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

Good to go. Great. Good morning, everyone. My name is Eric Coldwell. I cover pharma services, health care distribution and related industries for Baird. And it's a great pleasure to have Cardinal Health with us here today. On stage with me, Jason Hollar, CEO; Aaron Alt, CFO; and of course, Matt Sims, who leads up Investor Relations. And we're very excited to have Cardinal. This has been a lot of fun for the last few years since you joined. And officially, I had a few best picks for the year, but officially, Cardinal was my top idea for 2025 and...

Well, we enjoy making you look good.

Thank you for making me look good. I needed some help for sure. I'm going to let Matt take a couple of minutes into disclosures, and we'll just jump right in.

Perfect. Well, thanks for hosting us, Eric. It's great to be here as always. And before we begin, just a few reminders. So 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 IR website at ir.cardinalhealth.com. Back to you.

Great. You guys finished the year on a really strong note. The Street didn't read it the same way I did. I think maybe there was a little jubilation coming out of Investor Day and then kind of sell the news for a hot second, but it was a great finish. And I want to dig in on a couple of topics quickly at a high level. Revenue growth, fantastic ex Optum. Of course, that annualizes this quarter. You had some M&A, you had some GLP-1 growth, you had some net new wins, a lot of moving pieces. Aaron, maybe this is for you. I'm just hopeful you can walk us through some of those building blocks to get back to your organic growth rate, which -- Jason, whoever wants to takes it. Talk about organic growth, same-store, what's the real underlying metric on top line? And then how do you think that stacks up to the market?

Yes. No, thanks for having us, Eric. I'd like to jump in on that one because it is an important part of our story as an enterprise. If you think about the Pharma and Specialty Solutions segment, it's by far the largest, most significant part of our business. And let me just kind of address your -- kind of the lead in that you highlighted there, I think, is important to understand just Q4 and the year-end is that we did have our Investor Day in June just a few weeks before the end of the fiscal year. And then, of course, we just finished up our reporting and all that just a few weeks ago. So not a lot of new information to be provided today, given all those opportunities. But the stock has been very strong over that period of time. We have been very pleased with the underlying operating results that have driven that. And of course, a very clear strategic message, I think investors really appreciated in the transparency we provided at Investor Day. As it relates to your question around the growth of this large important segment, yes, it was very strong. It's 22% ex Optum, and that shows the broad-based strength that we've seen throughout our business. The underlying utilization was strong across the enterprise. So there's an industry aspect to it. But there's also a specific aspect where we had $10 billion of incremental new business that came online more in the second half of the fiscal year, which now carries over to about $7 billion for the first half of fiscal '26 until you get to that anniversary point. So that's being driven across the business, but it's also being driven with -- it doesn't impact revenue a lot, but certainly, generics is an important profit contributor for us and one that was also strong. And then specialty, which is important from both a top line and a bottom line perspective, we saw yet another year that mid-teens type of percentage growth rate when you ex out for Optum. And that just demonstrates that we're investing in the right areas, growing the right areas, winning with the winners, but also making the appropriate investments. So we're really pleased with that broad-based strength, and it's driven organically, but also through the investments and also through some of those new customers.

And if I remember, specialty has been growing at about a 14-plus percent CAGR for the last 4 years, 5 years.

Now about a $40 billion business, and this last year was a little touch higher than that as well. And that's why when people ask us about IRA redesign and other aspects, are they -- is it driving some of this revenue and maybe a little bit. But because of the breadth into areas that are less impactful from that plan participants behavior because the price points are lower likely in generics or the fact that specialty has been consistently high that we don't see the growth rates changing a lot as these policies change.

If we shift from revenue to operating income growth, I think reported was around 11%, but you did have the last quarter to comp the Optum transition. Aaron, you highlighted some maybe unexpected heightened expenses, a little bad debt or some vendor changes. You can talk about that if you want to go into details. But you highlighted a few things that popped up at the end of the quarter that I'm not sure if it was truly an anomaly, but certainly an elevated period compared to what you were expecting. You back those 2 out, I come up with at least 18% operating income growth. I don't know if your math is in the same zip code as mine. Maybe you don't want to respond to that. But I am hoping you could parse what happened at the end of the quarter that was perhaps a little bit of a surprise versus your thinking at Investor Day and then how that plays into fiscal '26?

Sure. Happy to do it. I want to start with repeating something Jason said, which is we saw strong demand, right, in the quarter and indeed across the year end. I know it's not lost on any of you that in a year in which we had a transition of our second largest customer, our largest business for the quarter still delivered 11% profit growth and for the year, delivered 12% profit growth. Now you correctly called out that we were at the bottom end of the range that we had called at Investor Day, 3 or 4 weeks earlier. And frankly, what that was, was at year-end, we're a big company. And usually, these things net off each other, and we were, call it, about $10 million off of what we thought we would be. It was a series of individually immaterial items that added up like bad -- some bad debt adjustments, a couple of other contract settlements. And so we go back to the strength of the portfolio from a demand perspective and the progress that Debbie Weitzman and team have made around operating that pharma business really gives us a lot of confidence. And that's why -- in part reflecting on that is why we actually raised our profit guide from what we had said earlier at Investor Day as well, and we took pharma up to 11% to 13% for fiscal year '26 and you know that's based on the nonrepetition of those items as well as the continued strong demand environment.

All right. That's one of the boring growth question. All right. We'll see if I finally ask something that no one else asked at all the other conferences. So you have another large customer. And in the last several years, your organic growth with that customer has been mid- to high single digits, 7.5% CAGR, I believe. And this year, it was 23% your other competitor who shares that account went from a 16% plus growth CAGR to slightly negative in the same year. What's going on here?

So you're talking about CVS. So let's go ahead and just make sure we're clear about that. And I'm not going to talk about the other side of it. We have a great relationship with CVS. Of course, we have a number of partnerships, whether it's Red Oak Sourcing on generics or Averon on biosimilars. Our growth has been pretty consistently quite strong with them. So again, I'm not going to speak to why it would not be as strong in other places. But with our portfolio and where we focus on our support of that customer, it's largely within the retail side of their business. They've benefited like all of our customers have. We're not giving any details on CVS, but all of our customers have benefited from GLPs. All of our customers have benefited from store closures of non-Cardinal Health customers. When you think about some of the reductions that happened with some of the large chains, our customers have not had quite the -- CVS had some closures a couple of years ago, but in the more recent past, they've had a lot fewer of those. So we and CVS have benefited from that broad utilization strength, but there's nothing to call out in terms of dramatic shift in the scope of our relationship with them other than just the ongoing growth of these partnerships.

So I didn't know if it had possibly anything to do with what they're doing in biosimilars was Cordavis or just your overall Red Oak relationship.

Well, again, in terms of the scope of biosimilars and how that's supported, that's not any different other than again, we have Averon on the sourcing side. Speaking broadly, not about CVS, but about the industry, there are revenue reductions as branded products go to LOE with biosimilars. So there are instances where price per unit does reduce, just like with generics and branded products for the generic. So that is an element that would impact us less in that relationship than our competitor.

Yes. Fair enough. And then let's talk about your MSO strategy. You have recently announced another deal with Solaris Health. That is a leading urology managed service organization. I'd like you to -- 1 or 2 lines on what it is, what it does, why you love it, and it's not in guidance yet. So remind us when you think it's going to close and then I'll jump into a couple of maybe impact to questions after that.

Well, we anticipate closing by the end of the calendar year. It is a urology-focused MSO managed services organization that covers over 750 providers throughout the United States. They are the leader within the urology space. It is a very fragmented therapeutic area, so still talking less than 5% share of the overall market, largest, but a very fragmented market. That's very attractive to us to be able to get in relatively early in the consolidation within this therapeutic space. Why we -- the services they provide are similar to other large-scale MSOs in terms of not only the back office, but more of the -- more complex type of support for those physicians. What we like about it is it fits very neatly tightly within our stated strategy. We're not accommodating or adapting the strategy for what businesses and partnerships are available. We are starting with our strategy and then prioritizing those areas, those partners that best accommodate that. Urology is a space that we love for a lot of different reasons. To start with, there's a lot of similarities between the needs of those physicians and autoimmune where we are the leader with GI Alliance and the specialty alliance already. So there's a nice fit across the different therapeutic areas between autoimmune, even some of the ancillary services, you think about pathology, anesthesia, diagnostic imaging, all these types of things, in addition to all the back office HR, IT, finance support, revenue cycle management. You can get into specialized similarities that we are going to take Solaris Health and combine with Urology America and the other additions we've had in urology. And that will create some synergies, but there will be some synergies more broadly with the rest of the specialty alliance. But the additional reason that we really like urology beyond all that, and I would call that kind of the first order synergies and what we would include in a business case when we evaluate it. There's a lot of option value as it relates to urology because we do lead in many key areas of the space. Think about our expertise in nuclear and radiopharmaceutical products with our nuclear position health business. We lead in oncology and in urology. Our at-Home Solutions business is the leader of medical supplies being delivered to patients' homes and then, of course, specialty networks that actually originated in urology and is by far the leader in that space. Interesting anecdote about Soliris Health is while we don't support them today from a distribution and GPO perspective, we have a long relationship with them with specialty networks and PPS Analytics. It's a key partner customer with that business, and it helps bring all this together. So it's a space that continues to be important for us, and we love urology, but we absolutely love the partnership we're going to have with Solar's Health.

So it seems like you're getting some solid accretion from other deals done in the space once they've onboarded. This still hasn't closed. It's not in guidance, you did say that once it closed, it would be slightly accretive in the first 12 months. Is there a different dynamic to the onboarding, the ramp, the multiple paid? Is there something unique about this that would prevent it from becoming as accretive or driving the kind of upside you've seen from some of the other deals?

It's a great question. We have high hopes for what Solaris will bring to the specialty alliance overall. I would point out, it's our practice, and this was true for GIA as with GI Alliance, when we announced a transaction as well. We don't provide specific guidance other than to signal the relative accretion upon flows. There are a couple of further thoughts. First, we do not assume that we will take on the distribution when we're doing the deal, right? As Jason referenced, we are not the current distributor for Soliris. You all noticed in our last earnings call in Q4, a couple of weeks ago, we did acknowledge the -- that we were picking up the distribution and provided the timing of the distribution on GI Alliance and the oncology part of our I&O business. And so we will, of course, put our best foot forward to seek the urology distribution as well carrying forward. That's not in the accretion math. Similarly, because Solaris is the second large platform acquisition we've done in the specialty area consistent with the strategy we called out 2 years ago at Investor Day when we talked about really focusing where our strength is and the other ologies in driving the diverse revenue streams there, we are being careful to not be too declarative on how are we going to put Soliris and GI Alliance, and how will the cross synergies across those platforms come together going to be very about how we do that. So we'll provide more context on that as we close the deal and then lay out our plans as we carry forward. But we did want the investment community to understand that we were doing a very strategic deal for us in the urology space consistent with everything we had said, that the deal would be accretive in the first 12 months, and we're going to, of course, go looking for additional opportunities to drive value creation as we have across each of the pieces of M&A we've now done in the last 2.5 years.

So Aaron, in terms of your philosophy on guidance around special events like this, maybe you're building a bit of a reputation for being very conservative and modest with your view. I know you haven't included distribution a couple of times now. Are there other things you haven't included? And you mentioned a few, right? You're just taking it easy with the integration path, but are there other things that you just philosophically don't include when you have a novel event like this and you lived off until it happens?

To the philosophy point, we are very careful to tell you what we're going to do, go do it and report back. And of course, while we're doing that, always looking for how can we do more with the assets that we have on the assets that we acquire. When you're going through any M&A process, of course, there, you're digging deep into that asset itself, and our team is working incredibly hard right now to both understand how this -- what Solaris will look like in partnership with new alliance, but also to point Jason was making earlier, to really unlock those additional opportunities. And with us acquiring Solaris and then on top of Urology Americas, on top of Potomac urology, on top of Prime and the other acquisitions we've done, right? We really are the leader in urology. And so part of what we're working on now from an integration planning perspective, and Debbie Weitzman is personally responsible for making sure that we deliver this. Jason's direction is how will we do more with the broader assets, and that will become more clear as we bring the specifics once we close the deal, which is I think Jason referenced it, and we're hopeful for a by calendar year-end close.

Fantastic. Part of me doesn't even want to ask about global medical products and distribution because it's only low to mid-single digit percent of your AOI. If I don't ask, I'm going to get in trouble. So I have to do a few questions. I'll make it easy and quick. Cardinal Health brands, part of your strategy is to increase the penetration of brands. You've rolled out a number of new proprietary products that you've, I think, proudly presented at Investor Day, and you've had some good traction with those. With 6% growth last quarter in brands, where do you see this going? Give us an update on where mix is of brands versus services? And tell us what's going to continue that momentum or will it continue?

Yes. Well, we've been pleased with the lack of surprises in this business other than tariffs, of course, which is something well out of our control, one that the teams manage very adeptly to mitigate the vast majority of those impacts. The underlying volume growth of Cardinal Health branded products has been quite strong, 5%, 6% each of the last couple of quarters. So it highlights the work that the team has done to really focus on the core operations. Our service level, think about it, all these supply chain challenges, including tariffs, very, very recently, where we're having to resource and move product to different product flows, our service levels have never been higher in this product line with our -- this business. So the team has done a great job of delivering high-quality products on time to our customers in a time of a lot of uncertainty and change in the supply chain. And that is what's necessary to be able to grow your own products. So that is table stakes. That's what we're focused on. And our long-term plans are anticipating continued market growth in the lower single digit, 2% to 3% range. What we need is slightly faster growth than that, a point or so. And then that combined with our simplification work allows us to reduce our cost, to be more efficient. And the combination of those two items gives us the confidence that we can grow that business about $50 million per year in profitability over the life of the next 3 years, and it's still got a long runway of opportunity in front of it.

In this space, you have one large private competitor that's very broad. You have a couple of public competitors that have maybe a bit more of a niche. Both of those competitors are for sale or seeking a strategic alternative, let's leave it broadly at that. What does that tell us about the space? And do you get any benefits from disruption as 2 of the larger -- the biggest nonacute player, the third biggest acute player are both going through these.

Well, I do believe we're the most predictable stable business in this industry right now. And that is not bad when you're talking about working with potentially new customers. We're focused on our current customers. It's a lot that we can still do to help them. What you're describing, again, not speaking for others, is that the competitive dynamics in the space I don't believe are any different. I think what is different though over the last several years, it's just been a challenging part of the industry because of the supply chain. This is a deeper, more global, more complex supply chain than the rest of our businesses. And with that comes -- with the supply chain shock comes additional actions and the variability that you just haven't seen in other parts of our business. So that is unique and that has created an environment where we all have to work harder for the same level of output that comes at. So it doesn't surprise me that there's more activity in this space. But our focus continues to be -- and when we completed the formal part of our portfolio review about a year ago, I say formal because this is healthy for every organization to always look at their portfolio. But when we completed that and the last piece to complete was the GNPD part of our enterprise, and what we said there is that what we're prioritizing the transformation of this business. We were just coming out of losses, pretty significant losses in this business, so we didn't have a lot of optionality with it. But the reality is there's a lot of opportunity for us and for our customers to still drive the improvements that we laid out within the GMP improvement plan, and that's what we're focused on.

And importantly to that point, we're very pleased with the progress that the team has made in driving the plan with the Cardinal Health brand growth, with the continued classification, with the mitigation of tariffs, with everything going on to see the dramatic improvement of profit in GMPD as well as the improvement in their cash flow. It speaks well of our efforts to put 1 foot in front of the other and continue our overall value creation efforts through that transformation plan.

Now on an exciting note, and I think Matt and Dustin and the team did a great job with Investor Day, you really probably more than ever started to shift the conversation to some of your diversified businesses. And people have been so focused on generics and biosimilars and MSOs and tariffs and what's going on in GMPD. And I think they've lost sight or maybe never had sight of Nuclear and At Home, OptiFreight. These are some really cool businesses; high growth, 3% of revenue, 20% of AOI, high margin, great outlook. I'd like to help you help others continue to understand these diversified businesses. So maybe if you want to take a second and give a one liner on each one, how it stacks up in the marketplace, just to help frame that, and then we'll dive into a couple of questions.

Thanks for the question and the opportunity to talk about these fantastic businesses. These are our other growth businesses, Nuclear, At Home and OptiFreight. And yes, I think the IR team did a great job telling the story as to why they are impactful and important. You should step back, it's been about 1.5 years now since we broke them out of their larger segment parents, if you will. And that was a starting point to give us the opportunity. Now let's be clear, we did not break them apart so that you would have better visibility. It wasn't some type of financial engineering here. We did it to give them the light of day, the very clear leaders, these 3 operating segment presidents that do directly report to me get the more access to the senior leadership and the resources of the enterprise, organic and inorganic, that they would have had more difficulty being able to achieve that type of flexibility, that type of speed, that type of access to capital if you're buried deeper in the organization. That was, as a result of that, the formal business and portfolio review. So it wasn't all about looking at should something be sold. It was also about, where do we need to lean in and invest in. And that's what we did with these 3 businesses. So each of these 3 businesses are in the faster growing parts of the industry, secular trends that are advantaging these businesses. That's more broad from the industry. And each of the 3 are the leaders in the respective part of the industry. So that is the profile of the businesses that you want to support more and then provide more investments. So then as a result of that portfolio review, we gave more investments to each of the 3 because of their leadership and in the right secular trends. So what do they do? At Home solutions, this is the business that is the only scale provider and distributor of medical home supplies directly into the patients home, roughly balanced type of revenue on both sides. A broad array of different product lines. And this business is differentiated because we are, by far, the best at what we do on the distribution side from the legacy Cardinal Health at Home solutions business and then with ADSG and that acquisition, they are the leader in patient acquisition and customer service. So we're taking the best of the best approach there, and it's a fantastic combination because of the strengths of both sides. Within our Nuclear and Precision Health Solutions business, leader in nuclear radiopharmaceutical isotope manufacturing as well as pharmacy distribution, so we have the country's largest distribution network there, but we also manufacture in a number of locations as well. So we are benefiting from the trend on precision health and taking these isotopes, working with big pharma, to provide very targeted precision products to primarily in areas of oncology and urology, but more and more expanding into other therapeutic areas for a long time, cardiology in terms of the core legacy products. But in terms of theranostics and higher energy new products, that's very much focused on oncology, urology and neurology. Then OptiFreight, the long history of freight management for large health systems, so effectively going into a health system, working with their logistics team and finding more efficient and lower-cost ways to work with freight providers. So we do this primarily historically in the med-surg space, but more recently expanding into the pharmacy side.

And let's not forget, importantly, much higher-margin businesses, growing 25% to 27% in fiscal year '26 and the top line growing even higher than that.

And while you're making some investments. So we recently saw the press release on the distribution centers in at home for example.

That's right. We had 3 new DCs in the last 3 years. We just announced the fourth, and we're going to do 3 additional investments over the next 3 years. So the number four has already been announced. So we have South, Southeast, West and Midwest now all defined and 3 of them are already up and running and really helps increase capacity, but also efficiency.

And perhaps less so with OptiFreight, you could correct me, but the other 2 tie in pretty nicely to your MSO strategy.

They tie in very nicely to the MSO strategy. OptiFreight is a fantastic business that ties into our medical business, our GMPD business and our pharma business, but less so into the MSOs, but having freight expertise does not hurt any business.

One thing, the Street worries about is competitive bidding. And that relates to At Home, specifically and really to Edgepark and ADS, not the distribution side, so about half of At Home. You're a huge player in diabetes. I'll have another question in a minute because we had a diabetes panel yesterday and the number of diabetes manufacturers reporting presenting here. But talk to us about your exposure to competitive bidding. And I think more importantly, talk about what happens when you win because you should win, you're the biggest player by far. Talk about what happens with scale advantage, market share in the competitive bidding areas. Any other thoughts on how this process may unfold and your overall exposure.

Well, the nature of your question, it's a little early because it's the very beginning of the process. There's been a lot...

We haven't even seen everything.

There's been a lot of comments back about the administration's approach to that. But to your point, again, we're the only large-scale provider and distributor. And even if we lose, we may win because we distribute to so many of the other HME DMEs. And so it is a very wide array of opportunity we have, but there's certainly a significant volume opportunity. As it relates to the exposure to our business, I mean, it's only about 15% of the -- at Home Solutions total book of business CGM fee-for-service. So we are quite diversified. And that was what we really liked about the ADSG acquisition. We knew about this possibility when we were doing that transaction. And what this did is it gives us an even more diverse payer set up, even more diverse product exposure. So we have -- at 15%, we think it's quite manageable for the business. And as the leader in this space, we feel very confident that when you think about, well, who will succeed through this process? It will be the most efficient, most capable providers. That is us. We are clearly the most efficient and most capable, and we are investing more than anyone else is in terms of that distribution capability. So we'll be able to do things at -- we already do things that others can't do, and we're extending that lead through these investments, both organic and inorganic. So we feel really good about our positioning here. And I do think there's going to be some volume opportunities, and we'll see how it all shakes out. I also think what's important is when you think about the intent of what the administration is looking to accomplish here, it really is focused on fraud. I mean there's a lot of data points that highlight that this space is just brought with a lot of that fraud. And of course, we are one of the good actors in this space. We invest heavily in our compliance programs and feel really good about where we stand. And I absolutely believe there will be fewer providers out there, that's no doubt in my mind. And it's safe to say, if we're not the last one standing, we will be one of the last ones standing because of the capabilities that we bring in this space. And so we feel really good about that position.

Unfortunately, I'm seeing the clock tick down to 0 seconds. So Aaron, I'm not going to get to ask you about your amazing cash flow and how you're going to deploy it. But if you wanted to give us a 20-second summary, we can let you run with that.

$10 billion dollars plus in the next 3 years, coming off a strong year of cash flow, we are expecting $2.75 billion to $3.25 billion in this coming year, and we are remaining constant to our disciplined capital allocation strategy to really create shareholder value over the long term.

That's a great finish. Everyone, please join me in thanking Cardinal. That was great. Thank you guys.