Cardinal Health Q1 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 8, 2021

There are 11 speakers on the call.

Operator

Good day, and welcome to the Cardinal Health, Inc. 1st Quarter Fiscal Year 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I would like to turn the conference over to Kevin Moran, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning and welcome. Today, we will discuss Cardinal Health's Q1 fiscal 2022 results. You can find today's press release and presentation on the IR section of our website at ir. Cardinalhealth .com. Joining me today are Mike Kauffman, Chief Executive Officer and Jason Holler, Chief Financial Officer.

Speaker 1

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 statements slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during our discussion today, 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 and can be found in the schedules attached to our press release.

Speaker 1

During the Q and A portion of today's call, we please ask With that, I'll now turn the call over to Mike.

Speaker 2

Thank you, Kevin, and good morning, everyone. Our first quarter results were in line with our expectations. As we continue to manage through the global pandemic, we're staying focused on the near term priorities and long term strategies to drive growth and momentum across our businesses. In pharma, we continue to see sequential volume improvement and are encouraged by the profit growth that we saw in the Q1. We believe our pharma business Inclusive of our strategic growth areas of specialty, nuclear and outcomes is well positioned for growth in FY 'twenty two and beyond.

Speaker 2

Our Medical segment continues to be impacted by the disruptions in the global supply chain that we called out last quarter. Recently, these pressures have rapidly escalated and we are experiencing significantly elevated Product costs due to international freight and commodities. While we believe the majority of these elevated supply chain costs are temporary, We do not expect them to return to normalized levels this fiscal year. As a result, We are lowering our FY 'twenty two outlook for Medical segment profit to adjust for these increased headwinds. We are taking action to mitigate these impacts across the enterprise and we are reaffirming our FY 'twenty two EPS guidance To simplify our portfolio and strengthen our core businesses, so we are positioned for broad based sustainable growth, As noted in the long term targets we're announcing today, we are prioritizing investment in our strategic growth areas and in innovative solutions to meet our customers' needs today and tomorrow.

Speaker 2

And with our improved balance sheet, Commitment to our dividend and now an additional $3,000,000,000 share repurchase authorization, we're positioned to return capital to shareholders. Looking ahead, we remain confident in our strategy. Now, I'll turn it over to

Speaker 3

Jason to discuss our results. Thanks, Mike, and good morning, everyone. I will review our Q1 results and updated expectations for fiscal 'twenty two before closing with some comments on capital deployment. Beginning with total company results, 1st quarter revenue increased 13% to $44,000,000,000 driven by sales growth from existing customers. Total gross margin decreased 4% to $1,600,000,000 driven by the Cordis divestiture and the net impact of elevated supply chain costs in medical.

Speaker 3

As a reminder, the sale of Cordis was completed on August 2nd and impacted the quarter's results by approximately 2 months. SG and A increased 1%, reflecting information technology investments and higher cost to support sales growth, partially offset by the Cordis divestiture and benefits from cost savings initiatives. Overall, 1st quarter operating earnings tracked in line with our expectations, down 15%. Moving below the line, Interest and other decreased by $2,000,000 driven primarily by lower interest expense from continued debt reduction actions. During the Q1, we exercised the make whole call provision to redeem $572,000,000 of outstanding June 2022 debt maturities.

Speaker 3

We continue to expect to repay the approximately $280,000,000 of remaining June 2022 notes upon maturity. Our first quarter effective tax rate was approximately 24%. Average diluted shares outstanding were 289,000,000, About 4,000,000 shares fewer than the prior year. This reflects prior year share repurchases as well as the $500,000,000 share repurchase program initiated in the Q1 and recently completed. The net result for the quarter was EPS of $1.29 We ended the Q1 with a cash Balance of $2,500,000,000 and no outstanding borrowings under our credit facilities.

Speaker 3

This cash balance also reflects our 1st annual settlement payment into escrow under the proposed opioid settlement agreement. Now turning to the segments beginning with Pharma on Slide 5, Revenue increased 13% to $40,000,000,000 driven primarily by branded pharmaceutical sales growth from large pharmaceutical distribution and specialty customers. Segment profit grew 1% to $406,000,000 which reflects an improvement in volumes compared to the prior year quarter, which was adversely impacted by COVID-nineteen. This was largely offset by investments in information technology enhancements. As a reminder, last quarter we began deploying new technology platforms across our pharmaceutical distribution business as a part of a multi year journey to enhance our IT infrastructure.

Speaker 3

This rollout is tracking according to plan and we continue to expect incremental implementation and depreciation costs through the 1st 3 quarters of fiscal 'twenty 2. As Mike mentioned, During the quarter, we saw broad based sequential improvement in pharmaceutical demand, including generics. We continue to expect to recovery generic volumes to pre COVID levels by the end of the calendar year. Outside of volumes, our generics program Continue to experience generally consistent market dynamics along with strong performance from Redo. And during the quarter, Pharma saw double digit contributions from our growth businesses, specialty, nuclear and outcomes.

Speaker 3

Transitioning to the Medical segment on Slide 6, Medical revenue increased 5 percent to $4,100,000,000 driven primarily by PPE sales, partially offset by the Cordis divestiture. Segment profit decreased 46 percent to $123,000,000 primarily due to elevated supply chain costs. To a lesser extent, this also reflects the impact of the Cordis divestiture as well as net favorability in the prior year attributed to COVID-nineteen. As Mike mentioned, Medical segment profit was negatively impacted by increased product costs due to significant inflationary pressures in our global supply chain, particularly in the areas of commodities and international freight. In commodities, we have seen spikes in some key resins Such as polypropylene that are inputs into our self manufactured and sourced products with recent index prices nearly double where they were last year.

Speaker 3

And with international freight, we are seeing ocean container costs at roughly 8 to 10 times pre COVID levels. We believe the majority of these headwinds are temporary, but we do not expect them to abate this fiscal year. We are taking action, including through pricing and aggressive cost management. I will discuss these impacts to our full year medical outlook shortly. To wrap up the quarter, despite some impact from the Delta variant on elective procedure volumes, Overall, our customers continue to manage effectively and total elective volumes exited the quarter near 95% of pre COVID levels.

Speaker 3

Additionally, lab testing volumes remained significantly elevated above pre COVID levels, but was not a material driver to the quarter due to the strong performance in the prior year. Next on Slide 8, a few updates to our fiscal 'twenty two outlook. We are reiterating our EPS guidance range of $5.60 to $5.90 per share. This reflects updated expectations for the Medical segment as well as lower ranges for our tax rate and share count. We now expect our annual effective tax rate in the range of 23% to 25%.

Speaker 3

We also now expect diluted weighted average shares outstanding in the range of $280,000,000 to $282,000,000 As for the segment outlooks on Slide 9, First, we are adjusting our pharma revenue outlook to low double digit growth to reflect the strong branded pharmaceutical sales growth that we are seeing from large customers. For Medical, we now expect fiscal 'twenty two segment profit to be down mid single to low double digits. This change is driven by the significant increases in Supply chain cost inflation that I previously discussed, which is expected to result in an incremental net headwind of approximately $100,000,000 to $125,000,000 on the year. Given the anticipated timing of realizing these cost increases and our mitigating actions, as well as the timing of selling higher cost PPE, We expect a sequential decline in Medical segment profit in the 2nd quarter. Stepping back, the only large The operational item that we see meaningfully different today compared to our original fiscal 'twenty two guidance is the incremental impact of elevated Notably, We do not anticipate any material net impact in pharma from inflationary supply chain costs.

Speaker 3

And as noted last quarter, We still expect the cadence of our EPS guidance to be significantly back half weighted. Now to close, an update on capital deployment. We are focused on deploying capital in the balance sheet and our portfolio and have made tremendous progress on our strategy. We have been on a journey to improve our balance sheet and our portfolio

Speaker 2

and have made tremendous progress on the

Speaker 3

balance sheet and beginning to moderate, which will provide an increased ability to be more opportunistic with our return of capital to shareholders. On that note, two important updates. And we now expect approximately $1,000,000,000 of share repurchases in fiscal 2022, which includes the 5 and recorded. We believe that capital deployment along with the future growth that we expect in both our segments will be a key driver to

Speaker 2

Thanks, Thanks, Jason. Throughout the pandemic, we have responded to challenges with resilience and agility, Approaching every situation with a focus of delivering for our As we navigate the dynamic macroeconomic environment, we're taking action to mitigate Elevated costs and managed through temporary supply chain disruptions in medical. These actions include pricing adjustments, Cutting additional costs throughout the organization and accelerating additional growth opportunities. Outside of a continual focus on the customer, we are directing our efforts to 3 main areas that will support Our long term target of mid single to high single digit growth for the Medical segment. First, We are simplifying and continue to take decisive action to reposition the business for growth.

Speaker 2

We We have invested the Cordis business and have begun significantly reducing our international commercial footprint. We have announced in our markets, which will allow us to focus on the markets where we have a competitive advantage. Additionally, Our distribution facilities, we expect these simplification initiatives to contribute to our $750,000,000 enterprise cost savings target and position us to generate sustained long term growth. 2nd, we are focused on driving mix through commercial excellence. Our Cardinal brand portfolio has significant breadth with leading brands and clinically differentiated products such as Kendall Compress, Recognize that we are underpenetrated in Cardinal Health brand mix relative to our potential.

Speaker 2

An increase in private label penetration across our U. S. And in channel customer base. We see this as a significant opportunity to both deliver And 3rd, we're fueling our Medical segment and Medical Services, which includes Optifreight Logistics and These growth businesses are aligned with industry trends and positioned to capture market share and grow double digits in FY 2022 And beyond, we continue to invest in technology enhancements and innovative solutions We continue to see volume growth as care is rapidly shifting. We are investing in new technologies Moving Specialty Nuclear and Outcomes.

Speaker 2

We will continue to strengthen our core business by focusing in 3 primary Over 50 years, we've honed our distribution expertise And develop a strong customer base across multiple classes of trade Along those lines, during the quarter, we extended our distribution 2nd, we're managing our This program is anchored by the scale and expertise of Red Oak Sourcing, a partnership we also recently extended through FY 20 We are investing heavily in our technology to enhance customer experience and drive efficiencies. We are approaching The end of a multi year investment journey to modernize our IT infrastructure, which will yield meaningful working capital improvements and operational efficiencies. As for our 2nd overall pharma objective, Fueling our growth businesses, we continue to expect these three businesses to realize double digit growth over the next several years. And as these businesses grow, they will become a bigger portion of the overall Pharma segment. In specialty, key downstream and upstream initiatives will enable our growth.

Speaker 2

In oncology, we are competing differently downstream by transforming from a distribution led orientation to a focus on supporting independent oncology practices We are seeing commercial momentum with the Vista TS, our technology platform that helps oncology practices improve their performance in value based care. We have a strong presence in other therapeutic areas such as rheumatology, which today is a $4,000,000,000 distribution market growing double digits. We are also encouraged by the anticipated growth in biosimilars As more products come to market, such as the FDA's approval for the first interchangeable biosimilar insulin product, We're well positioned to support the next phase of biosimilar growth as adoption increases in areas outside of oncology. Upstream, we are expecting strong growth from higher margin services supporting biopharma manufacturers. We operate a leading 3PL supporting hundreds of manufacturers that continues to see wins and support new products coming to market in this business by FY 'twenty six.

Speaker 2

We continue to build out our multimillion dollar center for Theranostics Advancement in Indianapolis and our We are partnering with several companies to grow the pipeline of novel derinostics. For example, through our agreement with TerraPower, We will produce and distribute Actinium-two twenty five, a radionuclide involved in creating targeted therapies for several cancer types. And in outcomes, we continue to see and expect strong growth. This business has added new payers and PBMs and is expanding clinical solutions for both independent pharmacies and retail chains to include solutions to improve our cost structure As we work to streamline operations and execute our As I mentioned earlier, we recently increased our total cost reduction goal To $750,000,000 we're pairing Allocation with a focus on investing in the business, EPS growth and dividend yield. These expectations are driven by our growth targets for our segments, Our commitment to our dividend and our new $3,000,000,000 share repurchase authorization.

Speaker 2

Now let me provide an update on the proposed opioid settlement agreement and settlement process. In September, We announced that enough states agreed to settle to proceed to the next phase and each participating state is offering its political subdivisions The opportunity to participate in the settlement for an additional 120 day period, which ends on January 2, 2022. At that point, each of the distributors and the states will have the opportunity to determine whether there is a sufficient participation to proceed with the agreement. If all conditions are satisfied, this agreement Would result in the settlement of a substantial majority of opioid lawsuits filed by the state and local governmental entities. This is an important step forward for our company.

Speaker 2

As we've consistently said, we remain committed to being part of the solution The U. S. Opioid epidemic and believe the settlement would provide relief for our communities and certainty for our shareholders. Turning to ESG, these priorities remain critical to achieving a healthier, more sustainable world. We recently announced goals to reduce Scope 1 and Scope 2 greenhouse gas, increase minority representation in our global workforce by 2,030.

Speaker 2

In closing, what we do matters and it is our privilege to serve our customers, their patients and their communities around the world. And now, Jason and I will take your questions.

Operator

And our first question will come from Lisa Gill with JPMorgan. Please go ahead.

Speaker 4

Thanks very much. Good morning, Mike and Jason, and thank you for all the comments. Mike, I just want to go back to your comments around simplifying the operating model on the medical supply side And where you talked about driving the mix of Cardinal branded products. 1, can you Remind us what percentage of sales today are cargo branded products? And then 2, can you talk about the margin differential on those And then my third and last question would just be that now that you have the divestiture of Cordis behind And you, the sale of Curtis behind you.

Speaker 4

Are there other assets within Medical that would make sense to divest?

Speaker 2

Thanks, Lisa. Thanks for the question. Tough questions to answer because these aren't things We have historically given plenty of room to grow. Some of our accounts were significantly penetrated by account that we are going after. So we think There's plenty of opportunity there.

Speaker 2

It's one of the key reasons we believe in our longer term guidance for medical is the fact They are much more higher as a percentage and dollars than national brand. There are times in certain preferred brand programs, which is why we have them that We do prefer National Brand, but in general, as a rule of thumb, our margin rates are much more significant on our Cardinal sourced or Cardinal manufactured products. And then lastly around Cordis, we're Always looking at our entire portfolio of businesses to make sure we have the right type of businesses where we are positioned to win. There's nothing that sticks out there that, but we are, as I mentioned, we are exiting 36 countries. So not only do we look at products, but we look at products by country and countries and where We don't believe we have significant growth opportunity, where there might be too much risk versus benefit, etcetera.

Speaker 2

We have made real conscious decisions for exiting 36 countries to help simplify the model.

Operator

All right. And up next, please go ahead.

Speaker 5

Yes. Thanks for taking the question. Can you talk a little bit about the long term growth I guess first is when we're starting the Earnings growth, are you starting from fiscal 2022? And is that a 5 year target that we should be thinking about? Or are we jumping off from fiscal 2021 as sort of the And then secondly within that, can you just remind us again sort of what the Obviously, the earnings this year are back half weighted.

Speaker 5

Just remind us what the tailwinds that we should be considering

Speaker 3

Okay. Hi, good morning. This is Jason. I'll try to capture all those points. Your question is certainly fair as it relates to trying to define the Baseline for those longer term targets, as we indicated in the remarks today, we do anticipate this Additional $100,000,000 to $125,000,000 related to the inflationary environment as temporary.

Speaker 3

It's difficult certainly to define exactly if That's short term, medium term or longer term. And at the current moment, we would expect those to be a time frame that is relatively And so when we talk about these longer term targets, we are not A more normalized state when we provide those targets. You referenced 5 years. So I'd say 3 to 5 years is a reasonable type of timeframe for average types of performance levels To get a broad perspective on the ins and the outs, but we would not expect big shocks associated with items like that, Divestitures and acquisitions, things of that nature would also be normalized out of that, so that we're getting at that core type of performance. And then as it relates to more specifics around elevated supply chain costs, we highlighted Within our remarks that is really just 2 key areas, the international freight and the commodities In both, we've seen on international freight, which is essentially the cost of getting a ship We're seeing that cost up 8 to 10 times versus pre COVID levels And on the commodities, we're talking about a lot of different types of things.

Speaker 3

Those levels are more like So, again, we would expect those to get back to a more normalized state at some point But again, those are not tailwinds to get us to these targets. Those targets are more normalized. In terms of the second half, the various businesses, We did indicate that with pharma, we would expect the second half to continue to improve steadily versus Where we're at today, just as it relates to getting back to more normalized state for underlying generic volume, so that continues to be as expected. And also Our investments in our technology investments, we indicated would be front end loaded, especially with the 1st 3 quarters, primarily As it relates to that Q4, we started to implement those cost increases in the final implementation last Q4. So we start to Get the full year effect of that as we exit the Q3 here.

Speaker 3

We did indicate a sequential decline from Q1 to Q2 and that's just related to the timing of realizing that supply chain costs that was with that. And And then also recall that we cited the COVID favorability in Q2 of last year that is not expected to repeat. And in fact, we expect that to be A headwind this Q2, primarily as a result of the PPE We have that Q1 to Q2, and we have a very strong Q4 of COVID tailwind associated with the comparison benefit from the PPE in the prior year. And then in all of our businesses, we expect ongoing stronger contributions from our growth businesses as we see the various initiatives and investments that have been put in place over the course of last year. Next question.

Operator

And next question will come from Eric Percher with Nephron Research. Please go ahead.

Speaker 6

Thank you. Appreciate the supply chain commentary. I'd like to get a little bit deeper here. We used to have guidance on commodity impact. So I think anything you can provide relative to $17,000,000 of revenue or the cost that you incur To give us some sense there.

Speaker 6

And then thinking about commodity and freight, what is clearly passed along versus what represents a decision that has to be made. And what I'm really looking for is $100,000,000 to $125,000,000 of increased expense. What does that represent relative to the Total expense that you're seeing pass through?

Speaker 2

Yes. Thanks for the question. So let me see if I can help. First First of all, we, as you know, called out in our Q4 of last year that we did expect elevated supply chain costs. So in our Our guidance for this year for the Medical segment, we already assumed a certain amount of elevated supply chain cost, Some of which we had planned already to offset through cost reductions, pricing actions and those types of things and that was originally built in.

Speaker 2

What we saw during the quarter in those supply chain costs, most notably in international freight, high container that we talked about as well as commodities and those We feel we'll create an incremental $100,000,000 to $125,000,000 of cost for us. Roughly, I would say that 100 to 125 is split relatively evenly between the impact of commodities And the impact of freight, very significant. We saw other minor ones In other areas, but those were the really 2 big ones, both of which we believe are, Tim said earlier, they're at all time highs for the most part, significantly higher than where they were. And we believe that over time the market will adjust and those will be able to come back down. So what are we doing about that?

Speaker 2

That is a net to medical guidance is that we are getting after it through pricing actions, passing some of it through. It's hard to really talk about exactly which ones you can pass through or not. The market is very complicated. Our improved balance sheet and we are also focusing on our growth businesses and pushing our teams to do More faster there. So those are some I hope some helpful comments.

Speaker 2

Yes.

Speaker 3

And the only thing I'd add is that this increase is not It's related to 2 parts. It's a greater increase in both of these areas of international freight commodities, but it's also a longer Expected duration, we had anticipated they would come back to more normalized levels a bit earlier. So we saw a higher spike in a longer duration. And in terms of just how you model it through on revenue, I'd like to draw just draw a little bit of distinction with PPE, we saw Many, many times higher total impact on that product cost. And so we saw a much more significant number of dollars in both cost and revenue that came through.

Speaker 3

While this is still Significant, it's much less meaningful from a revenue perspective and it's not moving that needle nearly as much. Next question?

Operator

And next, we'll hear from Kevin Caliendo with UBS. Please go ahead.

Speaker 7

Thanks. Thanks for taking my question. So if I'm doing the math right, it appears that the bad guy that is the incremental supply chain costs Is larger than the good guy of the lower share count and perhaps the lower tax rate. Am I doing am I thinking about that And the fact that you didn't change guidance, is that just you're still within the range, but maybe it's The lower end of the range or you're just giving yourself a little room? How should we think about that?

Speaker 7

Yes.

Speaker 3

I think your math is accurate for the items that we typically provide in guidance. One area that's not explicitly called But as implied is just the underlying other corporate expenses. And as we referenced a few times already in Mike's specific comments, There's broad based cost reductions. The $750,000,000 program, which we increased by 250,000,000 Quarter is enterprise wide and that includes the corporate function. So we have identified additional corporate cost reduction actions that are not included in either of the Segments, but do fall through to the bottom line, the total segment profit as well as our earnings per share.

Speaker 1

Next question please.

Operator

And next we will hear from Michael Cherny with Bank of America. Please go ahead.

Speaker 8

Good morning. I want to dive a little bit more into some of the long term guidance and compare and contrast it with the dynamics Seeing right now in terms of supply chain, I know that a lot of these are out of your control and clearly some companies in the space are seeing similar approaches. That being said, as you think about the ways that you're interacting with your customers now, interacting with your partners and supplier partners, are there any ways that you can Continue to evolve your business so that maybe we don't see ever spikes like this, but some of the fluctuations and volatility that you have seen in the supply chain in the past and I'm thinking in particular on some of the raw material cost spikes that do come up from time to time are ways that can be mitigated in a more systematic fashion going So we don't have this level of volatility and a little surprise for stuff that, as I mentioned, a lot of it tends to be out of your control.

Speaker 2

Yes. I really appreciate the question. It's a really good one. So let me step back and hit a couple of different pieces and I'll finish with your Question on medical, but I'll take a shot here to emphasize a few others. So there's really, I would say, 3 obviously components to our long term target, which our long term target we're talking about is having a Double digit combined EPS growth and dividend yield on average as Jason mentioned.

Speaker 2

In pharma, to your point, we don't really see those fluctuations in commodities and costs Affecting that business generally because if it does, it generally happens in the form of the drugs having increases, which And that model are able to be passed on and work through the model. And so our goal of low single digit to mid single digit growth And pharma is really focused on strengthening that core PD balance, getting that right mix of generics, Making sure we're managing the balancing through our margin initiatives and all that as well as then driving our growth businesses, Especially nuclear and outcomes and we gave some color on those. Hopefully you found helpful and exciting for instance nuclear doubling in the next 5 years, Specialty continuing and outcomes continuing with double digit growth. So we believe the combination of getting that PD business Stabilize, which we're seeing and then seeing the growth there is really what's going to drive that. And then of course, we mentioned The use of capital being able to having our debt lower commitment to our dividend and then the share repurchases.

Speaker 2

On medical, as you mentioned, it's a couple of different things. It's simplifying our operating model, focusing on driving mix and fueling our growth businesses. I won't go into those details because we did in the comments, but to your question, what kind of changes can we make that help, it's really One of the things we are working on with customers right now is how do we change our contracts with our customers To give us more flexibility when there is sudden significant changes in the supply chain That there is some ability to raise price. Our discussions with our customers are being very transparent. We want to be able to make sure that if we're able to do that, we're very willing to tie those things to indexes and things, so they understand that as they come back down.

Speaker 2

We're not we're willing to pass lower costs back on to them because we don't want to look at this as a necessarily a chance to To improve our margins, we'd like to do that through driving mix and launching more products, not on the backs of our customers during a supply chain. So we are working with them to create contracting methods that will allow us to be able to pass those on As well as help them understand what are the metrics we will do to be able to know for them when they're changed the other direction too.

Operator

All right. And our next question will come from Jalendra Singh with Credit Suisse. Please go ahead.

Speaker 7

Hi. This is Adam on for Jalendra today. Thanks for taking the question. Going back to your long term growth targets, just wondering if you take into account the capital allocated To the anticipated opioid settlement payments or how we should be thinking about that potential impact as it relates to being able to invest Across some of your growth and higher margin businesses.

Speaker 3

Yes. Good morning, Adam. This is Jason. Yes, so That would incorporate that as we think about the capital deployment side of that, we have for quite some time now included in an expectation of what those payments would be. That's of what those payments would be.

Speaker 3

That's all based upon our current set of assumptions, of course. And if that would change materially, then that would change the answer. But based On what we know now that would be the baseline, for example, the $3,000,000,000 share repurchase authorization that we have just completed It's inclusive of that as well. It's a part of the capital outlay that we would expect over that period of time and this would be the available capital beyond that. Next question?

Operator

And up next, we'll take a question from Steven Valiquette with Barclays. Please go ahead.

Speaker 9

Hi, thanks. Good morning, everybody. So just a question on the Medical segment. You mentioned that despite Some impact from the Delta variant that the total elective volumes exited the quarter near 95% of pre COVID levels. I guess I'm curious if there's any updates on your assumptions for the pace of return of procedures for the remainder of fiscal 2022?

Speaker 9

And is this also a positive factor that helps to offset some of the negatives that you discussed within the Medical segment? Thanks.

Speaker 3

Yes. There was a little bit of a reduction in that base in that Level of elective procedures in the Q1, we started the quarter at close to pre COVID levels. And as we indicated, we exited and then back at It's about 95%, and we think that's primarily attributed to the Delta variant. So we see that trending in the right direction. And with The pace of the virus since then, we feel that will continue to improve.

Speaker 3

And importantly, what we saw in the quarter is we saw improvement in our lab business that effectively offset that modest deterioration in the amount of elective procedures. So What we're seeing right now is that those two items tend to generally offset, both good and bad depending upon the pace of the virus. So it's nothing significant that we saw in the And as a result, we don't anticipate there being wild fluctuations going forward. Next question?

Operator

And next, we'll take a question from Stuart Hill with Deutsche Bank. Please go ahead.

Speaker 7

Good morning, guys. And this is the 2nd time this earnings season has been Stuart. Jason and Mike, just kind of a quick question on the long term guide, which is, I guess, over the long term, how do you think about the underlying operating earnings growth Contribution versus the capital deployment or inorganic growth contribution?

Speaker 2

Well, I think if you as you break down the long term targets, when we were really talking about pharma being low single digits The mid single digit growth, we're really talking about the operating earnings of that segment being in the low single to mid single, medical being in mid single to high Single digit and then the rest of it would come from our dividend yield as well as capital deployment around repo to get to the double digit combined EPS growth and dividend yield. So The guidance on medical and pharma is really about operating earnings. And I would also say that M and A is not A top priority in this, that may occur, and we may have some of that here and there and that is one option with capital deployment, but This is really more focused on what we talked about operating earnings growth as well as dividend yield and opportunistic repo. Next question.

Operator

And our last question will come from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Speaker 10

Yes. Hi. Good morning. So on the long term double digit growth, I know you talked about the growth rate being sort of on a normalized basis. So should we take that long term double digit growth Back out from 2022 guidance sort of the abnormal costs that you're seeing normalize for them and then apply that growth rate to get The 2023.

Speaker 10

So that's the first part of the question. And then secondly, as we think about these sort of transitory costs in nature, You talked about $100,000,000 to $125,000,000 costs related to the supply chain. What's the contribution of labor cost To that headwind, because when we think about labor costs, we think about it as potentially more structural, because once you raise someone's salaries, it's difficult To bring it back down, so how should we think about that component within the additional cost?

Speaker 3

Sure. Good morning, Ricky. This is Jason. I'll start. As we talk about our long term targets, It's not expected or intended to be each and every year.

Speaker 3

There's a reason that we do highlight that as an average over that period of time. So we are not providing fiscal 'twenty three guidance with the statement. With that said, we think that there are over these longer periods of time that these would be the primary drivers and We would have for our businesses. And but how you described it about the normalized level as an example that 100 to 125, We indicated that we anticipate these costs remain elevated for the balance of fiscal 2022. We are not taking a position at this Point as to how much, if any, carries over into fiscal 2023.

Speaker 3

That is a terrific example of an important element of fiscal 2023 guidance that we will provide in the future That is not, at this point, something that we feel comfortable being able to identify. And then your question about labor is a Great one. We did not call it out because it is very consistent with what we had last quarter. So while labor Inflation and those pressures are very real for us like the whole industry. We are not seeing anything new and unique this quarter versus last quarter.

Speaker 3

And so we're not adding in any additional costs for that. But I would also highlight that even what was included in the original guidance Was not nearly as substantial as the costs that we're referencing for what was included before for commodities and international freight. Those are clearly the most significant items that drive that fluctuation and items like labor as well as more Stick related costs such as domestic transportation and other fuel are all relatively low compared Those other two primary items of International Freight and Commodities.

Operator

And that concludes our Q and A session for today. I will turn the call back over to CEO, Mike Kauffman for closing remarks.

Speaker 2

I want to thank everybody for taking the time to be on the call today and for all of your questions. I'd like to conclude with just a few thoughts. I know the elevated product costs within the Medical segment garnered a lot of attention here today, but I want to just reiterate 1, we do believe the majority of these costs are temporary 2, that we are taking aggressive enterprise wide actions to help mitigate And 3, we did reaffirm our non GAAP EPS guidance. Additionally, in pharma, we're encouraged by the profit growth we saw in the And the ongoing resiliency in this business with an additional $3,000,000,000 share repurchase authorization and our commitment to our dividend, We are positioned to return capital to shareholders while prioritizing investment in our growth businesses, simplifying our operating model in strengthening our core businesses. And together, this gives us confidence in achieving the new long term growth targets that we provided.

Speaker 2

With that, thank you again. We

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Earnings Conference Call
Cardinal Health Q1 2022
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