Cardinal Health, Inc.

Good day and welcome to the fourth quarter and full year 2022 Cardinal Health Inc. Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Mr. Kevin Moran, Vice President of Investor Relations. Please go ahead, sir.

Good morning and welcome. Today we will discuss Cardinal Health fourth quarter and year-end fiscal 2022 results, along with our outlook for fiscal year 2023. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Mike Kaufman, Chief Executive Officer, Jason Holler, Chief Financial Officer, and Trish English, Chief Accounting 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 in the forward-looking statement slide at the beginning of our presentation for a full 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 reconciliations for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today's call, we kindly ask that you please 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. As I am sure many of you have seen, a short time ago we issued a press release announcing that I am stepping down as CEO and as a board member of Cardinal Health, but will continue to serve through August 31st. Effective September 1st, Jason will become Cardinal's new CEO. He has also been appointed as a board member effective today. They say timing is everything, And I believe as we start a new fiscal year, the time is right for me to step away as CEO and open the door for a new leader to take Cardinal Health forward over the coming years. I have been blessed to be part of the Cardinal Health family for 32 years. In that time, I've seen our company grow and evolve in many ways. We are truly essential to care, and I'm honored to have been part of it. Jason has been a tremendous partner over the past two-plus years and has been instrumental in many of our strategic initiatives. He deeply understands our business, priorities, and industry landscape. And the Board and I are confident that he is the right person for the job. With that, I would like to turn the call over to Jason.

Thanks, Mike. I really appreciate the kind words and the opportunity to work closely with you these past few years. Let me start by saying how excited I am to be taking on this new responsibility. I am grateful for the trust and the confidence the Board of Directors is placing in me. I would also like to thank you, Mike, for the leadership and the many contributions to the company over the years. I hope to preserve the culture that you've helped ingrain into the fabric of our organization, and I look forward to what I know will be a smooth transition. I also want to welcome Trish English, who will be serving as our Interim Chief Financial Officer. Chris most recently served as our chief accounting officer and has been a valuable member of the Cardinal Health family for over 16 years. I look forward to continuing to work with her in this new capacity while we conduct an external search for a permanent CFO. Before stepping into the details of our financial performance for the quarter, let me step back and summarize the key points this past year. Within our pharma segment, while we experienced the effects of industry-wide inflation and incurred incremental technology investments, we grew the business 5%. consistent with both our original guidance for the year, as well as our long-term growth targets. The medical business was more significantly impacted by these inflationary dynamics, which drove a significant impact on our results. However, we have strong mitigation actions in place, including pricing, and we'll present a plan to you today that mitigates all of the inflationary and global supply chain constraint impacts, plus an additional 8% of compounded annual growth by fiscal 25. Underlying these operating results this past year was a significant focus on cash flow, which results in increased financial flexibility. We are absolutely focused on shareholder value and intend to deploy these incremental funds to additional share repurchases for fiscal 23. While we remain in a dynamic environment, I'm excited to share further details of our plans with you today and commit to continue to provide increased clarity to the drivers and the key metrics underlying our performance. So let's now turn to some of the details driving our results in the fourth quarter, beginning with the pharma segment on slide six. Fourth quarter revenue increased 13% to $43 billion, driven by branded pharmaceutical sales growth from existing and net new PD and specialty customers. Segment profit increased 26% to $451 million, driven by generic program performance and a higher contribution from brand sales mix, partially offset by inflationary supply chain costs. As we previously noted, this also reflects a favorable comparison due to the prior year inventory adjustments. During the quarter, our generics program, including Red Oak, saw strong performance and continued to experience consistent market dynamics. Regarding the inflationary supply chain costs, we saw impacts in areas such as transportation and labor, which we expect to continue into next year. We also incurred higher costs supporting sales growth. And with ongoing progress in opioid litigation matters, we saw a decrease of approximately $15 million in opioid-related legal costs. Turning to medical on slide seven, fourth quarter revenue decreased 11% to $3.8 billion due to the divestiture of the Cordis business and lower products and distribution volumes. Medical segment loss of $16 million in the fourth quarter was due to net inflationary impacts and global supply chain constraints in products and distribution. On a year-over-year basis, The favorable comparison to the prior year $197 million PPE inventory reserve was mostly offset by the net inflationary and global supply chain constraint impacts, a lower contribution from PPE, and the Cordis divestiture. During the quarter, our products and distribution business saw an approximate $100 million impact from net incremental inflation and supply chain constraints. This reflects a gross impact of approximately $125 million and approximate $25 million offset from our mitigation actions which includes our initial wave of price increases on five Cardinal Health brand categories that went into effect back in March. I'll elaborate on our plans for further mitigation of fiscal 23 and beyond shortly. As mentioned, it continues to be a highly dynamic medical environment, and our Q4 results came in lower than we had previously expected. This primarily reflects overall volume softness in our products and distribution business, including a lower contribution from PPE. Stepping back, Demand for PPE has fluctuated significantly over the past couple of years. We saw lower volumes as we exited Q3, and the fourth quarter experienced further declines. We believe this primarily reflects customers' higher inventory levels and, to a lesser extent, some PPE category-specific customer losses driven by supply constraints during the pandemic. We continue to have strong conviction in our overall value proposition, which includes leading brands and clinically differentiated products. For context, PPE represents approximately 15% of sales in our overall Cardinal Health grant portfolio, as you'll see on slide 20. Moving below line, interest and other increased by $36 million to $64 million due to a decrease in the value of our deferred compensation plan investments compared to gains in the prior year. As a reminder, deferred compensation gains or losses reported in interest and other are fully offsetting corporate SG&A and net neutral to our bottom line. Additionally, in the fourth quarter, a one-time write-down of an equity investment impacted EPS by $0.06 per share. The increase in other expense was partially offset by lower interest due to debt reduction actions. As indicated, we repaid the $280 million of remaining June 2022 notes at maturity. Our fourth quarter effective tax rate finished at 25.4%, approximately three percentage points higher than the prior year. The net result was fourth quarter EPS of $1.05, an increase of 36%, primarily reflecting the growth in pharma segment profit. Now, transitioning to our consolidated results for the year. Fiscal 2022 revenues increased 12% to $181 billion, driven by the pharma segment. Gross margin decreased 3% to $6.5 billion due to the Cordis divestiture. Total company SG&A increased 1%, reflecting inflationary supply chain costs, our previously mentioned IT investments, and higher costs to support sales growth, mostly offset by the Cordis divestiture and benefits from cost savings initiatives. Operating earnings decreased 12%, which primarily reflects a year-over-year headwind of approximately $300 million related to net inflationary impacts and global supply chain constraints in medical, partially offset by pharma segment profit growth. Interest and other increased 24% to $165 million, largely due to the items affecting the fourth quarter. Of note, this came in higher than our guidance, primarily due to the equity investment write-down in the quarter. Our annual effective tax rate finished at 22.1%. The net result was fiscal 22 EPS of $5.06. Subtrain the balance sheet. In fiscal 22, we generated robust operating cash flow of $3.1 billion. This includes the previously defined tax refund of nearly $1 billion and favorable timing of working capital. Additionally, in fiscal 22, we made approximately $500 million in litigation payments, primarily related to opioid settlements. In July, we made our second annual payment under the National Opioid Settlement Agreement of approximately $375 million, which will be reflected in Q1 fiscal 23 operating cash flow. We are focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner. This year, we invested approximately $385 million of CapEx back into the business to drive future growth, paid down approximately $850 million in debt to reduce leverage, and returned $1.6 billion to shareholders through shared purchases and dividends. We ended the year with a cash position of $4.7 billion, which does reflect some timing favorability with no outstanding borrowings on our credit facilities. As for the segment's full year results, beginning with PhRMA on slide 10, Farmer revenue increased 14% to $165 billion, reflecting consistent drivers with the fourth quarter. Farmer segment profit increased 5% to $1.8 billion, driven primarily by generics program performance and an improvement in volumes compared to the prior year. This was partially offset by investments in technology enhancements and inflationary supply chain costs. To be helpful, the tailwind from improved volumes and the headwind from incremental IT investments effectively offset in fiscal 22, each approximately $80 million on a year-over-year basis. Additionally, we saw an approximate $50 million headwind from inflationary supply chain costs, primarily in the second half of the year. Moving to medical on slide 11, fiscal 22 medical revenue decreased 5% to $15.9 billion, primarily due to the divestiture of the Cordis business. To a lesser extent, lower products and distribution volumes were partially offset by growth in at-home solutions. Segment profits decreased 63% to $216 million, primarily due to the net inflationary impacts and global supply chain constraints in products and distribution. Additionally, the favorable comparison to the prior year PPE inventory reserve was offset by a lower contribution from PPE and the divestiture of the Cordis business. Now for our fiscal 23 guidance on slide 13. We expect earnings per share in the range of $5.05 to $5.40, which reflects the following assumptions. First, for the enterprise, we expect interest in other between $140 to $170 million, which assumes approximately $550 million in debt pay down for the March 2023 notes at or before maturity. We are assuming a non-GAAP effective tax rate in the range of 23% to 25%. We anticipate diluted weighted average shares outstanding between $262 and $266 million, reflecting our plan to complete between $1.5 to $2 billion in share repurchases over the course of the year. And supporting our capital allocation priorities, we expect adjusted free cash flow in the range of $1.5 to $2 billion, which excludes litigation payments and any other significant and unusual or non-recurring items. As for the segments, beginning with pharma on slide 14, We expect revenue growth in the range of 10 to 14%, driven by growth in existing and net new PD and specialty customers. We expect segment profit growth in the range of 2 to 5%, based on the following key assumptions. We expect continued stability in overall pharmaceutical volumes, along with consistent market dynamics within our generics program. Continuation of the inflationary supply chain costs we've seen in the last two quarters should result in an approximate $50 million headwind, primarily in the first half of the year. The completion of ERP technology enhancements should be an approximate $30 million tailwind. We expect opioid-related legal costs, including initial costs for implementation of the settlement of injunctive relief terms of approximately $80 million in fiscal 23, a $20 million tailwind. And we see increased contributions from our growth areas, primarily specialty, including biosimilars. Before moving to medical, a couple of points on the pharma fiscal 23 cadence. Similar to last year, we expect the year-over-year segment profit growth to be significantly back half weighted, which primarily reflects the year-over-year impact of inflationary supply chain costs in the first half. Specifically, in the first quarter of next year, we expect segment profit between $400 and $420 million. While we do not typically provide quarterly guidance, we thought additional color may be helpful given the puts and takes over the last several quarters. I'll turn to medical in slide 15. We expect revenue to decline in the range of 3% to 6% due to lower PPE sales and lab testing volumes. We expect segment profit ranging from a decline of 10% to growth of 10%, reflecting the following assumptions. We expect a similar net impact of approximately $300 million from inflation, global supply chain constraints, and mitigation actions in fiscal 23, or a minimal impact on a year-over-year basis. This assumes an approximate $475 million gross impact from inflation and global supply chain constraints, partially offset by $175 million of mitigation actions, including pricing and evolving our commercial contracting. While still significantly elevated relative to historical levels, we're encouraged by the recent improvements in spot rates of certain cost drivers, such as international freight and some commodities. As a reminder, these product costs are capitalized and have historically been reflected in our P&L results in a one to two quarter delay. However, in the current period of elongated supply chains, it is closer to two quarters. Our current assumption is that the impact of inflation and global supply chain constraints will peak in the first quarter of fiscal 23 and gradually decrease over the next couple years. Additionally, along with the pricing actions that went into effect at the start of the year, we are implementing additional waves of increases over the course of fiscal 23. We continue to expect that as we exit fiscal 23, the run rate of our mitigation actions will offset at least 50% of the gross impact from inflation and global supply chain constraints. In terms of other key assumptions for medical in fiscal 23, as the operating environment continues to normalize, we expect an approximate $50 million tailwind from an improvement in PPE margins. We plan to sell through the majority of higher-cost PPE in the first half of the year and for PPE margins to normalize as we exit the year. We expect the PPE tailwind to be offset by a similar headwind from lower lab testing volumes. We also anticipate a headwind of approximately $50 million from rebaseline incentive compensation following fiscal 22 underperformance. And finally, we expect increased contributions from our strategic growth areas, primarily at-home solutions. On medical's quarterly cadence, while we are assuming a similar segment profit total in fiscal 23 versus fiscal 22, we do expect the cadence to be the reverse of the prior year. Specifically, in the first quarter, we expect segment profit ranging from a loss of $20 million to profit of $20 million. We expect the gross impact of inflation and global supply chain constraints in the first quarter to be approximately $150 million, with approximately 25% of this offset through our mitigation actions. As for the rest of the year, we expect the substantial majority of segment profit to come in the second half of fiscal 23, particularly in the fourth quarter. This sequencing primarily reflects our assumptions around inflation, global supply chain constraints, inflation mitigation, and PPE. While there are many moving parts in fiscal 23, we are confident in our long-term outlook and are reiterating our previously announced long-term targets for our businesses and for double-digit combined EPS growth and dividend yield over longer, normalized periods. Additionally, we are introducing a new target for at least $650 million in medical segment profit by fiscal 25, driven by the medical improvement plan that we are introducing today. Slide 17 highlights our four areas of focus to improve medical performance. Number one, mitigate inflation and global supply chain constraints. We plan to fully address the impact of inflation and global supply chain constraints through mitigation initiatives by the time we exit fiscal 24. and are targeting to exit fiscal 23, offsetting at least half of the gross impact on our business. Our second wave of price increases went into effect on July 1st on four more categories. We plan on the next wave commencing on October 1st. In addition, we've executed distribution fee increases for certain suppliers, and we are actively working with customers and GPOs to adjust language in our product and distribution contracts as they renew, allowing for greater price flexibility to respond to current and future macroeconomic dynamics. Two, optimize and grow the Cardinal Health brand portfolio. Our $4.6 billion Cardinal Health brand portfolio, which includes nearly $4 billion of non-PPE categories, offers leading brands and clinically differentiated products. Plan to grow Cardinal Health brand sales by a compounded annual growth rate of at least 3%, which will generate $75 million or more of incremental segment profit over the next three years. This growth will be achieved through two key areas of focus. R&D, and new product innovation. We see opportunities in key categories, such as nutritional delivery, where we will be launching the next generation kangaroo enteral feeding platform. Second is increased product availability as a result of investments within targeted categories, such as surgical gloves and electrodes. For example, in our surgical glove portfolio, we are investing $125 million for construction of a new manufacturing facility dedicated to increased supply for our Leading for Texas brand gloves. Third area of focus is to accelerate our growth businesses, primarily at-home solutions. These businesses have growth rates in excess of our core, along with a higher margin opportunity, and we've been making investments to drive at least $60 million of total segment profit by fiscal 25. At-home solutions, for example, is now a $2.4 billion business that has consistently grown top line at around 10% as patient care continues to shift into the home. And finally, Our fourth area of focus is to continue our simplification and cost optimization efforts. We expect actions that increase productivity in our manufacturing plants, distribution centers, supply chain, and back office to yield at least $50 million of net cost savings by fiscal 25. Going forward, we are focused on driving simplification through value improvement projects, transportation management, and further optimizing our sourcing and manufacturing footprint where possible. We expect these initiatives to contribute towards exceeding our existing enterprise $750 million cost savings goal by fiscal 23. While on the topic of our supply chain, let me take a moment to share some additional color where we have received a number of investor questions. We operate a highly diverse global supply chain with approximately two-thirds of our Cardinal Health brand revenue coming from self-manufactured products. We have invested in additional self-manufacturing capabilities, many in our own North American facilities, and today approximately half Our Cardinal Health brand revenue comes from North America in total. To best serve our customers, we continue to believe in the importance of a diverse global supply chain, and we are focused on responding to any global supply chain disruptions with resilience and agility. In summary, we believe the introduction of measurable proof points in each of these four areas of focus provides visibility to measure progress against our plans going forward. Now let's turn to the pharmaceutical segment where we continue to focus on strengthening our core PD business and investing in our growth businesses, primarily specialty. In pharma distribution, with our significant technology enhancements that we've been working on over the past several years substantially completed, we now focus our attention on increasing productivity, maximizing working capital efficiency, and prioritizing the customer experience. With our generics program anchored by the scale and expertise of Red Oak, continue to further enhance our capabilities as we focus on shared wallets and maximizing margins. We recently held our retail business conference where over 4,000 customers attended live for the first time in three years and had an opportunity to see and experience our latest innovations. They also had the chance to register for services that would help them create an online shopping portal, advisory support to optimize reimbursement, and central field compliance packaging services. In specialty, we are continuing to see downstream momentum in oncology and emerging therapeutic areas driven by our offerings, including the VISTA TS. We recently announced a tuck-in acquisition of the BankCare GPO and an investment in their main services organization. These will further strengthen Specialty Solutions' cornerstone rheumatology GPO, which offers innovative office management solutions and robust specialty drug access to over 1,300 rheumatology providers nationwide. Upstream, With biopharma manufacturers, we are investing for future growth in our 3PL business as evidenced through our cold chain storage expansion, which increases our current capacity by 200%. We also continue to see strong growth in Synexis, our patient hub where our technology solutions help biopharma customers remove barriers to patient care. And with biosimilars, we are proactively addressing common barriers to adoption by investing in education campaigns to build awareness, clinical comfort, and ensure accessibility. We continue to be excited about the future growth in the space and remain well positioned as new biosimilars come to market. In closing, while there's a lot of work to be done, I'm excited to work with our 44,000 teammates in executing our plans to grow in fiscal 23 and beyond. With that, I will now take your questions.

Thank you. Ladies and gentlemen, if you would like to ask a question, please press the star or asterisk key followed by the digit 1 on your telephone. please ensure that the mute function on your telephone is switched off to allow your signal to reach our equipment. If you find that your question has already been answered, you may remove yourself from the queue by pressing star 2. Once again, please press star 1 to ask a question. We will take our first question today from Lisa Gill of J.P. Morgan. Please go ahead.

I want to say best of luck to you, Mike Kaufman. It's been great working with you all these years, and I look forward to hopefully staying in touch. And congratulations, Jason, on becoming CEO. I really want to start with, you know, obviously you talk about this huge ramp getting the medical side of the business back to $650 million of profit. And, Jason, you just talked about four different areas. I really want to just focus on the first area, and that's growing businesses. you know, Cardinal brand products and obviously for someone like myself that's followed the company for a long time, you know, that's kind of ebbed and flowed as far as the focus of the company. Can you talk about one, why now you think that you can really accelerate that? Two, I think you've talked about nutritional, you know, we've had others that have had problems in that area, right? You know, why do you think that that's a good area for Cardinal to go into? And then secondly, when we think about, you know, physician preference, et cetera, what are you hearing in the market around private label product, you know, to give you some of the insights as to the opportunities that you see here specific to Cardinal brand products? So, I'll stop there.

Yeah, great list to start off the discussion. Thanks, Lisa. So, first of all, Let's start with your first one there about why now. So ebbs and flows, I understand what you mean. And, of course, I think what you're referring to is we especially talked about the sales force. Right before the pandemic, we'd made a significant restructuring to have that team very much focused on driving our cardinal brand mix. And then COVID occurred, and it went from a sales-focused challenge to now a supply chain challenge. And, of course, our sales team, as well as our customers, were very much focused on PPE and in getting care to COVID patients, and the change in the mix was not exactly the highest priority. So I think it's always been a focus of Cardinal, but we recognize that we needed to change our priority to align with our customers' priority over the last couple of years. But behind the scenes, especially with the pandemic, our medical team realized that we needed to invest in our own supply chain capability, their own products, and a lot of the capacity that was necessary for the manufacturing, either whether it's our own products or source products, to ensure further resiliency. So now that we are getting a little bit more normalized and we see that we have to invest in that supply chain, it not only helps provide resiliency to our customers, but also allows us to grow high margin products where we have the right to win and expand our margins further. So now is the right time as we start to move on and allow our sales team to get reengaged and focus on driving that volume. But of course, we need the capacity and the products to allow them to be successful. You asked a specific question about nutritional. That's just one area, right? We have a very broad, diverse product line. We are successful in the category today. The Kangaroo brand is a market leader. So this is not necessarily we're getting into it. In fact, that's what gets me so excited about this item, this opportunity. The two items I referenced, the surgical gloves and nutritional, are already areas where we're significant leaders. We are with good margins, good growth. We have the opportunity to just continue our leadership through additional products and additional capacity. So it's actually a lower risk strategy than entering in separately. As it relates to your last question, again, we have a very broad, diverse product, and we can manufacture, we can source, and we're going to use all tools available to us and use that diverse capability, internal, external, with partners or ourselves, and just continue to adapt and evolve as the market demands it. And when we look at the supply chain, it's the rates that go behind that.

Next question, please.

Thank you. Our next question comes from George Hill of Deutsche Bank. Please go ahead.

Yeah, good morning, guys. And, Mike, I'll echo Lisa's comments in wishing you well. And I guess, Jason, I don't mean this question to sound insensitive, but I guess given the company's recent performance, could you talk about why the board chose to not run a process to replace Mike and why you guys kind of went with an internal promotion? And just kind of, I don't know if you're able to comment at all, just kind of on the board's perception of company performance and how it kind of wants to evaluate management going forward.

I certainly will not attempt to speak for the board, but what I will say is that my time both here as well as elsewhere in industry, I'm very focused, very tenured on driving operational performance within the business. I have made a mark within this organization. I've been very focused on capital deployment, driving cash in the company, and have made that impact. When I think about why I feel like I'm the right person going forward here, we have a lot of great aspects within the organization. We have a wonderful culture. We have wonderful products, leading positions, great growth areas. But what the pandemic has shown us is that we need to go back to some level of basics here in terms of the operational core and driving efficiency, driving simplification, so probably doing fewer things but doing them better. and that focus and that attention to de-risking the model and driving this profit improvement plan for the medical business the pharma business has been very resilient we hit our both short and long-term goals this year we need to keep doing more of the same while also continuing to grow those growth areas of which of course specialty is the largest one so you know we're in a very different phase there and then with this plan today you know we're really uh highlighting how aggressive we're going to be with our capital deployment, that when we generate that cash, $3.1 billion in 22, we're going to deploy it effectively. I'm well positioned to take us through those challenges that we've been faced with, and I'm going to be absolutely focused on taking the next steps here.

Operator, next question, please.

Thank you. We now move to AJ Rice of Credit Suisse. Please go ahead.

Hi, it's Jonathan Young on for AJ. I just want to echo my congrats to Jason and Mike as well. So you mentioned the various costs have been coming down within the medical segment and understanding there is a lag between when the spot prices come down versus when it flows through your P&O. Should we take it that any further decline in the spot prices would be upside to the medical outlook for FY23 and beyond? And then alongside that, you talked about the 3% revenue CAGR for the Cardinal Health brand products. I guess what are you assuming in terms of pricing growth moving forward and alongside that utilization? Thanks.

Okay. So to start with the spot prices, well, that's why we always talk about the net impact is because obviously there's a gross impact and a pricing and other contracting items that create that net. And so as I think about that dynamic in the short term, as I think you indicated and understand, depends on what it is, right? If it's inventory costs like the freight, international freight, the product freight, or the commodities, that will be rolled in, and that will be more of that two-quarter lag. But as it relates to the domestic transportation, that piece, which hasn't moved, you know, very much in either direction, that is a little bit more real-time. So it kind of depends on what cost you're talking about. You know, long term, we believe there's going to be a parity to pre-pandemic levels for this. So, if costs weaken, get lower, then some of the pricing actions may change. In the near term, I don't think pricing is going to change. Under all these pricing scenarios, we're still not covering, expected to cover more than half of that impact. we think in the short term, yeah, the costs are going to flow more to minimizing the impact of what we have. But again, that would be most likely in the second half of the year. In terms of the 3% CAGR, I'm not sure I fully understand the price question there, but within our cardinal health, it's specifically related to that $4 billion bucket that I referenced in my comments, that the underlying volume is what that's related to. there is pricing that goes along with that, but I would say it's more on the volume side than the pricing side that's driving that type of CAGR. It's not double dipping on the pricing actions. That is presuming a normalized level of inflation and pricing, and so then it would be more volume driving that incremental value.

Next question.

Thank you. Moving to Michael Schurney of Bank of America. Please go ahead.

Good morning, and Mike, obviously a theme here, but best wishes as you move on. It's been a pleasure working with you over the years. Maybe, Jason, to dive a little bit also into the medical transformation plan, as you think about the totality of Cardinal as you step into the CEO seat, as you think about the moving pieces that you have and the drivers to push back towards growth, can you give us a sense as well on how much the linkage between the pharma and medical side will be able to help allow you to hit these targets that you've laid out, and how do you view the synergies, especially among this revamped medical outlook, between these two segments going forward?

Yeah, so when I step back and think about that plan, the area that is, there's a couple of areas that could be impacted that have connectivity there. Probably the first one is the simplification and continued cost optimization. Those types of of initiatives are wide-ranging, and as we implement a particular project to reduce cost, it's a lot of cherry-picking between the segments and the corporate functions. When one person has a good idea, we push those across all of them. And in some cases, we're leveraging that scale. We're doing a lot of centralization of work to standardize and offshore back office activities, things of that nature, using digital tools. when we can invest in those types of technologies and capabilities centrally and blow that out to the whole organization. So that's certainly a piece of it. And then when we talk about the growing our Cardinal Health brand portfolio, while there's not a lot of crossover selling, we do have the same customers. And so those relationships, those discussions can spawn into a variety of different opportunities. So that's not a huge enabler of that type of item, but it could be a component of it. And I would say that that's probably the areas that there's the most overlap.

We move now to Elizabeth Anderson of Evercore.

Hi, guys. Thanks so much for the question. Best wishes, Mike, and excited to work with you in your new role, Jason. I have a question just in terms of you talked about I think on the last call that you had gotten sort of 50% of SKUs sort of at a higher, you know, been able to pass through higher cost there. I was wondering if you could update that because I know you said in your slides obviously you were going to have offset about 50% of that gross impact exiting 23 and I know there are a variety of things in there. So I was just wondering if you could update us on that.

Yeah, so that reference to 50% of SKUs was reflective of the expected July 1st price increases. So that is effective July 1st. Now, since then, we've now discussed and are informing everyone of the October 1st increases. I didn't provide that exact number. But remember, that's just the percentage of SKUs that we're touching. I think the more important way to think about it is the percentage of mitigation that we're targeting. So let me kind of walk through the flow and how I think you should think about it for this upcoming year. So just as an anchor point, I just walked it through in the prepared comments. In Q4 of 22, what we just finished is about a 20% mitigation. So we indicated there was 125 million gross impact with 25 million of pricing. So a 20% mitigation. We expect that 20% with the July increases and phasing in over the quarter, That's going to increase that to 25% average for the first quarter of 23. Now, we would expect that to continue to increase each and every quarter over the course of the year as we roll through various other increases. I mean, these are the big waves, but there's always going to be other increases along the way and our supplier fees that go along with this too. And then that 25%, we expect to double by the time we exit fiscal 23. So we would expect a run rate of about 50% by the time we exit fiscal 23. And then, as I indicated in my comments, we would expect to exit fiscal 24 with 100 percent mitigation. By the time you get to the end of 24, we would expect that part of this inflation continues to come down. So, our gross impact in 24 would trend lower, and then our pricing would trend higher until effectively those two numbers offset.

Thank you. We now move to Stephen of Barclays.

Please go ahead.

Yeah, thanks. I also just want to congratulate Mike on rewarding 30 plus years at Cardinal. And Jason, here's to you hoping you'll have 30 plus years at Cardinal as well. I think it'll put you in your late 70s, but I think you can do it. Just the 10 to 14% revenue growth in pharma jumped out as pretty high. I guess I was curious for more color on the drivers of growth within that. That's for fiscal 23, obviously. One more color on the double-digit top line. Sure.

Well, yeah, no, yeah, okay, got it. I think there's a couple of key points. First of all, it's very consistent with what we've done this past year, and that was driven by a couple of key drivers. And I think you should think about the drivers as being similar. Because one of those drivers we've referenced a few times is some net new business that we referenced came in beginning in the third quarter of 22. So that would be a little bit more of a front-end loaded type of revenue benefit as we see fiscal 23. And then we've also been highlighting the strength in our large customers, large both PD specialty, and we've seen some really good volume in the brand category. And so, as you know, some of that larger customers and some of the brand volume doesn't always bring with it a tremendous amount of margin, but that's one of the reasons why you see very robust revenue growth and, you know, still profit growth well within the range of what we've indicated for both our short- and long-term goals. But those are the biggest drivers.

Thank you. Next, we move to Ricky Goldwasser of Morgan Stanley. Please go ahead.

Yeah, hi, good morning, and Mike, all my very best wishes, and Jason, congrats and good luck. So a couple of follow-up questions here. So just to get a sense in – and Jason, thank you for clarifying the $150 million in a headwind, in gross headwind in the first quarter versus the $125 million. So Jason, As we think about it, it seems like in your guidance, you're assuming that the headwinds are going to get worse in the first quarter versus the exit run rate. I just want to make sure that I'm thinking about this correctly. And then we'll slowly improve throughout the year. As we think about the mitigation, I think your numbers imply about $38 million in mitigation from better pricing in the first quarter. When you're saying 50%, Should we assume basically a double from that, so $75 million? I just want to kind of like understand the reference of that 50%. And then an additional question on the Cardinal brand, because it seems that that's a really important part of sort of the longer-term plan. It seems that it's about 29% of revenue for the segment that comes from Cardinal Health brand. So, one, how do you envision this revenue mix, what it will be by 2025? And then, how should we think about sort of the EBIT mix? It's 29% of revenue. What percent is it of profits today? Thank you.

Okay. Okay. So, starting with the pricing. I think you got it fairly close, but let me clarify a few points. Yes, you got the math right for Q1. That would be pretty close to how you should think about it. So yes, the growth impact is increasing a little bit from the 125 in Q4 to the 150 in Q1. And that is, just make sure we connect all the dots. Yes, spot prices, we see are starting to soften in a few areas, not all areas, there's some going the opposite direction too, but generally speaking, there's some benefit there, but it's not impacting our P&L because it's got that two-quarter lag. So when you think about when the international freight specifically, it started reducing dramatically about two months ago, two, three months ago, there's a really big reduction. So you wouldn't expect that in a And it didn't reduce, it's just been a consistent reduction over the last several weeks. So it's going to take some time for that to flow through. So certainly Q1 is not going to see any of that benefit. And that's why you see the growth impact still increasing is because that's from, you know, five, six months ago as well. As you think about the exits and you're trying to get the math on the pricing, does the pricing double from that 37, 38? Probably not because what, What you're missing, I think, in your math is that that 150 should come down over the course of the year. We are anticipating it will come down in part because of that international freight. So that will begin to come down, and then pricing will continue to go up. But by the time we exit, again, that exit rate would be around that 50 percent, but lower than the 150 and higher than the 37, 38 from the first quarter. As it relates to the revenue mix, um you know that's that's hard to say i i i i'm not ready to to answer that specifically the one thing i'll highlight is as we indicated 2.4 billion dollars of revenue for at home is a meaningful number when you when you look at that so it's a matter of are you are you doing calculations on the full segment or only on medical products and distribution um at 2.4 billion dollars of revenue It's been growing consistently at 10%. We expect it to continue growing robustly. And so that will, in a way, have a mix effect. So a percentage of revenue in the total segment, that will be a bigger piece. The medical product distribution most likely will be a smaller piece. So, you know, we'll need to do a bit more math before we can respond more clearly on that one.

Thank you.

We now move to Eric Percher of Nefron Research. Please go ahead. Mr. Parcher, your line is open.

We move to our next question. Charles Rye of Cowan. Please go ahead.

Yeah, thanks for taking the question. And, Mike, congratulations and best wishes with everything. And, Jason, I look forward to continuing working with you. You know, I wanted just to maybe follow up. You know, Jason, you talked about, you know, really using the cash and deploying it, and obviously you've outlined an amount for share repurchase. You know, when you think about getting to this 650 million sort of target in medical operating profit, you know, can you talk about maybe sort of M&A and other kind of capabilities that you might want to add? I know that, you know, we spent the last few years actually divesting assets, but is part of that growth inorganic as well. And then secondly, you know, producer price index kind of fell below, you know, it was below what people expected. When we think about the gross impact from inflationary pressures, are you starting to see some of that ease as well, given sort of this July report? Thanks.

So as The short answer for the medical improvement plan is no, M&A is not a cornerstone of that plan. We will be looking to always augment, especially our growth businesses. So when we talk about that second point, accelerating our growth businesses, primarily at-home solutions, that is very much an organic investment story. We are investing in distribution capacity, that 10% growth. does mean that we have some constraints and we need to invest in that to ensure that that business can continue to grow profitably. So that is not a cornerstone. In fact, I would say maybe a little bit of the opposite. A lot of what this plan is is very focused on the core. It's very focused on, you know, we have a, we just increased our CapEx guidance this year from where it's been in the past. That was hinted at and signaled last quarter where we talked about some of these capacity investments that, again, we feel are relatively low risk and a good return. So it's more of that type of investment that we're focused on and that we believe is a better balance of risk and return as we drive this plan forward. We won't ever ignore it, and it could be a pillar, or I'm sorry, it could be an enabler at some point later on, but it's not the focus and not necessary for what we're doing. As it relates to PPI, I think this one maybe, I kind of talked about a lot of the pieces, but one area that is often referenced as a key driver for a lot of our costs is just oil in general. You know, that has come down. So PPI in general, I don't pay much attention to. I do look at the price of oil at least two, three times a day. It does have an impact on a lot of input costs. And we talk about polypropylene, polyethylene, polystyrene, all these polys have some input costs that are petroleum-based that does impact it. But the supply-demand dynamics are so wonky right now that it's hard to see a one-for-one transition of these input costs, and I think at some point that will come through, but we're really not seeing it that much. You know, we are seeing lower diesel costs, so that's going in the right direction. That, you know, I would expect at some point will help with the transportation rates, but we're not necessarily seeing those elements. Where it is most striking is the international freight, and that continues to be the one that is clearly running lower. But it's just going to take time for that to run through our P&L. But I wouldn't call that a inflation driven or input cost driven point. The cost of diesel fuel for a freighter is small. It's the supply and demand dynamics that were all out of whack early on in the pandemic that appear to be getting a bit more in line. And that's why at this point, I believe that that cost will maybe not keep going down at the pace that's going down, but it does feel like we're seeing more flattened down days for those costs than up days. Everything else, we're going to have to get more data to be able to provide additional input.

Thank you. We now move to Kevin Calindo of UBS.

Hi. Thanks for taking my call. And again, congrats to both you, Mike, and Jason. I guess my question is going back to the medical segment. There's a lot of execution that needs to take place between now and 2025 to hit these targets. Are you happy with the team in place? How do you enhance your probability of success here internally? Is it bringing in new people, more people, or do you feel the team in place can do it? And the second part of that question is a lot of this is price increases, which you've talked about. How are you competitively positioned now when it comes to price? You talked earlier about losing some share in medical because of PPE capacity and availability earlier. How are you now positioned competitively when it comes to pricing? And are customers asking for any offsets anywhere else? I know you talked about some guarantees and the like, but just want to understand the competitive positioning as well.

Yes, I am happy with the team in place. This is This is our plan. They've been working on this for quite some time. We have shared elements of it conceptually with our investors, with you all in the past. What this is doing is putting a finer point on this plan and making it more visible the commitments that we're making. We are leaning into some of the investments I mentioned before, especially on the CapEx. I do think that we need to continue to augment some of the capabilities. We have a several very key new team members on that team that when you think about a lot of the supply chain challenges that we're talking about over, especially this past year and even this last quarter, we have augmented that team significantly with terrific talent, industry-relevant talent, but most importantly, product talent, talent that knows the supply chain, knows manufacturing, that was able to make an immediate impact in finalizing this plan and allowing us to take it over the line. So I would not be presenting it this way if I didn't have the confidence that we have the people behind it to actually execute it. The other thing I'll say about a plan like this is I absolutely understand the intent of your question because there's several things that need to happen here. And one thing I've learned in my two years here is that it's not what's on the piece of paper that ends up taking it sideways. It's the things that are unforeseen like COVID and like inflation. And so with that said, that's why you see after every single one of these actions, at least or 60 million plus or 50 million plus is because our internal plans are definitely more aggressive than this. And we know that there's going to be some unforeseen things that are going to make us exceed some of these items so that we can hit it. So yes, a lot of execution, but we have the team and we have the plan in place and that's where we have to start. As it relates to your question on competitiveness, I think I'd like to answer that maybe a little bit more broadly because let's just talk about inflation. As long as we have a cost competitive sourcing manufacturing footprint, then inflation that we incur absolutely needs to be pushed down to the final customer. By its nature, inflation in most industries in most periods of time don't get absorbed in the supply chain. There's not, especially in distribution, there's not the margin to absorb inflation. And so when that higher cost lifts the industry's costs over longer periods of time, we would expect that to flow, generally speaking. But how you get there is a very choppy type of process. That's why this is taking two, three years. It's also Certainly because of the contracting nature where a lot of this is rolling over into more permanent contracts in addition to the shorter term actions. So there's nothing about industry dynamics, there's nothing about our competitiveness that indicates that we should be losing margin here. We have to be versatile and move our supply chain if we're uncompetitive in a particular area. But if we're competitive from a cost perspective, there's no reason we shouldn't go back to historical margins.

Thank you.

We now take our last question today from Eric Percher of Nephron Research. Please go ahead.

Thank you. Am I coming through this time? Yes. Perfect. So, Jason, as you take on the new role, I think a couple of questions came down to what you will do different. And what I heard during the call was you've had a desire to be more aggressive on returning capital to shareholders and opioid settlement behind you, strong balance sheet. We're going to see that. heard the focus on cost management i want to ask if there are other elements that you think are important for us to understand and then i want to also ask pointedly will you reassess the portfolio and consider whether medical and pharmacy pharma need to be together long term yeah so let me let me start um whenever whenever i step into any project let alone a role

It is always about defining, well, where's the best opportunity to create value? Where's the opportunities? Where are the challenges? And what is clear to me is that until we can get better evidence of the progress on our medical business, we're going to be challenged. And so that is why I'm so focused on this medical improvement plan, why we provided such clarity on it. is that it is absolutely one of, if not my greatest focus, especially in the near term. And when you think about, you know, kind of, you know, any type of process to fix anything, it has to be, first and foremost, defining what the challenge is. And I do want to step back for a moment. When you think about the challenges in medical, I know there's been a lot of adjustments. I know there's been a lot of noise. But when you think about The vast majority of the issues, they do stem from one very common theme. It is related to the supply chain. Now, I can start and highlight all the external influences with that and blame things that have happened to us, and it's very, very true. But when you think about where we were pre-COVID, this type of business, this type of industry was extremely stable. Our volume was predictable, especially in areas like PPE. To think about, you know, going up, you know, 5, 10x in terms of demand overnight and then not having a supply chain that could adjust with that, it really impacted our ability to execute in that environment. And our diverse, low-cost global footprint went from a strength to a challenge pretty much overnight. So now we've learned from that. That's what this plan is talking about. It's building in resiliency and capacity into our system so we can be a lot more flexible. We can de-risk the model while also growing profitable categories. So this is very much a cornerstone of what needs to be the focus. But it's not just cost. It's simplification to reduce cost. It's also about driving the right volume, driving organic volume, driving high margin volume in simplifying everything about how we operate so that we can be more nimble and we can be risk. And then, you know, again, within both segments, there is an absolute need to continue to grow our growth businesses. What you heard me say today was more of an emphasis on specialty and on at home. Of course, we love all of our growth businesses, but what I'm really indicating here is for us to achieve the $650 million, what we need are those two businesses, to continue to grow the top line and to have a good flow through on that incremental volume that comes with it. And with that, then we have high confidence that we'll be able to get the pieces of growth for both segments necessary to hit their longer-term objectives. So that is very much a growth-based story, but it's about, again, prioritization and being really, really focused on the core of both businesses so that these two growth businesses can build from there. In terms of the portfolio, you know, hey, it's something that I believe in continually evaluating our portfolio for all of our businesses. And the company has demonstrated this in the past. You know about China, NaviHealth, and more recently, Cordis. And we've monetized several billion dollars over the last several years through those activities and was responsible with the capital deployment thereafter. I'm not going to attempt to define what the appropriate long-term course of action is for this business, for the medical business. But under all scenarios, what's really, really clear to me is that the near-term actions need to be very focused on this improvement plan, and then that will set us up for the best actions thereafter.

Thank you. I would now like to turn the call back over to Mr. Mike Kaufman for any additional or closing remarks.

Thank you. Before Jason ends the call, I would like to say that I appreciate all of your congratulations and comments and enjoyed working with all of you. I look forward to a smooth transition with Jason and have complete confidence in his leadership. Jason, to you.

Yeah, thanks, Mike. I want to also thank everybody for taking the time to be on the call today and for all your questions. In addition to the leadership succession, I acknowledge that we threw a lot out at you today, including new disclosures, various puts and takes, and examples of incremental actions that we are taking. We did all this in an effort to provide additional visibility as we are confident and excited about these opportunities to drive growth. But there are three key takeaways I want to make sure that you have. First, we are committed to improving our results, as demonstrated by the introduction of our medical improvement plan. We continue to be encouraged by the resiliency of our pharma segment, which continues to meet both our short and long-term objectives. And third, that we continue to take actions that are in our shareholders' best interest.

With that, thank you and have a great day.

Thank you, ladies and gentlemen. That will conclude today's conference call. Thank you for your participation. You may now disconnect.