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

Okay. Good morning, everyone. My name is Eric Coldwell. Obviously, I cover a number of health care names with Baird. I've been with Baird quite a long time. And not as long as I've covered the pharmaceutical wholesaling space, which is obviously a lot more than that today. But it's been a pretty amazing handful of years here. And I've said this several times and maybe blowing smoke but my favorite management team at Cardinal in my lifetime, and I continue to enjoy having you guys at events hopefully, many years to come. So thank you for being here. So of course, we have Jason Hollar today. And David, for us wants to NIR wants to make a quick comment take a comment -- and then we're going to jump straight into Q&A. And if you guys want to send questions up to the front, I'll happily take those on the iPad. Otherwise, I have, believe me, more than enough. You do. Okay. there...

Just just a little bit of housekeeping. We'll 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. Thanks.

Thank you, David. Okay. A bit of a warm-up here. soften you up before the hard ones -- so you just provided fiscal '27 guidance. You absolutely crushed last year. more than $2 of upside versus the original midpoint. Yet on a normalized basis, you still see earnings growth at or above the LRP. So against a tough comp against a massive upside year, more incredible strength in that you weren't planning on beating last year by over 20% all year long. Talk to us about the 3-year our biggest upside drivers and which of those are sustainable versus which were a bit more transitory because that will lead to some of the follow-ons regarding the fiscal '27 outlook?

Yes. Thanks again, Eric, for having us here, and thank you all for attending. It may sound like a simple softball type of question up front. It's actually a little challenging to answer because it's hard to boil it down to just 3 or 4 things because I think that's the real testament a great management team, a great business, a great industry, is the breadth and the depth of the activities and the opportunities that we see in front of us. And when you think about that overperformance in '26, it was every 1 of our 5 operating segments performed incredibly well. Every single one had earnings growth of at least double digits irrespective of the M&A, they each had some really great cash flow, which was another great story for us this last year. And we have recently increased our long-range targets for the pharma business in the last Investor Day. And we are forecasting for and guiding for growth to be a little bit above even that type of range. So we haven't raised the bar on ourselves. I do get the point that, that is lower growth, still strong growth, but lower growth than we saw last year. So the reasons why the key differentiation there -- let's break it all apart. So we have that breadth of each of these 5 businesses doing really well. Within each of these businesses, I think it's important to think about the stuff we can control and the things that we have had more difficulty like volume utilization. That's been very, very constructive, very strong. I like the word constructive because just having the volume by itself doesn't mean you're going to have a great result, though, and we've seen that in the past. The last several years, we've taken that predictable, relatively modest, consistent growth, and we translated it into a fantastic result, and that's the performance that we have led. But that underlying utilization continues to be very robust, but we anticipate it being a little bit less robust this last year. A few reasons why specialty at 25% growth for us. I mean, that's really, really strong volume. Part of that driven by the M&A part of that driven by some new customer conquest, those are the types of things that are going to happen at a lower rate going forward and why we think it's more prudent to have a more normalized type of growth rate. Generics. That one's a little bit harder to pin down. It's been quite robust, but you're talking about relatively small percentage changes to that baseline 2% to 3% growth that we have in our long-term plan. demographics and innovation, loss of exclusivity, all elements that are driving a nice answer. That's a little bit more difficult to pin down exactly where that's going to be period to period. But we saw good growth last year, and we anticipate good growth, but not quite as outsized that we've had in the past. So overall, from a pharma perspective, strong volume, doing a lot of organic and inorganic investments to optimize that, not just for our benefit but for that of our customers and ultimately for patients. Other has been a great growth story as well, of course. Same thing, organic and inorganic investments. When you think about the inorganic investment with the ADS now we fully lap that. So that means that our growth rates going forward. We're not going to have quite that same upside, but we're not replacing it with some other acquisitions strive in the diabetes segment of the Adapt business. So we do have some inorganic opportunities there, too, but the core growth, the synergies from the prior acquisitions, the Theranostics and nuclear, expanding the product portfolio and OptiFreight -- these are all and specific investments that we made that we do think will continue to drive good growth in the future, but not quite that outsized we've had in the past. And then the one big surprise we had this last year that was outside of our guidance on GNPD. -- core growth, right where we thought it would be. the tariff refund created some positive noise for us. But you stripped that out and the results were still fantastic. And so it is just a nice add at the very end. But ultimately, the core growth there being right where we thought it would be as well. So those are some of the key points.

When you look back on the last year, you have this 5 segments, a lot of moving pieces, but overall, really good performance. You have a tumultuous global environment more tariffs, commodities, you name it. What were the aha moment? What -- was there anything that happened in fiscal '26 or even fiscal '25 where you said, you know what, we need to double down here or we need to back off here? We need to -- you went through a big strategic review just a few years ago. So I assume there's probably not a lot of those conversations, but maybe a few .

You always have to challenge yourself -- you want to be your own activist is how you approach it. not many things that we had to back off. I think in of itself may be an aha that we were closer to the center of the target with our strategy than perhaps even we thought. The execution, the connectivity of all these pieces, again, using specialty as a reference point, 25% growth with specialty. That didn't just happen with M&A. That didn't happen with new customer onboarding. It happened with also taking care of all of our other existing customers with service and support. And these are all kind of aggregated in a way the flywheel effect that help create value across the spectrum. So I think the aha was the strategy really is not just working the way we thought, but in ways we didn't even think where we're going to be possible. Our nuclear business with Solaris, I think, is a good example that we knew there were opportunities bringing on the urology MSO. We knew that we were the leader in the nuclear pharmaceutical space. The pull that the nuclear team is seeing from those urologists to help them with their business help them be a better -- urologist, a better physician to those patients. They're just all sorts of those opportunities with our MSO strategy that we knew were out there, but the thirst for having the connectivity between this huge suite of services and products that we provide to these physicians that have an incredible number of needs to take care of their patients every single day has been a really nice fit. And then, of course, just the other growth businesses filling all these categories quite nicely. And we knew that was possible when we resegmented the business 3 years ago, not even 3 years ago, and a lot has changed over that period of time, and we've seen some great growth -- maybe aha, there was the ADS transaction, that acquisition, the synergies went so well above our expectations that we were like, okay, not only do we see the value there -- we feel confident with the integration where that's at, we can go faster, and that's why we picked up strive in the diabetes segment of Adapt as well. So these all are coming together in a way that are very accretive, very synergistic. It gives us confidence that we are going at the right pace to continue to look for growth opportunities.

On the last earnings call, you made -- well, I think it was hearing actually, but there was a very interesting comment. For planning purposes, we are assuming a consistent book of business. Was that a throwaway comment? Or was there something more hidden behind that in terms of we know something you don't know or we're getting ready to do a deal, but we're giving you guidance before a deal. Well, it felt like there was more .

So let me tell you what it is, and I'll let you define if it's through a common or not. Remember, the prior year, we had a significant tailwind for new business onboarding in a number of our businesses, biopharma solutions with our SCYNEXIS business, but also core distribution, picking up some large customers that lapped midway through '26. So we had this tailwind in '26 that we do not see repeating in '27. And at the beginning of the fiscal year, you have a pretty good understanding of what your book of business is going to look like for the next 12 months. Even if we get a great new customer today, it's unlikely to generate a lot of incremental revenue margin in the current fiscal year. So this really is just for planning purposes that we wanted to highlight that at that stage, we didn't see the book of business changing materially for our -- especially our larger distribution customers -- and that's just different than where it was in the prior year, and we felt it was important to make sure that when you look at the growth rates of 26% to 27% that you understand that distinction. .

When I reupgraded the group, February of 2020, a few weeks before the national emergency with COVID, which was interesting. One of the main there were several, but one of the main tenets in our upgrade thought process was for the first time in my life, I was watching what felt like a very steady plain field basically pardon the term an oligopoly of companies playing well in the sandbox, not seeing big churn, not seeing big negative revisions with customer renewals. You just announced one of your larger clients, Kroger has renewed and I believe, extended. I'm not sure was an expansion Yes. 5 years.

Long term.

Long term. Okay. And you didn't -- you didn't have to back off putting up upside LRP against upside base year. Are we at a point now where an existing customer and incumbent customer renewal is just a nonevent unless it only becomes an event if they leave, .

A couple of things here. First of all, it's our key responsibility objective to provide continuous improvement to our business that, of course, our customers are always looking for additional value. They're in tough competitive environments as well. So there -- we have a desire and work streams to always get better, use technology, use AI, use productivity, use automation to further improve the business. So we can have it both ways. So we can provide value to our customers while at the same time growing our business in a way that's consistent with our expectations. With that said, the comparison points that I think you're referring to, where perhaps the dynamic was most out of balance was some other environments where the underlying industry was going through some changes. When you think about the generics at the beginning of the toughest period of time was in the 70s percent type of penetration and that went pretty quickly to Well, that created a lot of value because that's also when the buying groups are formed, right? And so it created a lot of value that then was exchanged in different ways with customers. Well, it's been at 90% penetration for, well, the 7 years I've been at Cardinal, is barely moved. It's a nice evergreen new products coming in both brand and generics. But that dynamic of that creation of this incredible amount of incremental value, incremental currency that was then passed back and forth with your customers is a dynamic that's just different today. It is much more consistent. We're seeing much slower growth but consistent growth with generics, but not the really significant step cliff event that created all the activity you're talking about. So I just don't see that, that will change in that same way. And you throw on top of that for the wholesalers more broadly, but certainly for Cardinal, that part of our business, while it's growing, is growing slower than the other parts of our business. And so it just becomes less meaningful, less impactful, still important to us. These are still important parts of the customer an important part of the core and the base but there's a lot of other parts of our business that are growing faster, usually higher margin parts of the business as well that makes that impact -- that relative impact even smaller bus.

And you and the rest of the industry went through a period of really balancing out profitability across all of the different channels, both with customers as well as with the therapeutic categories. So is there more to be done there? -- with the growth in specialty that we're seeing. I know the generics are stable at 2%, 3%-ish volume. But with this rapid growth in specialty, this rapid well. debatable, but a lot of biosimilars coming to the market and having some impacts, right? You're still seeing some pretty tremendous growth rates in specialty despite that. Do we need to go through another round of renegotiation or hammering out contracts with customers on where mix is today versus where it was 5 to 10 years ago when the industry went through that last big round of conversation?

The industry has learned about those mix challenges. I think before the mix changes happened dramatically, the contracts weren't structured to be reflective of that. we have now lived in a world of significant mix changes for well over a decade. So our contracts are structured to recognize that as a low-margin distributor we cannot afford to have substantial mix changes where profitability might be different product category. If the product category profitability is the same, you don't need those contract utilization requirements. But typically, there's varying product margins within a customer contract that does require a utilization requirement. And so we have that embedded in the contracts that matter with that profitability distinction. -- and then it just adjusts for itself real time, and it's not the requirement then to have these massive changes come in new contract because it's grown and it's evolved in a way that is much more consistent than what it would have been in the prior contracts.

I want to transition and talk about managed services for a minute. So the acronym MSO came up just 6 times on the last conference call. And I know I've already prepared you for this one. 19 times, 12 times, 17 x on the prior 3 calls. So less than 1/3 of the average of -- or I guess, roughly 1/3 of the average of the last 3 calls. I don't think it became a boring topic, but it definitely did not get the level of attention I was expecting. I don't believe you came out and provided a revenue framing or other additional color commentary on numbers around it. And we haven't seen big growth in the number of providers in the channels since we did a deep dive on you guys probably 4 or 5 months ago now. So again, am I overinterpreting -- or is it -- was this just more of a period where there were so many other things to talk about that the MSO conversation wasn't as visible .

Yes, I think you're over interpreting. But let me address it nonetheless. I think that when you're talking about anything 6x, that's still quite meaningful in any business. So -- but remember that the last large transaction we did would have been announced about a year ago. It's been closed now for only about 9 months -- but we're now into a much more stable environment as it relates to the MSR strategy is clear. We have these 3 very clear platforms, oncology, urology and GI. We have the leadership teams in place. We have the business in place, we are now in execution mode, completing the integration, which is a complex long process, but also continuing though, with our acquisitions. We just closed 4 new bolt-on acquisitions over the course of this last quarter. And it's still a critical component to the critical growth element of our strategy, which is specialty. So it's the high priority within the highest priority of our growth initiatives. -- nothing there has changed other than there's been less new things that have occurred with our MSOs this last quarter. And to your point, with the fiscal year end, I can tell you, we look at our total word count on these scripts and it was already long. So to bring in more content on any particular topic means that we have to bring back some other things. And there are a lot of great things happening in the company. We, of course, had the acquisitions with -- at Home Solutions and further growing our growth businesses, and that was a little bit more of the focus this quarter than the prior ones. But I would anticipate you're going to continue to see very good focus from this team on not just driving the strategy, but making sure we're transparent with where we're going with the business.