticipating perhaps your next question.
Speaker Change: Q2, we are guiding to be slightly down due to the headwind from COVID-19.
Speaker Change: The second half we are expecting to be consistent with the guide of 4% to 6% that we have for the long term and as I frequently say Q3 will be the highest dollar profit.
Speaker Change: <unk> just given that's when we see the impact of brand inflation over the over the course as well one final note on the guide our guide does not include the impact of Iron will.
Speaker Change: Integrated oncology network acquisition, we will.
Speaker Change: Provide that uptick update to our guidance when we close although I am pleased to report that the.
Speaker Change: The HSR waiting period on that transaction has now expired and subject to the completion of some other customary closing conditions. We are anticipating that we're going to close that deal by the end of the calendar year.
Speaker Change: Next question please.
Speaker Change: Our next question is from Erin Wright of Morgan Stanley. Please go ahead.
Erin Wright: Great. Thanks, Yes, it's primarily with John but I do want to ask on medical.
Medical here, so how do we think about the quarterly progression and medical at this point, where the balance of the year and then how are you thinking about kind of just underlying demand trends. Excluding some of the dynamics that you were talking about in your prepared remarks, but just underlying utilization across that medical thank you.
Erin Wright: Okay.
Speaker Change: Great question, let me offer some perspective on both the quarter and the year as we carry forward.
Speaker Change: Chart with the headline that we are still in the fight to hit the 175 that was our original guide for the year and it is absolutely. The case that would continue to make progress against the GNP improvement plan and our fiscal 'twenty six target of 300 $300 million, which is unchanged notwithstanding.
Speaker Change: Notwithstanding the results in Q1.
Speaker Change: We did update our guide for the year to be $140 million to $175 million, primarily reflecting some unanticipated health and wellness cost.
Speaker Change: And just a little bit more context on that at the enterprise level that was around $45 million I think I called out about half of the $91 million increase in overall SG&A about a third of that was an error by our actuaries tied to prior years. The rest was tied to.
Speaker Change: A notable increase in the number of claims as well as notable increase in the cost per claim.
Speaker Change: Unusual level for us.
Speaker Change: That's really what was driving the Q1 performance we are otherwise quite pleased with the G&P D progress against the plan the tenacity, they showed and continuing to find additional opportunities.
Speaker Change: To help drive the plan now the health and wellness challenges, we arent anticipating there'll be the same level in Q1, certainly given the breakdown I just gave you.
Speaker Change: Security into Q2.
Speaker Change: But the team continues to accelerate as we knew they would as we plan they would against the execution of the <unk> improvement plan for fiscal 'twenty five and we are seeing increased increased contributions from the planned initiatives. The mitigation of the supply chain cost inflation as well as in progress right significant year over year growth.
Speaker Change: From the fiscal 'twenty for inflation mitigation that we've already experienced we are anticipating the Cardinal health brand revenue growth will continue following the 3% fiscal 'twenty for revenue growth there and the team has proven very tenacious and finding additional ways to simplify and cost optimize their busy.
Speaker Change: As we carry forward.
Speaker Change: From a cadence perspective, the cadence for our guide remains unchanged from our prior guidance. We have always said the plan. The JBT improvement plan will be back half weighted and indeed that continues there is no change to the overall seasonality of the business from what we've described previously, but we are expecting sequential improvement quarter over.
Speaker Change: Over quarter as we push ahead.
Speaker Change: Now the only thing I would add is there is an element of utilization I think in your question Erin.
Speaker Change: And you certainly didn't see the same level of strength on the medical side that we have seen on pharma products, but with that said.
It's fairly consistent utilization than what we've seen more recently historically in the last year or two so we're not seeing big changes there which to me is.
Speaker Change: Partly positive just given when you think that all the macro factors and the hurricanes and of course, the disruptions with saline.
Speaker Change: That we're not seeing big changes some smaller health systems, we do see there being some deferral or cancellation of some procedures, but overall, we've not seen wide.
Speaker Change: Wide aspects throughout the industry on that so cautiously optimistic that we as well as our customers are doing a fantastic job of managing through some disruptions at this point, we don't see materially impacting underlying utilization.
Speaker Change: Yes.
Speaker Change: Next question please.
Speaker Change: Next question will be coming from Eric Percher Nephron Research. Please go ahead. Your line is open.
Eric Percher: Thank you question on pharma, we heard some commentary from manufacturers of DLP ones on inventory fluctuation.
Eric Percher: The DSA agreements do not allow you to build inventory in pharma is pretty good visibility can we check that assumption and then relative to GL and DLP. One inventory have you been able to optimize as growth stabilizes and was that at all a factor in improving cash flow.
Speaker Change: Yes, so I'm aware of some comments on <unk> inventory, obviously can't speak for the broader industry for US specifically, we manage this very closely as.
Speaker Change: As you can imagine that there's a lot of volatility in terms of strong demand.
Speaker Change: Supply that does not meet that demand. So we're managing it at a very detailed manual level and we have seen very static levels of inventory relatively low levels of inventory to have not fluctuated much at all over the last several quarters.
Speaker Change: Relatively low levels of inventory certainly, but it is our practice our priority to get this product in the hands of our customers and ultimately to patients as quickly as possible. So no we have not been.
Speaker Change: Changing our levels of inventory in any meaningful way whatsoever.
Speaker Change: As it relates to our the impact on.
Speaker Change: Our underlying financials. It is 5% of that 16% Q1 revenue growth. So it was certainly meaningful to our.
Speaker Change: Our top line.
Speaker Change: And still it implies strong growth ex.
Speaker Change: Ex that GLC one impact.
Speaker Change: As we've always said it is not a meaningful driver of our earnings and that continues to be the case and is not a significant driver of the financial results other than revenues for this particular quarter.
Speaker Change: And given the inventory is not fluctuating is also not a significant driver of our cash flow.
Speaker Change: Next question please.
Speaker Change: Yes.
The next question will be coming from Allen Lutz of Bank of America. Please go ahead.
Allen Lutz: Good morning, and thanks for taking the question one for Aaron.
Allen Lutz: The gross margin really nice improvement year over year, obviously, youre getting some type of benefit there from losing a low margin customer, but is there any way to frame the puts and takes on the gross margin line excluding that contract change.
Speaker Change: Yeah.
Speaker Change: Yes.
Speaker Change: I'll take that one first I know you would give it to erinn I'll, let him talk after me, but I'm. The one that made a lot of statements on this before Erin arrived and after he arrived so.
Speaker Change: I did not.
Speaker Change: <unk>.
Speaker Change: When gross margin rates were.
Speaker Change: Lower year over year, I always highlighted thats not how we manage our business, we manage our business on gross margin dollars and so I'm not going to take credit for our gross margin rate improvements when we lose a low margin large customer. So I. Appreciate the fact that we like the direction of those metrics and all things being equal I would love.
Speaker Change: To have higher margin rates, especially if revenues are growing higher but in a business like this that has negative working capital very.
Speaker Change: Slim overall margins, what's important is how we manage the balance between our SG&A and our gross margin and.
This is another great example of that this quarter that regardless of the gross margin rate, we manage gross margin dollars higher than our SG&A increase and that's what keeps this model working the way it is.
Speaker Change: And that's what we're going to continue to be focused on will celebrate the margin rate increases which are largely driven by.
Speaker Change: The cost reductions and the mix benefits and having more higher margin customers fewer lower margin customers, but it's not a model change and thats. The key thing I want to get across and I just realized I, probably took all youre talking points, Aaron anything to I thought that was incredibly well.
Speaker Change: The next question please.
Speaker Change: We will now go to Kevin Caliendo of UBS. Please go ahead.
Thanks, I appreciate you taking my question.
Kevin Caliendo: My question. So I just want to make sure theres been no necessarily any change in <unk> economics going forward.
Speaker Change: At all that's not driving in any way the change in guidance for the full year and to sort of secondarily.
Speaker Change: One of the infusion companies, who reported this week suggested that.
Speaker Change: The layer of pricing brand pricing was going to get cut come 102005, when biosimilars came in I'm just wondering.
Speaker Change: Part of Thats infusion part of that is sub Q, but im wondering if a brand company lowest price.
Speaker Change: Sort of a lower level, how does that impact you does this.
Speaker Change: Potentially impact you in any way can you just talk through the economics of how that would work.
Speaker Change: And potentially impact you if at all thanks.
Speaker Change: Sure.
Speaker Change: Yes, no the GOP, one economics, I think I basically answered that one before.
Speaker Change: So I don't think there's much else to add there it's not a key part of the change again I highlighted that broad strength.
Speaker Change: I didn't even mention Gop's, specifically, what I was talking about the key drivers there.
Speaker Change: We love innovation, we think that's great for.
Speaker Change: The industry, it's great for us.
Speaker Change: It benefits, we'd like the volume it helps allow us to be even more efficient and things of that nature.
Speaker Change: But.
Speaker Change: It's not something that <unk>.
Speaker Change: Specifically drove.
Speaker Change: The underlying.
Speaker Change: Strength that we saw in all those other areas that I highlighted.
Speaker Change: It's a component, but it's definitely not the driver.
Speaker Change: In terms of.
Speaker Change: The Solara comment this is not new when it comes to price changes that we see in our industry. The model continues to work in a way that makes sense for us.
Speaker Change: We basically operate on a fixed fee basis for.
Speaker Change: For our service and that concept was recently tested yet again with insulin and those dramatic price reductions that we saw at that point and not only us, but our peers you didn't hear us talking a lot about that type of flow through so we continue to believe that we are by far the best alternative to <unk>.
Speaker Change: Delivering.
Speaker Change: These products safely securely and efficiently in the marketplace.
Speaker Change: And when the price levels change the dollar fee, we get for those prices from.
Speaker Change: So stock and support on the manufacturer side is unchanged. We provide the exact same service and expect to get the exact same financial compensation for that so we continue to expect that model to continue to evolve.
Speaker Change: And what are you talking about again insulin or Solara. You also have all of the IRA products that will happen in phases over the future and each of those cases.
Speaker Change: Would expect that model to continue to hold given how how we have structured that today and how we will continue to evolve with it.
Speaker Change: Question. Please.
Speaker Change: Our next question will be coming from Eric Coldwell of Baird. Please go ahead.
Eric Coldwell: Thanks, very much good morning.
Eric Coldwell: And congrats on the good performance here I had a couple of just quick ones on <unk>.
Eric Coldwell: I just wanted to confirm that profit in the segment would have more than doubled it looks like if not for the unexpected increase in health and wellness wellness costs.
Eric Coldwell: And just so I guess a confirmation on that and then is it possible to size the incremental manufacturing costs as you build out the syringe capacity in the U S. And also talk about what Youre seeing with international costs across other products. We're hearing some suppliers might be raising their costs as we're seeing some of these.
Eric Coldwell: China tariffs knock ons and then some of the other.
Eric Coldwell: <unk>, two China product coming into the U S market for other reasons so.
Eric Coldwell: I guess, a multiple question around GMP D, but.
Eric Coldwell: Anything you could help us size, what if there is such a thing as underlying profit growth ex health and wellness and next the increase in manufacturing costs would be helpful. Thanks.
Eric Coldwell: Okay.
Eric Coldwell: I appreciate the questions.
Eric Coldwell: A quick responses.
Eric Coldwell: Yeah.
Eric Coldwell: Your math is no doubt correct, where if you add the $17 million headwind from health and wellness to the $8 million. So that would put you at.
Eric Coldwell: Our mid twenties profit delivery.
Eric Coldwell: On an operating business for the business X that one adjustments and then broadly the.
Eric Coldwell: Quantification or the estimation, if you will as the manufacturing across it was a similar.
Dollar impact to the health and wellness impact in Q1.
Speaker Change: Yes, and on your <unk>.
Eric Coldwell: Last part of your question related to cost us.
Eric Coldwell: You're referencing products come out of China, you're really getting at.
Eric Coldwell: Tariffs that are going to go into place Youre beginning in January and then rolling out later.
Eric Coldwell: So.
Eric Coldwell: We let me make a broad statement about it that I think is.
Eric Coldwell: Consistent with how to think about it in the short term.
Eric Coldwell: We have a very diversified supply base.
Eric Coldwell: But given it's diversified it's not entirely in the U S. We've highlighted about half of our Cardinal health brand products come from North America, which does include a decent month coming out of Mexico, as well, but we use.
Eric Coldwell: <unk>.
Some degree out of China less than 10% sourced out of China, We don't manufacture anything in China, but we use southeast Asia, we use Latin America quite a bit as well and like I mentioned U S and Mexico. So we have a very diverse supply base that has served us.
Fairly well, we had challenges of course during COVID-19 when perhaps too much was in Asia, and we continue to migrate that.
Eric Coldwell: But when you add tariffs on top of it.
Eric Coldwell: That is something that will raise cost there's no doubt about that it will mean that we will take it from the economically optimal location to one that is less optimal and that will raise cost not only for us but throughout the industry and you know our margins the margins in this space that if there's a 10% across the board type of tariff.
That will have to flow through in some way we will do everything we can to keep that from flowing through entirely to our customers, but there will be some impacts that will have to be absorbed so your commentary around some data points that we're already seeing it for these very short list of products, namely syringes and PPE.
Eric Coldwell: Thats occurring here in the near term I think is representative of that those are products that are largely sourced out of southeast Asia, and especially in the China and you are seeing some pricing changes that are coming through the marketplace anecdotally and we think that makes sense because the low cost alternative is being impacted with a higher <unk>.
And that will have to flow through the supply base, but of course, we're working on solutions to minimize that impact, but I think it's something that should be expected that there will be price increases.
Speaker Change: Next question.
Speaker Change: We'll now go to George Hill of Deutsche Bank. Please go ahead.
George Hill: Yes. Good morning, guys. Thanks for taking my question and I Hope Youll forgive the joke, which as I have just one question, but in 27 parts.
George Hill: Actually a lot of the questions that I'm getting this morning from investors focus on the pharma or outperformance in the quarter.
Jason I was wondering if you guys could either just maybe attribute kind of vaccine versus it sounds like DLP ones weren't much versus generics from other and you guys called out the generics program where.
George Hill: Where we've seen kind of an increase in generic drug pricing and we've seen an increase in generic drug shortages, which we tend to think of as being able to contribute to pharma margins. So again just like outperformance.
Vaccines versus other and we'll just kind of love your commentary on what's happening in the generic drug market as it relates to pricing and shortages.
Speaker Change: Yes, I can.
Speaker Change: I can kind of force rank I mean, what we put into our comments and within the presentation you can see that.
Speaker Change: Our brand and express relief products together are the greatest drivers within that both brand and specialty were good drivers.
Speaker Change: All ill say it again, the vaccines were a slight year over year increase I think we quantified before last year that was about $25 million of profit in the quarter. It was a little bit higher than that but it's not the driver of it.
Speaker Change: Generics.
Speaker Change: Notable.
Speaker Change: It's not as large as brand and specialty.
Speaker Change: But it was also a driver of it and that's why I answered the question that I did that.
Speaker Change: We're seeing strength in utilization across the board and we had strong operational and cost performance as well that was a nice tailwind.
Speaker Change: Whats more simple operating environment of course, this particular quarter, even though we had a lot of change we managed through that very well, but.
Speaker Change: The best I can do given and again you can do the math with the revenue growth highlights it was pretty good revenue as well with 16% ex the customer transition five percentage points of that being <unk>. So still quite strong kind of core revenue growth, which translates into all those categories I referenced but the only thing I would add.
Speaker Change: As we did.
Speaker Change: As we usually do we called out the fact that generics program had consistent market dynamics, which you should really take is the sign that we saw good volumes there because there's nothing extraordinary happening on the buyer. So we managed through two sides together.
Speaker Change: Next question please.
Speaker Change: Next question will be coming from Stephanie Davis, calling from Barclays. Please go ahead.
Speaker Change: All while congrats Macquarie and thanks for taking my question.
Stephanie Davis: One that kind of dovetails Eric.
Stephanie Davis: Hoping to hear how you're thinking about the puts and takes on for potential election.
Speaker Change: So do you think M&A risk biomarker, there's potential acquirer, France can GMP.
Speaker Change: Got it that's helpful. Thank.
Speaker Change: Thank you.
Speaker Change: Sure.
Speaker Change: Well.
I think the first thing I would think about is the good news is I think most most people in D C.
Speaker Change: Believe that affordable.
Access to health care is really important and when you have heard me talk about any of these topics I talked about we love affordability, we love transparency, we love access because ultimately that drives the utilization for the right products to solve those patients needs, which is helps us being even better.
Speaker Change: <unk> to those that ultimately provide those services to the patients.
Speaker Change: So I don't see that at the highest level. There is a difference and wanting what's best for the patient of course theres different ways to get there.
Speaker Change: Heard my commentary already today about tariffs being something that could impact how prices flow through to the industry and we see that are our customers are already under a lot of reimbursement pressure and thats something thats certainly top of mind for us.
Speaker Change: At the end of the day, there's a lot there's a lot more not known about how that would flow through and how medical and pharma products would be included.
Speaker Change: That.
Speaker Change: Trade system level of uncertainty with that but ultimately and doing what's best for the patient is something that I think will always be the north star and we feel that we're very well positioned to work with either party.
Speaker Change: Whether we're talking about.
Speaker Change: The president or either of the other elements of Congress. So we are in a good spot and we have a lot of momentum going into that and we don't foresee that changing.
Speaker Change: The near medium or long term.
Speaker Change: The next question please.
Speaker Change: We'll now go to Elizabeth Anderson Evercore ISI. Please go ahead ma'am.
Elizabeth Anderson: Hey, guys. Thanks, so much of the question.
Elizabeth Anderson: You talked about some of the simplification efforts I think I mean, obviously this has been a longer term trend for you guys where are we in that how much of it was obviously driven by the contract change this quarter, but as we think about sort of the rest of the year and beyond to help us maybe think through that a little bit more and then just one follow up on the nuclear supply shortage timeline.
Elizabeth Anderson: Like how do you see that evolving across the rest of the year in terms of like the potential timeline for that or any kind of parameters you could help on that would be helpful. Thank you.
Speaker Change: Yes, yes. Thanks.
As it relates to simplification, it's not any one particular business. This is very much a core part of our broader strategy. It has absolutely served us well.
Speaker Change: It's a bit cliche, but it is absolutely a journey not a destination so.
Speaker Change: Think that theres, probably more opportunity relative to the size of the business for <unk> and there is for pharma, but even within pharma. This.
Speaker Change: This quarter I think highlighted that we can do some things I am not sure we fully understood. So theres going to be ongoing journey here to continue to challenge ourselves and continue to find additional ways to be even more efficient.
Speaker Change: Throughout our whole enterprise, we don't use a ton of automation and <unk>.
Speaker Change: All aspects of our business, we are absolutely testing and learning in different parts of the company that as we learned from that we introduced in other parts. So I think theres a lot of opportunity there within GM PD.
Speaker Change: Whether we're talking about our distribution network or a manufacturing manufacturing, especially is always an area. That's always going to have opportunities through automation through new and improved processes.
One little anecdote with this.
Speaker Change: It shows up in our financial numbers all the efficiencies. We have had this last quarter fantastic safety metric something we don't often talk about because it's not directly related to financials, but it's really important to our team and it just shows that our underlying processes are working incredibly well much much better than we have historically, which is driving improvements through.
Speaker Change: We're out the process.
Speaker Change: We've talked quite a bit about the investments we're making in at home I referenced in my comments that we have best on record metrics. This quarter all the way from quality to service to efficiency to safety was also an all time high on record for that business as well highlighting that the right investments where were making more.
Speaker Change: <unk> investments there than we are in other business as a percentage of the size of the business and we're going to continue to learn from that and.
Speaker Change: Roll it out more broadly so we have received a lot of value from it I think there's still more to come but I would also say that as part of that continued ongoing expectation for those long term targets that we have we have these types of cost reductions are baked into that and of course, our customers are always wanting to share in that and so we'll continue to.
Speaker Change: Find ways to be competitive, but also try to put some of that to the bottom line as well on nuclear. So this is a bit of unfortunate timing with three of the six reactors that typically we derive our product from out of Europe for moly 99 being down simultaneously some planned some unplanned type of.
Speaker Change: Downtime. The good news is we do have a pretty good line of sight as to those reactors coming back up in the next week or two so this seems to be about a one month type of impact for us pretty significant for this month of October.
Speaker Change: Starting to come up over the course of the next couple of weeks and we have pretty good line of sight to indicate that it will be resolved within this quarter.
Then the volumes will take a couple more quarters. We believe most of that will come back because of course that then that this process is a patient that needs. These types of scans. This is the low energy product is usually more for cardiac type of scanning procedures. So these are patients that we expect to reschedule. This in the next couple of quarters, but I doubt.
Speaker Change: It will go beyond the fiscal year, but there is still a bit early to understand the full implications of that just to put a pin in that we have not changed our guidance for the full year for the other segments. As a result of it this was a timing or cadence observation.
Speaker Change: Next question please.
Speaker Change: Yes. Our next question is from Daniel gross slates, calling from Citi. Please go ahead.
Speaker Change: Hey, guys. Thanks for taking the question and congrats on the quarter.
Speaker Change: Just a question on <unk> and really you mentioned the loss of a couple of regions in the VA program.
Speaker Change: More broadly speaking youre seeing an increase in the competitive intensity within this segment specifically as one of your competitors is it.
Speaker Change: Rumor too.
Speaker Change: Be gone public.
Yes.
Speaker Change: Okay.
Speaker Change: Yes, my comments here will be the same as they've been in the past, it's a competitive but stable environment that VA business Youre talking about it was relatively low margin.
Speaker Change: Quite low Cardinal brand products attached to it so it's something that we would've liked to have kept it but at the same time, there's not as much value associated with that as with other customers.
Speaker Change: So I don't see that that's anything different than what we see within this space just normal type of customer rotation.
Speaker Change: Next question please.
Speaker Change: Yes. The next question will be from Charles right of TD Cowen. Please go ahead Sir.
Charles right: Hi, yes. Thanks for squeezing me in here just maybe a couple of quick clarifications, Jason you've kind of made a comment I think maybe it's related to hurricanes about some deferrals and cancellations of procedures.
Are you seeing just those are just hurricane related and has distribution kind of everything kind of pick back up since and then also related to the health care utilization costs.
Charles right: Is that.
Your assumptions for the level of utilization going forward and is that already embedded into the guide. Thanks.
Yes, so to be clear when I was talking about the hurricane that was.
Charles right: It wasn't the MPD and what I indicated was we're not seeing anything meaningful at all for that both us and our customers are managing it quite well.
Charles right: Utilization is what I was highlighting that utilization is not as strong as on the pharma side, but I wouldn't say that because <unk> week I would just say that because pharma has been stronger which I think leads into the second part of your question, which is that we're guiding for a normal.
Charles right: Utilization type of environment.
Charles right: So it would be more consistent with as you heard from Aaron our long term guidance.
That's basically effectively when you normalize for the Covid timing and things of that nature.
Charles right: We are guiding for in Q2 to four is much more normalized type of earnings growth, which would be consistent with a normalized level of utilization.
Speaker Change: Next question please.
Speaker Change: Thank you Sir.
Our last question today will be coming from Stephen Baxter coming from Wells Fargo. Please go ahead, Sir your line is open.
Hi, Thanks, just one last clean up one on the pharma guidance I appreciate all the comments that the strength.
Speaker Change: Broadly there are some differences in cadence to keep an ear I guess, when we think about $60 million.
Speaker Change: Raise on the EBIT line, you were very clear that it's not.
Speaker Change: Driven by Covid.
Speaker Change: Think about this as largely just the end of Q1 underlying with favorability in the business or should we think about this as the annual edition of the quarter relative to what we saw in the first quarter. Some of that strength is likely to continue in 2000.
Speaker Change: Thanks.
Speaker Change: Yes, so it depends on which pieces were talking about it for the.
Speaker Change: The three elements that I talked about in terms of what's driving the growth of the business. The first element I highlighted was the underlying broad volume growth and I'd highlight that would be.
Speaker Change: For our Q2 to four would be more normalized levels of growth.
Speaker Change: I also highlight that part of this quarter favorability was favorable mix that some quarters as positive some negative almost neutral. This particular quarter. It was more favorable. So that's the type of thing that normally does not continue one direction or the other and then of course, our ongoing cost reductions is the smaller of the pieces, but still relevant in all of this so.
Speaker Change: Yes.
Speaker Change: It's the combination of all that.
Speaker Change: Again, our guidance here anticipates, a more normalized level, except for that Covid piece will certainly with pretty high confidence we've seen COVID-19 vaccines peak and come down now we track this very very tightly at.
Speaker Change: It will be.
Speaker Change: Quite a modest impact headwind in the second quarter, that's baked into this but ex that we expect more normalized levels of performance.
Speaker Change: Great.
Speaker Change: Thank you very much as you have no further questions. Mr Hall, there I'd like to turn the call back over to you for any additional or closing remarks. Thank you.
Speaker Change: Yes, just thanks again for joining us. This morning again, an excellent start to the year, showing our broad strength resiliency and momentum of our broad business, especially our largest most significant pharma business. We're pleased to be in a position to raise our guidance. After only the first the first quarter and looking forward to continuing to.
Speaker Change: Give you more updates throughout the year with that thank you and have a great day.
Speaker Change: Thank you.
Speaker Change: Today's conference. Thank you for your attendance, which are a very good day have a good day and goodbye.