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

Good morning, everyone. My name is Eric Coldwell. I cover pharma services, health care distribution, a broad list of related health care business service-type entities. And it's a great pleasure to have Cardinal Health here with us here today. Before we get going, I'm going to let Matt do some quick -- Matt Sims, of course, do some quick intro. And then Aaron Alt, CFO; and Jason Hollar, CEO, and I will be doing a lot of Q&A. So -- and feel free to send in questions as you have them. So with that, Matt.

Well, great. Thanks for hosting us today, Eric. It's great to be here. So just some quick housekeeping before we get started. We will be making forward-looking statements today, which are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. For a description of these factors, please review our SEC filings, which can be found on our Investor Relations website at ir.cardinalhealth.com.

Great. Well, I had a laundry list of sad questions, but you had a little bit of news this week, small amount. Your -- Elliott, Board member, and their related party have decided not to stand for reelection. So maybe we should just jump in there with a quick update on everything that's transpired here over the last couple of years and where you go from here?

Yes, let's step back, right? It's been 2 years since I was placed as CEO and Aaron came in a little bit after that as soon as I could find the right partner for this. And like you said, Eric, we brought on four new independent directors, almost simultaneously with my appointment. So we have been hard at work the last couple of years. And when you step back and think about the performance, let's just start at the highest level. The financial performance has certainly been strong. When you look at the last 2 years, the cumulative earnings per share growth has been nearly 50%. And the cumulative adjusted free cash flow has been nearly $7 billion. So very strong financial returns, and it's driven by a couple of key components. Yes, the industry has been much more resilient and predictable than it was over the pandemic. But that was only the foundation and the basis from which our performance then began. We had a broad-based set of strategies across each of our businesses to simplify, focus on our core and really lean on investments on some of our most important growth areas. We did bring on these four new independent directors, one of which was Stephen Bard with Elliott, and worked with that team as well as other legacy Board Directors -- Board members to establish the business review committee, where we evaluated our entire portfolio over that period of time. A little over a year ago at the Investor Day in June of last year. We had the first kind of report out that was less than a year in this role and going through this work, and we made some big conclusions at that point. We prioritized on our largest, most significant business, that first year, which was our pharma segment. And I made some conclusions. We took the outcomes business where we were less well positioned than other pieces of our businesses and contributed that to ATS to form a stronger company. We decided to retain and invest in our Nuclear and Precision Health business, just fantastic opportunities there. And then we took our -- the remaining part of our pharma business, and we prioritize specialty organic investments. We announced the Navista creation at that point in time which is a little over a year ago and also reemphasized and doubled down on M&A activity for the first time in quite a few years, and really for the first time in even more years as it relates to the pharma business. And that culminated with our -- the first transaction, the first major transaction that we did over that period of time. That was announced last January with specialty networks closed in March, and is a key component of driving our specialty business going forward. And then at the same time, in January of this last year is when we announced the further conclusion of some of that BRC business review committee work, where we highlighted the retention and the further investments in pieces of the Medical segment, our at-Home Solutions business and our OptiFreight Logistics business. really identifying these areas as key growth areas, secular growth trends, rights to win, and that left us the GMPD business, which we recently made some comments around there around that business as well, highlighting that while we made fantastic improvements, very confident with our plan. We think that there's still a lot of opportunity in front of us. And so we are continuing to execute upon that plan. On track for the $175 million of profit for fiscal '25 and $300 million by '26 million. So that's the work that we've done, that's the high level summary of all the work that we've done, and I certainly won't speak for any of the Board members, but we have accomplished a lot. And it's been 2 years. The BRC has sunset here this last -- just January. So we are now in kind of normal course type of mode where we will continue to always look at our portfolio, continue to look at right now, more M&A than other restructuring. But it will be a constant process where we'll work closely with our Board and evaluate where we go from here. And obviously, Elliott left on great terms in that regard. We believe that it's still shareholders. We hope that they are because we love all of our shareholders. We think this is a great story and that everyone can continue to be successful. But we've accomplished a lot with them and with all the other directors.

Would you say that you've transitioned from fully from defense to offense? Are you -- maybe the baseball analogy of what inning are you in and -- how happy are you with where the company is today?

Yes. I think we made that transition after the first year. The first year, there was a lot of restructuring that we had to do a lot of simplification. On the second year, this last year, fiscal '24, we saw an acceleration of the earnings, a lot of momentum. We were -- each of our businesses, our service levels were fantastic, which drove great customer retention, which drove great revenue and earnings growth. So the business model was working. The simplification was benefiting not only us, but our customers and ultimately patients. So this last year and then we did M&A, right? I think M&A is a sign that we felt common the board felt confident that we could do more than just the organic type of growth of the business, which in and of itself is significant opportunities. But now going forward, I think we can be even more aggressive with that. But we're not going to lose focus on what really made the biggest improvement over the last couple of years, which is focusing on that core business, ensuring our customers have a fantastic experience and that we keep that marching along too.

When we met at your Investor Day, what I think it was 2 years ago now, if I remember on...

June of '23.

'23, okay. So a year, maybe feel like 2 years. It's been one of those markets. But you did emphasize that you were hoping to get back on that path but it was going to be very selective. And basically, you knew you had to get the first one right. So to that regard, specialty networks. Can you -- I think you're 6 months in now since the close. Can you tell us what you did and why you did it? And how is it going?

Yes. So let's just step back from the process. Why specialty networks in the first place? Maybe it's obvious, but what I was very clear about, especially at that point in time, Eric, was that it needed to be in specialty. We weren't even looking at anything outside the specialty business because it needed to be the right area. We needed to put all of our attention on, first and foremost, the organic growth, treating our customers really well. But we were ready for some inorganic expansion, but we needed it to be in the most important part of the growth of the company. At that time, we were a $32 billion specialty business. That's grown to $36 billion in fiscal '24. And we have confidence it's going to continue to grow. So that's a 14% CAGR that we've had now the last 4 years on this business. And so we felt it was the right area to further invest. Why specialty networks is they brought to us really two key things. First of all, breadth of different therapeutic areas. So very strong in neurology, fast-growing area, but also a good presence in GI and rheumatology. But they also brought and was probably even more important to us, a leadership team and a technology stack that could be applicable across the rest of our business. PPS Analytics is their technology. I think that as AI that takes electronic medical records and other data -- medical data feeds and creates actionable insights, both upstream with manufacturers and downstream with health care providers, helping the health care providers not just run their business better, but probably more importantly, provide even better service and solutions to their patients. So that has given us everything we thought it would from an earnings perspective, but also from a capability perspective, using this to now look across the rest of our portfolio. And specifically, I referenced briefly in Navista earlier, which is our organic initiatives to build our MSO for oncology. And we are partnering and building different pieces of it. This is now bringing some technology and leadership capabilities as well so that team that allows us to grow that space even further. So we're very pleased with that and couldn't be happier with really the business, the people, the culture as well as the technology.

I want to step back and jump into something the pharma growth rate. So ex Optum, you came out with fiscal year guidance of 15% to 18% growth. Pretty amazing, right? So breaking that down, $10 billion of net customer wins and expansions you'd still be in that very high single digit to low double-digit growth even if I strip out the good guys, the wins, take out what's left to annualize on specialty, maybe knock off another point or so, but you'd still be a high single-digit to low double-digit target growth rate. And even if I ripped out the GLP-1s, which I'm going to throw out there, let's say, 30% to 50% growth, let's go, hey, wire, you'd still be talking very solid mid-single-digit growth. How are you doing that? Again, ex Optum, how are you doing that kind of growth in this environment?

Yes. Your math, I think, is pretty close to spot on. I'd say maybe you may overestimate a little bit the GLP-1 contribution. We do agree on the percentages, but just given the relative size...

I was actually trying to bring the number down a little because it was so good.

But when you look at that mid- to high growth rates ex GLP-1s, ex new customers, wins and losses, that's fairly consistent with what we've seen in the last couple of several years. And how I break that down is actually quite straightforward. It's -- we continue to believe utilization will be in the low single digits. And while revenue is in interesting and relevant number as we've talked, it's not the best measure of our financial success because a lot of inflation does still permeate through our revenue. And so I think the key difference is that low single-digit utilization, you do need to add several hundred basis points for normal branded inflation because that still remains, by far, the largest part of our revenue, not the units and not the profitability, but in the revenue. And when you add those two together, you get into well beyond the mid-single digits into the mid- to high single digits. So it's just that inflation. And I know at times, I get some questions around, well, is that inflation changing meaningfully. Well, not so much, maybe plus or minus 50 basis points for that core branded inflation. There are things like insulin repricing, there's some biosimilar type of conversion, but that's still relatively small to our overall revenue. And I know one of the further questions then is just HUMIRA and the impacts there. A lot of our HUMIRA business was through Optum. And so that's not going to be so much of an impact for us going forward. So fiscal '25, certainly, we don't anticipate IRA. -- that's a calendar '26 item. So all those items, we don't anticipate being very significant for our business outside the customer wins and losses for this year.

So ironically, one of the larger shareholder holdbacks in the past before this team joined the company and had the roles that you had, was that the company was underexposed in specialty relative to your peers, and that would have included products like HUMIRA, although that's a Part D drug, so not as important, but from a revenue standpoint. And ironically, with your customer that didn't stick with you, that takes away some of the revenue downside risk that otherwise might have come in over fiscal '25 as we see more and more of these Part D conversions, which are going to accelerate. I think there's clear signs from a number of the PBMs that are going this route.

Yes. And again, it's hard to tell exactly where things will go longer term, but in the near term, when we think about that $32 billion in fiscal '23 for specialty growing to $36 billion, what we've guided towards is we anticipate still growing that $36 billion this year, even though 10% of the Optum revenue is specialty, so pretty small percent, but $4 billion coming off, so basically restarting at 32, which means that we have another 12% or so that's implied in our fiscal '25 guidance for our specialty business ex Optum.

Let's shift to -- got to get your other businesses in here. So let's shift to Medical for a second. Probably the hardest question to ask because it's so diverse. But overall, I'm looking for a lay of the land on what's going on in the market, and my setup would be. We've seen some of the MedSurg's distributors in primary care have more challenged results recently, speaking about some general weakness in the marketplace. What I'm seeing in more acute care and other sectors of MedSurg distribution has been maybe stronger than recent growth rates. You have a -- the largest competitor is purported to be seeking an IPO. The Street often fears increased competitive behavior in front of that as companies get ready to come out, if that's in fact the case. Medicaid disenrollment, just a lot going on. What's the overall lay of the land in MedSurg today?

Yes. For -- let's step back and remind ourselves where we have the greatest share in this space. We are clearly overweighted towards acute larger health care systems and ASCs. So ASCs often will be aligned with those health care systems. And so we have the natural ability to benefit from that ASC growth through those health systems. But we also have very strong relationships with the largest IDNs. And so we have that particular -- those spaces of this part of the industry is by far our greatest exposure, the physician offices much lower exposure to that. And so I can't really speak for those that we don't have as our customers. But what I see within utilization of our health care systems is they've been through a lot, right? When you think about COVID and the substantial reduction in elective procedures, that impacted that customer base significantly. And then after they all got through that, then of course, we had the health care professional shortage that further kind of delayed normalization. But when you go back to about 2 years ago, things started to feel a lot more normal. And then that continued to improve for us -- for that same period of time. About 2 years ago, we had -- we're investing heavily in our service so that we would make sure that we could retain and grow with our customers better than we had in the past. And so that improvement we saw over that first year. And then over this last year, and we saw that actually result in the retention of customers and growing with the market, and that's why we had the low single-digit revenue growth that we had this last year, and low single-digit type of growth that we saw in Cardinal Health brand products. So in our space, we see it being much more predictable, much more resilient, much more normal over the last 2 years. But today, we're not seeing any change in that. And that there -- you can see that they're continuing to have a better environment to hiring and having the right staff in place so they can continue to operate their businesses more effectively. And so we think we're in a much more normalized environment.

Aaron, I'm going to try to sneak you in on one, I'll throw a numbers question at you on the profit side. So we came into this year with Cardinal as our best idea. And then, of course, international freight went from about 1,300 a container to about 6,000 a container in 8 months, and that took away a little bit of the thunder early in the year, of course, before we also got the Optum news. You've come back through a lot of that. Stock is up about 12% right now. So that's good. But when I think about this international freight, I think I and a number of investors struggle with the concept of how do freight cost quadruple with no change to your AOI targets either this year or as you said earlier in your prepared remarks, the goal -- the march towards $300 million. So how does -- how do you manage through that? You found additional upside elsewhere. Have you changed how you contract, how often you ship? What's the real driver here?

Sure. So I think it's important to reflect on the fact that our last 2 years of journey with our -- what we now call our GMPD, Global Medical Products and Distribution business has been about building a resilient supply chain and put us in a place where we can actually manage the business versus react to what -- just have to react to what happens to us. And whether it's on the freight costs or other elements, and inflation that touch the portfolio. Steve Mason and his team have done an excellent job of taking a giant step back and assessing, okay, what does our overall supply chain need to look like? Where are we manufacturing, where are we sourcing from what lanes are we using as we're moving the goods around the world because we manufacture and source from around the world. Building the right supplier contracts, and making sure we're not where we can avoid it exposed to spot rates so that we can manage the business smartly. Now it's also important to keep in mind that while the outside world was reacting to this in the moment, we saw a lot of this coming, right? And so indeed, when we provided our updated guidance, we were able to take into account the cost trends we were seeing in providing the confirmed guidance to $175 million for fiscal '25 and indeed we're confirming the $300 million for fiscal '26 as well. And so while there will always be puts and takes as we manage the business, right, we walked into the year with the guide, seeing what was happening with the freight rates by the way, when we -- by the time we gave the guide, it was starting to come down, right? And our commitment is we'll continue to manage the business smartly. We continue to look ahead. And we'll also ensure that we have the right customer relationships so that we don't get holding the bag, the way it has happened in the years in the past. Anything you'd add, Jason, on that?

No, that's good.

So perhaps the takeaway is that we should be cautious not to get overly worked up on 1 data point like that. Assume that you're in the right spot to manage through it most of the time. On the flip side, as those rates have started to come back down. And last I looked, we were closer to 5,000 instead of 6,000. We'll see where it goes.

Maybe one thing I can add just to put it all into perspective...

And that somewhere near where it was.

Exactly. No, that's -- you nailed it. So at 5,000-ish -- and by the way, that's an average over a lot of different lanes and we source, as Aaron highlighted all over the world. That was enough -- so to put it on in the perspective, that was closer to at the peak, perhaps close to $20,000. So from $1,000 to $2,000 to $5,000, $6,000, yes, we don't love it, but it's much more manageable than at $20,000. But here's the biggest difference in my mind. During the middle of pandemic, if we were lucky to actually be able to get serviced by paying $20,000. So we are paying $20,000 per container. We were not able to get the service that we needed. And then we had a whole bunch of detainment fees on top of it because the supply chain was so screwed up. So it's not just the container cost. It's all the other fees, all the excess ground freight then by having product not where it needed to be compounded in a way that as frustrating as even $5,000 to $6,000 is for me today. So I don't think that that's actually what the rate should be. It's what the market currently is at least we are getting markedly substantially better service for that, so we can operate efficiently and effectively throughout our supply chain, which gives us opportunities with other productivity, other efficiency that is as important as this penalty is in and of itself.

So one or two quick hits on medical, and I'm going to shift to your other businesses. Number one, you've announced some investments in new domestic -- I think it's all onshore, maybe some nearshore domestic manufacturing. Help clarify that if I've got that wrong. What specifically are you investing in? When do they come online? What's the benefit to you?

Right. Right. So look, broadly, we often get asked about tariffs and the impact to our profitability profile as well. And it goes back to what I was saying earlier about us creating a resilient supply chain that we're able to source or manufacture the most effectively. And in this particular case, there's been some action around the world, whether it's tariffs or FDA actions, which have created an opportunity for us where we actually produce syringes domestically in the U.S. And so what we called out as part of our guidance, in particular, as it relates to the first half of our year is the fact that we are investing in existing in -- existing facilities we have for domestic production of syringes, which present us with an opportunity to drive revenue and profitability on that basis. It's important to think about that because whereas in previous years, we were somewhat defensively working on how do we optimize. Now we're leaning in and looking, okay, where do we have opportunities leveraging the more resilient network that we have.

Timing?

We -- it's having an impact on us in the first half of the year. And so that tells you it's a -- inter-year benefit to us, but the first half is impacted by some of the manufacturing .

Cost and 1H benefits?

That's all part of our guidance, right? Keep mind, the $175 million is the $175 million. We're not changing that, but it's a contributing piece to that.

Yes. Sounds good. Okay. Other businesses, hard to tackle three very different businesses in one question, but lay out maybe a one liner on OptiFreight, Nuclear and Precision Health and at-Home. And then I think most intriguing, they're growing great. Higher margin, growing well. It doesn't get ironically, the things that are working off and don't get as much attention as the things that don't. I'm hoping they start to get more attention. But what is the single biggest catalyst for each of those businesses? Maybe a one liner around what you do for people less familiar and then the single biggest catalyst as we go into the next 12, 24 months.

Okay. So let me just walk through each of them. So well, overall, they all benefit from favorable secular trends in the industry. So we love the health care industry, but we also love that these are each three businesses that are in faster-growing areas of the market. and we have a right to win and continue to lead in each of these three areas. Yes, they're in the same segment, but they are very individual in terms of their management of that business and the investments that go into them. So let's start with Nuclear and Precision Health Solutions. In the name, Precision Health Solutions kind of tells you what you need to know there. It's riding the wave of Precision Health, targeting with these therapeutics to benefit the patient in a variety of different needs. It's got cardiology, it has neurology, some of the Alzheimer's drugs. But what's really, I think, underappreciated is how much overweighted this whole business is more and more, especially in the Theranostics side to oncology. And that's through the Theranostics business that we've been investing heavily into. This is about $100 million -- over $100 million from '24 to '26, we're investing in Theranostics in the [ pet ] sites that go along with it. So this is a business that we continue to invest in heavily. We see growing quite nicely, and we have a lot of opportunity to grow with -- last year, we grew 20%, a variety of Theranostics business, a variety of products, but one of the ones that really stands out as a [indiscernible]. This year, we're expecting further 20% growth on top of that. Pluvicto is one of the key products that we're driving our revenue this year in terms of incremental growth. And then we have a pipeline of 60-plus additional programs that we think will continue to be that pipeline for us well into the future. On the at-Home Solutions business, this is the secular trend of care more and more moving into the home. So we have a fantastic patient direct business, but also distribution business that services other HMEs other providers. And we see that business growing very consistently over many years, a lot of investment in this business as well. But here a little bit more on the capacity side, the distribution side. We have a nationwide network of 11 different distribution centers, 3 of which are new in the last 12 months. And with that new distribution centers, why that's important is that we're putting in the best latest state-of-the-art technology on automation to improve, certainly, productivity but also to drive worker safety, but also throughput. We can get a lot more capacity out of each square foot through this technology. And then finally, it's our OptiFreight Logistics business. This secular trend is just really all about freight management. When you think about the cost continue to get more and more expensive for the type of courier services that this industry uses for near type of delivery of product. And that becomes more difficult, more costly. And we have some of the best health systems in the world, 17 of Gartner's top 25 health systems are our customers. And it's because we provide a lot of value, but also a lot of insulin expertise into freight management. So these are each 3 fantastic businesses that we think will be small but mighty. There are $4 billion plus in revenue, $400 million plus in earnings. And so yes, higher margin for our type of business, higher growth, and we think will be a nice consistent tailwind long into the future.

So when you said your first move in M&A needed to be specialty. Where does this stack up in terms of your current strategic priorities in M&A?

Yes, great question because we have evolved our messaging. You're leading me to the answer, I think you already know, which is we -- that first year was clearly about specialty. And that culminated with specialty networks. And while specialty remains our highest priority, we have indicated we will consider M&A for these three growth businesses. So what I would call it a secondary priority, but there's such great organic opportunities. That's where we're most focused. But we think it's possible there could be a partnership in there somewhere that would allow us to accelerate that. I think the key about M&A that I would like to stress is that we see M&A as an acceleration of our strategy, but not the driver of it. We are not going to rely on M&A because you can't control it. You can't control what the seller is going to do when an asset is going to be available or not. So we need a strategy, which is why with oncology within specialty why we created Navista. We were not going to be reliant upon a particular acquisition for that strategy. And we'll continue to evaluate our options within the specialty or within these other businesses, but it will be prioritized that way. We -- if you can't tell already, we believe strongly in prioritization across the enterprise to make sure our team knows exactly where we need to put our time and our attention.

And to that point, if I can just add, we have a very disciplined capital allocation philosophy where setting aside M&A, the first thing we're going to do is invest in the business, right? So we're going to spend between $500 million and $550 million in organic capital investments in our existing portfolio of businesses. The good news from a balance sheet management perspective, which is our second priority, maintaining our strong investment-grade rating. We don't have a lot to do there this year because the team has brought the debt down, and we're now within our leverage ratios with Moody, which takes us to our third priority, which I just wanted to emphasize, which was a baseline return of capital to shareholders, And we actually increased our guide for '25. We now committed that our baseline -- or the commitment we've made for '25 will be $750 million of share repurchase versus the $500 million we had called previously. After that, we look at M&A and we go back to the top when we start again. And it's the plan we had last year. It's the plan we've got going forward as well.

All right. 40 seconds. This was going to be a 10 parter, I'll make it a one parter. You guided May 2 to $2.5 billion, give or take, free cash flow. By June 30, you did about $4 billion. What changed?

Blood, sweat and tears and the team working really hard. If you go all the way back to our Investor Day, what we comment was that cash flow was an opportunity for us. And the team worked really hard to deliver on increasing that cash flow. We continue to work on that, notwithstanding the fact that for this year, the cash flow will be dramatically less as we work through the negative working capital from the Optum nonrenewal as we work through an additional payable day out. And importantly, as we invest in working capital in the back half of the year to support that $10 billion of new revenue that's coming on board with new customers and customer expansions in the back half.

All right. We're at time. Guys, thank you.

Thank you.

Fantastic. Really good to see the progress and performance this year. Everyone, please join me in thanking Cardinal.