Cardinal Health, Inc.

Good morning. Today we will discuss Cardinal Health's third quarter fiscal 2022 results, along with an update to our FY22 outlook. You can find today's press release and presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Mike Kaufman, Chief Executive Officer, and Jason Holler, 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 statement slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliation for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today's call, we please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity. With that, I'll now turn the call over to Mike.

Thanks, Kevin, and good morning, everyone. Our third quarter results reflect continued inflationary impacts and global supply chain constraints. As we continue to manage through the current macroeconomic environment, we remain focused on both near-term priorities and long-term strategies to drive growth and momentum across our businesses. At an enterprise level, we're maintaining our focus on our three strategic priorities, optimizing our core businesses, investing for growth and innovation, and deploying capital efficiently. In pharma, despite the quarter being a little lower, due to higher operations costs, we remain encouraged by the trajectory of the business. We saw resiliency in overall pharmaceutical demand, strong performance in our generics program, and continue to expect pharma to realize mid-single-digit profit growth in FY22. In medical, our core U.S. medical products and distribution business continues to experience unprecedented inflationary impacts and global supply chain constraints. We continue to take action to mitigate the effects of these global challenges on our business, including taking pricing actions, evolving our commercial contracting strategies, and investing in additional supply chain capacity. While we remain confident these actions will deliver value and are encouraged by the other areas of our medical business and our opportunities for long-term growth, the current environment remains highly dynamic. Our updated outlook for FY22 reflects our most current expectation. I'll elaborate on the actions we're taking to drive performance, particularly in medical, after Jason reviews our third quarter results and updated outlook. Before turning the discussion over to Jason, it's important to note that the opioid settlement agreement was finalized during the quarter and became effective on April 2nd. This is an important and significant step forward for our company. We feel this settlement is the best way to deliver relief to communities across the United States and allow our company to move forward by putting thousands of lawsuits behind us. 46 of 49 eligible states, all six eligible territories, and over 98% of litigating political subdivisions are part of the national agreement. This comprehensive agreement will settle the vast majority of the opioid lawsuits filed by state and local governmental entities. Additionally, we recently reached an agreement with the state of Washington and its participating subdivisions to resolve opioid-related claims on similar terms to the broader settlement, bringing the total number of states with which we have settled to 47 out of 49. While these settlements do not cover all opioid-related claims, these comprehensive agreements are a significant milestone toward achieving broad resolutions of governmental opioid claims and include injunctive relief terms designed, in part, to increase transparency for the supply chain for these products and demonstrate our commitment to the safety of the pharmaceutical supply chain. With that, I'll turn it over to Jason.

Thanks, Mike, and good morning, everyone. Beginning with total company results, third quarter revenue increased 14 percent to $45 billion, driven by sales growth from existing and net new pharma customers. Total gross margin was $1.7 billion, a decrease of 7 percent due to the elevated supply chain costs in medical and the Cordis divestiture, partially offset by generics program performance. Consolidated SG&A increased 2 percent to $1.1 billion, reflecting higher operations expenses and previously anticipated IT investments, partially offset by the Cordis divestiture and cost savings initiatives. Third quarter operating earnings decreased 21% to $545 million, primarily reflecting the elevated supply chain costs in medical. Moving below the line, interest and other increased by $8 million, which reflects one-time gains in other income in the prior year, partially offset by lower interest expense from debt reduction actions. Our third quarter effective tax rate finished at 20.1%, 11 percentage points lower than the prior year due to certain discrete items affecting both periods. Average diluted shares outstanding were $277 million, 6% lower than a year ago due to share repurchases. During the quarter, we initiated a $200 million share repurchase program which was completed in April and brings our year-to-date repurchases to $1 billion. The net result for the quarter was EPS of $1.45, a decline of 5%. In the quarter, we also recorded a $474 million non-cash pre-tax goodwill impairment charge related to the medical segment, which is excluded from our non-GAAP results. This accounting charge reflects an increase in the discount rate used in our goodwill impairment analysis. Third quarter operating cash flow was a use of $419 million, and we ended the quarter with a cash balance of $2.4 billion and no outstanding borrowings under our credit facilities. Looking ahead to the fourth quarter, in addition to expecting strong operating cash flow generation, we received the previously defined tax receivable of approximately $1 billion in April. Timing, including the day of the week in which any period ends, affects point-in-time cash flows And fiscal 22 is unfairly affected by this dynamic. Additionally, we expect approximately $550 million in total litigation payments this year, primarily related to opioid settlements, which includes the initial payment for the national settlement already made. Now turning to segments, beginning with pharma on slide five. Revenue increased 17% to $41 billion. driven by branded pharmaceutical sales growth from existing and net new pharmaceutical distribution and specialty customers. Segment profit decreased 5% to $487 million, driven by higher operations expenses and previously anticipated investments in technology enhancements, partially offset by generics program performance. During the quarter, we incurred higher costs supporting sales growth, including some initial customer onboarding costs, and inflationary impacts in areas like transportation and labor. Importantly, we also completed the launch of our planned technology enhancements. As Mike mentioned, we continue to see resiliency in pharmaceutical demand, and our generics program continued to experience generally consistent market dynamics, including strong performance from Red Oak. Turning to medical on slide six, third quarter revenue decreased 7 percent to $3.9 billion, due to the divestiture of the Cordis business and lower products and distribution volumes, which includes the impact of global supply chain constraints. Segment profit decreased 66 percent to $59 million, primarily due to net inflationary impacts and global supply chain constraints in products and distribution. During the quarter, our U.S. medical products and distribution business continued to experience significant inflationary impacts across the global supply chain, particularly in the areas of international and domestic transportation and commodities. Additionally, increased pressures from global supply chain constraints affected the volume of some of our higher margin Cardinal Health brand products. To a lesser extent, the third quarter decline in segment profit also reflected a lower contribution from PPE as well as the Cordis divestiture. On PPE, we saw unfavorable price-cost timing in the quarter, as well as lower volumes as we exited the quarter. We were encouraged, however, by the resiliency and surgical product demand related to elective procedures, which was generally consistent with recent quarters and improved from a year ago. And we continue to see strong performance from our lab business. We continue to take action to address the inflationary cost challenges and manage through the temporary supply disruptions, including pricing adjustments, cutting costs throughout the organization. and investing in our supply chain network, which Mike will elaborate on momentarily. Now, transitioning to our updated fiscal 22 outlook on slide 8, we now expect EPS in the range of $5.15 to $5.25 per share, reflecting updated expectations for medical and a few of our corporate assumptions. With the favorability seen today from discrete items, we now expect our annual effective tax rate to be in the range of 22 to 23%. We expect diluted weighted average shares outstanding of approximately $281 million, which reflects the $1 billion in share repurchases completed to date. And with one quarter to go, we expect CapEx of approximately $400 million. We continue to expect interest in the other in the range of $140 to $160 million. As for the segments on slide nine, for pharma, no changes to our outlook. We continue to expect low double-digit revenue growth mid-single-digit segment profit growth, and as previously indicated, strong fourth-quarter segment profit growth. With the culmination of our planned technology enhancements, we will now be lapping elevated expense levels from the initial deployment a year ago, which has been a year-over-year headwind the last several quarters. We are also lapping a few one-time items that we called out last year, which will create a favorable fourth-quarter comparison, and we expect strong underlying performance in the quarter. For medical, we now expect revenue at the low end of our previous range, down mid-single digits, and segment profit to be down 45 to 55 percent in fiscal 22, which includes a net incremental headwind of nearly $300 million due to inflationary and global supply chain constraints. Additionally, based on volume trends, the update from our previous medical outlook primarily reflects a lower contribution from PPE. Let me spend some time sharing a few high-level thoughts on fiscal 23 from our vantage point today, ahead of providing our usual guidance in early August. In pharma, the business is tracking consistent with our long-term target of low to mid single-digit segment profit growth. With respect to a couple other notable pharma puts and takes for next year, we do anticipate higher operations expenses based on recent inflationary trends, particularly in the first half of the fiscal year. Additionally, With the finalization of the global opioid settlement, we anticipate lower opioid-related legal costs, partially offset by higher costs for implementation of the settlement's injunctive relief terms. Together, we expect these litigation items to be a modest net tailwind in fiscal 23. For reference, we are currently estimating opioid-related legal costs of approximately $115 million in fiscal 22. We expect a further reduction in opioid-related legal costs in subsequent years. In medical, we are highly focused on the inflationary impacts and global supply chain constraints affecting our U.S. medical products and distribution business. At this time, we expect a similar to modestly higher net impact from inflation and global supply chain constraints in fiscal 23 as in fiscal 22. Embedded in this are two key assumptions. First, with disability generally limited to the first half of the year, we are assuming key cost drivers such as international freight and commodities have flattened and will begin to decrease slowly over the course of the next fiscal year, affecting our results in a one- to two-quarter delay. This would result in a greater absolute impact from inflation and global supply chain constraints in fiscal 23 due to the analyzation of higher costs seen in the second half of fiscal 22. Second, we also expect a greater impact from mitigation initiatives, with various waves of price increases going into effect throughout the year. In total, these two assumptions result in a similar to modestly higher net impact from inflation and global supply chain constraints as in the current year. As we exit fiscal 23, we anticipate a run rate where our pricing actions will offset approximately half of the gross impact. Though these inflationary impacts are persisting for much longer than originally anticipated, We remain committed to mitigating the effects on our medical business over time. We continue to believe the majority of these impacts will prove temporary once global supply chain pressures eventually abate or pricing will adjust accordingly. Below the line, we anticipate a year-over-year headwind in our fiscal 23 effective tax rate with the discrete favorability seen in fiscal 22 not expected to repeat. And with our strong balance sheet, we see the potential for a creative capital deployment through a similar level of share repurchases over the course of the year, supported by the $2.7 billion of authorization remaining on our existing share repurchase program expiring at the end of 2024. In summary, while there's obviously moving parts for fiscal 23 or any particular year, we continue to believe our previously announced long-term targets for our businesses and for double-digit combined EPS growth and dividend yield are achievable over normalized, longer periods. With that, I'll turn it back over to Mike.