Cardinal Health Q4 2024 Earnings Call Transcript

Good morning. Thank you for the question. Happy to talk about it. We are really pleased to raise our guide for the pharma business for fiscal '25. It really reflects our continued confidence in the team and continued confidence in the resiliency of that business, notwithstanding some of the puts and takes that we've been talking about over the last couple of quarters. I'll touch on the profile in a second, but I do want to emphasize on the revenue side of the house from a guidance perspective, that we guided down 4% to 6%, all in reflecting the $40 billion headwind on the low margin contract non-renewal. But it's really up 15% to 18% on an adjusted basis if you take out the impact of that -- impact of that customer loss. Within that 15% to 18% is $10 billion of new revenue, new customers and expansions of service with existing customers. That's on top of an underlying 10% underlying growth with the existing business. And so, from that you can tell that we are growing the portfolio, doing what we said we were going to do with our existing customers, and adding on both new customers and expansions with existing customers to get to that revenue base.

That supports the increase in guide. The 1% to 3% on the profitability side of the house. The things we called out during the earnings call is consistent market dynamics. It's the generic volume growing, the low single digit growth in core, the high single digit growth in specialty, the strong overall RX demand. There's a lot of things going on, but we are confident our plans as we carry forward.

Now, we don't comment on the margin profile of any particular customer, particularly in the context of a new customer, and we were delighted to announce formally the Publix [Phonetic] win today in our earnings release. I'm not going to comment on their profitability, but I will observe that we have publicly commented on the low margin nature of the business that we've lost, and that certainly doesn't hurt us as we carry forward. Jason, I think you would add?

Nothing then.

Sure. Thanks for the question, Eric. I think it's important to just go back in time a little bit in this last 12 months. A year ago, when we were sitting here, certainly the freight costs had gone all the way back down to historic levels. So, we were enjoying really the run up had come all the way back down, and it was at the beginning of the calendar year. So, in our third quarter, when the Red Sea issues first began, and that's when we saw the first spike, and the reason I remind you of that is that first spike was known come springtime when we gave our initial guidance for GMPD. And so, we knew about that first step-up already. And that's been factored in from the guidance from day one.

Yes, there has been further increases since then, but when you look at the combined two increases, the two different steps, first in January, then in the spring, they still are woefully short of where we were a couple of years ago when the whole supply chain was under pressure, where even when we were spending two, three times the current levels, we were having difficulty in actually getting reasonable service. So yes, the costs are higher, but not nearly as high as they used to be. And most importantly, the supply chain is functioning a lot more efficiently than it was before. Long way of saying, Eric, that, yeah, there's a little bit of an increase here. It's something we monitor and manage very, very tightly, but it's not the point where it requires widespread price adjustments accordingly, at least not yet.

In addition to that, it's important that we look at the overall inflationary environment. And we talked about this a couple of years ago. At the peak, we had a lot of oil and petroleum-based products, including fuel and other type of freight, that was also a big issue. Those are actually a little bit softer in terms of the cost. So overall net-net, we're managing through it better than we have before, and overall, we have some puts and takes that are all very manageable. We'll continue to evaluate the pricing necessary within that, but at this stage, we haven't had to exercise that lever to near the extent that we did in the past.

Next question, please.

Yeah, let me try to address a few of those pieces. So, specialty is absolutely a key part of this story and why we still anticipate being able to grow this business next year. We highlighted in our comments that in fiscal '24 for the year, we saw another year of 14% growth. You may recall at our Investor Day last year, the specialty business CAGR over the prior three years was anticipated at that time to be 14% as well. So, another year strong growth driven by the widespread investments that we have made and continue to make. We talked today about a couple of interesting growth drivers for the future, whether it's our advanced therapy solutions business, new venture with CVS for Averon focused on biosimilars. Biosimilars in general has been a rising tie-type of benefit over the last several years. And of course, then our acquisition, especially networks, which closed in March and has eight-month, nine-month type of year-over-year benefit tailwind.

So, these are all areas that are of driving our specialty business to some degree in fiscal '24, but they're all examples of where we would expect that to continue to grow over fiscal '25 to help mitigate for that contract non-renewal that we think, you know, while that growth will be slower in '25 due to that. I also made the comment in the remarks that even in spite of this overall revenue reduction for the enterprise, for the pharma segment, and the impact of that contract nonrenewal, we still expect our specialty business to grow in fiscal '25 in spite of that. So that tells you that our run rate as we lap fiscal '25, and that non-renewal, we would anticipate it to be very consistent with the long-term algorithm that we've highlighted in the past, which, you know, from a profit perspective has been defined as low single digit type of profit growth for our PD core business, and double-digit growth for specialties. So, we'll continue to look at other opportunities to invest organically as well as inorganically to continue to feed that growth.

Next question please.

Yeah, I'll have Aaron walk through some of the cadence almost to your question, but I wanted to stress just upfront, what you should have heard from these messages are very, very similar words and phrases that we use last quarter. The plan is unchanged. Of course, we get a little bit smarter, we sharpen our pencils a little bit, and we get a better understanding of where our exit rate is for '24. But all the factors that we are talking about today with this business are very similar to what we walked through in the past. And of course, all the investments that we made this last year. Aaron, a few thoughts on the cadence.

Sure. So, the way to think about it is Optum was an existing customer with us until the end of our Q4, and you can see the results in Q4. We don't need to go deeper on that. But what did also happen in Q4 was us being incredibly planful around the impact to our operations as well as to our financials of that customer unwind. We've talked in the past, we talked during our last earnings call around the three offsetting actions, the contribution of specialty networks. Of course, the new customer wins the expansion with existing customers, as well as further cost optimization opportunities. And we're pleased the team got on it, got ahead of it, and they've already been executing in that respect. And so, the guidance we're able to provide today we view as relatively consistent with what we provided in Q3, but with an additional degree of confidence because the plans are behind us, and now we're acting in that way.

The nonrenewal will impact our Q1. There's no way to avoid that. They were a large, low margin customer. And as we've talked about, the new customers coming on board are largely back half loaded. And so, we will have a timing difference relative to prior years, and that will impact certainly our revenue and profitability timing over the course of the year. There's also a cash impact, right. The unwind of negative working capital position there is a Q1 impact for us, and a key reason why we are carefully monitoring our cash flow during the first quarter. Of course, balanced with the fact that we are delighted with the strong adjusted free cash flow and the strong cash balance at the end of our Q4.

So, look, on balance, the cost optimization is already in play, especially networks is already in play, and we continue to work on the customer expansions and the new customer onboarding, and we will make that successful as well.

Thank you. Our next question, please.

I'll start. Look, I would observe that our gross margin progression went largely as we anticipated over the course of the quarter and the year. We have a very complicated business managing between the two various parts, and no real surprises from my chair in that way. Second part of the question was...

So, yeah, let me take that. It was related to, I think, just the general impact of insulin pricing, and there's also Humira element there. So probably a couple different questions. Within the quarter, we did, as you -- as Aaron had highlighted before, we saw, of course, the ongoing benefit of the GLP-1 growth. But we did have a similar offset as it relates to the pricing change for, for the WACC insulin adjustments that happened at the beginning of the calendar year. So, until we get through the second quarter of fiscal '25, we'd anticipate there to be a bit of an offset related to that price change. There was also a question around Humira, and I assume just the biosimilar type of migration. So, we see that it started to move a little bit more. Certainly, some of the actions that CVS has done more broadly in the marketplace seems to have moved things along a little bit further. It's still fairly low penetration throughout the broad industry, but generally speaking, we have seen that start to pick up a little bit, I wouldn't say meaningfully within the quarter, maybe a little bit even afterwards, but it's still at fairly low penetration rates. You know, it's one of the reasons why we're so focused on biosimilars and with our joint venture with Averon is just to continue to look for ways to increase access for patients that need that therapy at an affordable cost. So, we'll continue to do our part there.

Next question, please.

Yeah. So, it is certainly true that GMPD is more acute focused customers, and we do benefit from the migration towards more of an ASC model. We do not participate widely in physician offices. So that is an element. It's nothing that we've called out as broad trends, and so I don't have much more to go on there other than on a same store sale basis. We're seeing the utilization fairly consistent this past year, generally speaking, in that low single digit type of range. So, we are seeing that there's like for like growth. What we've highlighted fairly consistently is that this last year was or the end of '23, beginning '24 was the inflection point for us. We were not growing with the market at this, at that point. Over the course of '24, we've largely grown with the market plus or minus a point here or there. So, very consistent with that low single digit type of growth over, especially after our first quarter. So, we don't think there's widespread shifts there. But we definitely have an ASC presence that we do think we benefit from. But I wouldn't call that a main driver of what we're looking at.

In terms of the investments we're making, we did call out some domestic investments, but they're not limited to domestic. We believe in a very diversified competitive geographic footprint. We've stressed that specifically we don't have manufacturing -- direct manufacturing in China. It's one of the related questions here as it relates to certainly the ongoing tariff risk. And I can also let you know that we only source less than 10% of our total Cardinal Health branded product in China. So, specifically to China, we don't have a large exposure, but we do have exposure beyond China. In Asia, near shore, Central South America, we believe a diversified, broad supply base is important as well as a domestic footprint. So, we have increased our investments across the supply chain to improve the resiliency. And there's a couple of areas within the U.S. specifically, you've seen that some of the tariffs related to syringes is a specific area of focus, and we happen to have that capability in the United States. And so that's just one example of where we're really doubling down on that investment.

So, yeah, cost and freight are always a consideration. We build a financial model behind all that and we look at the risk. But on this particular example, and one example where we're really leaning in on that investment, that's more about just ensuring our customers get the products they need. This is more of a volume opportunity than a pure cost and margin opportunity. So, you got to look at all those factors.

Next question, please.

Yeah, thanks for the question, Eric. Again, I think my answer is going to be fairly similar to what I said before, but in a different context. We have a very broad base of customers, very broad based of payers behind those customers. So, we don't have necessarily even the insight all the time as to where those reimbursements are coming from, the same store sales types of information, what we see more broadly is just not a lot of fluctuations and variations, and we're not talking again in any type of growth rate above and beyond what we believe that underlying utilization is. So generally speaking, if there are some of those trends at this stage, I'm not seeing that as a meaningful driver to where our business is going.

Next question, please.

I would just observe that we're being very thoughtful in the planning we're doing for the year, given the number of moving pieces we have both within the pharma business and within the GMPD business, and of course keeping an eye on the three growth businesses within other. It was in pharma. What we've referenced is first half from a cadence perspective will be slightly down to flat versus prior year. That's only natural given the customer unwind and the back ended nature of the new customer onboarding. Largely the drivers within the pharma business are consistent with what had been true in previous years. Q3 will be where we see the branded inflation rolling through, and so not a lot of new, not a lot of different news there that I would call out. From a med perspective, we're very focused on executing against the plan. We tried to be transparent every quarter about how we're doing and where we see it going, which is why we were purposeful in calling out Q1 specifically as we push ahead, we had great success during fiscal year '24 and accomplished what we told you we're going to do, and we plan to do that again, and just want to be clear that we are investing in the business, and there are some near term Q1 drivers that will make that profit number in what we call the up to $20 million as we carry forward. There's no magic there, though. I want to be clear. The plan and the cadence is generally consistent with how we've described the GMPD rather improvement plan in the past. Of course, we have the benefit of the inflation mitigation now lapping as we push ahead. And of course, we can't forget the important topic of seasonality from a Q4 to Q1 perspective. We've called that out before, and that's why you see a dip from the great results in Q4 into Q1.

As it relates to the second question, I'll say what I said before, hey, we're 1% industry, so it's competitive but stable. I would say that the vast majority of contracts don't change hands period to period. These couple several that have that are more notable. There's been several that have long-term, five-year types of agreements. So, every five years there's the chance opportunity of risk for that to occur. But again, I'll just stress that the vast majority don't. And we feel really good about our positioning, competitive positioning. We know we're competitive. We know that our message and our work and our results resonate with our customers. We're very much focused on that experience, the service levels, the value initiatives and propositions behind it, the tools and platforms. We've talked about our InteLogix and our Atrix platforms for health systems as one example of not just going at them with price, but going at them with value and having true value components to those offerings. And we feel really, really good about what that positioning is, and that's why we've been able to offset to the degree that we have.

Next question, please.

Yeah, thanks for the question. It's broad based, it's varied. We don't call it out in every call in all areas, but it's so broad. It really is everywhere. It's in the core of how we operate. Examples of what we talked about today without using the phrase AI, especially networks, their PPS analytics, is a great example of taking that data, electronic medical records and synthesizing that for manufacturers as well as the providers and getting actual insights. I mean, that is AI. When you look at some of the automation I've commented on, on our at-Home Solutions network, this is now over 25% of our sites that in just the last 12 to 18 months, we're launching a new footprint that is bringing in technology and automation in various forms into the manufacturing, or I'm sorry -- into the distribution setting to be even more innovative, even more efficient and productive. And as you mentioned, those other platforms, InteLogix, Atrix, working with Palantir and other partners to create value. And then I'm not even getting into the more basic use cases like customer service and back office. I guess, I don't want to just hit the same drumbeat everyone else as what we were trying to do in our communication is get beyond the buzzwords and really talk about the essence of where we're driving our business. And we feel really good about that. And it's definitely [Technical Issues].

Next question please.

Yeah, I'll start. On the customer expansion, these are existing customer relationships where we are already a primary distributor for them, and they are expanding their footprint, whether it's acquisitions or just taking on more of the business themselves. And we're supporting their growth. So, it's an existing relationship and expanding upon that. So, it's committed in that sense where we're already there. And you can use Bioplus as one of the examples of what I'm talking about there. Perhaps, Aaron, you can go into a little bit more detail on the cost.

Sure. So, as I commented earlier, the team did a great job of assessing our opportunities in the face of the customer nonrenewal. But I guess I would go back and point out that at the end of the day, we operate at 1% operating margin business. And so, it's important for us to always be mindful of the cost structure around us. But with a north star of how do we continue to ensure our customer service? And so, we've been pleased that the reviews we undertook during Q4, the actions we identified, will help us to offset the near-term impact of your customer loss. But more importantly, they create a more efficient operational structure for us. And the changes are broad ranging across the enterprise. With that north star, though, of ensuring we continue our customer service focus as we push ahead.

Many of the changes have already been implemented, and we're operating that new framework already. We continue to assess what are the productive opportunities. And I also would emphasize that the ideas for these changes are coming from our broader teams as they look around and say, okay, how can we operate better in support of our existing customers and the new customers on the line?

Next question, please.

Yeah. Appreciate the question. The answer is there is no comparability issue. The $175 million is unimpacted by the revisions that we provide to the financials today. The revisions we provided were for the three years, for the three-year period. There will be -- there is an impact of shifting of income or expense into the prior periods as well, which is why you're not seeing direct your comparability as we carry forward. I do want to emphasize, though, that part of our operation here is building and maintaining a strong control environment. And as we identified the issue in the edge park, part of our at-Home business, which is part of other, it was a revenue recognition issue tied to a business which does -- it's less than a half a percent of our overall revenue base. We were careful to do the right thing and disclose, and at the same time, in partnership with our auditors, decided that we would reflect the feedback we've gotten from this community and others around comments, around nonrecurring adjustments in prior periods, etc., and so now we walk into fiscal '25 not only with comparability, but with a clean set of financials unimpacted by timing to be able to talk about our progress as we carry forward.

Next question, please.

Well, from a guidance perspective, we provide guidance for other on an aggregated basis. But I do want you to take away the enthusiasm present in Jason's comments and his tone of voice around the opportunity. We think that each of these three businesses presents to Cardinal Health as we carry forward. The businesses are unique. They're managed differently. We aggregate them from financial perspective. It's also the case that we are investing in each of those businesses. We have in '24, we are in '25. At-Home has recently opened two new distribution points and is investing in automation. OptiFreight has continued to invest in its digital platforms and service of its customer experience. The nuclear business, we've talked at length about expanding the PET network as well as our excitement about the Theranostic opportunities that that business presents. And so again, as I go back to the financial guide, part of what you're seeing in the other basis is we are presenting a consistent picture on an aggregated view, which reflects in some cases, we'll be investing in a year or a month, while reaping the benefit in the same year or month from other parts of the portfolio. Jason?

Yeah, I would say that the one thing we did clarify in the prior comments is that all three businesses are expected to contribute to that growth in fiscal '25 and we are investing -- fiscal '24 was an especially heavy investment period, but we are continuing to invest across the range. Just one example to put it into perspective is we talked a lot about our investments in our nuclear and precision health solutions business. This is a business that we've highlighted theranostics now just with our second phase of expansion that we announced about a year ago or this last year. And then we also have talked about some PET expansion. From a '24 -- fiscal '24 to '26, that's about $100 million, mainly capital that we're investing into that business, but is representative of the big investments that we're making, in addition to the three different distribution centers and at-Home solutions that Aaron had mentioned, are very representative of the inputs that we're putting into these businesses because we deeply believe in their ability to continue to grow, benefit from the secular trends they each enjoy, but then also reflecting the leadership position we have in each. And that is then further bolstered by these very specific investments.

Next question, please.

Okay, so you crammed in about four there. So, Averon -- the first specific question on Averon was just broadly speaking, yeah, so, well, I referenced a few different times, so I think maybe there's a more specific question behind it, but it, I think the question was, is it just service CVS? The answer is no. It's a consistent concept as what we did with Red Oak sourcing, reflecting that we both have different needs, different customers, if you will, and can jointly benefit those patients through combining our capabilities in this space. So, we would expect to operate it in a similar way where we have different benefits associated with that.

There are, I think what you're talking about are there's not the same type of payment structure and schedule that we have for Red Oak sourcing, kind of equalization payments, if you will. So that structure does not exist with this. It is structured quite a bit differently in that regard. So, and then we -- in terms of the, I think there was a renewal question there about CVS, and so the contract goes through -- the distribution contract goes through '27, and then the Red Oak agreement goes through '29. So, this is, you know, certainly outside of those agreements. And it's, you know, very much an example of the type of partnership that, you know, we look to have with any and all of our customers in various ways to ensure that we're thinking about how better to serve those underlying patients.

Yeah, yeah. Thank you. And thank you all for joining us. You know, in addition to the usual pleasantries I have at this point in the call, I do want to step back for just a minute, reflecting that given it's our year end as well as additional guidance, I know that there was a lot to digest within this, but I hope that we clarified many of your points today. But I do want to end where I started and just reemphasize those same three key points I had at the very beginning of the commentary today. First of all, we finished the year with terrific momentum. We grew our earnings per share by 29% for both the quarter end of fiscal year. You add that on top of the growth that we saw last year, that's a nearly 50% increase in our EPS over the last couple of years, driven by performance across the board, but really strong performance in our largest, most significant business, our pharma segment, growing just despite having some of those impacts in the quarter from that contract unwind.

But we're also seeing very good utilization across the enterprise, whether it's pharma as well as GMPD, we see that this industry continues to have a lot of need within the marketplace. That in part is driving our GMPD, but really, that $240 million improvement that we saw for that business this year is being driven by the successful mitigation of inflation. A long, hard journey, but we've gotten there, and now we're able to focus on driving the business going forward.

Our other businesses, we're seeing robust demand across the board utilization, but secular trends as well. Really excited about the ongoing growth there. Double digit 10% growth in '25 while continuing to invest in the business. Cash flow really strong. Not only $4 billion nearly this year, but when you take last year and this year in combination, that's nearly $7 billion. That positions us very well for financial flexibility going forward.

All right. The second point was, because of that momentum, we feel very confident about our fiscal '25, and that's why we raised our guidance both in our largest business with pharma, but also driving EPS growth in fiscal '25 despite that customer transition. And then thirdly, and lastly, we're doing all that operational and cash flow focus while also driving our strategy going forward, optimizing our portfolio. Very consistent, transparent dialogue we've had with you. This management team is focused on those key priorities and will continue to communicate.

We're excited about the progress across the number of areas that we talked about, whether it's furthering our partnership with our largest customer or the ongoing integration of our largest acquisition, especially networks, that we've done in quite some time. We're well positioned to continue to grow the business, even in spite of any type of headwinds that we've identified.

And of course, behind all that, we will continue to responsibly prioritize shareholder value creation. And we've communicated some additional near-term actions specifically within the GMPD business today, and that is translating to even more opportunistic share repurchases in fiscal year '25. So, a lot there, but a lot to be excited about, and we appreciate your time and attention, and look forward to keeping you updated on our progress.