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

Welcome to the 2021 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. I'm pleased to call to order the 2021 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 today. I'd also like to introduce Daniel Valero, John Rodgers, Crystal Threet and Kyle Kaufman of Ernst & Young, Independent Auditor for Cardinal Health. And finally, the company has appointed Broadridge Financial Services to act as Inspector of Election. Linda from Broadridge has joined the meeting today and has taken the oath of Inspector of Election earlier today. I'd now 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, and then we 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 the 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 this meeting. Please refer to the Annual Meeting of Shareholders guidelines 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 following the past annual meetings. I present to the meeting the notice of today's Annual Meeting of Shareholders and related proxy materials together with an affidavit of Broadridge Financial Services certifying that the notice of the annual meeting was mailed on September 23, 2021, to Cardinal Health shareholders. According to our inspector of election, approximately 250 million common shares, being approximately 88% of the total outstanding shares, are represented at today's meeting. This exceeds the majority and, therefore, constitutes a quorum for purposes of conducting the 2021 Annual Meeting of Shareholders. The first item of business is the election of 11 directors, each to serve until the 2022 Annual Meeting and until his or her successor is duly elected and qualified. The 11 persons nominated by the Board are: Carrie Cox, Bruce Downey, Sheri Edison, David Evans, Patricia Hemingway-Hall, Akhil Johri, Michael Kaufmann, Gregory Kenny, Nancy Killefer, Dean Scarborough and John Weiland. Our Board recommends voting for each of the director nominees included in the first proposal. The second item of business is the proposal to ratify the appointment of Ernst & Young LLP as our independent auditor for the fiscal year ending June 30, 2022. Our Board recommends voting for the second proposal. The next item of business is a 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 tables, notes and narrative in the proxy statement. Our Board recommends voting for the third proposal. The fourth item of business is a proposal to approve the Cardinal Health, Inc. 2021 long-term incentive plan. The Board recommends voting for the fourth proposal. The next item of business is the 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 10%. Our Board recommends voting for the fifth proposal. The last item of business is to vote on a proposal, if properly presented, from Ken Steiner on a policy that the Chairman of the Board be an independent director. Is a representative of the sponsor of this shareholder proposal present? Operator, can you bring Mr. Chevedden to the presenter line.

This is John Can you hear me okay?

Yes, we can.

This is Proposal 6, independent Board Chairman. Shareholders request that our Board of Directors adopt the policy that the Chairman of the Board be an independent member of the Board whenever possible. Currently, Cardinal Health Directors can now name 1 person to have the Chairman and CEO of jobs at the same time at any time they want to for as long as they want to. The Board created a loophole bigger than a barn door in its response to this proposal. This proposal topic won 52% support at Boeing in April 2020, and Boeing responded by naming an independent Board Chairman. This proposal topic also won 50-plus support -- 50% plus support at 5 major U.S. companies in 1 year, including 73% support at Netflix. This proposal topic won 42% support from Cardinal Health shareholders in 2020 and in spite of management's electioneering in text on the ballot itself and management text discouraging shareholders from even reading the proposal. Management repeated these cheap practices again today. It is more important to support this proposal in 2021 because management pay was rejected by 33 -- 37% of shares in 2020 when a 5% rejection is the norm. It will be more difficult to set outlandish management pay with a real independent Board Chairman policy instead of the policy recently adopted. Cardinal Health is accused like AmerisourceBergen recklessness in the distribution of opioids. At AmerisourceBergen was prepared to pay a whopping $6 billion legal settlement to compensate communities ravaged by opioid abuse. And meanwhile, the AmerisourceBergen CEO, Mr. Steve Collis, was set to receive a financial windfall. Parents lost their children to drug overdoses and entire communities were hobbled by drug addiction, while the drug industry titans extended their wealth. An independent Board Chairman would make it more difficult for Cardinal Health to again engage in the reckless distribution of drugs. Management has plenty of goal to claim and implemented this proposal. Management failed to convince the neutral Securities and Exchange Commission that it had implemented this proposal. The SEC issued its formal decision on August 23, 2021, and denied Cardinal Health's management's appeal on September 7, 2021. The SEC has already shut the door twice on the management claim that is supposedly adopted this proposal. But the SEC decision did not stop management from throwing the kitchen sink at this proposal. Management went to the corporate war chest and published a voter's guide for dummy shortly before this meeting promoting the management party line. Clearly, management does not want this issue to be cited on a balanced presentation of the facts. When reading the management text next to this proposal, please remember that there is no formal -- that there is a formal process to root out the possibility of misleading shareholder text in a shareholder proposal, but there is no formal process to root out misleading management tech next to a shareholder proposal. An independent Board 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. Please vote yes, independent Board Chairman, Proposal 6.

Thank you, Mr. The Board's statement in opposition to this proposal is contained in the proxy statement. The Board of Director recommends a vote against the shareholder proposal. Operator, please remove Mr. from the line. I now declare the polls closed. The results on the bounce 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 11 director nominees has been elected. On Proposal #2, the ratification of the appointment of Ernst & Young LLP as our independent auditor for fiscal 2022, 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 the Cardinal Health 2021 long-term incentive plan, preliminary results indicate that this proposal has passed. On Proposal #5, to approve an amendment to our restated food regulations, to reduce the share ownership threshold for calling a special meeting of shareholders, preliminary results indicate that this proposal has passed. 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 preliminary results is now concluded.

Thank you, Jack. The formal portion of today's meeting is now adjourned. Mike Kaufmann will now provide a brief business update. Mike?

Thank you, Greg. Good morning, everyone, and thank you for joining us today. I will share a brief update on the company, then Greg, Carrie, Jack 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. Our path forward not only tells our employees, shareholders and customers why we exist, where we are going and how we will get there, but it also details the values and behaviors we expect from our teammates. Our overarching strategy is to be health care's most trusted partner and build upon our scale and heritage in distribution, products and solutions and to drive growth in evolving areas of health care through customer insights, data and analytics. We're focusing our resources on what matters most. Our plan for growth must be focused on our customers, meeting their needs today and anticipating their needs tomorrow. To get there, we're strengthening our core, investing for the future and growing and developing the next generation of leaders who are going to lead our company for the next 50 years. Turning to Slide 6. We had a strong start to FY '21, which was overshadowed by disappointing fourth quarter results. Although I am not satisfied with our full year performance, we did see growth in both segments, excluding the impact of COVID-19. And this underlying growth gives me confidence in our strategy. In FY '21, we grew revenue 6% versus the prior year. And despite an estimated $200 million year-over-year operating earnings headwind related to COVID-19, we grew non-GAAP EPS. We continue to aggressively streamline our cost structure and surpassed our enterprise cost savings target for the third consecutive year. We generated strong operating cash flow, returned approximately $800 million to shareholders through dividends and share repurchases and strengthened our balance sheet by paying down approximately $550 million of debt. Throughout the past year, we have been taking action to drive performance and we'll continue to move forward with urgency. We divested the business, extended our Red Oak Sourcing agreement, extended our pharmaceutical distribution agreements with CVSL and identified $250 million of additional cost savings opportunities. As I reflect on the unprecedented events of the past 1.5 years, our team has prioritized customers, maintained continuous operations, partnered with governmental agencies to support vaccine administration and protect patients and further improve the resiliency of our supply chain. Moving on to Slide 7. We are working to transform our business through growth, innovation and technology, so we are best positioned to serve our customers and their patients now and into the future. As I mentioned, we're aggressively reviewing our cost structure to continue streamlining our operations and processes and intend to reinvest a portion of these savings to fuel future growth. To achieve our growth objectives, we're prioritizing investment in our strategic growth areas, and we said in the Q4 earnings call that we expect these businesses to collectively realize double-digit growth in FY '22. And across our business, we're enhancing our IT infrastructure in key areas to increase capabilities and digitization, improve the customer experience and drive productivity. We are taking a balanced, disciplined approach to capital deployment with a focus on investing in our business, maintaining a strong balance sheet and returning cash to shareholders. Slide 8 outlines our ESG priorities, which are more critical than ever to our shared future. As a global company, we know that the long-term health of our employees, customers, partners and communities depends on a healthier, more sustainable and equitable world. We continually push ourselves to find ways to care for our people and our planet. In many ways, the pandemic has exposed how much our world still needs to change to protect and serve the most vulnerable among us and create a more inclusive future. For more information on our efforts and the significant commitments we are making, please review our most recent corporate citizenship report. Moving to Slide 9. In July, we announced that we have negotiated a comprehensive proposed settlement agreement and settlement process designed to achieve broad resolution of governmental opioid claims. In September, we announced that enough states agreed to settle to proceed to the next phase and each participating state is offering its political subdivisions the opportunity to participate in the settlement for an additional 120-day period, which ends on January 2, 2022. If all conditions are satisfied, this agreement will result in the settlement of a substantial majority of opioid losses filed by state and local governmental entities. This is an important step forward for our company. As we've consistently said, we remain committed to being a part of the solution to the U.S. opioid epidemic and believe this settlement would provide relief for our communities and certainty for our shareholders. In conclusion, from our start as a grocery distributor 50 years ago, we've evolved into the company we are today, a distributor of pharmaceuticals, a global manufacturer and distributor of medical and laboratory products and a provider of digital performance and data solutions for health care facilities. The pandemic has illuminated the final role our company plays in the global health care system. I want to thank our 44,000 employees for their hard work and resilience. What we do matters, and it is our privilege to serve our customers, their patients and their communities around the world. I'll turn it over to Jack for some comments regarding the Q&A process, and then Greg, Carrie, Jack and I will answer your questions.

We will now address questions from shareholders received through the web portal. As noted, the guidelines distributed for this meeting, there is a limit of 1 question or comment for shareholder. It will help us if questions are succinct and cover only 1 topic per question. We ask that you not to comply with the published guidelines regarding the appropriate questions for this meeting, which are posted on web portal for the meeting for your reference. 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 in the time allocated for the meeting will be posted on our company's Investor Relations website shortly after the meeting. We have received some questions through our portal in advance of the meeting, so we will start by addressing those questions.

First, we did receive a number of questions relating to executive compensation, including questions about why compensation for 4 of our named executive officers increased? How the increase in executive pay compares to raises given to employees and why we take, as the shareholder put it, "such extreme measures to convince our shareholders," the compensation to our shareholders is fair and reasonable. To address these questions, I will turn it over to Carrie Cox, who is Chair of our Human Resources and Compensation Committee.

Thanks, Jack. Keyboard priority is to attract and retain a strong executive team to lead our company and the Human Resources and Compensation Committee has designed a competitive pay program that supports long-term value creation and aligns executive interest with those of shareholders. We ask our shareholders every year to vote in support of our compensation program at each year's annual meeting. And their perspective has always been an important input in our decision-making process. As a result of feedback from shareholders in last year's meeting, I and others at Cardinal Health spoken with shareholders representing the majority of shares and presented our compensation structure and cost compensation package changes to them. Based on these conversations, we adopted a package of changes that we believe are responsive to our shareholders' feedback. We also provided enhanced disclosure of our compensation decision-making in our proxy statement to provide further transparency. With respect to the question about why the compensation of 4 named executive officers was increased, let me clarify that in terms of total compensation, only 2 named executive officers received an increase. These 2 officers were each promoted into their current role 2 years ago, and we increased their compensation targets based primarily on market data. And we've been gradually increasing their target compensation towards the median of our comparator group data for their respective roles since their promotions. Lastly, in response to the question about how employee compensation increases compared to executive compensation increases this year, let me note that in light of the uncertainties about COVID-19, Vice President and above, including the executive officers, received no base salary increases last year, while nonsupervisory and frontline employees received standard merit salary increases. In addition, we gave a bonus to all nonincentive-eligible employees from a portion of the annual cash incentive funding reductions, recognizing their critical work during the pandemic.

Thank you, Carrie. Next, we have a few questions related to our Board. I'll ask Greg Kenny, who, as we noted before, is our Board Chairman, to address these. First, we received a suggestion that we should consider reducing the size or reducing the number of directors due to the expense of maintaining the Board of this size. Greg?

Jack, we feel this is important and valuable to have directors with diverse backgrounds and skills to effectively oversee our business in strategic direction and to properly perform the Board's oversight responsibilities. Each of our directors brings skills and experience that contribute to a well-functioning Board that is commensurate with the size and complexity of a company like Cardinal. We currently have 11 members.

Thank you. Carol and Kayne also asked whether we have given consideration to removing Akhil Johri from the Board in light of his involvement with Boeing and her expresses her concern that involvement with Boeing could impair our relationship with federal regulators. So let me first comment note that we won't be commenting about Boeing except to say Akhil only recently joined the Boeing Board in the middle of 2022. Greg?

Yes. No, Akhil is Head of our Audit Committee. He is an extraordinary executive and Board member and has my full support.

Thank you. The next question is what is the Board doing to prevent what the acquired shareholder classifies as u "unethical dispersal" pharmaceuticals such as what happened with opioids?

We care deeply about the demonstration that the opioid epidemic has caused families and communities, and we remain committed to being a part of the solution. As a wholesale distributor, Cardinal Health is an intermediary in the pharmaceutical supply chain with a limited specific role of providing a secure channel to deliver medications of all kinds from manufacturers to hospitals and pharmacies that dispense them to their patients. We operate a constantly adaptive and rigorous system to combat controlled substance diversion and remain committed to supporting solutions for the opioid crisis. The Board actively oversees the company's response to the opioid epidemic, including its anti-diversion program and formed the ad hoc committee of independent directors in February 2018 to assist in this. The Board also recently formed the Risk Oversight Committee to assist the Board in overseeing other ethics, quality, legal and regulatory compliance matters. We see our proxy statement for more details.

Thank you, Greg. The next question comes from Stephen Martinez, who asks why companies do not offer shareholders the option to nominate Board members? I'll briefly address this one, noting that the company actually does offer shareholders the opportunity to nominate directors for consideration. For more information on how shareholders can nominate a director, please refer to our proxy statement. The next question is about the shareholder proposal, noting that we need an independent chair, not a CEO as Board Chair. I'll answer that one, too. Our Board currently has an independent Board Chair and Greg Kenny, who has served as Board Chair since 2018 and is with us here. As Chair, Greg has robust responsibilities and serves on key committees. In addition, earlier this year, the Board amended the corporate governance guidelines to ensure that whenever possible, the Chairman of the Board be an independent director. Now Mike, we have a few questions here around company performance. Samuel asked how long it will take to grow the company after the opioid settlement and that a couple of shareholders are expressing disappointment in recent performance and asking what we intend to do to turn things around?

Well, I covered some of this in my presentation, but let me just reiterate that we did have a strong start to our fiscal 2021, which was, unfortunately, overshadowed by disappointing fourth quarter results due to a large COVID-19-related inventory charge in our fourth quarter. Although I am not satisfied with our full year performance, we did see growth in both segments, excluding the impact of COVID-19, which gives me confidence in our strategy. In terms of our strategic priorities for fiscal '22, we are working to transform our business through growth, innovation and technology so that we are best positioned to serve our customers and their patients now and into the future. We are also aggressively reviewing our cost structure to continue streamlining our operations and process. We intend to reinvest a portion of these savings to fuel future growth. Lastly, we are prioritizing investing in our strategic growth areas and are taking a balanced, disciplined approach to capital deployment with a focus on investing in our business, maintaining a strong balance sheet and returning cash to shareholders.

Thank you. A related question for Mike. A shareholder points out that over the last 5 years, the Dow Jones is up 46% while our stock price has declined 32% in that time. They ask with this recent disappointing performance and related decline in stock price, why should someone invest more into Cardinal with its current leadership? And who is accountable for the poor stock performance? And another question also notes the disappointing stock price and asked when we can expect to see improved business performance related to the stock price and what we're doing to be more competitive in the marketplace?

Ultimately, as CEO, I am always accountable for our performance. And I acknowledge our disappointing stock performance. As you know, there are a lot of factors that can influence stock price, so I couldn't comment on when our performance may result in an increase to our stock price. But I will say that we are moving forward, and we're taking action, as I highlighted in the prior question. We remain focused on executing our strategy and deploying capital effectively, including with our commitment to our dividend to generate value for our shareholders.

Michael asked why we lost the Northwestern Medicines business?

We don't comment on specific customer relationships, but I will say that we operate in a highly competitive industry. We put the customer at the center of everything we do. What we do matters, and it is our privilege to serve our customers so they, in turn, can serve their patients and communities.

Next question comes from David Woodruff, who asked whether Cardinal and our PAC have made any policy changes for taking any action in response to the events in Washington, D.C. on January 6 or to address reputational risks associated with past and future direct and indirect political contributions? Mike?

In July, our PAC Board decided not to support any of the members of Congress who voted against certification of the 2020 results until at least the end of this year 2021. We will continue to assess our political spending policies as part of our broader public policy agenda and current events as warranted.

And Michael asked whether Cardinal Health has a dividend reinvestment plan. And if not, why not?

We don't have a dividend reinvestment plan, but we continue to have a goal of returning cash to shareholders through share repurchases and our dividend, which we expect to grow modestly. Many brokers offer this service. So if it is something that you're interested in, I'd recommend reaching out to your broker.

Next question is from Harry Stewart, who says that he is a smaller shareholder and asked whether we would consider a project to buy out smaller shareholders like him, noting that this may reduce shareholder noise? In response, I can say we have worked with our transfer agent on projects like this in the past, although it has been a few years. We will look into whether there may be a benefit to revisiting this again now or in the future. Thanks for the suggestion. We have also received a few questions concerning employee matters, including questions about employee compensation and development as well as vaccine mandates. There were a few questions specifically about stock options. Mike?

Thanks, Jack. Well, let me start with stock options. We no longer issue stock options. However, certain employees do receive restricted share units and performance share units to align company and employee interest. We believe that our employee compensation and benefits package is competitive with others in the marketplace, and we will continue to evaluate and adjust it as the market changes. With respect to the COVID-19 vaccine, we have announced it would require certain groups of U.S. and Canadian employees, including salary and office-based employees, sales teams and some others to be fully vaccinated. We are also implementing vaccination requirements from the federal government that cover additional employees. We, unfortunately, recognize that some of these employees may make the decision to not get vaccinated. However, we feel that requiring vaccinations for these employees is important for the continued safety of all of our employees as well as our ability to continue to fulfill our critical role in health care. I touched on this briefly during my presentation, but we are also pleased to have recently announced long-term emissions reduction goals as well as minority representation goals. ESG priorities are more critical than ever to our shared future, and I'd point out to our shareholders to our recent corporate citizenship report for more information on what we are doing in this area.

We have our Vice President of Investor Relations, Kevin Moran, here with us today to relay questions we've received through the web portal during the meeting. So I'll turn it to Kevin now to see if we've received any questions.

Thanks, Jack. Yes, we received a few questions. The first one, I'll direct to Mike. Can you please give an example of how the pandemic has induced positive change for our business going forward?

Great question. Throughout the pandemic, we have responded to challenges with resilience and agility, approaching every situation with a focus of both delivering for our customers so they can care for their patients and protecting the health and safety of our employees. To maintain our strong company culture, while many of our employees were working remotely, we implemented more frequent communication with our employees. These deeper connections with and among our employees enable us to seize opportunities to innovate for our customers by piloting technology solutions to incorporate robotics, automation and data analytics across our warehouse and distribution processes as well as drive operational efficiencies across the enterprise.

Our next question, I'm going to direct to Jack. With respect to opioids, what are the most important court dates for Cardinal Health in the next 12 months?

I'll say that we have a couple of court dates that are coming up. Later this month, we will begin a trial with the Washington Attorney General against the company and 2 other national distributors and then there are a couple of more cases that are scheduled to begin shortly after the New Year. I'd refer you to our public securities filings for more information.

Mike, this question is on share buybacks. Has there been any in the last 12 months?

Yes. In our fiscal year 2021, we did do $200 million of share repurchases. And recently, we initiated in Q1 of fiscal year '22, a $500 million share repurchase.

The next question, I'll direct to you, Jack. It comes from Jim Lore. The company's proxy statement reports that for the past year, there have been no reportable related persons transactions. The proxy statement also discloses that Vanguard, BlackRock and State Street each hold at least 5% of the company's outstanding shares. Could you please indicate why these business relation -- excuse me, it went on to say that these institutions provide investment services to the Cardinal Health Foundation. Could you please indicate why these business relationships with 5% shareholders, which create potential conflicts of interest are not considered reportable related persons by the company?

Thank you, Kevin. This is a pretty technical question that refers to our related persons transaction policy, which is disclosed in our proxy statement and require certain material transactions with persons who are referred to as related persons to be disclosed -- to be approved by the Audit Committee and disclosed. These -- any such transactions with these large investors are in an ordinary course and are not subject to this policy. Thank you.

Mike, the next question is with respect to our cost savings program. Can you please give an example of a successful cost savings measures that we've implemented in the last 6 months?

Yes. We've recently increased our cost savings program of $500 million to $750 million. There's many areas that I could give examples of where we've been successful, but I would say that I would bucket them in 2 areas. First, we are simplifying our operating model, including global manufacturing and supply chain; and secondly, we are streamlining our cost structure through the use of technology. We are also investing a portion of the savings back into the business.

There are no more questions in the queue.

Great. Thank you, Kevin. That concludes the Q&A portion of today's meeting. We did receive several questions through the portal that were specific to individuals who submitted them and not a general shareholder interest. If you submitted a specific question that we did not address today, please follow up with a member of our Investor Relations team, whose contact information can be found in the guidelines for this meeting and on our website.

Thank you all for attending.

Goodbye.

This now concludes the conference. Thank you for joining, and have a pleasant day.