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

Good morning, and welcome. I'm...

Welcome to the 2020 Annual Meeting of Shareholders for Cardinal Health, Inc. I will now hand the meeting over to Greg Kenny, Chairman of the Board of Cardinal Health.

Good morning, and welcome. I'm Greg Kenny, Chairman of the Board of Directors of Cardinal Health. I'm pleased to call to order the 2020 Annual Meeting of Shareholders. Due to the public health impact of the coronavirus pandemic and to support the health and well-being of our employees and shareholders, this year's Annual Meeting of Shareholders is being conducted exclusively via the web portal. I'd like to begin by thanking each of our other directors who have joined us remotely today. Next, I'd like to introduce John Rodgers, Mike Keane, Kyle Kaufman, Crystal Threet of Ernst & Young, independent auditor for Cardinal Health. And finally, the company has appointed Broadridge Financial Services to act as an inspector of election. Linda Piscadlo with Broadridge has joined the meeting today, has taken the oath of inspector of election earlier today. Now I'd like to ask the secretary of the meeting, Jack Adams, to lead us through the formal portion of our meeting. Jack?

Thank you, Greg. As you can see from our meeting agenda posted on the web portal for today's meeting, we will begin by considering the 6 proposals outlined in our proxy materials and announcing the preliminary results of our shareholder voting. When the formal portion of the meeting is concluded, Mike Kaufmann, our CEO, will provide a brief business report, then Mike and Greg will address questions from shareholders received through the web portal. The polls are now open. If there are any shareholders present at this meeting virtually who would like to vote, please do so using the meeting website. If you have already voted prior to this meeting, you do not need to vote now, unless you wish to change your vote. We will close the polls on all matters at the end of the formal part of the meeting. Please refer to the Annual Meeting of Shareholders guide posted on the web portal for the procedures and guidelines applicable to today's meeting. The guidelines are intended to allow for an orderly meeting consistent with the procedures we have followed in the past for our in-person annual meetings. I present to the meeting the notice of today's Annual Meeting of Shareholders and the related proxy material, together with an affidavit of Broadridge Financial Services, certifying that the notice of annual meeting was mailed on September 23, 2020, to Cardinal Health shareholders. According to our inspector of election, 258 million common shares, being approximately 88% of total outstanding shares, are represented at today's meeting. This exceeds the majority and constitutes a quorum for conducting the 2020 Annual Meeting of Shareholders. The first item of business is the election of 13 directors, each to serve until the 2021 Annual Meeting and until his or her successor is duly elected and qualified. The 13 persons nominated by the Board are Carrie Cox, Calvin Darden, Bruce Downey, Sheri Edison, David Evans, Patricia Hemingway Hall, Akhil Johri, Michael Kaufmann, Gregory Kenny, Nancy Killefer, J. Michael Losh, Dean Scarborough and John Weiland. Our Board recommends for each of the director nominees included in the first proposal. The second item of business is a proposal to ratify the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending June 30, 2021. Our Board recommends voting for the second proposal. The next item of business is the proposal to approve, on a nonbinding advisory basis, the compensation of our named executive officers as disclosed in the Compensation Discussion and Analysis, the Summary Compensation Table and the related compensation table, notes and narrative in the proxy statement. Our Board recommends voting for the third proposal. The next item of business is a proposal to approve an amendment to our Restated Code of Regulations to reduce the share ownership threshold for calling a special meeting of shareholders to 15%. Our Board recommends voting for the fourth proposal. The next 2 items of business are 2 nonbinding advisory proposals. Proposal #5 from John Chevedden is on reducing the ownership threshold for calling a special meeting of shareholders to 10%. Proposal #6 from Kenneth Steiner is to adopt the policies that the Chairman of the Board be an independent director. Operator, please bring John Chevedden into the presenter line.

John, your line is open.

Hello.

Welcome, Mr. Chevedden. Please provide any comments regarding the substance of the 2 proposals within 3 minutes on each proposal. You may go ahead.

Can you hear me okay then?

Yes.

Okay. Proposal 5: make shareholder right to call a special meeting more accessible. Shareholders ask our Board to take the steps necessary to amend the appropriate governing documents to give the owners with a combined total of 10% of our outstanding common stock the power to call a special shareholder meeting. This proposal is already a success because it led the Board of Directors to lower the stock ownership threshold to call a special shareholder meeting, which is incorporated in proposal 4 for today. Shareholders can logically vote in favor of both proposals 4 and 5. Proposal 4 is good, and proposal 5 asks management to do better. It is simply logical to make it less difficult to call a special shareholder meeting because less can be accomplished by a special shareholder meeting, and management is better protected from shareholder criticism in a special shareholder meeting due to the near extinction of in-person shareholder meetings. Cardinal Health shareholders also do not -- permanently do not have the right to act by written consent, which makes this proposal all the more important since scores of major companies give shareholders both the right to call a special meeting and the right to act by written consent. Special shareholder meetings allow shareholders to vote on important matters such as electing new directors that can arise between annual meetings. This proposal topic won more than 70% support at Edward Lifesciences and SunEdison. Nuance Communications shareholders gave 94% support to a 2018 proposal on this same topic. Since a special shareholder meeting can elect a new director, it can be of increased importance to refresh our Board of Directors after Chairman Gregory Kenny was rejected by 12x as many shares in 2019 as each of 5 other Cardinal Health Directors. John Losh, the Chairman of the Audit Committee, was rejected by 10x as many shares. Patricia Hemingway Hall, who chaired the Director Nomination Committee, was rejected by 9x as many shares. And Bruce Downey was rejected by 7x as many shares. The Chairman of this meeting should at least announce before the end of the meeting whether these directors did any better today in voting results and also the percentage vote for the say on executive pay, proposal #3. Please vote yes: make the shareholder right to call a special meeting more accessible. So do you want me to continue with proposal 6? Or do you have...

Please go ahead and proceed with proposal 6.

Okay. Just giving you an opportunity to state the company position. So proposal 6. As an independent -- is for an independent Board Chairman as a permanent policy, sponsored by Kenneth Steiner of Great Neck, New York. Shareholders request that our Board of Directors adopt a policy and amend our governing documents to require that the Chairman of the Board be an independent member of the Board, whenever possible. Currently, Cardinal Health Directors can, at any time they want, name one person to have both the Chairman and CEO jobs at the same time. This proposal won 52% support at Boeing and 54% support at Baxter International in 2020. This proposal topic also won 50-plus percent support at 5 major U.S. companies in 1 year, including 73% support at Netflix. This proposal topic won significant 36% support from Cardinal Health's shareholders in 2017. However, there have been setbacks at Cardinal Health since 2017 when our stock was at $80. Cardinal Health and 2 other large opioid distributors and 2 opioid manufacturers were in talks to settle more than 2,000 lawsuits against them over their role in the opioid epidemic for $50 billion. The possible settlement would include $22 billion in cash and $29 billion in drugs. Cardinal Health, McKesson and AmerisourceBergen Corporation would give $18 billion to be used for treatment and prevention over 18 years. Meanwhile, our Directors were busy making it more difficult to hold them responsible. In late 2019, Cardinal Health Directors adopted a formal amendment to require that the United States District Court for the Southern District of Ohio will be the exclusive forum for derivative lawsuits and other lawsuits. There are indications that shareholders are growing impatient with the directors. Bruce Downey, Gregory Kenny, John Losh and Patricia Hall each received from 7x to 12x as many negative votes from shareholders as each of 5 other Cardinal Health Directors at the 2019 Annual Meeting. An independent Chairman is best positioned to build up the oversight capabilities of our directors while our CEO addresses the challenging day-to-day issues facing the company. The roles of Chairman of the Board and CEO are fundamentally different and should not be held by the same person as a consistent practice for the future. Please vote yes: independent Board Chairman, proposal 6.

Thank you, Mr. Chevedden. Does that conclude your remarks?

Yes.

Okay. Thank you very much.

Thank you.

Operator, please remove him from the line. Thank you. The Board's statement and opposition to each of these proposals is contained in the proxy statement. The Board of Directors recommends a vote against these shareholder proposals. So I now declare the polls closed. The results I'm about to report are considered preliminary and are subject to final tabulation and verification by the inspector of election. We will post the final results on our website at www.cardinalhealth.com on the Investor Relations page in the next few days. On proposal #1, the election of directors, preliminary results indicate that each of the 13 director nominees has been elected. On proposal 2, ratification of the appointment of Ernst & Young LLP as our independent auditor for fiscal 2021, preliminary results indicate that this proposal has passed. On proposal 3 to approve the compensation of our named executive officers, preliminary results indicate that this proposal has passed. On proposal 4, to approve an amendment to our Restated Code of Regulations to reduce the share ownership threshold for calling a special meeting of shareholders, preliminary results indicate that this proposal has passed. On proposal 5, preliminary results indicate that the shareholder proposal on reducing the ownership threshold for calling a special meeting of shareholders did not pass. And finally, on proposal 6, preliminary results indicate that the shareholder proposal to adopt the policy that the Chairman of the Board be an independent director did not pass. The report of the voting results is now concluded.

Thank you, Jack. That concludes the formal portion of today's meeting. Mike Kaufmann will now provide a brief business update, then Mike and I will address questions received through the web portal. Mike?

Thanks, Greg. Good morning, everyone, and thank you for joining us today. I will share a brief update on the company, then Greg and I will answer questions. Before I begin my remarks, I'll direct your attention to Slide 4. During today's meeting, we will be making forward-looking statements. The matters addressed in these statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. For a description of these risks and uncertainties, please refer to this slide and to our SEC filings. Now let's turn to our company updates, beginning on Slide 5. Since our fiscal '20 numbers were recently issued in our annual report and our fiscal '21 Q1 numbers will be reported tomorrow, I'll just briefly touch on performance and then give some context for our strategic and cultural direction, particularly as we evolve to address COVID-19 and the macroeconomic environment. I will ground my comments in the framework we shared with you last year called Our Path Forward. This evolution of our mission, vision and values is more relevant now than ever, and it continues to guide our future. I will share a few thoughts about where we are going and what we value. In doing so, I'll highlight the progress we've made in fiscal '20 and our commitments for fiscal '21 in each of these areas. First, where we are going on Slide 6. This statement is our strategic lens and how we want to evolve. I will break this statement into 5 sections and discuss how each 1 helps drive our fiscal '20 results and fiscal '21 strategic priorities. First, trusted partner. We play a critical role in the health care supply chain and are, first and foremost, committed to being a trusted partner to our customers, suppliers, the government and others. This is especially critical as we collectively navigate the pandemic and drive our business forward. Second, scale and heritage in distribution, products and solutions. We are optimizing our scale and leveraging our deep expertise in our core distribution, products and solutions capabilities to create current and future value. Third, drive growth in evolving areas of health care. We're prioritizing growth in key businesses that are well positioned in rapidly evolving areas of the industry, such as our specialty, at-home and services businesses. Fourth, customer insights, data and analytics. To foster this growth, we're developing and deploying technologies that will enable us to better understand, respond to and predict the needs of our customers. And finally, focusing our resources. To support this optimization and growth, we remain disciplined with managing our resources and allocating capital. Transitioning to Slide 7, I will share a few highlights from fiscal '20 that showcase our accomplishments and progress. In fiscal '20, we delivered on our commitments while adapting quickly to the challenges of COVID-19. For the year, we exceeded our non-GAAP guidance range and surpassed our cost savings target, highlighting our focus on using our resources carefully. We continue to deploy capital in a disciplined manner, returning more than $900 million to shareholders and strengthening our balance sheet by paying down more than $1.4 billion of long-term debt. To drive growth, we made strategic investments in evolving areas, including our specialty, at-home and services businesses. And we continue to fulfill our role in the supply chain by leveraging our scale, working diligently with partners across the care continuum and building upon our deep capabilities in distribution, products and services. We remain focused on this role throughout the pandemic and into the future. Let's now turn to Slide 8 to discuss a few areas of our COVID-19 response. As the global pandemic unfolded, we moved quickly to protect the health and safety of our employees and maintained operations to serve our customers while addressing potential impacts to our financial performance. First, regarding our employees. Our greatest priority is and has been the health and safety of our employees and their families. To that end, we implemented worksite hygiene practices and enhanced cleaning procedures in all facilities. Also, in March, we quickly transitioned office-based employees to a remote work model and implemented new technologies and practices to ensure ongoing connectivity. And we have provided incremental educational, mental health and financial benefits for our employees to support their total well-being. This included additional compensation for our frontline teams as they continue to support our operations. Our employees have been amazing, and I thank them for their commitment and contributions. Second, regarding our operations. We have maintained continuous operations in all distribution facilities, nuclear pharmacies and global manufacturing plants. As the pandemic evolved, we acquired additional equipment to expand production of PPE, and we continue to evaluate additional suppliers to expand and diversify our critical product options. At the same time, we leveraged our sourcing capabilities through Red Oak to ensure minimal disruptions to the pharmaceutical supply chain. Third, COVID-19 impacts on our financial performance. In fiscal '20, we experienced an estimated net negative impact of about $100 million to operating earnings. We will provide updates regarding our COVID-19 assumptions and their potential impacts to our fiscal '21 performance tomorrow on our earnings call. Now let's turn to Slide 9 to review how we are advancing our mission in fiscal '21. This year, as we approach our 50th anniversary, we are focused on building upon our rich history as a distribution and logistics company and prioritizing growth areas to position our company for the future. This means optimizing our core businesses, including our global supply chain and commercial areas, as well as maximizing our generics program. We remain focused on our cost savings targets, and we'll leverage our strong governance structure to identify, execute and track efficiency initiatives across the company. To drive growth, we continue to make select strategic investments in specialty, at-home and our services businesses as well as our core technology and infrastructure capabilities. Finally, to support business growth, we will create maximum efficiency in our capital structure. We are focused on maintaining a strong balance sheet and returning capital to shareholders. Now that I've shared a bit about where we are going, I would like to transition to Slide 10 to discuss another key part of Our Path Forward: what we value. This year presents both unique challenges and unique opportunities to grow, think and work differently, and none of that would be possible without our people. These 5 values are central to our identity as a company, and I see our teams demonstrating them every day in the way we serve our customers. I, along with the Board and the management team, am fully committed to fostering a best-in-class, respectful and diverse work environment that embodies these values and inspires excellence, innovation and collaboration. Slide 11 illustrates our deep commitment to diversity and inclusion, which has been a key focus of the company for many years. We continue to modify and improve our strategies to ensure that every employee, regardless of skin color, sexual orientation, ethnic background or gender, brings 100% of themselves to work every day. The diversity of our Board and Executive Committee creates a broad, inclusive lens through which we can confront today's difficult realities and determine how to move forward. Creating this type of culture means having difficult, uncomfortable conversations, and we're leaning into that discomfort to drive real change. In fiscal '20, we continued to demonstrate this commitment and fosters these conversations in multiple ways. In February, our Executive Committee and other senior management traveled to the National Memorial for Peace and Justice and the Legacy Museum in Montgomery, Alabama, for a day of discussion, reflection and ideation. We established an African American and Black Racial Equity Cabinet to share barriers, opportunities, recommendations and successes monthly with me and our Chief Human Resources Officer. And we hosted multiple VP-plus meetings and an all-employee town hall focused on honest conversations around D&I. In addition, we implemented mandatory unconscious bias training for all manager and above employees, and we embedded D&I and culture metrics in our annual incentive plan goals for all VPs and above. As we move forward into fiscal '21, our leaders recognize that it is imperative to continue this progress. For this reason, we set incremental D&I and culture incentive plan goals for all leaders across the company. We also established a corporate holiday honoring Martin Luther King, Jr. for U.S.-based employees. Going forward, we are continuing enterprise-wide deployment of unconscious bias training and other D&I trainings. We are also creating forums for strategy development and ongoing listening sessions for African American and Black leaders and employees. We are facilitating ongoing discussions through our D&I counsel, employee resource groups, all-employee meetings and engagement with our Chief Diversity Officer and other senior leaders. We are also progressing workforce strategies and talent processes to further enhance organizational performance, team collaboration, commitment to external customers and competitive advantage in the marketplace. I believe this is work -- this work is both the right thing to do and the smart thing to do for our people and for our business and for our collective future. To close, thank you for your continued engagement and support. Together, we will continue to serve our customers and their patients, and we will continue to invest for growth in our business and in our people so that we can perform our essential role in health care now and into the future. Now with that, Jack will make some initial comments regarding the Q&A process, and then Greg and I will answer your questions.

We will now address questions from shareholders received through the web portal. [Operator Instructions] We ask that you note and comply with the published guidelines regarding appropriate questions for this meeting, which are posted on the web portal for the meeting. Please note, we will attempt to answer as many questions as time allows, but only questions that are germane to the meeting will be addressed. Answers to any pertinent questions that we do not address during the time allotted for the meeting will be posted on our company's Investor Relations website shortly after the meeting. We have our Vice President of Investor Relations, Kevin Moran, here with us today to relay questions received through the portal. Kevin, please go ahead.

Thanks, Jack. The first question we have today is which directors are not in attendance for this meeting?