Cardinal Health, Inc.

Hello, and welcome to the third quarter fiscal year 2026 Cardinal Health Incorporated earnings conference call. My name is George, and I'll be the coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, you're going to be in the listen-only mode. However, you have the opportunity to ask questions towards the end of the presentation, and this can be done by pressing star 1 on your telephone keypad to register your questions. Also, can you please limit yourselves to one question each to allow the maximum attendees to ask a question? If you require assistance at any point, please press star zero and you will be connected to an operator. I'd like to have a call over to your host, Mr. Matt Sims, Vice President of Restoration, to begin today's conference. Please go ahead, sir.

Good morning. Good morning. And welcome to Cardinal Health's third quarter fiscal 26 earnings conference call, and thank you for joining us. With me today are Cardinal Health CEO Jason Holler and our CFO Aaron Ault. You can find this morning's earnings press release and investor presentation on the investor relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in these statements are subject to risks and uncertainties that could cause our 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, the comments will be on a non-GAAP basis and less 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.

Thanks, Matt, and good morning, everyone. We are pleased to report another strong quarter for Cardinal Health, building on the momentum we displayed over the past few years. This quarter's performance highlights the durability and resilience of our business and the team's disciplined execution. The results reinforce our conviction in the company's growth trajectory and ability to deliver long-term value creation. Our underlying operating strength continues to be led by our largest and most significant business, pharmaceutical and specialty solutions, and is amplified by contributions from our higher margin growth businesses. Within pharma, we delivered strong growth, highlighting the strength of our core. We continue to see benefits from our strategic focus on expanding our capabilities across specialty, both downstream with providers and upstream with manufacturers. We are progressing the expansion of our MSO platforms, in particular with the Specialty Alliance's multi-specialty offerings, delivering differentiated value to a growing network of physicians and enhancing patient care and access. The integration of Solaris into the Specialty Alliance remains on track, and we are taking actions to realize synergistic benefits across our portfolio. In GMPD, we continue to execute against our improvement plan. Our focus on simplification and cost optimization initiatives is producing tangible results and we continue to see notable strength in our portfolio of Cardinal Health brand products. Our deliberate actions to simplify operations, enhance supply chain resiliency, and drive commercial excellence remain strategic priorities as the business navigates the dynamic tariff environment. Our other growth businesses, At Home Solutions, Nuclear and Precision Health Solutions, and Optifreight Logistics continue to deliver robust results. Their sustained performance is a direct outcome of our continued strategic long-term investments in these areas, which are aligned with a favorable demand environment and positive secular trends in faster-growing areas of healthcare. The collective strength and sustained momentum across the enterprise, including our financial position, gives us the confidence to again raise our full-year outlook for fiscal 26 and highlight our expectations for continued momentum in fiscal 27. And with that, I'll turn it over to Aaron to review our financials and outlook.

Thank you, Jason, and good morning. Our team delivered strong financial results in the third quarter, reflecting positive and broad-based demand, operational execution, and loyalty to our disciplined capital allocation framework. Our strong operational performance was supplemented by positive discrete tax planning benefits below the operating line and continued share repurchase activity. Given our confidence in the remainder of the fiscal year, we are pleased to be raising our full-year fiscal 2026 non-GAAP EPS and adjusted pre-cash flow guidance. Let's begin with a review of our consolidated third quarter results. Total company revenue increased 11% to $61 billion. This growth was driven by strong demand in our pharmaceutical and specialty solution segment and in other. Gross profit grew 18% to $2.5 billion due to benefits from our acquisitions and segment performance. While we maintained our focus on cost management, we also invested in the business. with SG&A, inclusive of the impact of our M&A, increasing 17% on a headline basis. When you adjust for the impact of the M&A, our SG&A growth was 7%, reflecting increased volumes and purposeful investments in teams and technology across our business. The combination of these results led to an 18% increase in enterprise operating earnings to $956 million. Moving below the line, we recorded net interest and other expense of $117 million for the quarter, driven primarily by the increased financing costs associated with prior acquisitions. Our non-GAAP effective tax rate for the third quarter was 10.2% due to the benefit of discrete tax planning items in the quarter. Included in our Q3 ETR was a multi-year benefit that contributed approximately 35 cents to the quarter. Average diluted shares outstanding were 236 million shares. This reflects the positive impact of the completion of our second quarter ASR program in January, as well as the launch of an additional $250 million share repurchase program in the quarter, which was completed in April. This brings our fiscal year 26 total share repurchases to $1 billion, exceeding our fiscal year baseline target by $250 million year to date. The net result of these factors was third quarter non-GAAP EPS of $3.17, representing 35% growth. Diving deeper into the businesses, the pharma segment delivered a strong quarter. Segment revenue grew 11% to $56.1 billion. This was primarily driven by existing customer growth across the portfolio. We continue to see strong overall pharmaceutical demand across product categories, including specialty, generics, and consumer health. Within brand, volume growth also remains quite healthy, though we did observe some fluctuations in mix that impacted the overall revenue line between GLP-1s IRA changes, and generics. Of note, during Q3, GOP 1s added six percentage points to our revenue growth. GOP 1 revenue growth remained robust at over 30%, but moderated from the prior quarter. The growth from GOP 1s was generally offset in the quarter by a six percentage point impact to revenue from inflation reduction and WAC pricing adjustments. Segment profit growth outpaced revenue growth significantly. increasing 18% to $784 million. This strong result was primarily driven by contributions from brand and specialty products. As previously shared, we maintained our economics on distribution contracts, notwithstanding the impact of WAC changes. We also saw positive performance of our generics program, and we're pleased to again see consistent market dynamics. I want to highlight how our teams have definitely managed through the increased operational complexity resulting from heightened winter storm activity during the third quarter, a testament to the agility of our workforce and fundamental durability of our business model. As a matter of financial transparency, I will note that on a GAAP basis, earnings were impacted by $184 million pre-tax goodwill impairment charge related to our Novista business. The non-cash impairment charge was primarily due to changes in the risk profile of the business plans resulting in an increase in the discount rate. These changes reflect business model updates and base operational performance. The impairment does not affect our non-GAAP results. Our strong positive outlook for our specialty business is unchanged. We are pleased with the above-market growth we are seeing in specialty, including over 20% revenue growth in the third quarter, and we continue to expect our specialty revenue to exceed $50 billion in fiscal 2026. In our GMPD segment, revenue was $3.1 billion. This was generally flat the prior year. reflecting lower distribution volumes offset by Cardinal Health brand growth. We were again pleased with Cardinal Health brand performance, which grew over 5% in the U.S., including timing shifts in the Q2 that we called out last quarter. GPD segment profits saw a decrease to $25 million through the adverse net impact of tariffs. That said, our segment results reflect solid underlying operational performance, and the team remains focused on executing our improvement plan, driving cost efficiencies, and managing supply chain resilience to serve our customers effectively. As you are aware, our tariff exposure is concentrated in the GMPD segments. In February of 2026, the Supreme Court ruled tariffs imposed under the International Emergency Economic Powers Act unlawful, and work is underway to establish a refund process. Uncertainty remains in the timing, scope, and administration of refunds, and we have not recognized any financial impact in the quarter nor reflected potential impacts in our updated guidance. To date, we have paid approximately $200 million in IEPA tariffs and previously noted sharing in these impacts with our customers. As a result, if circumstances change and become more certain, we would anticipate the potential future net benefit to Cardinal to be about half of that $200 million, primarily driven by the repayment of the IEPA pricing that we've taken to our customers. Turning to our other growth businesses, At-Home Solutions, Nuclear and Precision Health Solutions, and Optiframe Logistics, we saw strong results. These businesses represent a key element of our long-term growth expectations. Segment revenue grew 31% to $1.7 billion, and segment profit grew 34% to $179 million. This performance was driven by robust demand across all three businesses and the acquisition of ADS. The integration of ADS into our at-home solutions business is progressing well, and this combination has created a powerful platform for patients with chronic conditions that supports and can be supported by other parts of our business. Our nuclear and precision health solutions business is executing like clockwork. MPHS again saw over 30% revenue growth from Theranostics, a key area of innovation and investment. And Optifreight Logistics continues to deliver its unique value proposition helping healthcare providers manage logistics with greater efficiency and cost effectiveness, growing revenue nearly 20% in the quarter. Now turning to the balance sheet. Our capital deployment priorities remain consistent, investing organically in the business for long-term profit growth, maintaining our investment credit rating, returning capital to shareholders, and opportunistically pursuing value creation through strategic M&A. We ended the quarter with a cash position of nearly $4 billion after generating $1.7 billion of adjusted pre-cash flow in the quarter and taking several actions that align with our discipline framework. We continue to invest heavily into the business with capex of $385 million so far this year across all of our businesses. We prepaid $100 million on our outstanding term loan, further reducing our Moody's adjusted leverage ratio to three times. This places us comfortably within our target leverage range of two and three quarters times to three and a quarter times and demonstrates our commitment to our BAA2 rating at Moody's. As I noted, we also return capital to shareholders through an additional $250 million accelerated share repurchase. So let's talk about the rest of fiscal 26. Our strong performance through the third quarter and our confidence in the fundamentals of our business leads us to raise our non-GAAP EPS outlook for the full year to a range of $10.70 to $10.80. That is a 50-cent increase at the midpoint made up of approximately 13 cents from operational strength at pharma and in our other growth businesses and the remainder below the line. This new range represents annual EPS growth of 30% to 31%. In pharma, we expect our fiscal 2026 revenue to come in at the lower end of our 15% to 70% range, reflecting the continued strong overall volume growth and the mixed dynamics within brand that I referenced earlier. For segment profit, we are pleased to raise and narrow our profit growth outlook to 22% to 23%, an increase from our prior range of 20% to 22%. This change reflects our performance through the third quarter and is indicative of our confidence in the segment's continued operational execution with anticipated high-teens profit growth in the fourth quarter at the midpoint. As you model the remainder of the year, Please keep in mind that we have now fully lapped our large pharma wins from fiscal 25 and the GIA acquisition. Consequently, Solaris will be the primary inorganic driver to account for in your year-over-year comparisons. Additionally, I will note we are onboarding distribution volumes for GIA Alliance and Solaris during Q4, which are reflected in our guidance. For the GMPD segment, we are reiterating our revenue outlook of 1% to 3% growth and holding our profit guidance to $150 million. We remain pleased with the progress against the GMPD improvement plan and are encouraged by both the consistency of our Cardinal Health brand growth and tangible impact of our simplification strategy. With our other growth businesses, revenue guidance is unchanged, projecting the full year between 26% to 28% growth. However, we are increasing our profit growth guidance to a range of 36% to 38%, up from 33% to 35%. This positive revision is driven by strong performance across all three growth businesses to date. As you model the remainder of the year, please continue to remember that we have lapped the acquisition of ADS in April, which will result in more normalized Q4 growth. Focusing below the line, we are updating our outlook for interest and other to approximately $340 million, up from our previous estimate of $325 million. This is due to some Q3 adjustments within the other income and expense line the majority of which was offset in tax and net neutral to the enterprise. Additionally, as a result of the discrete planning benefits in Q3, we are lowering our expected non-GAAP effective tax rate for the full year to approximately 19% down from our prior range of 21% to 23%. Reflecting the impact of our share repurchase activity, we are updating our outlook for weighted average shares outstanding to approximately 237 million shares from our previous guidance of 237 million to 238 million shares. Finally, we are raising and narrowing our full year adjusted free cash flow guidance to a range of $3.3 billion to $3.7 billion from our previous guidance of $3 billion to $3.5 billion, which reinforces the robust and resilient cash generating capabilities of our business model. In summary, our third quarter results demonstrate the broad-based strength of our business and the progress we are making against our strategic objectives. Before I close, I'd like to share some initial thoughts on fiscal 2027. The headline is that we remain confident in our long-term targets and will continue to assess the various puts and takes for next year as we progress further through our annual planning process. We look forward to sharing detail of our fiscal 2027 outlook during our fourth quarter earnings call, but before then, a few items of perspective. While the healthcare landscape and regulatory environment remain dynamic, We have consistently demonstrated an ability to navigate change, reinforcing the durability and deep resilience of our model and our enduring value proposition. In our pharmaceutical and specialty solutions segment, we anticipate positive demand and demographic trends to persist, supported by strong, ongoing operating performance. There are several positive items informing our views. The scale and efficiency of our pharmaceutical distribution operations and our growing position in specialty including specialty distribution, our MSO strategy, and biopharma solutions. We will see benefits from the annualization of the Solaris acquisition in the beginning of the fiscal year and anticipate benefits of continued synergy realization. The three businesses and other are exceptionally well positioned to benefit from secular trends and to win in high-growth innovation areas like theranostics. We plan to continue to strategically invest and position ourselves to capitalize on those trends. In our GMPD segment, the successful execution of our multi-year improvement plan is on track and gives us confidence in our continued potential to unlock value in this business. We continue to monitor the dynamic tariff environment and broader macroeconomic factors, including fuel and commodity exposure, with improved ability to navigate change as a result of our multi-year focus on simplification and efficiency. All of this is supported by the fact that we are completing our third year of long-term, sustained investment in our businesses to ensure that the foundations of future growth are built before we need them. Below the line, we'll have the comparison to the discrete tax benefits this year, while continuing to pursue opportunities to drive durable improvements in our tax position. We expect another year of robust cash flow generation, and we'll be sticking to our knitting with respect to our disciplined capital framework. which creates opportunity for accretion through our baseline share repurchases. In closing, we are confident in our ability to achieve our updated higher guidance for fiscal 2026. Our priorities are unchanged and we are executing against them. Our team is committed to our vision and will remain focused on its achievement while investing for long-term growth and value creation. With that, I'll now turn the call back over to Jason.

Thanks, Aaron. Our pharma segment once again led our performance, providing proof points of our strategy to strengthen the core and expand in specialty. Our continued focus on the core with investments in infrastructure, technology, and our people are delivering measurable improvements across the network. As an example, we continue to invest in our existing distribution centers through automation and productivity initiatives, which both improves our costs and expands our capacity. We are achieving record high service levels, which is a testament to our employees and the investments we've made focusing on the core. We continue to see consistent dynamics in generics with our Red Oak partnership and continue to have best in class performance in the strength of our generics program. Specialty continues to be an increasingly important driver of our strategy and results. Upstream, our biopharma solutions business is advancing its momentum, providing critical services to our pharmaceutical partners evidenced by three new pharmaceutical therapies that our Synexis patient support business onboarded this quarter, with another 10 scheduled to be completed over the next two quarters. This growing pipeline underscores the trust and value we provide to manufacturers, bringing life-changing therapies to market. We continue to see opportunity from our multi-specialty MSO strategy within the Specialty Alliance, which is proving to be a key differentiator in the marketplace, generating value for community-based physicians and their patients. Since last quarter, we closed three tuck-in acquisitions within the Specialty Alliance, adding physicians to our network and further extending our geographic reach into our 33rd state. Our model continues to unlock value through the synergies we create across our businesses. For instance, Specialty Networks and the Specialty Alliance are now partnering to support a pharmaceutical company on a multi-year study focused on understanding real-world outcomes for patients receiving care at community gastroenterology clinics across the country. Specialty networks will perform the analysis, showcasing how we connect our vast network of partners, physicians, and patients to create long-term differentiated value. Turning to GMPD, we continue to demonstrate disciplined execution and make progress on our ongoing improvement plan. The team remained focused on growing Cardinal Health brand and relentlessly simplifying operations, and we made tangible progress on both fronts during the quarter. With the execution of our five-point plan, Cardinal Health brand has now grown at least mid-single digits for five consecutive quarters, outpacing the broader market. Our other growth businesses, which remain an increasingly critical component of our long-term strategy, were again a significant driver of our performance this quarter. In at-home solutions, we continue to see a strong demand environment fueled by the ongoing shift of care into the home. To support the growing demand, we are investing to expand the capacity of our network, the breadth of our offering, and a new technology to drive efficiencies and customer experience. We are pleased with the integration progress of ADS, which now marks one year as part of Cardinal Health. We have successfully migrated ADS volume into our distribution centers, as well as onboarded nearly 1,000 new employees and nearly 500,000 new patients. This marks a significant operational achievement that positions us for enhanced efficiency and long-term growth. We are well positioned to capture ongoing growth as evidenced by the key synergies between pharma and home health, where we are seeing strong growth of our continued care pathway program, which we announced early this year, with the team now serving 165,000 patients and growing up nearly 20% since January. This progress is supported by our ongoing investments in technology and our core distribution footprint. To that end, We have signed a lease and are progressing with our new Sacramento Distribution Center, which will help us serve even more customers on the West Coast. Nuclear and Precision Health Solutions continues to demonstrate its leading position thanks to our differentiated offerings and specialized expertise. This quarter, we announced a significant expansion of our Actinium 225 production capabilities at our Center for Theranostics Advancement, which will substantially increase our capacity to support the rapidly growing demand for novel, targeted cancer therapies, and strengthen our ability to meet customer needs today and into the future. To date, Nucleus Actonium 225 has supported more than 15 clinical trials worldwide, reflecting broad engagement with pharmaceutical innovators, a clear indicator of our ability to execute and scale in this complex and highly differentiated field. We continue to unlock opportunities for greater connectivity between our nuclear business and our specialty businesses, exemplified by a recent supply agreement with the Specialty Alliance, which makes them our nuclear business's largest user of Eleusix for prostate cancer imaging. Our Opti-Freight logistics business also continues to perform well and expand its offerings, consistently demonstrating its leading value proposition for healthcare providers. Launched last quarter, the pharmacy solution from Opti-Freight Logistics, inclusive of Tech Forward products, shipment navigator, and tracking beacon, provides meaningful shipping process efficiencies and improved tracking visibility via an all-in-one platform to drive confidence, security, and clarity for outbound pharmacy shipments. In closing, our results this quarter again demonstrate the clear progress we're making across the business. The relentless focus and dedication of our colleagues around the world underscores the vital role we play in ensuring critical products reach the right place at the right time for our customers evidenced by the increased complexity our teams manage through to achieve record high service levels for the quarter. Our resilient business model and our foundational role as the backbone of the healthcare system give us great confidence in our ability to capitalize on opportunities ahead and to deliver sustained long-term value. With that, we'll take your questions.

Thank you very much, sir. Ladies and gentlemen, as a reminder, if you have any questions, please press star 1 on your double keypad. Once again, can you please also limit yourselves to one question each to allow the maximum attendees to ask a question. Our very first question today is coming from Lisa Gill, taught from J.P. Morgan. Please go ahead, Lisa.

Your line is open. Lisa, your line is open.

I'm not able to hear you at this time. I'm just going to put you back in the queue to check your phone. And we're just going to move to our next question. It's coming from Michael Cherney of Learing Partners. Please go ahead, Michael. Your line is open.

Morning. Can you hear me?

Your line is open.

Okay, great. Perfect. Thanks. One quick housekeeping and then one broader question. First, on the housekeeping side, is there any way to quantify the James Meeker- accelerate sga investments that you mentioned in the quarter relative to positioning for future growth and then. James Meeker- Broadly speaking, great to hear all the progress on specialty as you look at the portfolio now, where do you think if there are any kind of holes or shortfalls that you continue to see the opportunity to build out either organically or inorganic Lee from here, thank you.

James Meeker- Great good morning thanks for the questions happy to. And we did call out in the prepared remarks that while SG&A was up 17% across the enterprise overall, if you exclude the impact of the M&A, it was up, you know, 7%. And I can assure you we are being quite purposeful and disciplined in thinking through our SG&A structure to ensure that where we are investing, particularly in technology and team, as I called out, it's focused on setting us up for success, you know, going forward. With respect to the specialty portfolio, I guess I'll start and just observe that we are really pleased with the continued strength we're seeing in our specialty business, indeed across the pharmaceutical demand overall. But as we think about the specialty portfolio, that was a key contributor to the excellent results that Nofarma had. GIA, Solaris, you know, Ion, all of the businesses that we've acquired have certainly partnered well with the existing specialty capabilities, specialty networks, et cetera, and are performing as we expected when we brought them into the portfolio. As far as where to next, if your question is really about the inorganic opportunities, what I would observe is while we will continue to be focused on specialty, we have prioritized autoimmune and urology, and we'll remain focused there. But we are going to be quite disciplined as well. The right assets at the right timing at the right price we will continue to lean in to support our growing specialty platforms. Jason, anything to add?

Yeah, I just add that we're very pleased. Aaron just used the word platform. And I think that's an important distinction of the investments we've made to date. We're clearly much more focused on the bolt-ons. We believe we have the capability, the business, and perhaps most importantly, the teams in place to execute this strategy. And we see that there's a lot of opportunity, not just within each of these platforms, but how these platforms work together. You even heard in this call already some of the examples of the areas that were working not just between the MSOs, but the MSOs and the rest of the specialty business between MSOs and what we're doing with nuclear or our at-home solutions business. So we have a lot of interconnectivity there. And it's all a component to our broader strategy to drive overall specialty growth, which we reinforce again today is growing at over 20%. Still expect to exceed $50 billion of revenue this year. The only other thing to add outside, especially clearly our highest priority, we've been very clear on that point, The other acquisition that we've done in the last year that we just anniversary here, April 1st, of course, is the at-home solutions business. So the other businesses are the other areas of potential opportunity for us. Secular growth trends that are part of the market that's growing very quickly. We are very well positioned in each of those three spaces. And if the right opportunity presents itself, I would use similar words as to Aaron just said. We will be very disciplined. as to how we approach those opportunities. But we think the market's growing and we're well positioned. Next question, please.

Yes, sir. The next question is coming from Elizabeth Anderson of Evercore ISI. Please go ahead.

Hi, guys. Thank you so much for the question. I wanted to dive into other, you know, obviously that continues to grow very nicely, and you just raised the guidance for the fourth quarter. Are you seeing any sort of changes in trend there that give you the confidence to do that, or how should we think about that as we sort of think about the back half of the year and then into 2027? Thank you.

Good morning. Thanks for the question. We saw strong performance across all three of the growth businesses affectionately known as others. Revenue was up 31%, profit was up 34%. But if you really unpack that, you know, Jason referenced these strong secular trends, the positioning, the competitive positioning we have, that's contributing to good results within the business and indeed lots of positive perspective on where those businesses are going to take us as we carry forward. Strong demand has also been a key part of why those businesses have succeeded the way they have. I would highlight a couple things. The core business with an at-home is doing well, and it has been reinforced by the ADS acquisition. The integration that Jason referenced earlier, it's going very well. We had highlighted in an earlier earnings call that we had a plan with opportunities to overperform, and we continue to see the goodness coming from the at-home business supported by the ADSG acquisition. And we pivoted from the integration of the supply chain, the distribution, to now being focused on the systems, the back office, and ensuring that we're providing the best-in-class customer experience that we aspire to for the patients being served by our at-home business. Within nuclear, boy, that theranostic growth just keeps coming. The investments that we're making in supporting the 70 different therapeutics that are coming our way really have created a pipeline of success for the business, some of which we're now starting to see, particularly within urology and oncology. So we're excited about that. And then OptiFrate, continues to perform, providing the excellent services to its customers with another good quarter as well. And so we were pleased to deliver a good quarter, and this business will, of course, contribute to our race to our guidance and achieving our long-term targets.

Next question, please.

Thank you, sir. Next question, we're coming from Aaron Wright of Morgan Stanley.

Great, thanks. So some of the commentary on 2027 and the moving pieces was helpful. When we dig into that core pharma and specialty distribution segment and the AOI growth assumptions that we should be considering remain strong, but how do we think about the sustained momentum into 2027? What would make you deviate from the long-term growth algo? in that segment and how do we kind of reconcile with underlying utilization trends that you're seeing or you're expecting into 2027 and then also those continuing specialty drivers? Thanks.

A couple of thoughts there. First, we remain confident that our business is quite resilient and has demonstrated durability notwithstanding a fair amount of change in the industry. And I think it's important to keep that in mind that as we talk about, you know, fiscal 27 as well. And that's part of why we're able to express the confidence in the long-term targets that we have really across the enterprise, but particularly within the pharma business. We have a strong core to our business, right? We have seen consistent positive demand, right? We saw it again, you know, this quarter and the business is supported by, you know, positive demographic trends that aren't going away as we get one more quarter into our business. And so we think those are all things that are going to, James Rattling Leafs, is support the trajectory of that business, we will also continue to benefit from the specialty expansion that Jason and I have just commented upon right and. James Rattling Leafs, One thing we're particularly excited about as well as how the pieces are all now starting to fit together. James Rattling Leafs, specialty alliance working with you know nuclear biopharma really working with the broader portfolio and so there's a lot of goodness there within the pharma business that. we think is supportive of the long-term target. And, of course, we'll provide more perspective as we get through our planning cycle at the Q4 earnings call.

Next question, please.

Thank you, sir. Next question will be coming from Eric Percher of Nephron Research. Please go ahead, Eric.

Thank you. I want to stick with pharma and specialty, and I'd like to get a little bit more on NAVISTA and ION and the impairment. And I know you called out changes to the, risk profile relative to a business plan, can you give us a feel for whether that was near-term versus long-term changes? And does it alter at all the oncology MSO strategy or economics of the platform?

Sure. Thanks, Eric. And I'll go ahead and start and then turn it over to Aaron to walk through a few of the mechanics. First of all, I'll just reinforce what Aaron already said. The broader strategy, we're very pleased with the execution, not just this quarter, but this year, but also the last several years. Exceeding this $50 billion this year, continuing to see over 20% growth in specialty highlights our strategies working within the collective assets that we have put in place. And I'll remind you that that 20% growth is pretty consistent to what we said over the last two quarters. So each quarter this year, which was an acceleration from the mid-teens growth that we saw in the prior several years. So we've seen our specialty growth be strong, and then it's accelerated this year into, you know, very strong competitive positioning. And then within oncology, it was even stronger this quarter, continuing on those trends as well, over 30% growth in oncology. So as a reminder, you know, specialty has a lot of components to it. Within specialty, MSO is just one component. Within, you know, within the MSOs, oncology is just one component. And then we have, of course, NAVISTA within that. So NAVISTA is a component of that, and it was a combination of an acquisition, but also organic business. And we had a couple of different strategies in place. We had the equity strategy. working with physicians to create this long-term cooperation, collaborations agreements with an equity component. And then we had the non-equity where it was more transactional, more contractual. And what we've seen is that while physicians like to have choices and like to have different alternatives, ultimately we're seeing the market voting for the equity arrangement. And that's where the market has moved. and why we're prioritizing our strategy to that component. It does not change the broader strategy of either on the MSO strategy or the broader specialty strategy. And I think the underlying data certainly supports that it's all coming together in a very accretive way. But with this pivot and strategy, it did have some knock-on effects that Erin can walk through.

You know, I won't believe the point, just to observe that one piece of specialty and one piece of oncology, and we're keeping score right on ourselves, as we've always committed, we would tell you what we're going to do, do it and report back. And in this case, we have increased the discount rate applied to a small part of the oncology business. And, but we remain pleased with the contribution that the specialty M&A is adding to our portfolio overall, you know, the eight percentage points or so. within fiscal 26, consistent with the prior guidance that we give it.

Next question, please.

Yes, sir. The next question is coming from Alan Lutz of Bank of America. Please go ahead.

Good morning, and thanks for taking the questions. Aaron, you know, big free cash flow raise with a quarter to go. You mentioned or called out that revenue was maybe a little bit lower than your expectations. I think you called out IRA and maybe a little bit from GLP-1. We know that IRA is maybe more of a headwind on the revenue side, but you were able to raise the free cash flow guidance. Can you talk about what gave you the confidence for what you're seeing? Was it better than expected? Was there a mixed shift with a movement, I guess, more toward those IRA drugs that was actually a positive contributor to free cash flow? Was it more generic? Just trying to understand what makeshift, if at all, impacted the free cash flow guide that was maybe a little bit better than you expected. Thanks.

Alan, good morning. Thanks for the question. What I would observe is that it's amazing how what gets measured gets done. And I can't point to just one factor across the enterprise as being the single source of success for our ability to generate the adjusted free cash flow we did or indeed drive the increase to the increase to the guidance, it was driven really across all of our businesses with the management teams focused on the intersection between our customer service levels and our inventory positions, ensuring that we're collecting that which is due to us from a, you know, AR perspective and focusing on the appropriate levels of AP with our suppliers. And so there were a series of initiatives that have been underway now for several quarters that are really James Rattling Leafs, generating the success, you know that we're that we are able to call out, I do want to seize on your question to maybe answer a question I haven't gotten yet or maybe put an emphasis on a. James Rattling Leafs, point in the broader your final results which is you called out the revenue and I think it's probably a good point for me to observe that. James Rattling Leafs, The revenue growth within the pharma business was 11% which I understand some were maybe expecting a little bit more than that it's important to understand that. We're in a quarter, we're in the first quarter of a couple of things going on. Firstly, of course, we have, you know, the IRA WAC changes, which was a, that was a negative relative to the overall growth rate. And similarly, yeah, sorry, revenue, thank you. And similarly, GLP-1s is also in a period of change. And so while GLP-1s are growing extensively, still over 30%, they're growing less than they were before. And so we saw a six percentage points uplift from growth within GOP ones offset by a similar level of downdraft from IRA WAC. And then you toss in some other brand dynamics like the LOE to generics, which is a positive for profit, right? That's really what's going on within the revenue line, even though the profit line The demand line was very strong. The profit line is very strong. And so I just wanted to take this opportunity to reference what was going on there.

Thank you, sir. We'll now move to Glenn Santangelo of Barclays. Please go ahead.

Yeah, thanks for taking my question. You know, Jason, I just want to follow up on some of those comments you were just making because I think there is obviously a lot of focus. on these IRA impact on the pricing and the revenue line. And I guess what the concern that some may have is as these prices come down, it seems like on the fee-for-service side, you're clearly maybe being made whole, but maybe some are concerned about you know, the buy margin on the 2% discount, and then ultimately downstream when you look at practice profits, if the price of these drugs are coming down, if these practices inherently become less profitable, can you get squeezed in any way at the distributor level from these IRA price reductions beyond just the fee-for-service agreements? And I think that's, you know, what we're all trying to sort of figure out is the different components of the profitability there and if there's any vulnerability. Thanks.

Yeah, thanks for the follow-on question on that. Let's break it into the two components, because I think you're right to talk about this in two different pieces. Aaron's comments were very much focused on the distribution side. That's by far the biggest component of our business, and it's relevant to start there. We remain incredibly confident in our underlying business model. When you think about the fees that we receive today for the services we provide, That should not change. The services are certainly not changing, and we remain the lowest paid component of this supply chain than anyone in the supply chain. So we feel very good about continuing to receive the fees that we currently receive for that work. And as a reminder, we announced the completion of the renegotiation of these contracts at the very beginning of the quarter at an analyst conference there. So this was all done prior to the quarter. It executed exactly consistent with that announcement because those agreements were already in place. Very similar to what happened with the insulin repricing the year before that. So there's a lot of precedents, and frankly, it just makes sense. And it is consistent with we have the right to renegotiate the vast majority of our contracts for situations like this. So I continue to feel very, very confident with that. Now, when you talk about other components of our business, MSOs in particular, As a reminder, the drug spend for our four, four and a half billion dollars of revenue in MSOs is pretty diversified. We have only about a third of that being drug spend. And within that, we have a very diverse payer mix. So we feel very confident that the implications to our MSOs are going to be very manageable, if any at all, because ultimately what we're all looking for is exactly what is the administration's intent. for providers as it relates to these go-forward initiatives. We don't think the intent is to harm community providers that provide the excellent service to their patients, excellent care at the lowest cost already today. So it all makes sense for them not to be harmed, but we recognize actions need to be taken. But even if they don't, we believe this is very manageable for Cardinal Health. Next question, please.

Yes, sir, the next question will be coming from George Hill, from Deutsche Bank. Please go ahead, George.

Yeah, good morning, guys, and take the questions. And I'm going to dovetail right off of what Glenn just asked. I guess I would, Jason and Aaron, how would you guys characterize your fee-for-service pricing power as it relates to distribution agreements, especially in the face of some falling drug prices? And then I would ask as a follow-up, like, how have you guys analyzed that in the face of BFSF risk?

uh as that's supposed to roll out and kind of get recalculated in the back half of this year thank you yeah as it relates to bona fide service fees i think it's just too early to talk about the um exactly what the implications can be for the whole industry i mean this is far from just a distributor type of process change if at all and again it goes all back to we feel very comfortable with the value we're providing so just like in the initial shift to fee for service in the first place which maintain those economics, we would expect there to be a similar type of transition if there is a transition that's required. In terms of just the pricing power, it's quite simple. You know, we have 1% margins, and I think we've been, I've been very clear that branded products are at the low end of that 1%, right? I mean, this is a blended margin of 1%. These products are at the low end. We have the right to renegotiate these rates. We get paid a certain dollar fee today. for the service we provide. It's clearly the best value for all those in the supply chain, or they wouldn't be using the distributors in the first place. So there's nothing that changes in terms of the value we're providing tomorrow. So we fully expect, we fully demand to be paid the same amount going into the future. Next question, please.

Our next question will be coming from Steven Baxter, quite from Wells Fargo. Please go ahead.

Yeah, hi, thanks. Appreciate the early comments on next year at this stage. I'm trying to boil down some of the business commentary and the below-the-line commentary. I guess I'm trying to understand whether you're suggesting that the benefits from lapping deals and ramping synergies you think could potentially offset the below-the-line items that we're going to be comping against as we move into next year and therefore leave the kind of typical EPS long-term growth rate intact, or do you think people need to be modeling maybe something more conservative at this stage? I just want to make sure I understood that right. Thanks.

It's a great question. Our job is to manage the entire income statement year over year. And what I want you to take my comments as being is providing initial perspective that we believe there are good reasons to believe in our long-term targets overall, the 12 to 14% non-GAAP EPS growth. We've talked about some of the operating reasons, the demand, the demographics, industry positioning, et cetera, all in supportive of The overall position, and as we do in every year and every quarter, we will continue to go looking for ways to optimize. Our below the line items, whether it's finding further durable ways to ensure we have the appropriate tax rate, or also looking at our server purchase plans. And so we have a lot of planning yet to do in our cycle, but we are confident in our long term targets. Next question, please.

Yes, sir. Next question is coming from Kevin Caliendo of UBS. Please go ahead. Your line is open, sir.

Hey, guys. Thanks for taking my question. I want to talk a little bit about GPMD and understanding exactly what you meant by lower volumes. Is that just a macro thing? Is that a market share thing? Is there anything you can talk about that's happening? And have the volumes improved in April if it was a macro thing? And then Secondly, you talked about the potential clawback on the tariffs. How do you account for that? You mentioned it's potentially upwards of $100 million versus maybe the $200 million impact. How does that get accounted for? Does that drop through the P&L? Is it something that you're reserving for on the balance sheet now? I just want to sort of understand from an economic perspective, from a modeling perspective, from an accounting perspective, how that all works. Thanks.

Sure. Yeah, this is Jason. I'll go ahead and start, and I'm sure Aaron will clean up and after that. In terms of volumes, I think the underlying industry volumes for the med-surg side of our business seem to be fairly resilient and consistent, likely in the low single-digit type of range. The one area that I know I've seen public data on as well is we saw a little bit of softness in lab, respiratory, It's not a huge component of our GMPD business, but it is one that had a little bit earlier flu season, certainly weaker in the third quarter. Not one that's materially driving our numbers, but it is one that does have a little bit of an impact on the top line as well. We had called out in the past a large government customer, the VA, that we did lose earlier in the year. And so that is a fairly low Cardinal branded product customer. We also had a TAB, Mark McIntyre, A large customer that went through a significant merger we had part of the business better had other part, and so we did not carry over that piece of the business also. TAB, Mark McIntyre, A relatively low cardinal branded next customer, which is why you're seeing over 5% cardinal brand growth in the quarter, even though the top line was a little bit weaker, so we feel pretty good about the underlying. TAB, Mark McIntyre, Industry strength the underlying positioning we have and we're seeing. a continued strength on the most valuable parts of our business, which is that Cardinal branded products. We're at the best service levels we've ever been at. We're in a really good position, certainly some supply chain complexities, but underlying a really good, strong position to continue to support our customers and grow that part of our business. As it relates to the tariffs, I think the message is trying to be simple and clear. that we have the potential for a $200 million refund based upon the tariffs that we paid up to the IPA announcement. And that is none of that has been put into our panel at this point in time. What Aaron commented that we want to be really clear with is that we have directly received price increases from our customers over the last year. as a result of these tariffs. And so about half that $200 million, we ultimately, if we receive it, we would expect to share in that about half range with our customers, implying that someday we may have $100 million earnings gain as a result of that change. But it is still too uncertain for us to put through any of that into the P&L, and so we have not recognized any of that.

Yeah, I'm just going to emphasize that last point. We haven't recognized the financial impact in Q3. We've also not provided an update to our guidance reflective of that. The amount of any recovery, the means by which the recovery occurs, the timing of the recovery, those are all uncertain at this point. I'm not going to get ahead of ourselves and provide you with a specific accounting and treatment until we have full clarity on how this plays out.

Yeah. And, you know, while we're on the topic of tariffs, it wasn't exactly the question that was asked here, but we had a couple questions so far on the 27 puts and takes. Just one thing to kind of double back on to what Erin had referenced earlier. As it relates to unrelated to the tariff refund, but the ongoing tariffs that are still in place and certainly may change further with the 232 study that's ongoing. We would anticipate that from a year-over-year perspective, there is some opportunity as it relates to tariffs for the GMPD business. But we also all know that fuel prices are higher at this moment in time. And that also flows through to some of the commodity prices within our products. These are fairly modest in their nature. They're nowhere near the impacts that we saw several years ago with the hyperinflation that was in place. So we have a tailwind associated with tariffs that we think at this moment will be likely from an operational standpoint. We also expect that it's likely that there's going to be this ongoing commodity impacts. Both are in, I'll say, a reasonable similar ballpark. We'll get a lot more specific with this when we provide our 27 guidance. But you have a put and take there that is to some degree offsetting. It will be dependent upon where things stand in three months, and we'll provide those at that time. But overall, we think that that's not only manageable for the GMPD business, it's even more manageable for the overall enterprise. We have some impacts for fuel, but it's certainly the GMPD business is where we are most closely focused at this point. Next question, please.

Yes, sir. The next question will be coming from Charles Roy of TD Cowan. Please go ahead, Charles. Your line is open, sir.

Hi. This is Ethan on Frick Farm. Thanks for taking our questions. I just want to go back to the IRA topic real quickly. So given that you said you expect to be at the lower end of your rep guide for pharma, is it a fair extrapolation to say that the IRA impact so far this year has maybe been a bit larger than your expectations? Thank you.

No, I think what I observe is there are a series of things going on within the uh revenue line or the revenue guide that we had provided and we're trying to be transparent that as as we are modeling as you are modeling um the revenue impact to be thinking about on the one hand you know the strong demand we're seeing certainly as a as a positive but also uh understanding the impact of you know glp one growth given that they are relatively empty calorie dollars for us they impact revenue don't provide a lot of profit for us similarly When a branded product converts to generic, and we are seeing some notable LOE examples this year, that is a downdraft on revenue, but a positive for us from a profit perspective as well. And so we're just trying to provide some of the puts and takes that are going on within that revenue line.

Question, please.

Yes, sir. Next question will be coming from Stephen Valliquette of Mizuho Securities. Please go ahead.

Yeah, thanks. Good morning. Hopefully I didn't miss this, but I think in some of the segment discussions with the talk about the soft distribution volumes, et cetera, it seems like some of the investors believe that that's been tied to weather impact. That was obviously pretty prevalent in some of the public hospital patient volumes. But it seems like you're not really calling out weather as a volume headwind in either GM, PD, or pharma, unless I missed it. So even though this whole weather discussion is obviously irrelevant going forward, just wanted to get your thoughts on that dynamic just within the just reported quarter, really, for any of the segments. Thanks.

Yeah, thanks for the question. And I don't think you missed much. We didn't dwell on that point, Stephen. It was so nice. focus and prioritize on what's important as our team did a fantastic job of maintaining record high service level across the enterprise in an environment that was fairly complicated. We have some global supply chain challenges, of course, but in the quarter, you're right to point out whether. I would characterize it as a slight financial impact across the enterprise. It kind of popped up a little bit here or there. Very little within our traditional distribution types of businesses. TAB, Mark McIntyre, some excess costs associated with just getting the right people in the right spot and transportation reroute and things like that, but it was very slight not certainly not large enough to to call out, you know the one area that was. TAB, Mark McIntyre, Relative to the size of business, you know them as those had a little bit more of an impact, just because of the nature of it's it's much more difficult to make up for lost volume. on an MSO. When you think about like pharmaceutical or medical products, the next week, the next day, you can just send a second truck and you can kind of catch up nearly real time. With lost physician visits and procedures, it's harder to reschedule those. And so it's likely we lost a little bit of volume there too, but I would consider that also slight in the big picture for the pharma segment, a little bit more for the specific MSO. Next question, please.

Yes, sir, the next question is coming from Daniel of Citi. Please go ahead.

Guys, thanks for taking the question. You mentioned that the ion distribution contract began transitioning in 2Q and the GIA and Solaris distribution contract will begin this month. I'm curious how the ramp of distribution volumes have cracked versus your initial expectations And then on the Solaris contract, I don't believe that was previously included in guidance. Can you confirm that and comment on how much of the pharma profitability guidance list was driven by the Solaris distribution onboarding?

Thanks. Daniel, eagle eyes always, and that you caught that. We are indeed confirming today the Solaris distribution volume is now in the process of ramping up with our pharma business. We're pleased with that, you know, development as we were when we achieved the GIA distribution contract and the ION distribution contract as well. I want to emphasize when we talked about the acquisition originally, we do not include the impact of the distribution contracts in our financial models. That is a separate, you know, part of our business, and so it is, you know, good news for us to have the volumes coming in. Now, it is late in the year. It's our fourth quarter. And so the impact to our fiscal 26 will not be material. Otherwise, we would have called it out. But as you think about the puts and takes for next year within our specialty business, certainly now having Solaris ramping up is a positive for our future year.

Next question, please. Yes, sir. Now we'll move to Brian Conquiment of Jefferies. Please go ahead.

Hey, you've got Jack Slevin on for Brian. Thanks for sneaking me in here. Um, maybe just one, a lot of questions already been asked. Maybe, maybe one to just sort of clean up. I haven't heard too much discussion on it. There's been some reference to some of the energy costs and shipping trends you had that created headwinds for this business in 2022. Can you maybe just speak to if any of that applies right now, given some of the volatility we're seeing in, in energy prices or, um, or input costs of things like polypropylene. Can you maybe speak to what's different now versus what happened in 2022 or if there's anything we should be worried about as it relates to some of those trends across the business? Thanks.

Sure. Yeah, and I did touch on it, but I can expand further to try to answer the question of what's different now. Well, first of all, the shock we're talking about now is different. It's very much focused on not just energy, but it's on oil. And, you know, that does take time to kind of filter through to some of the products, some of the, you know, polyethylene, polypropylene types of products. But what we're seeing is more of an oil shock right now. It does translate to fuel, and that's the comments I made earlier. The excess inflation that we saw several years ago was way beyond just fuel. It was a lot of the container costs. You may recall international freight was by far the biggest We had very high labor inflation that carried on with that as well. And so while we did call out fuel four years ago, it was number four on the list of items. Since then, we've also structured our agreements to be more flexible for us, both with the carriers as well as our customers. You know, it's not completely protecting us, but it gets back to the, I think the word I used earlier that I think is a good one of using here, it's certainly much more manageable than an advent. Structurally, but also based upon the type of issues that we have. And as it relates to the product cost, really exam gloves is the one item that I continue to see and hear a lot of industry chatter about. That is one product category that we're already seeing costs increase quite a bit. Just as a reminder, PPE is a relatively small category for us, but exam gloves in particular is relatively small. It's less than 5% of our Cardinal branded product. So again, manageable even when we see significant dollars like that. It's important for those customers that are buying a lot of exam gloves, which are many, but it will be a relatively small pull through today based upon those prices. And we'll certainly continue to evaluate that. Also as a reminder, if there are further impacts, the fuel tends to impact the the distribution activity. So that's a current period type of cost, and you kind of see it a little bit quicker. The product costs will take at least a couple of quarters before they'll start to flow through the P&L. So we've not seen a lot of product costs yet other than exam gloves. And when we do, we're going to have two to three quarters to be able to understand, see if we can mitigate, and then, of course, delay the impact on the cost side so that we can see what happens with industry pricing at that point in time.

I guess I would just close on that point of we're in a better position than we ever have been before in this business, and we are not backing away from our longer-term guidance with respect to the GMPD business either. Great point.

Next question, please.

Thank you, sir. And our last question, which is from Eric Coldwell, calling from Bayard. Please go ahead, Eric. Your line is open.

Thank you. Thanks very much, and I think most of mine were covered here, but I just want to circle back on two quick ones, if I may. First on Novista and ION and the changes you're making, I just want to kind of tie the bow on this. The topic of the impairment and the changes you're making, I just want to make sure that that is 100% cardinal specific, how you're going to market, how you're interacting with the MSOs. And this is not any kind of a broader comment to the overall oncology or MSO marketplaces. Is that a fair interpretation?

Absolutely. And as I highlighted in my comments and Aaron's comments as well, over 20% specialty growth so far this year in the quarter as well, more than 30% growth in oncology. We're very pleased with our specialty strategy, very pleased with our oncology strategy. This is entirely a focus, a prioritization on that equity model of our MSOs.

And Eric, did you have one other?

discrete item, could you just tell us what that multi-year capture was, what the actual nature of that tax item is?

Yeah, Eric, we aren't in the practice of disclosing our individual tax decisions we take other than to observe that it was a multi-year opportunity that we did take in the quarter, which was about 35 cents.

Future.

Great, thank you.

Thank you very much, sir.

We don't have any further questions now. I'd like to turn the call back over to Mr. Jason Haller for any additional or closing remarks. Thank you.

Yeah, I'll be brief. Very pleased with another strong quarter. Of course, we're looking to finish the year strong, but more importantly, as always, we're focused on the long term, doing the right things today to make sure we're successful tomorrow. So thanks for joining us today and have a great day.

And thank you much, sir. Ladies and gentlemen, I would like to conclude today's conference. Thank you for your attendance.