Cardinal Health, Inc. (CAH) Earnings Call Transcript & Summary

Good morning, and thank you for joining us. My name is Lisa Gill, and I'm the Health Care Technology and Distribution Analyst with JPMorgan. It is with great pleasure this morning that I introduce Cardinal Health. With us this morning is CEO, Mike Kaufmann. The breakout room will be the Yorkshire Room, where we'll take questions after the presentation. Mike?

Thanks, Lisa. Good morning, everyone. Before I begin, I want to note that I will be making forward-looking statements today. These forward-looking statements are subject to certain risk and uncertainties that may cause actual results to differ materially from those projected or implied. For a description of these risk and uncertainties, please refer to our investor website or to our SEC filings. So imagine a health care company that delivers products and solutions on a daily basis to the country's largest retail chain, to the largest health insurer, to the largest grocery chain and to the largest IDNs. A company that is committed to partnering with all of our customers to solve today's toughest health care challenges. That company would be Cardinal Health. In a world where health care is challenged each and every day, we partner with our customers to buy generics at better prices, to manage inventory to its lowest possible levels, to track valuable inventory to manage patients' safety and expiration or obsolete inventory, to offer high-quality medical products at lower-than-brand prices, to reduce operating cost and to deliver products to the patients that need them in their home. We are clearly essential to care. We're also a company of broad scale and breadth. For our fiscal year FY '19, ended in June, we did $146 billion in revenue. We operated in over 45 countries, and we have approximately 48,000 employees. Building upon that, we service nearly 90% of U.S. hospitals. We also serve more than 6,500 labs with nearly 51,000 various laboratory products. We serve more than 29,000 pharmacies, whether it be retail chain, independent, alternate care, hospital pharmacies. We serve more than 3 million patients in their homes with more than 46,000 different medical products, and we also serve more than 10,000 clinics and physicians with specialty physician products and items. Now let me give you a little bit of financial context for Cardinal Health. Our revenue for our Fiscal Year '19 was nearly $146 billion. Our non-GAAP operating earnings were nearly $2.4 billion and our non-GAAP diluted earnings per share was $5.28. And we generated a robust $2.7 billion in cash flow this past fiscal year. We operate both internally and report externally in 2 different segments with the CEO over each 1 of these 2 segments. First of all, our Pharmaceutical segment had revenues of nearly $130 billion and segment profit of $1.8 billion, and then our Medical segment with revenues of nearly $16 billion and segment profit of nearly $600 million. Now let me go a little deeper into each one of these segments. I want to tell you a little bit about the businesses that are comprised in these segments and also tell you what our key drivers of success are over the next couple of years. First of all, the Pharmaceutical segment. The largest business within the segment and also within the company is our Pharmaceutical Distribution business. This is a business that provides branded, generic and consumer health products on a daily basis to our customers. You order by 9:00 p.m. tonight, you'll get it the next day. And we're on call 24/7, 365 for emergency needs. This business also has many other little businesses in it, such as our generic telemarketing businesses and other services businesses that provide often services to retail independents, chains and hospitals. The second business in our segment is our Specialty Solutions business. This is a business that provides services both upstream to manufacturers and downstream to providers, whether it be specialty physician offices or acute care hospitals, and I'll talk more about that business in a minute. And lastly, we have our Nuclear and Precision Health Solutions business. This is a business that operates the country's largest network of nuclear pharmacies. We can deliver to over 90% of the U.S. population, in less than 3 hours, a nuclear dose. We also manufacture both therapeutic and diagnostic nuclear products such as FDG, iodine, and we also contract manufacturer for companies such as Bayer Pharmaceuticals. So this is also a company of considerable breadth and market presence. So now let me step back and talk about the key drivers of success for this segment. I would break these 5 drivers in the kind of 2 buckets. The first bucket, I will call those items that are focused more on growth and the other 3 items are focused more around execution. First of all, from a growth standpoint. One of our key drivers is to continue to invest in our Specialty Solutions business. This is a business that in our FY '15 did $5 billion of revenue. This past year in FY '19, it did $19 billion in revenue. It's a business that has been growing consistently double digits and has been providing and expanding its services, both upstream to manufacturers, such as hub services, third-party logistics, scientific and regulatory services and also downstream to our acute and physician office customers, providing inventory management services as well as next-day delivery. This is an important business that is well aligned with health care's trends with the growth of specialty. And so we're going to continue to focus our key investments in this business. Second of all, another area where we're going to invest in the Pharmaceutical segment is our, what we call our connected care businesses. These are businesses that provide outcomes therapy management -- medication therapy management services for retail pharmacies. We also can provide mobile applications. Basically, what we try to do here is connect manufacturers, payers, providers and patients. And we have a significant growth forecast and plan for this business, and we will continue to invest in these businesses. As I move to the more execution business -- our more execution factors, first of all, we must maximize all of the components of our generics program to be successful. Our generics program, we look at as having 4 key components. First of all, we must procure drugs at the lowest possible cost. We must also be able to grow our volumes in generics. We must launch generics successfully. And lastly, we must sell and price our generics appropriately. All 4 of these are very important. As I focus on the costing component, as many of you know, we have formed, 5 years ago, a 50-50 joint venture with CVS called Red Oak Sourcing. We continue to be very excited and impressed with what the team at Red Oak Sourcing is doing. We think we have world-class talent, and they continue to operate at an incredibly high level. So we think we are in great shape from a costing standpoint. Red Oak also does a great job of managing our service levels. We believe we have the industry's highest service levels on generics, and that has helped us be able to continue to grow our generic volumes as well as launch our generics successfully. The last area is strategic pricing or pricing generics, and we have invested significantly in both people and systems in order to be able to collect, utilize, evaluate intel so that we can price appropriately in the market. The next area that is important for us to be successful is enhancing our core distribution business. As I mentioned, Pharmaceutical Distribution is our largest business, and we need that business to be able to grow. So not only are we investing in the key areas of generics, we're also investing in all areas of pricing for this business because whether it's pricing generics or pricing just our overall contracts appropriately or separately pricing specialty from other types of brand products, all of those are important. So we continue to invest in our pricing and analytics capabilities as well as we're making significant investments in our front-end offerings so that we can ease the way that our customers can do business with us. And lastly, a key success item is going to be improving our cost and efficiency. This is something I'm going to talk about more in a minute, but across the entire company and within each one of our businesses, all of our general managers and our function leaders are being challenged with doing things more efficiently at lower cost. So now let me move to our Medical segment. Our Medical segment is broken into 4 different areas. First of all, we have our medical products business. So we are one of the world's largest manufacturers and sourcers of medical products. We operate over 30 global manufacturing plants, and we also source from various countries. These products are products that are underneath the Cardinal Health brand, many of them, but there are also other brands that you might recognize like Kendall, Curity, Monoject, Kangaroo, these are all brands that are part of the Cardinal Health family of brands. So every day, we look to be able to deliver these products from our own distribution to our customers or through other competitors or directly to -- or to patients. The second bucket in our medical products business is our medical distribution segment. So we not only distribute our own products every day to customers, again, order by this evening, get it the next day, but we also distribute a large variety of national branded products and have a very large breadth of products that we deliver to our customers. Third, we have our at-Home solutions business. This is a business I'm going to talk more about in a minute, but this is a business that is delivering ostomy supplies, nutritional supplies, diabetic supplies to patients in their home every single day. And lastly, we have a significant amount of services business in the Medical segment. Businesses such as OptiFreight that helps customers manage their freight cost, WaveMark that helps use RFID technology to ensure supply chain integrity, billing and those types of items for customers. So now let's talk about the key success factors of our Medical segment. First of all, we need to continue to grow Cardinal Health at-Home. Like our Specialty Solutions business, this is a business that's been growing double digits for us. It's a business that we think is right on track with health care trends as more people want to get care in the home. So we're continuing not only to invest in growing the therapeutic or the categories that we have, such as the nutritional and ostomy and diabetic, but we're constantly looking for new categories to expand our offerings into the home. The next area where we want to invest is our higher-margin services business. I've mentioned OptiFreight and WaveMark. These are 2 businesses that we continue to invest in updating their infrastructure and expanding their capabilities to continue to grow, and we feel excited about both of these businesses, both by looking at their pipeline and what's capable for them to help customers reduce their cost. Moving to the more execution-related items. We have 3 big ones here. First of all, our commercial realignment. This is something that we've been talking about. Over the last year, we spent time both internally and with external experts and spending a lot of time talking to our customers, to understand how we could better organize our commercial organization in the Medical segment so that we can address customers' needs more effectively and sell more Cardinal Health product. We launched that restructure in July of this year and have not only changed the jobs, upgraded the talent and worked with customers through this transition. We're very excited about this. We've also significantly changed our incentive -- the way we incent our sales reps, so they're more focused on selling Cardinal Health products, which will improve our mix. So this is something that we started at the beginning of the year. We will be wrapping up here in the third quarter, and we expect benefits to be more -- be hitting us in our FY '21. We must also optimize the Medical segment's footprint, both in manufacturing and distribution. In distribution, for instance, we are looking at our entire U.S. footprint, and we are upgrading our buildings. And for instance, in California, we merged 2 of our buildings into 1 larger state of-the-art facility, and we have several of these planned throughout the United States, so we can increase our capacity and improve our efficiency. We -- as I mentioned, we have over 30 global manufacturing plants. We are looking at this footprint to make sure should we own each manufacturing plant? Should we sell some of these to other folks? Or should we source these products? And we are in the midst of that project right now, and we'll have our game plan wrapped up here soon and begin executing as we go forward. And so far, we've seen significant benefits on getting cost out of our manufacturing footprint. And lastly, improving our cost position. As I mentioned, this was important in our Pharmaceutical segment, it's also very important in our Medical segment. But not only within the 2 segments, this is incredibly important across the entire company. So all of our corporate functions, whether it be HR, IT or finance, are all focused on being more efficient and more effective. If you remember our last quarter announcement, we mentioned that we've signed a partnership with Genpact related to our finance function. So we have significant changes that we're going through there to both upgrade the systems that we use in finance, to use AI more appropriately and more effectively to reduce our cost, but also, more importantly, improve the outcomes of our finance department, and we will do that across all of our functions. So let me talk about one of the other things, that's the most important thing that I believe the corporate departments can do besides getting after cost and enabling our segments is really being focused on disciplined and thoughtful capital deployment. I look at capital deployment broken down into 5 buckets. The first 3 here, I believe, are our priorities and where we're going to place the most focus, but we have to think about all 5. So first of all, most importantly, we believe in all of our businesses. We believe that every business that we operate in right now can grow and to -- but to grow, they need capital. And so CapEx is going to be the most important component of our capital deployment. We will invest in our businesses to grow, not only the growth businesses I mentioned, like specialty, at-Home, in pharma and med services, but also our core distribution businesses to make sure that they continue to be able to grow and expand. The second area for us that's going to be important is maintaining our debt leverage. It is important to us that we remain investment-grade. So we constantly look at our debt ratios and are managing appropriately to maintain our investment-grade rating. And so this year, we committed to pay down at least $1 billion in debt. We had a $450 million maturity happened in November that we paid off, and we will pay down at least $1 billion this year and continue to look at our debt leverage based on our results to make sure that we stay investment-grade. Third, we are committed to our dividend. We will grow our dividend. Now we will grow it modestly because we want to get back down to our stated goal of 30% to 35% payout ratio, and we're slightly above that. But we will maintain, and we will at least modestly grow our dividend. After we take care of all 3 of these, we will look at M&A and share repo. M&A is going to have to be both strategic fit for us, a cultural fit for us and priced appropriately. Over the last 2 years, we have done very limited M&A, some small tuck-ins. That doesn't mean that we won't go out and do aggressive M&A, but again, it must meet those 3, and it must be only after we're satisfying the first 3 that I talked about. And lastly, we have repo. This year, we did $350 million of repo in our first quarter. We have $1 billion left on our share repurchase program, but it will be opportunistic and again, after we make sure that we take care of the first 3 things that we talked about, we will look at share repo opportunistically. So let me begin to wrap up with some of the important themes I'd like you to take away from this presentation for Cardinal Health. First of all, customers value what we do. I travel a lot to see customers. And when I'm with them, there's never been a circumstance where customers don't say that what we do is important. They know that we help them reduce their cost and they know we are best positioned to do that for them. So I feel very confident about the future of our businesses and the fact that customers still value what we do. Second of all, we're a leader in consolidated industries. If you look at either from a profit standpoint or a revenue standpoint, we are #1, #2 and #3 in just about every single business that we compete. And we probably have over 20 different businesses in which we compete. And so we are a leader in very -- we have scaled businesses, and we are customer-focused. And so it's -- our breadth is unparalleled in health care, and that puts us in a great position to help customers solve their health care challenges. For instance, if you were acute care hospital, you'd be able to buy your pharmaceuticals from us, your medical product distribution, your medical products from us. You'd be able to get nuclear pharmacy services from us. We could manage your freight cost, we can manage your inventory, and I could go on and on. We can touch an acute care hospital in over 20 different ways to help them improve their system and reduce their cost and improve patient safety. We are a business that is aligned with favorable health care trends and demographics. As you know, over 10,000 people a day are turning 65. This aligns really well with our businesses, and we would expect to continue to see increased utilization across our pharma and Medical segments. Our Pharmaceutical Distribution business is stabilizing. It is our largest business. And it has seen improving market dynamics in our generics program, which has been very important, both from the standpoint of us operating well on our 4 components, but also from a market dynamic standpoint, we continue to see improvement in those market dynamics. And we've also recently renewed our 3 largest customers. And our 3 largest customers are now under contract for at least the next 4 years. Strong cash flow and disciplined capital management. I just spoke about this. This is important. We spend a lot of time looking at our balance sheet and focused on cash flow to make sure that we are doing everything we can to generate as much cash flow as possible, so we can continue to fund the 5 key areas that I talked about. And lastly, we have a 5-year $500 million goal to take out cost. We have been on track for that. We took out $133 million, our first year. We said, we would get out at least $130 million this year, which we are absolutely on track to do. And we will continue to believe that we can hit this number. But it's not just about the cost takeout that's important to me as the CEO, what also is really important is this isn't like we just cut heads and they drift back in, we're really changing the way we do business. And so folks on the team are really looking at ways not only to be more efficient, but be more effective. And so I feel very comfortable. These are permanent cost takeouts that won't creep back into the business. And I think that's really important. So in an environment where health care is challenged, there is no better partner than Cardinal Health. We are focused on our customers, and we're aligned with health care's trends. So with that, thank you, and we'll see you in the breakout session, in the Yorkshire. Thank you.

To my left is Mike Kaufmann, CEO, and to Mike's left is Kevin Moran from Investor Relations. Thanks, guys, for joining me this morning. Mike, looking back over the last year, what do you think have been the greatest achievements and challenges for Cardinal Health?

Achievements and challenges? Well, I think from an achievement standpoint, I'm really proud of the work we've done just from a team and culture standpoint. I think that anytime you are working through a transition, like I think our entire industry is right now, and specifically, Cardinal Health, where we've been challenged in the last couple of years to grow earnings, it's been important for us to really get the right people in. And I message a lot to our team that, hey, this is hard work, we've got work to do and I want people here that are committed to it. And some people opted out, which is great, and we were able to either promote or bring folks in. And so I really like what we've done on building the team. So my direct report team, I feel really great about having world-class talent. I think the second area I found -- I'll call it foundation building has really been around data, pricing analytics and that and so both the systems and the people we've added around that to be able to continue to get more and more insight to make sure that we're analyzing and pricing deals right and individual products right across M&P. That's been incredibly important. And I think this cost takeout initiative, which I hate to call it that, because it's really what we call internally is building a healthier future, that initiative has been really powerful because what I've seen is people going from, oh, gosh, I got a cut to now people excited in bringing ideas to the table and just how to be more efficient in realizing this isn't just cutting to have people do more with less, this is actually changing the way we do work. So deploying -- for instance, in finance, we're going to deploy a significant amount of AI to do those tasks that you don't really need people to do anymore, or we're going to locate it in the right cost positions, the right cost locations to do really back-office work in a more effective way. And so we're doing that across all of our functions, whether it be IT, HR, legal, finance, deploying IT. And so I think some of those foundational things have been really important things that I've been excited about as well as we've been delivering on our commitments every quarter since I've been in the role. So that's been really important.

So you've -- we talked a little bit about specifics to Cardinal Health. But you also made a comment that the industry remains challenged. And as we think about the challenges for the drug distribution industry, can you talk about where you think we are in those challenges? Are we towards the end? Are we starting to see stabilization? If we aren't seeing stabilization, when do you expect that we'll see? I think we're starting to see it in your numbers. And what are the key drivers to that stabilization?

Yes. Let me make a couple of comments. First of all, I'll be careful. There's -- obviously, we haven't released our Q2 yet, so I'm not going to be able to give any real specifics on Q2, but there's 2 things that I'll update kind of tied to your question. One is, I think, around brand price increases. So knowing that's probably on your mind, it's part of this, I'll just cover that in that it's only 13 days into the month so far. But what we've seen so far is essentially in line with our expectations.

Kind of mid-single digit, right?

Yes, yes. So we feel like -- again, 13 days in, and there's still some things yet to occur. But from what we see so far, we don't expect brand inflation to be outside of our expectations. So I think we can take that kind of worry off. And as most of you know, while it's only 5% of our current margin related to brand is tied to inflation, that 5% is highly concentrated in January. And so it's important that we see the type of activity that we have seen so far. So that's good. That's in line with expectations. And I will also say -- if you were in my presentation, I did say that not only are we seeing good execution on the 4 components of our generics program, but we are continuing to see the stabilization in the generic market dynamics. And so while I'll get into more specifics of what that means when we actually give our Q2 results, we are continuing to see stabilization, which is really important and gives us a lot of confidence in the future.

And as you think about those components of the stabilization, as you talked about in your presentation, there are multiple components to it, right? So there's how well you can buy, what the price is, how -- what the competitive market dynamics are. I know it's been several years now. It's 4 years since there were market dynamics around generic pricing in the fall of 2015. But I think investors still have that concern of could we have another event like that.

It's hard to say that we couldn't. But I think I can tell you from a Cardinal perspective, and I think from an industry perspective, we've learned a lot from this. And it wasn't just generics that began to slow down. It's the same thing, as you saw, a lot of dynamics changing at one time. You saw generics beginning to deflate at a much higher rate when they were in the inflation market. We saw branded price increases coming down, and we saw several other factors.

The competitive, right?

Competitive landscape and all that. And I think as distributors, when you have all those hit, and you have longer-term pricing models and contracts with customers, it's not that you can just change overnight. And even when you go to change the very next contract, you're still not 100% sure. If you remember, when we first started seeing the generic deflation, nobody knew that was going to last for 4 years and how it was going to be. Is this going to be temporary? Just like it's hard to say now that we see stabilization. Can I say that's a forever trend? I don't know. But I think that we have learned a lot as an industry to, I think, contract in a way to help take these things into account. I think we're understanding how these components all work together to price better in the marketplace. So when you look at a deal, you don't just look at, okay, I'll give away a brand to get generics, how can I make money on my brand, so that if this changes then I'm okay in all areas? How can I work with customers to penetrate other areas that might be helpful, such as consumer health products and services businesses and require customers to do more? So I think we've all been doing a lot of learning about contracting in total, not just focused on just generics, so there's a lot of learnings and improvements there. I think you also had to step back, and I think the industry, and I can talk for Cardinal is looking at it in a much broader way.

If we think about industry and Cardinal, and again, not talking about a specific quarter, but when do you think that we -- or are we starting to see more normalization of the model? So if we think about the top line, think about that as kind of a mid- single-digit growth rate, when we think about some of the guidance on the EBIT line, a single-digit growth rate, will we ever get back to where those are more equal? Or is it just that you're seeing growth, you talked today about specialty going from $5 billion back in 2015 to be $19 billion today, much bigger growth number, but the margin is lower, right, because of the dollar impact. So how do we think about that longer-term model? Like what is the goal inside of Cardinal? Is there opportunities beyond the $0.5 billion to take cost out so that the EBIT growth for drug distribution can look more like revenue growth? Or do you think we just -- the new normal is kind of what we're seeing today?

I think it's going to be a couple of different things. I think it's a mix of the total company. So I think if you just look at pharma distribution, I do believe that pharma distribution can get back to growth, as a stand-alone business unit. Do I think it will be back to the 10%, 15% growth that we saw for several years? I don't, but I don't think we need to have our Pharmaceutical Distribution business growing at that. If Pharmaceutical Distribution can grow, even if it's low single digits, produce the type of cash that it does and then on top of it, we're continuing to be successful growing our specialty business, our nuclear business and our entire group of medical businesses, and you think about our differentiated dividend, you can see a path to significant returns for shareholders that doesn't require like the old model did where pharma distribution had to be 10% or 15% growth in order to get your TSR to be 10% or 15% growth. I think because of how significant our specialty, our at-Home, our nuclear, our medical products businesses are in their growth trajectories, I think there's a different formula for Cardinal that is different than it had been in the past.

And I think one of the areas is Medical that really stands out versus the other 2 large competitors in the marketplace. And in the most recent quarter, it really stood out, right, because it felt like that business is starting to turn one quarter? Is this one quarter?

Yes, exactly.

So we'll be anxious to see what happens with the December quarter. But as we sat here last year, we talked about the number of locations that you have. And I think you even alluded to it today in your presentation, how many manufacturing sites do we want, where we want to be around the world? Where are you in that assessment today, number one? And then number two, you talked about Cardinal at-Home. At one point, there were some challenges there. But today, you sound much more excited about the opportunities in that business. So have you made the turn on that side?

Cardinal Health at-Home, just covering that one first, completely turned the quarter. That is a business that now we've had probably close to 2 years of every quarter being double-digit revenue and bottom line growth. So that business is really operating well. It used to struggle with a lot of demand being stuffed in year-end and some dynamics, but we've ramped up our operations and our capabilities, our IT infrastructure. We've expanded categories with more products in our core categories like ostomy, nutritional and diabetic, but we've also started new categories like breast pumps and things like that, that have had significant growth. So that's a business that across the board is both executing well, expanding its categories, and I think is really well placed on where care is going. I mean, everybody you talk to more and more people want to be -- get their care at home. And so we think it's right on trend. And so we feel really good about that continuing to be a growth engine. As far as the Medical segment goes on the footprint, I would say that the distribution network footprint we have, we are -- we have the one building we've built in Southern California that merged 2 of them. We have at least probably 2 more minimum of those that we'll do across the United States to close other buildings and be able to increase capacity and improve efficiency. But we do have over 30 global manufacturing plants. And last year, I believe, and I could be wrong on this, so -- but I'm pretty sure our slide said that we operate in over 60 countries. And this year, you saw it was 45.

45. Right.

So that's probably still a few too many. And so we continue to evaluate which countries we should be in because there's a lot of hidden cost when you're in a country. And you get into a country and if you only have.

Regulatory cost.

The regulatory cost, statutory audit cost, FCPA risk that you're in a country and you're only selling $5 million and maybe making $1 million, but what happens if you have some type of FCPA issue or -- and all these other hidden costs that kind of get buried. And so we're aggressively working our way through which countries do we really need to be in. And so that alone, we've taken out some there. And as far as our plants go, we're putting on a lens of 3 different views. Should we own the plant? And the answer on that one is yes, if we believe that we can -- ourselves can operate the plant more efficiently. If we see a lot of opportunity that we are capable of getting after and improving the cost structure, where there's a competitive advantage or reason why we should own that plant, we'll continue to own some of our plants. Some of our plants we put out an RFP to work with folks that buy plants, and many of those companies, you're probably familiar with it, do with lots of companies that they could own the plant and run it more efficiently and take advantage of their breadth and scale. So we're looking at the RFPs and stuff on that. And then some, we believe the products can just be actually sourced at a better cost than us having to own it, but there's plants in Asia that can source it. And so we are putting all of our plants through that lens. Our plan is wrapping up right now, and we will begin execution of moving to the new players or new structure here over time. That takes a while. That's not something you can do overnight because of regulatory issues and people and country challenges, but that is something that we're aggressively working at that we're confident will be a significant takeout for us on the Medical side.

Last quarter, your interim CFO, Dave Evans, he talked about, on the Medical side, one of the unknowns was around the medical device tax. And obviously, everybody knows, right, it's been permanently repealed at this point. Can you just remind us, did you have something in your current guidance around that?

We did not. We were calling it out as a risk factor, but then we did not -- we assume that it would be repealed, but we did not have it in...

But just in case it wasn't, there was a risk factor.

Exactly. That was a risk factor. So it's not an upside for us, but it is it's 1 of those things. One of the nice things, if you look what we're sitting at right now, you can take branded inflation take that kind of risk off. Tariffs has kind of come down. So that risk for us has kind of come off the board, and the medical device tax coming off the board has come off the board. And if you take a look at market dynamics, as I said, in generics, continuing. So we've seen some things that were risk factors earlier that have kind of gone our way in those types of things.

When we think about some of the other risk factors, there's a question always around Amazon as it pertains to the medical supply side of the business, right? They've gotten into that side of the business. They seem to be more focused on the physician, small physician market, but we have heard of some hospital relationships. You have another large competitor who has struggled through a large acquisition in the last couple of years. Can you just talk about the competitive landscape on the medical supply distribution? And do you see Amazon?

We don't. We have not -- as you said, we've seen some activity in physician office, but we haven't -- I mean we sold that business to Henry Schein. So we no longer -- other than if it's a physician office, that's part of a hospital IDN, we shift to it as part of the overall deal of that, but we don't ship to individual physician offices. So I talked to a lot of hospital CEOs and I don't think there's been -- one of them that I've talked to that hasn't had a conversation with Amazon. And it hasn't looked into it. But what most of them tell me is that they -- what they're offering is exactly the opposite of what they want. Amazon is offering choice and hospital CEOs don't want choice. The last thing they want is to have their people picking whatever they want and losing control of their ordering systems. It's not good for patients, it's not good for cost because when you have different doctors and nurses using different products all the time, it's just not good for patient safety. Standardization is key to cost control and better outcomes. And so I think that the way we work with our hospital IDN customers to make sure they stick to formulary, delivering large products, amounts of products every day. We're not delivering a box of gloves to an IDN at 25% or 40% margin, like you might into a physician office. We're shipping in a palette of gloves in a semi truck to a hospital at much lower margins. And so when you look at this breadth of our product manufacturing and sourcing, our cost position is significantly better than Amazon. And I think the way that hospitals want to control choice is a big reason that we connect. Now I think Amazon is a great company. And one of the things I think that they've done really well, that I actually think will be a benefit to our industry is that they forced us all to up our game to improve our customer interface. I mean the way we, as industry, interface with our customers is much more complicated than a way an Amazon does to a consumer standpoint. And so we're investing a lot of dollars into our front-end system so that we can make the experience for customers to be much more of an online retail experience than the more traditional one. But again, we have not seen any real significant competition of any type yet from them directly to our businesses.

Last quarter, it was interesting with the 3 drug distribution companies that you each came to the potential settlement for opioids in a different manner. So McKesson reported first, only talked about the settling of the 2 counties. Cardinal came second and said, well, we're going to frame this dollar amount, take this $18 billion, and we're going to say what our component is going to be. And you and I understand after an earlier conversation today that you have this same auditor, Ernst & Young and decided to go ahead and reserve for this.

Yes, we did.

So -- and I know you're an accountant by background, right?

Yes. Yes.

So maybe just walk us through your decision around actually taking the reserve, number one. And number two, do we have any idea around the time line of when this could actually be wrapped up?

Yes. We don't have any specific idea around the time line. There's like no hard date set. I think that it's obvious that folks, in general, I think, thought it was going to happen sooner than once it was announced at a very short time period. That was never my assumption, but it's hard to know a time frame. And so I knew this will take a while, right? We had 4 AGs, 2 Ds and 2Rs that were the leads on this that we got the agreement with. But remember, their job now is to go back and sell 46 AGs, all that have opinions, egos, political aspirations, and it takes time. And I would -- so I knew this was not going to happen overnight. What to me was important was getting some structure on the table that these 4 felt good about selling. We -- I don't want to use the word felt good about, but felt like it was something that we could live with and brought surety at least to the marketplace and that we would have to let them do their job and work through all of the pieces. And they're continuing to do that. And so I still remain hopeful that they will continue to win more and more of the AGs over and we'll get this to a point where we can get it done. But it's hard to predict the timing and exactly if everything will fall out as exactly as we laid out. So as it relates to the decision on the accrual, I don't really want to obviously comment on the other folks. But from our view, from accounting, working with our auditors, working with our Chief Accounting Officer, myself and the CFO, when we looked at the accounting rules, we felt that it was appropriate to book the reserves since we had made the offer. We felt it was important to book it. And so again, other people, I'm sure, have looked at it -- they have clearly looked at it differently, but from our point of view, we felt that was the right thing to do.

Reasonable, probable, could come to a dollar amount. When we think about -- you said you came to this with your interim CFO.

Yes.

I've read recently some great articles where you're a big proponent of women inside of the Cardinal organization, the number of women sitting on your Board, that are on your management team. As you think about replacing that CFO, how are you thinking about candidates? And what's the time line for that? Because we did talk about Dave Evans has some medical issues and would have been great because I thought he came across well on the call, et cetera.

He's fantastic. I mean I couldn't be happier. Honestly, Dave's done a better job in his 6 months than I did in 2 years as CFO. So he's a great partner, a great CFO. But we knew going into this that this was something that he was going to do temporarily and then I've known Dave since little in 1985, we started at Arthur Andersen together. And so he was the CFO of ScottsMiracle-Gro and the CFO of Battelle. So a very successful public company CFO. That's allowed us to have -- because we've had such an outstanding guy in the seat that he's been able to -- it gives me time to really try to find the right person and not be rushed. So we've interviewed a lot of candidates. We've interviewed some good candidates, and we continue to have some interviews lined up over the next several weeks. We're looking for as a diverse slate as possible. Our preference is to have public company CFO experience. If they -- if we find someone that doesn't have a public company CFO experience, which, so far, all the candidates we're interviewing do, but we could choose someone that doesn't have it as long as maybe they have at least strong divisional, treasury and those other folks and that we feel that they're the right cultural fit, and we'll challenge myself and the team to always think differently and do those types of things. So it's really about a cultural fit that's going to be important and someone that will bring the guts to challenge folks and make us a better company, and that's what we're looking for.

You talked about capital deployment today. You talked about the priorities of capital deployment. You also may note that you haven't made any major acquisitions in 2 years. And I think the last couple of acquisitions have gone little more challenging than you had anticipated at the time you made the acquisition. What are your thoughts today? I mean do you think that there is a large-scale acquisition in the future for Cardinal? And how do you think about the segments of your business? And is it just tuck-ins from here? Or do you think that there's another -- this has been a while for many of you in the room, but another leg to the stool, potentially when we think about Cardinal?

I don't feel a need to have to go get another leg to the stool. Like, I don't feel that -- I can play the cards we have dealt. I feel really good about our businesses. I think when I look at the mix that we have of growth businesses like specialty and at-Home, services business and Medical has been growing significantly. The services business in pharma have been growing significantly. And the progress we're making on the core like pharma distribution, stabilizing and heading towards growth. And then Medical with not only the ability of what we're doing in the commercial org and the cost takeout, I don't feel a need to have to go get another leg to the stool. That being said, I would never say never, but at this point in time, our big focus is really going to be, as I said, CapEx, maintaining our investment-grade status and maintaining our differentiated dividend. So if there's dollars left over and there's something in there or the right opportunity comes with some unique type of structure where we might be able to put it together, we're constantly having conversations with folks and looking at those, but I don't feel compelled to have to have a new leg to the stool.

When we're sitting here next year, 2021, what do you think investors will appreciate about Cardinal Health that they don't appreciate today?

Hopefully, that they'll have seen another 4 quarters of living up to the expectations that we said, that we're executing well, and that we have a team that is customer-focused and driving all the right behaviors. It's hard to say whether some of these clouds like the opioid and those things will be lifted, which I know can make it challenging for folks. But I do believe that we're going to do as much as we can on those. But the key for us is to control what we can control, which is execution and talent, and that's what we're going to do.

Okay, great. Thanks, everybody.

All right. Thank you, everybody. Thank you.