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

Hi, everybody. I am Elizabeth Anderson. I'm the technology and distribution analyst here at Evercore. Very pleased to be joined by Aaron Alt, CFO, Cardinal, which you -- many of you know; Annie Lange, who's SVP of Finance; and then Matt Sims, who has -- is the new IR -- well, I don't know, still kind of new, but IR, and so we're very pleased to have you. I think, Matt, you wanted to read something before we get going.

Yes. Great. Thanks, Elizabeth, and thanks for hosting us today. It's great to be here. So before we begin, let me just note that we will be making forward-looking statements today, which are subject to certain risks and uncertainties that could cause our actual results to differ materially from those projected or implied. For a full description of these risks and uncertainties, please refer to our Investor Relations website or to our SEC filings.

Great. Awesome. So on that note. So Aaron you've been in the CFO seat now for about 9 months. You survived an Investor Day already and all sorts of things. Can you talk about sort of your reflections on the time so far and sort of what's been accomplished to date? What are you most excited about going forward?

Great. Well, first, thanks for having us. On behalf of Jason and the entire Cardinal team, we're excited to be out here. Talking about the story because we've got a lot to talk about, I am 9 or 10 months into the job as CFO, and boy, what a first year it has been. I could see a couple of things on the outside before coming in. I thought I saw a high-quality, very engaged management team that was relentlessly focused on creating shareholder value. I thought I saw a complex business that had a lot of opportunity to do things different. I thought I saw a great balance sheet that would enable both the success of the operating business and create a renewed focus on shareholder value creation. And as I've come in from the cold, so to speak, now being in the chair of the company, all those things are true, where I could not be more pleased with the management team. Jason's leadership has been exceptional in taking the breadth and the complexity that is Cardinal Health and all of its various incarnations and really driving towards the core priorities that we carry forward. If you had a chance to listen to our Investor Day, which was about 6 months into my time back in June, you'll get a lot of material about what we're up -- who we are and what we're up to. The complexity of our business is not to -- it creates opportunity for us in a lot of places. And what I hope you'll take away as you listen to those materials as well is the fact that we are relentlessly focused on 3 key priorities, right? We are pushing to decide things that don't matter as much and driving towards simplicity by focusing on the 3 things. The first is really accelerating the profit growth of our core pharma business. It's our largest business. And whether it's our generics platform, which I suspect we'll talk about, whether it's our supportive branded manufacturers, whether it's our $30 billion-plus specialty business, those are all elements where we are digging in and doubling down and really looking to drive the growth of the business. We're also very focused on the Medical Improvement Plan, right? We have a growth story from a pharma core and specialty perspective. We're working on the medical turnaround plan, Medical Improvement Plan, as we call it. And if you've been watching our results the last couple of quarters, we've had some good results so far in that plan. That relentless focus continues. And third, I said it before a bit as well. It's just a focus on shareholder value creation and thinking about not just how do we -- not just about investing in the business or giving it back, but the blend, what's the right balance between how we're going to invest to drive the growth for the future or return the cash given the strong cash position we're in. So I'm very optimistic about Cardinal. We have a lot of work to do, don't get me wrong, but I'm very optimistic. We've got the assets we need. We've got the team we need. We've got the balance sheet we need to be able to do that, and I'm looking forward to great things for Cardinal as we carry forward.

As part of that at the Investor Day, you outlined the double-digit specialty growth within the pharma, driven by nuclear upstream services, community oncology. Maybe unpacking each of those a bit, can you talk about -- more about your business in upstream services? I think that's somewhere where we haven't heard as much about. So it would be great to sort of understand what the opportunities and sort of growth outlook looks like on that business.

Happy to. I'm going to put Matt on the spot, fair warning, and ask him to start and I'll jump in.

Yes. No, that sounds great. Yes, certainly, Elizabeth, at Investor Day, we outlined that specialty is our clear area of focus. I think certainly, we're very large today, as Aaron noted, over $30 billion of revenue. At Investor Day, we shared had grown 14% over the last 3 years. And so very scale today, very large and we've been growing very quickly. And so where we're focused is expanding both downstream across therapeutic areas, oncology, rheumatology, other emerging areas as well as upstream supporting biopharma manufacturers. And so you asked about that business. And so that business is approximately $400 million of that $30 billion. And the key thing there is it's significantly higher margin than our core distribution business. And it's also been historically growing double digits. And so really exciting opportunities with that business. We've done a couple of key things. And so we've reorganized those businesses to manage them holistically, and we really offer the full breadth of service capabilities to support biopharma manufacturers across their clinical needs, whether that's driving market access, helping to lower cost, helping support patient adherence. And so we really do have the breadth and scale that we need in that business to support biopharma. And a couple that we've highlighted, our leading specialty 3PL, where our scale and our service capabilities differentiate us, our Sonexus Access and Patient Support platform where we've been continually investing in that business and have seen really good feedback from manufacturers. And I think we noted at Investor Day, the number of customers we support grew 30% in fiscal '23. And so really pleased with the progress we've made across our specialty business and will continue to be a key area of focus for us.

Part of why I'm excited about the future for Cardinal is we have our core distribution business, and we have the specialty, which many refer to as the ologies. But as you start to think about the opportunities we have, cell and gene, biosimilars, the manufacturing services, helping our branded partners drive their own innovation and take their complex products to market, COVID-19 vaccines anyone, right? We have opportunities to leverage up the scale and down the scale. And that's where we're investing when we talk about the specialty business as we carry forward. A lot of that will be organic. We certainly have a core already. Where we have opportunities, we'll also invest inorganically in support of our specialty business as well.

That makes sense. And I think you talked about how it obviously has better margins. Is the right way to think about that kind of like a combo of like 3PL professional services margin -- like typical professional services margins that might [indiscernible].

Yes. We haven't actually guided the margin rate on those businesses. We have guided the double digit...

I was giving you the opportunity.

I know, and he did give you a forward-looking statement, but I'm not going to offer that one up today.

Okay. That makes sense. If we think about sort of the opportunity in nuclear, I know every time we hear about Alzheimer's, everyone like -- they're -- something that would probably the PET scan would pick up, starts like going off. How do I think about that business and sort of where the opportunities are, Alzheimer's, obviously, and elsewhere?

Yes. Well, we are excited about the nuclear business. We went through the portfolio review that you're all aware of earlier in the year and made the declarative statement at Investor Day that not only were we retaining our nuclear business, which is a differentiated business for Cardinal versus some of our competitive set, but we're actually doubling down and investing in that business. What we like about the business is it's national scale. What we like about the business is it's applicability to a number of different parts of the specialty treatment cycle. We're investing -- we're actually building and expanding our facilities so that we can handle the influx of innovation, whether it's in support of the scans, the Alzheimer medications. The exact business model was still a little unclear from the innovation coming. That said, we can see the opportunity set already from what we know is in the pipeline so that we're comfortable with the double-digit growth coming out of that business.

Okay. That makes sense. As we think about -- you obviously launched Navista earlier this year. As you know, that's been obviously going now for almost 6 months. How -- what's your sort of latest update in early learnings from that launch?

Yes. We are really excited about the opportunity that Navista presents to us from an overall growth perspective. And both before Investor Day and following Investor Day, we spent a lot of time talking to our customers and talking to clinicians, right? And what we have -- what has resulted is we have corroborated -- or they have corroborated our belief that there is a market segment in which we can have a differentiated offering. There are a large number of community oncologists that don't want to be part of a broader practice. They value their independence. And so what we have been building internally in collaboration with our existing customers as well as additional community oncology practices outside of the existing Cardinal portfolio is what's the right service offering for them? How can we help -- in particular, how can we help drive their own practice growth, right, while preserving their independence? So that they don't need to join in ways they don't want to in order to be able to increase their own revenue streams. And that comes down to giving them access to clinical research. That comes down to giving them the tools on revenue growth. That comes down to giving them access to additional therapeutics, nuclear business anyone, right? That comes down to us providing them service or the opportunities in the back of the house, how can they run their practices better. And if Debbie Weitzman were here, she and the team would be very enthusiastic about the future of Navista as we carry forward. And so that's going to be a -- we're excited about where we are. It's not going to have a material impact on fiscal '24 because we are investing in that now, particularly in systems and platforms, et cetera. But as we think about our long-term guidance, we continue to drive the growth past '24, Navista will be a key part of that.

Okay. And how do we think about sort of -- well, I guess 2 questions to follow up on that. One is that, how do we think about the like uptake in terms of, I don't know, maybe like a number of oncologists or sort of people who were previously maybe doing just the distribution for who have moved out? And then two, what is the typical sort of oncologist journey with that? Is like, hey, we have this relationship in the procurement side and maybe we add one thing? Or do they kind of just go all in, in one perspective? Like how does that work or how does it work so far?

It's a great question, but here's the simple answer, which is the community oncologists that want to stay independent, they have a diversity of approach to their own practices, and that's why they want to stay independent. And so as much as I'd like to say, it is the access to the additional therapeutics or the back-office opportunity or the drug spend. It varies by oncologists. And part of the Navista model that we're building is the flexibility so that we get an appropriate return for the services we're providing. They get the benefit of a strong partner like Cardinal that preserves their independence that allows them to practice in the way they want to without having to join one of the larger organizations that are much more declarative in the thou shalt do it this way.

Got it. Okay. That definitely makes sense. Okay. So maybe moving away from specialty. Can you talk about the investments that you've made in your generics platform over the past -- over your time or over the past 12 months, however you want to think about it? And sort of where are we today on that business? And then how do we sort of think about maybe the rest of this year and next year in terms of further opportunities?

Yes. Our generics platform, through our Red Oak partnership, is a significant part of our business. As you listen to Jason and I talk about our financial results in every quarter, you have the branded business, which is the largest part of our revenue base, but low margin, right? Then you have the generics business, which is lower revenue because it's a lower price point but higher profit for us. We are really pleased with the impact that Red Oak has had for several years on our business. Red Oak's mission is to both keep our costs down and drive costs down, but also to ensure that we have access in the face of constraints across the network based on scale, right, to the generics that our customers need as we carry forward, and Red Oak has delivered in that respect. And so from an investment perspective, the supply chain for generics is very similar to the brand supply chain once it gets into our network, and we are investing across our network. But for us, the success comes from ensuring that we have a strong Red Oak business, which we do and keeping an eye on the market dynamics. So what I would tell you is from a financial perspective, we are quite pleased as part of our guidance. It's certainly what we called out during Q1 as being the case of we see a consistent market dynamic, which is day to day, things may move, but the buy and the sell tend to move across the basket in the same way. And we appreciate the consistency that generic platforms brings to our financial results because when we have that consistency when we can manage to it, as we drive volume growth, right, we were pleased in Q1 to see volume growth within generics as well, goodness results.

Yes. No, that makes sense. How do we think about that Red Oak? Like obviously, when you first formed it, in the first couple of years, you're recontracting. There's a significant sort of improvement. How do we think about the types and sort of and like a degree of incremental improvement that Red Oak would drive in, say, 2023 or '24 versus last year?

Unfortunately, I may have to disappoint you because we haven't broken that out specifically other than...

Conceptually?

The generics platform is a high profit -- higher profit part of our business that as we drive revenue growth that will certainly -- as we drive volume growth, that volume comes with a stable margin per unit, right? And then as our volume grows, that adds to our profitability in the pharma business, and that certainly contributes to the 4% to 6% profit growth for the pharma business we've called on the long term each year and is a key component of the 12% to 14% EPS growth as well that we've called as our long-term guidance as well.

So it's mostly a function of the volume, not necessarily incrementally better procurement costs, although that might be a small contributor to it. It's mostly that volume.

Yes. If I'm hearing the question right, I think what you're asking me is, is there something beyond consistent market dynamics, and we've gotten that question a lot lately. I know some others have made some comments in that respect. All we can say is that as we look across the basket for each of the last several quarters, what we've seen is consistent market dynamics where across the basket, the buy and the sell are in line, so there's not a -- there's not an up or a down opportunity beyond sticking to our knitting and doing the right thing through the generics profile.

Got it. No, that makes sense. And then in terms of what we think about the like base sort of branded oral, solid, nonspecialty business, is that sort of mostly been volume driven as volume is probably the biggest driver of improvement there, too? Or would you say that there's other opportunities in terms of some of the pharma restructuring business to drive sort of incremental like benefits or sort of margin in that part of the business as well?

Let me take a swing at it, and Matt, I welcome your thoughts as well. We like innovation, right? And whether it is additional products going into generic, biosimilars, new brand innovation, GLP-1s are a great example, products that are important to our to the patients, are important to our customers, and as a result, they're important to us. And we're going to find a way to work with them in the extensive supply chain we have to ensure that the customers have it in stock and the patients can get it. The innovation drives incremental volume for us as well, which is always a positive from an absorption perspective, setting aside individual items, which I, of course, can't comment on today. But we actually love the innovation that helps to drive that additional adoption. Recently in the industry, there's been strong pharmaceutical demand, right, across the categories of pharmaceuticals. We certainly saw that last year. We saw it in Q1 as well. And that's in part driven by the innovation. Now the GLP-1s, maybe just to jump ahead to that for a second.

Sure. That was my next question.

There you go, I observed. The GLP-1s, we actually raised -- we had our Investor Day and then in Q4 Earnings, we raised our revenue guidance by 200 basis points because in the back half of our fiscal '23, what we saw was the adoption and the revenue volume momentum increasing and GLP-1 is well beyond what we had thought was going to be the case. And GLP-1 certainly are having a tailwind to our top line. Now GLP-1s, at least for the moment, are a -- they're branded good. And if you think about my comments earlier, branded goods tend to be very low margin in that way. And so while our top line is growing with GLP-1s, they are not a significant contributor to the growth in our profitability as we sit here today. But like I said before, they're important to the patients. They're important to our customers. And we are ultimately compensated on the value we bring to our manufacturers and our customers from moving the products across the board. And we are excited about where that product may go.

Yes. No, for sure. And I think some of the -- some of your -- one of your competitors on their earnings call sort of talked about that GLP-1 in terms of their expectations for their guidance kind of slowing as we turn the calendar year. How do you sort of think about what you've embedded in your guidance for the rest of your, obviously, different fiscal year?

Yes. The simple answer is we have not baked in a deceleration of GLP-1s.

So that's consistent to what we saw in the most recent...

Well, consistent what is really the question, right? Because our -- the back half of our last year saw a spike, right? So an increase in the growth, we didn't have that in Q1 or Q2 of the prior year. And so we're in our second quarter now. And so from a base -- a year-over-year perspective, we'd expect certainly the growth to be higher than our -- the growth over our back half. And then we'll lap that growth from a momentum perspective as we get into the back half of this year. Matt, anything you'd add to that?

No, that's right.

And you should have increasing supply too, which could provide some potential upside in terms of from the manufacturing side into next year.

Yes. It's a great question. And there are a lot of unknowns about GLP-1s right now. The first, for instance, is the payers, the PBMs, what are their formulary choices, right? That's something that we are the recipient of, not the decider of. Innovation will continue around what those products look like as well. And I know others have made comments on supply. We haven't commented on that, but just to state the obvious, if supply were ever constrained, that could impact growth as we carry forward as well. But like I said, we have not assumed a deceleration in our overall guidance.

Got it. And should we think of those margins as being relatively stable regardless of sort of maybe formulary decisions and supply? Is that the kind of right way to say it? I know you said obviously that they come through sort of typical branded margins. But is that -- there's no -- so would you expect any kind of changing profitability dynamics?

I think I would go back to what I said earlier, where we like innovation, and we expect to be compensated for the value that we provide in the supply chain. GLP-1s are still an evolving area and so it would be hard for me to say that nothing is going to change in that respect, particularly given the continued innovation in the cycle.

Okay. That makes sense. And then another area you guys obviously talked about in your first quarter results is the contribution from COVID, right? I think that's mostly coming from supplying vaccine to your -- to pharmacy customers and partners. So how do we think about that as we go through the second quarter? Obviously, a nice contribution. I think you sort of talked about it sort of continuing to increase and then maybe tapering off in the back half of your fiscal year. But that seems to be continuing on trend versus what you were sort of saying at the end of the first quarter?

Yes. Let me offer you a little perspective by starting with what we said on our Q1 results, and then I'll bring it into how we guided relative to Q2. No one knew going into our fiscal year or Q1, starting in July, when the approvals would come for the commercialization of the vaccination. The manufacturers were working hard, the distributors were working hard, but no one really do. We were well prepared to be able to take advantage of the approval when it came. And when it came, it resulted in us seeing a lift at the back end of our Q1, in particular, in September, where we were able to move significant volume from the manufacturer out the door to our key customers, as they were then anticipating the consumer demand for the vaccines. And we were really proud of our supply chain team on how they, with grit, moved that product aggressively in support of our customers. What we said during Q1 was that 1/3 of the profit growth for pharma in Q1 was tied to tied to the COVID-19, right? So you can do the math there on that and how much of the contribution was. And we also said that the goodness was carrying into October, but with the expectation that no one knew what was going to happen once the funnel filled, right? And I'm not here today to provide an update on Q2, but I am just repeating what I said during the Q1 results as we carry forward. The profitability, the impact to Q2, I believe I said would be a bit higher in Q2 than it was in Q1, just given the timing of the fill of the pipeline as we carry forward. But the real gist of this is we view the COVID-19 vaccines as an example of opportunities going forward, right? They're not -- I'm not calling out a specific impact to our guidance, if you will. But with the commercialization of vaccines like that as additional needs arise, right, the fact that we're able to jump on that as quickly as we are as those come down the pipe, well, we view as an opportunity for Cardinal.

Got it. Maybe 2 follow-up questions to that. When you're talking about sort of shipping in September in advance of some of the demand, is the -- we should think about like sort of sell-out dynamics for you versus when the shots are administered as being relatively fast, right? I mean, the pharmacies aren't keeping vaccines alive. So if we think of October being like the peak month, some of those you sold for -- in September might be for October, but probably not like the whole month. Is that the right way to think about it?

I can only speak generally because, of course, every customer's order pattern is different from every other customer order pattern. And indeed, the consumers, their servicing is different as well and how long they keep it in stock or not is -- that's outside of our control. What I was referring to is that upon approval, in many cases, we had the product in stock, and we were able to aggressively ship to fill the pipeline. That benefited September. We commented that. We thought that would continue to benefit October as well. And for the quarter, Q2 would be a bit more than Q1, and beyond that, we're not able to say because, obviously, the situation continues to evolve. What the consumers want as well as how the pharmacies choose to stock, as well as the innovation that comes from the area, all those stories are still being written and so we'll have to report back.

Sure. That makes sense. Okay. One last one on that one. Are you doing all of the major COVID vaccines? And should we think of the profitability, now that it's commercial, should just be typical and similar to other vaccines?

I don't actually know what's typical in that way. Have we commented on that previously?

We have noted that to think of this more as similar to specialty distribution versus historical vaccine distribution, given the complex requirement of the vaccine, how quickly we scaled up. We've made some capital investments and so we're being compensated for the value that we're providing. And we are servicing the COVID vaccines.

All of the major ones. Okay. That makes sense. Okay. Maybe switching away from that and sort of talking about biosimilars. Can you talk about sort of the -- obviously, everyone is very excited about HUMIRA. This year, it's maybe -- it seems to be obviously a continuing situation that's evolving as formularies change and the outlook on that business changes. Can you talk about sort of what has been sort of the key points that have been helpful for you guys in terms of biosimilars on the pharmacy side and maybe help to just talk about the profitability differences between biosimilars on the pharmacy side and then some of the medical biosimilar products that are also sort of continuing to gain market share?

Sure, a couple of thoughts. The first is, as I said before, we like innovation right? We like the choice that it presents to the patients, we are dependent upon the formulary choices that the PBMs and the payers are making in that respect. And that story is still being written relative to the biosimilars on HUMIRA or indeed other therapeutic areas. And so we encourage the innovation. We have built the supply chain to be able to support both the development of it, but then also the movement of the goods from our manufacturers through our network and indeed to the customers. And we're watching carefully the adoption of what that looks like. HUMIRA, I believe, has 8 biosimilars out there that we are supporting currently, and we believe we're in good position to service the biosimilars in additional therapeutic areas. We haven't commented on relative margins here, if you will. That would be a case-by-case basis on the specific biosimilar or indeed the contract with the manufacturers. That's a level of detail we don't go to.

Got it. And is there sort of like in terms of some of these similar launches, is there sort of a sweet spot in terms of number of launches that sort of are helpful for you or because it's such a formulary decision, we shouldn't think about it that way in terms of how the typical like oral, solid, generic launch would work?

I think the only way I can answer that is to observe that providing the clinicians with the biosimilars that are effective, right? That's the key. And we believe that the clinicians will drive the desire for the particular therapeutics based on the need state as a carry forward. They'll have a conversation themselves with the PBMs and then we'll have to have the conversations with the supplier on how are we compensate for the value that we're providing.

Okay. That makes sense. And then how important is like substitutability for you guys in terms of the approvals on certain biosimilars versus sort of just a biosimilar that's maybe not -- doesn't have that equivalent?

I think you're asking me a mix question and I'm going to state the obvious for a second, which is to the extent that we are able to shift our mix to a product which has more volume and better margins, we're happy with that. But it's impossible to say across the product spectrum of how exactly that will play out, right? Because the story is still being written. The biosimilar market is still relatively early days. We believe we are well positioned in the industry. We believe we are working with the right customers. We're talking about winning with the winners, if you will, so that when the formulary decisions are made, we've got the direct access to the product. We've got the supply chain that can move it, and we believe that we're in good shape to be able to do that.

Perfect. That sounds great. Maybe switching over to the medical business for a bit. PPE has obviously been a source of volatility over the past couple of years, particularly with sort of oil-based products. How do we think about the current market for sort of gloves and PPE more generally? And then how do you kind of expect it to sort of trend over the longer term?

Sure. Matt, why don't you start?

Yes. So the pandemic certainly highlighted PPE as an important category for our customers, gloves, mask, gowns. But in terms of our portfolio, it's a smaller part of our portfolio. And so as we continue -- we've continued to return to a normalized environment, we would expect PPE to be a less significant driver for us. So our portfolio is really more anchored towards the clinically differentiated, what we call our specialty medical products. So that's more of a needle mover for us. And so you'll remember, I think we had first noted some demand softness with PPE in Q3 of our fiscal '22. And so since then, demand really stabilized. We've seen pricing continue to come down as we had anticipated. And so we've really returned to effectively normalized margins with PPE. So going forward, we expect -- we would expect it to be less of a driver for us.

One of the nice things about that is we have a relentless focus on executing against the Medical Improvement Plan. And having the distraction of PPE behind us to a degree, right, is important because it allows the team to really focus on the other elements are the key elements, if you will, of the medical improvement plan. And I hope you took away from our Q4 results and our Q1 results that we're making good progress there, right? We had -- we slightly exceeded our own expectations in Q1. We are sticking with our guidance for medical of $400 million for the year. We've been open all along that as we think about inflation mitigation, as we think about the growth of Cardinal Health brand, as we think about simplification efforts, as we think about the growth businesses, there's a lot going on there and we're having good progress. It is a very back-half-loaded profit development plan as many of those things hit, though.

Yes. No, that makes sense. Maybe sort of 2 questions on that. Can you just remind us, I know you guys have commented previously about sort of the oil price dynamic with PPE, too? And then secondarily, can you talk about the shift towards medical specialty and sort of how you think about the portfolio evolution of the medical business maybe over the next couple of years?

Sure. Let's start with the commodities. We are very focused, and indeed, the single largest driver of executing against our Medical Improvement Plan is offsetting the impact of inflation in recent years. And we had -- what we said during Q1 was that we had achieved 70% offset through bringing our costs down and raising our prices tactically and strategically as we can do that. And we expressed confidence that we will have resolved that point by the end of our fiscal year '24, which comes at the end of June. We are seeing some variability. As you would expect, we're running a business day-to-day based on what is happening with commodities or other typical costs. So at the same time, we're seeing the cost of international freight coming down, which is a positive, right? Oil and the derivatives of oil, it has been up and it's also been down. It's varying around. And I guess the comment I would give you, whether it's oil specifically or the derivatives of oil, right, it's baked -- we are, as we say to you today, comfortable that we're addressing the cost variability in our overall inflation efforts, and there's no new news from us in that respect. I think the last part of your question was the portfolio question, if recollection serves. And so if I jump to that, what I would say is we were pleased at our Investor Day in June to announce that we had completed our portfolio review with respect to our pharma business, right? We were clear in our strategy there. We are doubling down in specialty. We are retaining and growing the nuclear business. But at the time, we said the review for the medical business continues. And we are blessed with a very supportive Business Review Committee that works incredibly well with our management team. That review does continue. So we have no news today in that respect. But in coming quarters, we do expect to provide updates on how are we feeling about the portfolio of the medical business. And part of that, I think, goes to the second part of your question, which is what's in or out of the medical portfolio from a specialty perspective. And that's work underway that will come in future quarters.

Got it. And that Business Review Committee, besides reviewing the individual component of the portfolio, could decide the entire portfolio is not correct? Like that's part of the scope of their conversations, too, or is it...

Well, look, it's a committee of our Board that works incredibly well with our management team. And when you have -- when you're operating at that level, the -- it started as an enterprise review. We finished the pharma review, and now we're focused on the medical part of the business. And so I guess the answer is yes, but I want to emphasize that this is work that's been underway for a long time. We are -- we have a great working relationship with the Board and with the BRC overall, and we'll have further updates in coming quarters.

Got it. When you talk about the product cost inflation offset, and I think you partially addressed this in your prior question, I think one thing that investors are still confused about is how those like offsets continue just to increase over the cost of the year. Is it just sort of continuing to, as you said, like cut cost and like pass on price inflation to customers on the medical side? Are you seeing -- are customers still willing to accept price inflation on the medical side? Could you help us break down like where we are from sort of where we are into Q4? Like where are you sort of anticipating those sort of specific medical margin improvement dollars to come from?

Sure.

I can start with that.

Please.

Yes. So Elizabeth, the way I would think about the inflation mitigation is really 2 components. And so you have the gross cost side, of which we've talked about the elements of that are the commodities, the international freight and just domestic transportation and labor costs. So the key piece there is we're assuming the commodities and the domestic transportation of labor remains elevated. It's the international freight that we were assuming is really kind of the driver of what's coming down. And remember, that happens on a 2- to 3-quarter delay because that's capitalized into our inventory and then rolls out as the product is sold. And so we've seen that reflect in our results. That's a key component of the improvement that we've seen in the last couple of quarters, and that will be a continued driver for us. At the same time, we are continuing to march forward and make progress on the mitigation side. So the pricing that Aaron touched on, the sourcing efficiencies, some of the supplier increases that we've taken. And so that's the kind of a continued march forward each and every quarter, and then we'll see kind of the cost impacts roll through as well.

Also, just to emphasize as well, we're committed to -- we're committed to making great progress on that this year. It's a key part of our guidance for the year and hitting the $400 million.

And customers are still accepting sort of price increases? Like it seemed like there was an extraordinary amount that they were willing to accept sort of understanding things that were going on during the pandemic, but how has that changed over the last 6 to 12 months?

I think we can observe without commenting on specific customers that the business is making good progress from a revenue perspective, from a profitability perspective. And let's just call it for what it is, which is in those areas where we had contracts where we could not adjust the price, they inevitably come due. And our customers understand how the last couple of years have played out from our cost perspective and what they have -- and what has been passed on to them or not. And so we have productive conversations with our customers all the time.

Great. And then how has the competitive market changed in sort of the hospital supplies business? Has there been -- I think people are talking about it. One of your competitors had a major shift in ownership and maybe some different changes. Like how has that sort of driven changes in the broader market?

Yes. As a general rule, I don't like to comment on our competitors, right? We have some very -- we have -- there's a diverse set of competitors out there. We focus on what we're doing. And what we're doing is just staying relentlessly focused on delivering on that Medical Improvement Plan, offsetting the impact of inflation, improving the service levels, having the inventory, driving the innovation on the Cardinal Health brand because that will be a key driver of our growth as we carry forward. Really simplifying the business. It's a complex business and we've been relentlessly focused on simplifying it as well. And of course, the contribution from the growth business is the at-home portfolio, which is certainly a nice part of the business to be in as we carry forward.

That makes sense. Maybe sort of talking about -- I think you've sort of talked about this a bit, but like on the M&A side, obviously, Cardinal has, well prior to your time, a mixed history in M&A. Obviously, the capital deployment has significantly, I would say, significantly is a well understatement, improved under you and Jason. How do we think about like sort of where your focus is on share repo? And then like when is the right time to perhaps start to bolt-on as you've said, some additional capabilities in some of these key growth areas you've outlined.

It's a great question. First, on paradigm and then I'll answer the specific question on the M&A. What we laid out at Investor Day is that we're going to have a disciplined capital allocation framework were we're going to tell you what it is, we're going to do what we say we're going to do and that we will revisit every quarter on how did we do against what we said we were going to do. We have a strong balance sheet. We're a AAA -- we are investment-grade BBB balance sheet with -- we just got a couple of positive outlook changes in the past quarter. And that means that -- and we have a strong cash balance. It was almost $4 billion at the end of Q1. So what are we going to do with that money and the access to the resources? What we're going to do with that is, first thing we're going to do is we're going to invest in our business. We believe -- I firmly believe that the best way to long-term shareholder value creation is to consistently invest in our business and find the new pockets of profit growth within our business. And that will be about $500 million of capital investment over the course of this year. We're going to act to preserve our investment-grade balance sheet. You just heard me say we got the outlook, positive outlook. We're in a strong position from a credit rating perspective. So we're not concerned about that. Although we have a maturity coming due, $750 million coming due at the end of this year that we will address. We've also committed that we will have a baseline return of capital, right? And that comes in the form of our dividend. We're a dividend aristocrat 34 years in a row so far of increasing the dividend each year and returning at least $500 million of shares through -- $500 million through share repurchase each year of our 3-year plan, as we announced at Investor Day. The good news there is we've quantified the capital investment for the year. We don't have any concerns on the investment-grade rating. We've raised our dividend as we said we would, most recently in May. We just completed in Q1 the $500 million, which was our baseline share repurchase. So now we're into the second part of our disciplined capital allocation framework, which is, a, are there additional investments we need to make in the business? And we'll talk about those over time as they come up. We are looking for good investments. B, is there -- are there inorganic opportunities which support the long-term growth of the company, and we are looking at those, right? It's not something in the future. We're going to be smart about it. Jason is a former deal guy. Are you ever really a former deal guy. He and I are both deal guys in that way, and we know that sometimes the best deal is the one you don't do. And so we're going to apply discipline to that, particularly focused in specialty and the capabilities that go with it. And then also looking at incremental return of capital opportunities as we carry forward. We're only 1 quarter into our year. We have a lot going on. We're making good progress. We were really pleased with Q1 by having done the $500 million of share repurchase already. Right now, we're looking at what further investment options do we have organically, what further M&A. And as we get further in our year, we'll continue to assess what is our cash balance and should we be returning additional capital to shareholders or not.

Got it. No, that makes sense. As we wind up on our last couple of minutes here, what do you think at this point in Cardinal's evolution is least well understood by investors?

When I joined Cardinal, the comment I heard all the time was that it was the biggest company that no one had ever heard of, right? And I've taken that to heart. I think it's a Midwestern thing, if you will. I'll go back to where I started in our comments about the opportunity I see. Cardinal has got a strong business. We've got -- we have an incredible set of assets. We have an incredible team. And as we execute against the simplicity of focusing on the core of that pharma business, the $185 billion-plus as it is. And what we can do with the capabilities we have and the capabilities we're building, plus as we execute on the Medical Improvement Plan, plus as we take advantage of that balance sheet, I believe that there is a lot of goodness that comes a little bit under the radar screen for Cardinal so far because we are oftentimes the biggest company that no one's ever heard of. And our goal, executing against the strategy consistent with our Investor Day comments, is to really take advantage of all of our assets in a way which really drives the shareholder value creation.

Great. Well, thank you so much, Aaron. It's a pleasure.

Thanks. Appreciate it.