Cardinal Health : Q4 2023 Earnings transcript

Q4 FY23 Cardinal Health, Inc. Earnings Conference Call

August 15, 2023, 8:30AM Eastern

Operator: Good day, and welcome to the Fourth-Quarter FY 2023 Cardinal Health, Inc. Earnings Conference Call. Please note, this conference is being recorded and for the duration of the call, your lines will be on listen-only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star one on your telephone keypad to register your question. I would now like to hand the call over to Kevin Moran, Vice President of Investor Relations. Please, go ahead.

Kevin Moran: Good morning, and welcome. Today we will discuss Cardinal Health's Fourth-Quarter and Fiscal Year-End 2023 results along with our outlook for Fiscal Year 2024. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer, and Aaron Alt, our Chief Financial Officer.

During the call we will be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note, that during the discussion today, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release.

For the Q&A portion of today's call, we kindly ask to limit yourself to one question, so that we can try and give everyone in the queue an opportunity. With that, I'll now turn the call over the Jason.

Jason Hollar: Thanks Kevin, and good morning, everyone.

Fiscal '23 was an inflection point for Cardinal Health, with improved performance, strong execution, and notable progress against both our short and long-term plans.

We delivered record financial performance, including our highest non-GAAP EPS ever, reflecting 14% growth from the prior year. We grew Pharma segment profit an impressive 13% and generated $2.8 billion dollars of adjusted free cash flow. And in Medical, we drove significant sequential improvement in operating performance, from a segment loss in the first quarter to over $80 million dollars of segment profit in Q4.

This year we took decisive action to advance our 3 strategic imperatives: building upon the resiliency of our Pharma segment, executing our Medical Improvement Plan and maximizing shareholder value creation. Consistent with what you heard at our June Investor Day, these results were achieved through our team's commitment to ruthlessly prioritize the core of our business, and to better serve our customers so they in turn, can focus on caring for patients.

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We simplified how we operate by streamlining our organizational structure, exiting non-core product lines, and rationalizing our geographic and manufacturing footprints. We made key leadership changes and governance enhancements, adding talent in key positions across the enterprise and to our Board. We formed and extended the Business Review Committee tasked with evaluating our strategy, portfolio, operations and capital deployment.

On that note, we completed our review of the Pharma segment, including announcements at Investor Day to further invest in our Nuclear & Precision Health Solutions business and launch our new Navista™ Network supporting community oncologists, which I will discuss more later in my remarks. We recently closed our Outcomes™ merger with Blackrock's Transaction Data Systems, which we see as a big win for pharmacies and an important opportunity to accelerate the business's future growth. We also deployed capital responsibly, with a continued eye on maximizing value. And we are positioned with the financial flexibility to continue driving value for shareholders.

At Investor Day we provided preliminary guidance for fiscal '24. With the strong finish to the year and increased confidence as we look ahead, I am pleased that we can raise our fiscal '24 outlook.

Later in my remarks I will share further details on our 3 strategic priorities. But first, let me hand it over to Aaron to walk you through our financial results and guidance.

Aaron Alt: Thanks Jason, and good morning. I won't bury the lead, Q4 was a strong finish to a year in which, with Jason's guidance, the Cardinal team made significant progress against our strategic initiatives.

We delivered fourth-quarter EPS of $1.55, and $5.79 for the full year, at the high end of our guidance from Investor Day. For both Q4 and the year, our EPS results reached historical high points. We also delivered stronger-than-expected cash flow, something I will touch on more later.

Let's start with the Pharma segment on slide 6.

Fourth-quarter revenue increased 15% to $49.7 billion dollars, driven by brand and specialty pharmaceutical sales growth, from existing customers. We continued to see broad-based strength in pharmaceutical demand spanning across product categories: brand, specialty, consumer health, and generics, and from our largest customers. Similar to Q3, GLP-1 medications provided a revenue tailwind in the quarter.

Segment profit increased 12% to $504 million dollars in the fourth quarter, primarily driven by positive generics program performance. Within our generics program, we saw volume growth and consistent market dynamics, including strong performance from Red Oak.

Increased contributions from brand and specialty products, along with nuclear, were also a positive factor, partially offset by higher investment and operating expenses, including higher costs to support sales growth.

Turning to Medical on slide 7.

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Fourth-quarter revenue was flat at $3.8 billion dollars, an improvement in trend. We saw a decrease in Products and Distribution sales related to lower PPE volumes and pricing, partially offset by inflationary impacts, including our mitigation initiatives. This decrease within Products and Distribution was offset by growth in at-Home Solutions.

In the fourth quarter we delivered Medical segment profit of $82 million dollars, a nearly $100 million dollar increase from the prior year loss. The results for the quarter were consistent with our Investor Day commentary, composed of approximately $60 million dollars of more core performance, driven in connection with the Medical Improvement Plan, and approximately $20 million dollars of both seasonality and net favorable one-time items.

As expected, we saw an improvement in net inflationary impacts, including our mitigation initiatives, and the normalization of PPE margins, which were impacted by unfavorable price-cost timing in the prior year. Of note, we achieved our target of exiting fiscal '23 with at least 50% inflation mitigation.

Consistent with the expectations communicated at Investor Day, we were encouraged to see early indicators of an improvement in trend with respect to our Cardinal Health Brand product sales. We also saw a positive overall contribution from our growth businesses, including at-Home Solutions and OptiFreight, and from our ongoing cost optimization measures.

So, with significant profit growth in both segments, we delivered total operating earnings of $560 million dollars, growth of 24%.

Moving below the line, Interest and Other decreased by $48 million dollars to $16 million dollars, due to increased interest income from cash and equivalents, and increased income from our company's deferred compensation plan investments, which as a reminder is fully offset above the line in Corporate.

Our fourth-quarter effective tax rate finished at 27%, approximately 2 percentage points higher than the prior year, due to certain discrete items.

Fourth-quarter average diluted shares outstanding were $256 million, 7% lower than a year ago due to share repurchases, including a $500 million dollar accelerated share repurchase program initiated in the quarter, as we announced at Investor Day. The net result of all of this was fourth-quarter EPS of $1.55, growth of 48%.

Now, transitioning to our consolidated results for the year.

We surpassed the $200 billion dollar revenue mark for the first time. Fiscal '23 revenue increased 13% to $205 billion dollars, and gross margin increased 5% to $6.9 billion dollars, both driven by the Pharma segment.

Total company SG&A increased 6% to $4.8 billion dollars, primarily reflecting inflationary supply chain costs and higher investment and operating expenses, such as higher costs to support sales growth, which were partially offset by our comprehensive enterprise-widecost-savings measures.

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Operating earnings increased 3% to $2.1 billion dollars.

Interest and Other decreased 46% to $89 million dollars, primarily driven by increased interest income from cash and equivalents. As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates in the near term.

Our annual effective tax rate finished at 23%.

The net result was, for fiscal '23 EPS, $5.79, growth of 14%.

As for the segment's full year results, beginning with Pharma on slide 10.

Pharma segment profit increased 13% to $2.0 billion dollars, driven by positive generics program performance and a higher contribution from brand and specialty products, partially offset by inflationary supply chain costs. Fiscal '23 year-over-year growth also included a modest benefit from branded manufacturer price increases, which we are assuming will not repeat in fiscal '24, as well as a favorable prior year comparison related to higher opioid-related legal costs and costs for technology enhancements in fiscal '22.

Moving to Medical on slide 11.

Segment profit decreased 49% to $111 million dollars, primarily due to lower Products and Distribution volumes and unfavorable sales mix and net inflationary impacts, including mitigation initiatives. This decline was partially offset by normalization of PPE margins.

But before I turn to fiscal '24, let's cover the balance sheet.

In fiscal '23, we generated robust adjusted free cash flow of $2.8 billion dollars, with particularly strong cash flow toward the end the year. We ended the year with $4 billion dollars of cash on hand.

At our Investor Day we highlighted that cash flow optimization was an area of go-forward focus for our teams, and the Cardinal Team delivered, across our businesses. This effort will continue in fiscal '24, notwithstanding that it is a tougher calendar from an inflow/outflow days of week perspective.

We remained focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner.

In fiscal '23, we invested approximately $480 million dollars of capex back into the business to drive future growth. Paid down $550 million dollars in debt to reduce leverage and maintain our strong investment grade ratings. Returned over $2.5 billion dollars to shareholders, including through the dividend that our board increased in May, for the 34th year in a row, and $2 billion dollars of share repurchases.

Now, for our updated fiscal '24 guidance on slide 13.

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Today, we are raising our fiscal '24 EPS guidance to a range of $6.50 to $6.75. This increase reflects the strong finish to fiscal '23, particularly within Pharma, where we are now entering the year at a higher jump-off point. We also are tightening our shares range to $250 million to $253 million, which reflects the recent share repurchases, as well as our continued expectation of $500 million dollars in base share repurchases over the course of fiscal '24.

As you will calculate, the mid-point of our newly raised fiscal '24 EPS guidance is 15% above our fiscal '23 EPS results. There are no changes to the other corporate guidance assumptions provided at Investor Day: Interest and Other between $110 to $130 million dollars, an effective tax rate in the range of 23 to 25% and adjusted free cash flow of approximately $2 billion dollars in fiscal '24.

Our segment outlooks for fiscal '24 are also unchanged, with one exception: a higher revenue range for Pharma, driven by the continued accelerations of GLP-1's, which as a branded product category do not meaningfully contribute to segment profit.

Slide 14 shows our fiscal '24 outlook for Pharma, our build-and-grow business. We expect revenue growth in the range of 10 to 12% and segment profit growth in the range of 4 to 6%, which is now on a larger fiscal year '23 reference point due to our strong finish to the year.

We are reiterating our key assumptions provided at Investor Day. We expect growth from our generics program, with volume growth and consistent market dynamics, and positive operational execution against our organic Specialty efforts. We are not assuming outsized benefits from branded inflation, in contrast to some of the benefits that we did see in fiscal '23.

On the Pharma fiscal '24 cadence, we expect the year to follow typical seasonality patterns. As usual, we see our fiscal Q3 being the largest segment profit dollar quarter due to the usual timing of branded manufacturer price increases.

Turning to Medical, I want to recognize the progress that the Medical team made during fiscal '23, particularly in Q4 and also acknowledge that we still have blocking and tackling to do against the turnaround to both drive demand and improve our cost. For the full year, we are reiterating our assumptions of revenue growth of approximately 3% and segment profit of approximately $400 million dollars for the year, while providing some additional color.

Like fiscal '23, we anticipate segment profit to be significantly back-half weighted. We expect Q1 to be generally consistent with the core performance from Q4, with quarterly sequential improvement thereafter driven by our Medical Improvement Plan initiatives.

There are a couple of factors for why Q1 is the low point in the year. First, keep in mind that Q1 is the seasonal low point for our global Medical products and distribution business, due to timing of volume and cost recognition. Second, while we continue to expect to exit fiscal '24 offsetting the impact of gross inflation, those improvements are expected to grow over time making the impact greater over the course of the year. And finally, we continue to plan for slight Cardinal Health Brand volume growth, that will largely hit in the second half of the fiscal year.

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