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

All right. Good morning, everyone. Thank you for going bright and early with us. I am delighted to have Cardinal here to kick off our day. We have the CFO, Aaron Alt, and with Head of IR, Matt Sims, who's also going to keep Aaron online and read off and disclosures.

Thanks, Stephanie, and thanks for hosting us here today. It's great to be here. So just a reminder, during the fireside chat, we will be making forward-looking statements. Our actual results could differ materially from those projected or implied. For a description of the factors which could cause our actual results to differ, please review our SEC filings, which can be found on our Investor Relations website at ir.cardinalhealth.com.

Well said.

Very well articulated. So Aaron, I'm new to the story, but you are kind of as well, right? You've been here for about 12 months and you joined from Sysco. So I'd love to kick it off here, kind of how your path was here and how you found the first year?

Sure. Well, I appreciate -- first, I appreciate you having us on behalf of Jason Hollar, and our entire management team. We're excited to be here talking about the Cardinal Health story giving an update on our progress, we have a lot of things underway. As far as me and the company, I would give you the brief vignette that. This is my fifth public company. It's my third public company as CFO chair, but there's been one constant in all of the companies I've been in, which is significant transformation underway. And what I can see from the outside before joining Cardinal was threefold. I could see a team led by Jason that was very focused on driving change on improving the trajectory of Cardinal Health, a great company that it is that they could see. I could see a strong balance sheet that Jason and team work very hard to position that for success as we carry forward. And I can see a complex business that had what I was looking for, which is an opportunity to drive simplification, prioritization to really drive that transformation. And indeed, now that I've been on the inside now 15 months, not that I'm counting, is that all 3 things have contributed to a great team, a real opportunity to drive the transformation and a strong balance sheet that I hope you're sensing that we are being very good stewards of as we carry forward. From a team perspective, from a strategy perspective, I believe, and Jason believes that if you are constantly changing your strategy, you don't have a strategy. You're reacting to events. And one of the nice things I've noticed is that...

It's kind of knock on the path...

No, it's not at all. It's kind of knock in the corporate world overall, which is the best traders or ones that endure over time. And so what we launched at our last Investor Day last June was we were very forthright here is our strategy. Here's what we're executing as we carry forward. We're going to tell you what we're going to do. We're going to do it. We're going to report back and we're going to do it again. And so our strategy is very simple. It is how do we grow our pharma and specialty business. How do we take advantage of the core fundamentals there and do more with that. And we'll try -- and I'm sure we'll talk more about that. Second priority is how do we execute relentlessly against our medical improvement plan, now the GMPD improvement plan as we carry forward. How do we grow our growth business that are now in our other segment, we have 3 businesses Nuclear and Precision Health, OptiFreight and at-Home that we see significant opportunity for. And indeed, a layer around all of that, the fourth priority is how do we relentlessly provide shareholder value creation by managing appropriately the assets and the resources that we have. So that's really what we're after and what we talk about every day.

As we know, and you definitely know this. No turnaround goes perfectly, right? It doesn't go exactly as you plan. So what -- what in this turnaround do you feel still to come? And what have you had happened thought, "Oh wow, I've thread the needle there.

Right. Correct. Well, I can't take credit for anything. We have a great team, relentlessly executing every day. And what I would tell you is I'm a big baseball fan. We're in early innings of our transformation. We've had - we've made some great progress against key elements. But within the pharma business, as I called out before, we business, which has got significant resiliency, right? We have great industry trends. We have a core foundational business that has strengths that we can further benefit from, but we have to grow it. We have to continue our efforts to simplify, to prioritize to really carry that business forward. And that's not a 1 quarter or a 1-year sort of thing, that's more opportunity that we have in front of us. On the medical improvement plan or the GMPD improvement plan now as well, every quarter, there's something. But the good news is, is that we see long-term success against that program. And against that program for us, it's putting 1 foot in front of the other. And Steve Mason and the medical team have done an excellent job of whatever comes really driving against those core priorities of first, the inflation mitigation, we got to 75% plus mitigation at the end of Q2, really driving the improvement against the Cardinal Health brand velocity. I hope you noticed that in Q1, we called out the positive change in trend there in Q2. We called out the 3% growth in the business overall from a revenue perspective. The first time in 2 years, we saw the revenue growth as we carry forward. And then it's not a thing that we haven't done, but a new opportunity because now we are providing more visibility internally and externally to our other growth businesses at-Home, Nuclear and OptiFreight, with direct reporting to the CEO with access to capital with opportunity for M&A comes additional accountability and responsibility on those teams and all of us to go execute against those plans. And so we have a long runway of things we continue to execute against.

With the best segment name ever.

I am not personally an accountant. We spent a lot of time working on what should the name of that segment be always be told on the last minute by our accounting team that sorry, folks, the SEC rules are, you have to call it other.

So I love that you started with the pharma business because I feel like all we focused on for the past year, I've been looking at your transcripts and it's medical, medical and medical. So what do you think those most underappreciated in the pharma side of the world?

Yes. Well, thanks for that question. We have a lot to be proud of on the progress within our pharma business, but we also have a lot of opportunity. And so the reason why we have made our pharma and specialty business, the core -- the keystone of our strategy, if you will, is really twofold. The first is, as I referenced earlier, the business is incredibly resilient. We see good underlying trends, right? Prescription demand is a positive for us. And when you see that, we have opportunities to carry forward. Innovation is across the industry, and you need look no further than GLP-1s or other categories of innovation within the specialty area to know that because of the essential role we play in the American health care system, where we have a role in driving that as well. And so the underlying fundamentals of the industry in which we participate are positive. But then you look at our portfolio overall, and we have an incredibly large core [ PB ] business, but we have a specialty business which has been underappreciated over time. And to be clear, we're behind some of the other players from the amount they've invested over time in that area. For us, that's opportunity. And so we look at the specialty business, which we disclosed at our Investor Day was $30-billion-plus of direct specialty sales. And we believe we have a path to dramatically increase the impact of that higher margin part of our business on the profile out of the enterprise overall. And so it's going to come from how do we reinforce the existing capabilities? What does our supply chain look like? What do our partnerships with key retailers -- sorry, with our key customers looks like. Is there opportunity for M&A? I hope you noticed the recent announcement of the acquisition of Specialty Networks, that gives us additional focus on rheumatology, gastroenterology, urology parts of the specialty space where we had a presence, but we weren't terribly strong. And so we look at all of those things as being opportunities to drive the [ pharma ] business as we carry forward. And I left one thing out, which I want to mention, we also take great pride and great focus on the fact that we are partnered with strong customers, the likes of CVS and others that we believe the combination of what we have and what we're building and their own capabilities will really set us up for success as we carry forward.

I want to pull on that specialty thread because when people talk about specialty and distribution, we almost always just talk about oncology. You did have the Specialty Networks acquisition. Are you built up on all the specialty focused on oncology or the other specialty most exciting?

Yes, it's a great question. The conversations inevitably do what you just said, which is oncology on the 1 hand and the other ologies. And our view partly because of the strength of our portfolio is the other ologies are as important as oncology is, right? Oncology is about 40% of the industry. The other 60% is where we have historically played more rheumatology, gastroenterology, urology, nephrology, allergy I could go on. And there are individual parts of that portfolio, which are attractive even within the umbrella of the other ologies. And so part of our strategy, leveraging both that, which we have that -- which we're already strong and driving our investments as we carry forward is how do we double and triple down on ensuring that we maintain our strong leadership position in the other ologies, right? You saw it. We did an acquisition a number of years ago, Metro Medical, which really put us in place in that area. It's now been -- it was been followed up by the Bendcare GPO acquisition and our investment in their MSO, which gives us more of an exposure on elements of rheumatology and now it's been followed by the Specialty Networks acquisition, which will not only give us access to the 3 ologies, I called out earlier, but it's actually a platform. It's a GPO plus platform that also has excellent technology services that practice enabler as well as a key partner to suppliers that we think will be a great platform to help us drive further progress not just in the 3 ologies it's in, but in an already defined pipeline of additional therapeutic areas that we'll be entering once that transaction closes.

So should we think of the future ologies as more of an organic basis now? Or are you still looking at other opportunities on the Street?

We've been very clear from an M&A perspective. I think that's where you're going, from a capital allocation perspective that our first priority is to invest organically in the business, and we'll spend somewhere between $500 million and $600 million each year in CapEx into the business, focusing on the pharma business, in particular, in specialty, in particular, within pharma. But there's only so far you can go from an organic investment perspective. And so after we have made those organic investments, after we've protected the balance sheet after we have returned the committed level of capital to shareholders, our dividend and the 500 base share repurchase, which, by the way, we've already got behind us at least for this year, then we'll look at additional M&A. Specialty Networks is the first great example of that. We expect to be -- we expect to continue to be smartly active in the M&A world. And my hope is that as we carry forward certainly within pharma, certainly was in specialty, whether it's oncology or other areas that we believe we'll have further opportunities there as well.

So your season better in 15 months. If we look 5 years out, what do you hope the specialty business look like?

Yes. Five years on, I hope we've done exactly what we said -- what we've told you we're going to do, starting with Investor Day and then carrying forward where we have a growth engine in our Pharma and Specialty business. I would expect that we'll continue to grow the core pharma business because we are -- we have an essential role in the healthcare system. Our job is to take the product and get it safely, securely and efficiently from our suppliers all the way into the patient's hands, so that the appropriate level of care, can be managed. As part of that, I would -- I don't hope I know that in 5 years from now, we will have increased our presence within the specialty portfolio that will have the appropriate and right impact on our underlying economics as a result of moving more overtly into a higher-margin part of our business, both in oncology and in the other ologies, because, as I said earlier, our focus isn't just on Nuclear. It is our oncology rather isn't just on the specialty areas, our focus is on how can we succeed -- how can we do more in each of those areas, of course, in partnership with the Nuclear business, the at-Home business and the OptiFreight business, I don't want to lose sight of those. They are a smaller part of our portfolio. They're in the other, but they are key parts of our growth plan as we carry forward. And you'll hear us talk about more about those as we carry forward.

Can we touch on the rest of M&A and Navista and where that business can go?

Matt, clarify for me, you are talking about Navista and...

Navista network.

Sure. So we launched the Navista network formally at our Investor Day last June, and it is a labor of love. It is a heavy lift. We are -- we have not had a as strong of a position in oncology as other players have been in Debbie Weitzman and the dedicated team within the business focused on oncology has spent the last several months working directly with our existing customers' oncology, working directly with suppliers and other key partners laying out the strategy and now executing against building the network itself so that we are now in a place where we're going to specific customers and talking about here are the advantages of working with Cardinal and the Navista Network versus being acquired or being aggregated as some of the other models are out there. Our promise -- our approach is not to run someone else's playbook, right? The world doesn't need another aggregator per se what they need...

It's very trendy thing to do right now.

Our view is to be successful. We have to run our own playbook not others. And for us, that is serving the community of independent oncologies that weren't getting -- haven't wanted to be acquired or aggregated by others. And so by ensuring that they can get the same access to the services, whether it's distribution or back office services or revenue management services or access to the clinical studies that are the promise of some of the other models. And we're impressed with the work the team is doing. There is still a road map ahead of us to get there, but we're making good progress.

Amazing. I know drug pricing isn't as relevant as it was in maybe some prior years for your model. But I'd be remiss not to ask about that, especially with an election coming up. I have a lot of folks often ask, is there a risk in the U.S. with an election and maybe drug prices coming into focus?

I want to ask Matt to talk on pricing, then I'll maybe a follow-up on a couple of points.

I love that.

Yes, sure. So overall, nothing really new or different to call out with drug pricing. So if we start with brand, as a reminder, that branded manufacturer price increases has become less meaningful to our business over time, but that is primarily concentrated within our fiscal Q3. And so the assumption embedded within our guidance, again, just as a reminder, is that we would see less contribution from that. As I recall, last year, we called out a modest benefit last year. So we're not assuming that, that repeats here in our fiscal '21 guidance. But importantly, that's trended consistent with our expectations. And so that has been on track and consistent with what we were anticipating. On the generic side of the house, again, we continue to see consistent market dynamics there. And so for us, we focus on the buy-sell spread and managing that. That continues to be in balance. And so that's our continued expectation. You asked specifically about regulatory reform. We get that question a lot as it pertains to IRA. Of course, as there's advanced notice, that's always helpful for us. But overall, it comes back to -- we're very confident in our value proposition in the critical role that we provide in health care. And we have a long history of adapting our business model and working through any changes that come our way. And so we're very confident that we'll continue to be compensated appropriately.

Yes. The one thing I would add -- let me add a couple of things to it. You've heard me reference our role in the health care ecosystem. And a key part of our role is to safely, securely efficiently move the goods from our suppliers to the patients who are in need, right, from a prescription perspective. And part of that is supported through our Red Oak network, which has a dual mandate of making sure we have access, right? And all of our customers have access as well as keeping costs down. And so we are supportive of innovation. We are supportive of access at the right cost to the patients and believe that history has shown that our business model is designed about how do we ensure just that safely, securely, efficiently, giving patients access to the core and innovative products within the industry.

Touching on those 2 topics, both regulation and Red Oak, the FTC does have an investigation right now on generic shortages. How much of that is risk to your model versus maybe an opportunity for Red Oak?

Yes. I go back to where I was just starting to go, which is with our mission to safely, securely and efficiently offering, getting the goods to where they need to go. And in partnership with CVS through our Red Oak platform, which we believe has the largest scale in the industry, we're actually supportive of what they're after, which is keeping costs down at the same time, ensuring access, right? We aren't in control of the overall ecosystem, right? Reimbursement decisions are being made elsewhere in the ecosystem, and that certainly has a role to play. But we intend to be a productive part of the review of what's underway. And certainly, we're responding to questions like others, but believe that with our presence, with our scale, with the Red Oak partnership, so long as we continue to ensure the drugs are available and get there and get it at a low-cost place that we -- that it is certainly an opportunity for us.

It almost feels like unfairly targeted, right, because you touched so many parts of the ecosystem and not the price tag...

Yes, this is -- this is a complex area where, I mean, certainly, me being new to this part of the industry, I knowfirst hand how complex it can be. And there's a lot of education and understanding that we need to ensure is happening across stakeholders across the health care and government ecosystems.

As long as we're in a hot button topics, just going to ask you about Optum.

Sure. I hate to disappoint, but we have nothing new to say about Optum today. But I will reinforce a couple of key things that we've said, which is Optum has been a great long-standing customer of ours. And we believe that we have to earn our business every day with each of our customers. We take pride in the fact that we're partnered with the large customers across the ecosystem, and we intend to retain the business. Like I said, nothing new -- otherwise nothing new to say today.

Well, let's put it this way. I'm new to covering the space, right? Are there large contract renewals in the past you can point to and say, it's like inertia or it's the fact that you've been a good partner to these folks as cause these renewals?

Well, the renewals are, like any distribution business, right? Renewals come in cycles and particularly with large customers, of course, we pay attention to what they look like. And we have -- we don't spend a lot of time for obvious reasons talking about individual contracts when we have a larger contract, we will generally let people know when it's been renewed or not. But I want to focus not on the one contract but on the ecosystem, which we're offering because if I go back to what I said before, we are partnered with a number of large providers out there. CVS being a good example, and that contract has several years to run, has been renewed every time. And so there is a natural ebb and flow of those conversations, the renewal cycles, they are what they are. We view them as growth opportunities because while there's always a lot of focus on are you renewing a particular contract on what terms, you have to keep in mind is as long as we're consistent with our core message of safely securing efficiently, we're going to have a role, and we have the opportunity to not just renew but to grow with our customers across the board.

You've got about 5 minutes left. Should we talk about medical? Should we go back to the topic, I pointed out...

I'm always happy to talk about the medical. Our team is doing a great job of executing against the medical improvement plan. Some of the highlights that we talked about during our Q2 results have been true over the last several quarters as well, which is -- look, let's go back to our core guidance for the year. If you set aside our resegmentation, and I want to touch on that for a second, if I can, before my time expires. Before we did the resegmentation, what we knew was we had a $650 million goal -- profit by '26, which is driven by a couple of key levers. The first lever was inflation mitigation. Our medical business was disrupted during COVID by a variety of industry factors, including the global supply chain disruption. It was -- our business was disrupted by the fact that we had essentially fixed price contracts. So our costs were escalating, but we couldn't pass them on, right? The team has spent the last 2 years working through that, and we are very proud of the team and the progress they have made relative to renegotiating our supply arrangements, renegotiating our customer arrangements, so that we are not caught in the middle, and we're able to respond both now and in the future to whatever happens from a cost structure perspective. Our guidance for the Medical segment was, we were very overt, it was a back half loaded plan. Now we're in the back half, Q3 is coming. I work with -- stay with me here. And so that's because we knew we would start to see the benefit of the inflation mitigation efforts that we have been launching over the last couple of years. We've referenced that we could see 75% of our inflation mitigation progress at the end of Q2. And that carries through to 100% by the end of Q4. And here's a little bit of the why. Because we're a global manufacturer and distributor as well as a distributor of other national brands, there is a time gap between when we incur the cost, and we recognize the cost. We actually have to sell the goods before we recognize the goodness that comes from the lower cost. And that's starting started to happen in January, right, from an overall timing perspective, speaking broadly. And so as we look at the back half of our fiscal year, which we're now in, we expect the impact of the inflation mitigation efforts the team has been taking over the last couple of years and several quarters to really start to be more visible from a profitability perspective. The second part of that plan that was also are making progress against the Cardinal Health brand, right? The Cardinal Health brand portfolio of brands that are our own brands effectively, it's a more profitable part of our business. And so as we return that part of the portfolio to growth, right, we have more opportunity to drive the profitability up and go back to what I said earlier, Q1 change in trend, Q2 growth in revenue, right? We start to see that in the back half. When you mirror those 2 -- when you add those 2 things to the simplification efforts we've had underway, which is simplifying how we operate, the number of countries we're in, what's the model look like? How do we increase the profitability of how we operate? Are we in self-manufacturing, are we contract manufacturing? How are we managing our inventory flow. It's a complex part of our transformation that's going on large in the backroom. We're really starting to see the benefit of that. And those 3 things together drive the progress against the medical improvement plan, what is now the GMPD plan. And so if you're good, I'll go there for a second, which is in January, we announced a resegmentation of our business. We went from pharma and med to now we have pharma and specialty as one segment. We have our Global Medical Products and Distribution business, which is our second business. That is a subset of our old Medical segment. And we created a third accounting segment, which is the aggregation of 3 businesses that were individually report directly to our CEO, Nuclear at-Home and Opti. "Why is that important to you?" What's important to you is that we are driving visibility and accountability internally and externally against our business plans and against our progress against those plans. And for the first time, starting in January, certainly our future earnings and reinforcing that in our Q3 earnings, which are coming May 1 or May 2, we're providing incremental levels of the tail on the Global Medical Products and Distribution business. What you know now is that, that business lost $165 million in fiscal '23. What you know now is that, that business is going to hit $65 million or so of profit in this fiscal year. What you know now is that we have a $300 million target on just that subset of the business by fiscal '26. It's about equal distance between the loss in '23 and the profit in '26. What you also know now in my closing comment is you also have more visibility to those individual growth businesses I've called out a couple of times, Nuclear, at-Home and Opti. So overall, we're super excited about the portfolio. We've made an incredible amount of progress and we're looking forward to talking about it again in our Q3 earnings call.

I'm looking forward to it. Thank you so much for joining.

Thank you. Thanks for having us.

Thanks, Stephanie.