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

Okay. I want to switch gears to Medical segment. Maybe if you can spend some time around the moving parts that are impacting the revenue growth and profitability. Heading into fiscal year '21, you were guiding for high single-digit kind of decline in profits, but excluding the COVID-19 impact, Medical profits were going to be growing in mid-single digits. Any thoughts around there? Just kind of -- it's kind of pretty dramatic turnaround. So if we can discuss that?

Yes. I think, again, as we think about Medical, we really -- it really comes back to a couple of things, as I mentioned earlier. First of all, COVID not being as negative as we thought. And then driving expenses is number two. And number three is our lab business. So our low double-digit growth is, again, when we look at COVID-19, we only -- we exited down mid-single digits when it came to the impact of electives year-over-year. So that was better than we expected. We also were -- because our lab business is so important and it is providing COVID testing, working with manufacturers, working with the various labs and does have one of the leading players in that space, that's been a nice tailwind for us in our Q1 that we think has some real legs on it for the rest of the year, so that impact of that. And then some of the costs you don't have when you -- some of our customers, for instance, aren't still allowing some of our sales reps to come in. And so we continue to have some expense savings in those areas. So when you mix all that together for Medical, we just don't expect the COVID impact to be as significant on Medical this year as we did. And then we also mentioned that we were very aggressive on our cost savings in Medical for Q1 and -- not that we won't be the rest of the year, but we also really ramped it up in Q1, just to make sure we gave ourselves some breathing room for the year, and we'll, obviously, be stepping some of those expenses, layering some of them back in and doing the things we need to do, but we want to kind of take a little bit of a pause in Q1 to get the year started right. I think one of the other pieces that's really important to talk about is the revenue guidance going from to -- we said mid-single-digit to high single-digit growth. That is important that folks understand. That is only because of the expected price increases we plan to take and would expect to take on PPE. So if you were to do the math on that change, you can see it's several hundreds of millions of dollars of price increases we plan to take. At the same time, we expect that our cost will actually go up slightly more than even the revenue increases we take. So we would expect it to be a net of a little bit of a headwind in the last 3 quarters, probably based on the timing of when it rolls into inventory. Most of it probably hits our P&L in our Q2, but that's a little bit dependent on when the products are received and as they come in. So what I'm really proud of the team and really appreciative of the customers working with us is there has been significant cost increases on PPE. In order to continue to be able to supply it, we needed to work with customers to have the ability to adjust our pricing, and they worked with us to be able to do that. But we also, at the same time said, "Look, we're not looking to make more bottom line dollars. We just want to keep our margin dollars similar." And so you will see a very large revenue increase for the year, a corresponding cost of goods increase that's slightly more than that. So it will actually be dilutive to margin rates during the rest of the year, which is just important to know.

That's helpful color. I will just remind everyone, anybody who's listening, audiences, if they want to ask a question, you can e-mail them to me and I can ask on their behalf. Again, my email address is jailendra.singh@credit-suisse.com. So Mike, you mentioned about this ongoing commercial transformation initiatives. So it looks like majority of that is in Medical segment. I know it's enterprise-wide, but how is that split between Pharma focus versus Medical segment focus?

Yes. I think like any good organization, right, you're always taking a look at your commercial operations, making sure that you have the right talent, the right incentive plans and the right structure that really benefits customers so that they do it. And so we're constantly always taking a look at across the whole organization. But generally, for most of our business, it's just been some small tweaks here and there, other than for Medical, where a little over a year or so ago, actually over a year ago, we really started looking hard at this and came to the conclusion that we weren't structured right, primarily in our medical products and distribution business, a little bit in our solutions/services businesses, but generally in distribution and products. So we spent significant time talking to our customers and to our sales reps, understanding what our customers were looking for and how to help our reps be more efficient and effective. About a year ago, about this time last year, we began kicking that off, made the internal announcements, worked with customers in a very proactive way to let them know the changes that we were making. And we went out and began hiring new folks, upgrading talent in some areas where we thought we needed some better talent also, making sure we had the right amount of, for lack of a better analogy, the hunters and farmers mix was good, making sure we have the right mix of products in the reps bags so that they didn't have too much to sell, but at the same time, could be very effective for us. So we started that effort a little over a year ago, had -- have done a really good job on that. As we mentioned last year, we ran a little bit behind on that, but we got that executed really essentially by the end of our last fiscal year, so that the new structure is in place, the new compensation plans are in place, the new people are in place. And we were just really beginning to see a lot of that. And then obviously, COVID hit. And while that is in place, a lot of those folks have not been able to get out into the field and continue with some of the benefits that we would have liked to have seen because they just turned into making sure we were doing all the things we could do to make sure customers got the PPE they needed. But we feel really confident in the new strategy and the execution we've had so far. We're starting to see customers allowing our reps back into their locations. So while not -- we're not back to 100% of our reps able to get into every customer and work with them to improve selling both our distribution and our products, we are seeing more and more customers allowing our folks in. They value what they bring to the table. We feel good about where that's headed.

Okay. Great. I think it will be probably not proper if I don't ask you about election, election outcome here given the landscape how things look for next 4 years or at least next couple of years. I mean, Senate is still tied. I mean -- and we will see what the outcome is there. But just curious from political landscape and all the implication of different regulations being discussed on drug pricing and all, just curious about your thoughts here. How do you think what you'll be focused on in terms of working with administration or educating them on things which might be impacting you? Just curious about the thoughts on the current landscape.

Yes. It's a really interesting and fair question. It's a tough one to answer, but a couple of things I would say. First of all, the good news is, our industry and in both of our businesses, whether it's our Pharma segment or Medical segment, regardless of Rs or Ds in charge and whatever mix that might be and even with some of the challenges, whether it's the 2008 financial challenges or this COVID, both businesses have really demonstrated a lot of resiliency. And we've learned a lot over the many years of understanding how to set our contracts up right and work with our suppliers. So let me just take one. So let's think about -- I'll talk about a couple. But the first one is say drug pricing. So drug pricing, it's not going to be a direct impact for us because it's really probably more directly impacting the pharma manufacturers or downstream customers depending on how it works, so we would kind of be more in a second order of impact. So for us, the really important thing here is, do we have the right contracts in place with manufacturers? So for instance, if WACs were to be significantly reduced as part of a plan, would our fee-for-service model work well. And we've been able to demonstrate that it has been. We've been working with suppliers over the last couple of years as they've introduced some new low-cost brand alternatives. We have converted most to fee-for-service from inflation based. And manufacturers understand that while our DSAs may be set up as a percentage of WAC, that ultimately, at the end of the day, we bring dollars to the bottom line and our services are worth a certain amount of dollars and that they would need to adjust based on those types of things. And so I would say that while there's always the chance for short term disruptions any time you might have a sudden change in the system, I think what we've been able to demonstrate over the last couple of decades is that the system itself, of the way we get compensated by branded pharma, is something that we have been able to adjust and work with them in order to get compensated fairly, so that the business does well over the mid- to long term. So I feel on the Pharma side, that's probably one of the bigger ones that's out there that we'll continue to monitor. On the Medical side, again, there's a host of different things, but it's probably a lot around the push for Made in America or having many products, particularly PPE and maybe, even in some cases, pharmaceuticals made in the U.S. Red Oak continues to work on the pharmaceutical side related to generics, and I think that's really more of what we're talking about because the brand is a whole different situation. And look, we'll support generic manufacturers if they want to come back to the U.S., only -- but they're going to have to keep the price where it's at. And they're going to have to work with us on that because our goal is to acquire at the lowest cost possible so that we can pass on good pricing to our customers. But we'll constantly have the discussions and make sure we're understanding that. And then on the Medical side, we have been investing in our own U.S. plants as well as our nearshore plants in Mexico and Dominican and Costa Rica and upping our mask and gown production. And we continue to look at U.S.-based manufacturing, we'll always be supportive of that. But at the same time, we also need to make sure that our downstream customers on the Medical side can acquire these products at the lowest possible cost so that they can still manage their P&Ls. And so we're going to keep our eyes on getting the right blend, whether it's U.S.-based, nearshore or overseas sourcing, so that we can make sure we have a very strong, resilient supply chain, but also one that can be cost-effective for our customers.

All right. That's fair. Just a quick couple of last-minute questions here. On the vaccine, I mean, clearly, in terms of vaccine for COVID-19, obviously, McKesson has their contract with CDC. How should we think about Cardinal's role when it comes to distribution of vaccine? Given your relationship with CVS retail pharmacies, will you play a role through that channel?

Well, yes, you're right. As you know, we're not involved necessarily directly in Phase I that, as you mentioned, McKesson does have that contract. But at the same time, we are working and continuing to meet with the folks in the government to understand what's going on there. And if something changes on that or we're needed, we will be ready to go to either help -- whoever we need to help in Phase I. Our ultimate goal is to make sure the citizens of the U.S. can get a vaccine. So we always go in with that as our #1 goal. We have, obviously, been a successful distributor of other types of vaccines for decades. We do that today. We distribute millions of vaccines on an annual basis. We have the capabilities to do all types of vaccines at this point in time. We're constantly having conversations with the government and with manufacturers related to the COVID-19 vaccines. We're ready to support them and, as I mentioned, have the capability. And you can assume that we will do everything we can to support our customers and our manufacturers and the government in order to qualify our customers to be able to distribute them, if we could play a role there, or get the vaccine to them. If that's something that we're called on or have the ability to do, we'll be ready to do it.

That's fair. And then last, I want to touch upon opioid settlement. I mean, clearly, you guys were the first one to take accrual there. Now ABC has accrued for settlement. And McKesson had disclosed. How should we be thinking about the road blocks there in terms of reaching that settlement? It looks like we might be nearing there. But what I want to ask is about maybe your financial flexibility in light of this settlement, how do you feel about that?

Yes. I think overall, like I said, you've heard us say on the call, we continue to get more visibility on the settlement, which is why we increased our overall reserve for it. We've been having and continue to have very good discussions with the state AGs. And we would expect any settlement that we would reach would be not only with the states, but all the political subdivisions, to cities, counties, et cetera. We do need and want a global settlement in order for it to make sense, and we would hope that either all or almost all of the 50 states would be involved in it. So that continues to be our goal. As far as our capital structure, we always are evaluating our capital structure relative to our performance, our cash flow with a mind's eye to always drive long-term value for shareholders. So at this time, our capital priorities are, first and foremost, #1, investing in the key areas of our business. We believe we have a strong pipeline of organic growth opportunities. We believe in all of our businesses and the portfolios. So #1 priority is going to be able to continue to invest in them, to both maintain and grow them. #2 is, we want to make sure that we are focused on taking the appropriate actions to maintain our investment-grade balance sheet. That's important to us. So that's our second priority. #3 then would be returning cash to shareholders, primarily through our dividend. That would be the third bucket. And then last, we'll continue to evaluate whether there's some opportunity for some tuck-in M&A. But if we do any tuck-in M&A, it will be very specific to the growth areas that we have been talking about, and that's going to be either our specialty business, our at-home business or potentially one of our services businesses. That's where we would focus our M&A, and only if it's in those areas and only if it meets all the other strict requirements we have for M&A. So we feel like progress is being made, and we'll continue to be very disciplined on our capital structure.

Great. I guess we are out of time here. So we will leave it there. Thanks a lot, Mike and Kevin, for participating at our conference. Have a nice afternoon. Take care.

All right. Bye-bye.

Thanks. Bye-bye.