Cardinal Health Q4 2021 Earnings Report

Cardinal Health EPS Results

• Actual EPS: $0.77
• Consensus EPS: $1.20
• Beat/Miss: Missed by -$0.43
• One Year Ago EPS: $1.04

Cardinal Health Revenue Results

• Actual Revenue: $42.59 billion
• Expected Revenue: $40.25 billion
• Beat/Miss: Beat by +$2.33 billion
• YoY Revenue Growth: +16.10%

Cardinal Health Announcement Details

• Quarter: Q4 2021
• Date: 8/5/2021
• Time: Before Market Opens
• Conference Call Date: Thursday, August 5, 2021
• Conference Call Time: 12:41PM ET

Cardinal Health (NYSE:CAH) is a multinational healthcare services and products company headquartered in Dublin, Ohio. Tracing its roots to the early 1970s, the company has grown into a major provider of supply chain and distribution services for the healthcare sector. Cardinal Health operates across a range of service lines that support hospitals, health systems, pharmacies, physician offices and clinical laboratories.

The company's core activities include the wholesale distribution of branded and generic pharmaceuticals, the supply and distribution of medical-surgical products, and the provision of logistics and inventory management solutions. Cardinal Health also offers specialty services for pharmacies and health systems, including medication management, nuclear pharmacy services, clinical product offerings and solutions designed to improve operational efficiency. Its product portfolio spans consumables such as gloves and surgical supplies to capital equipment, diagnostic and laboratory products, and software-enabled supply chain services.

Cardinal Health serves customers across the United States and in international markets, delivering products and services through an extensive distribution network and logistics infrastructure. The company supports a broad set of healthcare stakeholders — from independent and chain pharmacies to large health systems and manufacturers — and emphasizes integrated supply chain solutions, regulatory compliance and operational support. Cardinal Health is managed by an executive leadership team and governed by a board of directors focused on delivering healthcare supply chain services and innovation for its clients.

Cardinal Health Q4 2021 Earnings Call Transcript

Key Takeaways

• Inventory Reserve Impact: Cardinal booked a $197 million inventory reserve for highly commoditized PPE in Q4, driving results below expectations.
• Opioid Settlement: Cardinal negotiated a proposed settlement of up to $6.4 billion over 18 years to resolve a majority of governmental opioid lawsuits, subject to state and local participation.
• FY 2022 EPS Guidance: The company expects non-GAAP EPS of $5.60 to $5.90, incorporating $120 million in technology investments and the Cordis divestiture.
• Cost Savings Initiatives: Cardinal identified an additional $250 million in enterprise cost-savings opportunities and plans to deliver these savings by FY 2023 through supply chain and operational improvements.
• FY 2021 Performance & Cash Flow: Revenue grew 6% to $162 billion and EPS rose 2% despite a $200 million COVID headwind, while operating cash flow reached $2.4 billion and shareholder returns accelerated.

Presentation

[Operator]

Welcome to the Cardinal Health, Inc. fourth quarter fiscal year 2021 earnings conference call. Today's conference is being recorded. At this time, I would like to turn the conference over to Vice President of Investor Relations, Kevin Moran. Please go ahead, sir.

[Kevin Moran, VP of Investor Relations at Cardinal Health Inc]

Good morning, and welcome. Today, we will discuss Cardinal Health fourth quarter fiscal 2021 results, along with guidance for fiscal year 2022. 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 Kaufmann, Chief Executive Officer, and Jason Hollar, 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 description of these risks and uncertainties. Please note that during the discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP.

[Kevin Moran, VP of Investor Relations at Cardinal Health Inc]

GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. During the Q&A portion of today's call, we please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity. With that, I'll now turn the call over to Mike.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Thank you, Kevin. Good morning, everyone. I will start my comments today by acknowledging that our fourth quarter results were below our expectation and yours, primarily due to an inventory reserve adjustment of $197 million. This reserve adjustment was driven by changing market conditions related to COVID-19 on certain highly commoditized PPE products. To meet our customer commitments during the pandemic, we carried higher levels of inventory in certain PPE categories during a period of significantly increased demand, higher prices, and longer than normal supply chains. Our analysis at the quarter end of both the anticipated customer demand and projected future sale prices for these products resulted in a sizable inventory reserve that affected a subset of our medical products inventory. In addition, there were a few other unexpected items that affected our results, which Jason will cover in his remarks.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Throughout the past year, we have been taking action to drive performance, and we will continue to move forward with urgency. For example, we divested the Cordis business, extended our Red Oak Sourcing agreement with CVS Health, identified $250 million of additional cost savings opportunities, restructured parts of our organization to increase accountability, and made important leadership changes. We are continually reviewing our business and seeking areas to improve. With the actions we've taken to date and our plans for FY 2022, we feel confident in our strategy and are encouraged by the tailwinds behind our growth areas and strong cash flow generation. In FY 2021, we grew revenue 6% versus the prior year, and despite an estimated $200 million year-over-year operating earnings headwind related to COVID-19, we grew EPS. We continued to aggressively streamline our cost structure and surpassed our enterprise cost savings target for the third consecutive year.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We generated strong operating cash flow, prioritized returning cash to shareholders through dividends and share repurchases, and took actions to further strengthen our balance sheet. As I reflect on the unprecedented events of the past year, our team has prioritized our customers, maintained continuous operations, partnered with governmental agencies to support vaccine administration and protect patients, and further improved the resiliency of our supply chain. Before turning it over to Jason, I want to highlight last week's announcement that we have negotiated a comprehensive proposed settlement agreement and settlement process designed to achieve broad resolution of governmental opioid claims. If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities, and depending on the level of state and subdivision participation, we would pay up to $6.4 billion over 18 years.

[Mike Kaufmann, CEO at Cardinal Health Inc]

This is an important step forward for our company. As we've consistently said, we remain committed to being part of the solution to the U.S. opioid epidemic and believe a settlement would be a prudent way to provide necessary relief for our communities and certainty for our shareholders. With that, I'll turn it over to Jason to further discuss our results and FY 2022 guidance.

[Jason Hollar, CFO at Cardinal Health Inc]

Thanks, Mike, good morning, everyone. In the fourth quarter, we delivered EPS of $0.77, which, as Mike mentioned, included a $197 million inventory reserve on certain PPE in the Medical segment. Turning to the Pharma segment on slide 6, fourth quarter revenue increased 15% to $38 billion, driven primarily by sales growth from large pharmaceutical distribution and specialty solutions customers. As a reminder, the fourth quarter of fiscal 2020 included reduced pharmaceutical demand related to COVID-19, which to a lesser extent, contributed to the growth in the quarter. Pharma segment profit was flat in the fourth quarter at $358 million. This reflects COVID-19 related volume recovery in our nuclear business, offset by pharmaceutical distribution customer contract renewals. This impact from renewals was in line with our expectations and generally consistent with prior quarters.

[Jason Hollar, CFO at Cardinal Health Inc]

However, there were some other items, including inventory adjustments and opioid-related legal costs, that were higher than previously assumed. As we've mentioned, we continue to prioritize investing for growth and optimizing our core operations. In the fourth quarter, the deployment of some of these technology enhancements resulted in incremental costs for implementation and depreciation, which we also expect the next several quarters as we continue to deploy new capabilities. I will further discuss our investments as we look to fiscal year 2022. As we highlighted last quarter, we continued to experience softer volumes in certain therapeutic classes within our generics program. Our generics program continued to see generally consistent market dynamics. With respect to other product types, including brand, specialty, and consumer health, we largely saw volumes at or above pre-pandemic levels during the fourth quarter.

[Jason Hollar, CFO at Cardinal Health Inc]

In Medical, depicted on slide seven, revenue increased 23% to $4.2 billion in the fourth quarter. This revenue increase was driven by a net positive impact from COVID-19 on products and distribution, primarily due to a recovery in elective procedure volumes and a positive PPE pricing impact. Medical segment loss of $63 million in the fourth quarter was due to an adverse impact from COVID-19, primarily due to the previously mentioned inventory reserve, partially offset by a recovery in elective procedure volumes. Additionally, benefits from cost savings initiatives were offset by elevated supply chain costs. During the quarter, we were encouraged to see elective procedure volumes effectively return to near pre-COVID-19 levels. While our team continued to execute on our cost savings and efficiency initiatives within our global manufacturing and supply chain, we did experience elevated supply chain costs, particularly in the areas of freight, labor, and commodities.

[Jason Hollar, CFO at Cardinal Health Inc]

We are taking actions to help mitigate these impacts, but as we look forward, we do expect some of these higher costs to continue into next year. Now I'll transition to full-year results, beginning with the enterprise. Total company revenue increased 6% to $162 billion, with strong top-line growth in both segments. Consolidated gross margin decreased 2% to $6.8 billion. Despite sales growth, SG&A decreased 1%, reflecting the benefits of our enterprise-wide cost savings measures. Operating earnings decreased 5%, reflecting a headwind of approximately $200 million year-over-year related to COVID-19, which was split fairly evenly between the segments. Excluding COVID-19, operating earnings would have grown in the low single digits in fiscal 2021.

[Jason Hollar, CFO at Cardinal Health Inc]

Moving below the line, interest and other decreased 44% to $133 million, driven by multiple items, including lower interest expense from debt reduction actions, an increase in the value of our deferred compensation plan, and one-time investment gains. As a reminder, deferred compensation gains or losses reported in interest and other are fully offset in corporate SG&A and net neutral to our bottom line. Our annual effective tax rate finished at 22.8%, benefiting from discrete items. We finished the year with EPS of $5.57, reflecting growth of 2% despite the net COVID-19 headwind. Turning to the balance sheet, we continue to operate with high net working capital efficiency, generating robust operating cash flow of $2.4 billion for the full year. We finished the year with a strong cash position of $3.4 billion, with no outstanding borrowings on our credit facilities.

[Jason Hollar, CFO at Cardinal Health Inc]

As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We continued to deploy capital according to our priorities, investing $400 million back, which occurred primarily in the fourth quarter, and returning nearly $800 million to shareholders through dividends and share repurchases. As for the segment's full year results, beginning with Pharma on slide 10, Pharma revenue increased 6% to $146 billion, driven by sales growth from pharmaceutical distribution and specialty solutions customers. Pharma segment profit decreased 4% to $1.7 billion due to volume declines in the company's generics program, including the impact of COVID-19. This was partially offset by favorable brand sales mix. Excluding COVID-19, we estimate the Pharma segment would have grown low single digits in FY 2021. Turning to Medical on slide 11.

[Jason Hollar, CFO at Cardinal Health Inc]

Full year medical revenue increased 8% to $16.7 billion, driven by a net positive impact from COVID-19 on products and distribution. As we saw throughout the year, this increase was primarily due to the impact of PPE sales and higher volumes in our lab business. Medical Segment Profit decreased 13% to $577 million due to an adverse impact from COVID-19 on products and distribution. This was primarily due to the fourth quarter inventory reserve on certain PPE products, partially offset by higher volumes in our lab business. The team delivered strong cost savings, including global manufacturing efficiencies on the year. When adjusting for COVID-19 related impacts in medical, we estimate the segment would have grown mid-single digits for the full year.

[Jason Hollar, CFO at Cardinal Health Inc]

While our fiscal 2021 results fell short of our expectations, the underlying growth we saw in both segments excluding COVID-19 gives us confidence as we move into next year and the pandemic's effects on our businesses continue to dissipate. Turning to our guidance for fiscal 2022 on slide 13. We expect earnings per share in the range of $5.60-$5.90. This reflects incremental technology investments of approximately $120 million to drive growth and efficiencies across the enterprise, the Cordis divestiture, and other assumptions that we will detail momentarily. We expect interest in other in the range of $150 million-$180 million. We anticipate continued reduction in interest expense with the increase or the prior year primarily result of the fiscal 2021 favorability in deferred compensation not expected to repeat. We are assuming a non-GAAP effective tax rate in the range of 23.5%-25.5%.

[Jason Hollar, CFO at Cardinal Health Inc]

We expect diluted weighted average shares outstanding in the range of 287 million-292 million, and CapEx of $400 million-$450 million. Transitioning to the segments beginning with Pharma on slide 14. We expect high single-digit revenue growth driven by growth from large customers and continued COVID-19 recovery and mid-single digit segment profit growth. We anticipate COVID-19 will be an overall tailwind of approximately $100 million to Pharma segment profit compared to the prior year. While we will likely continue to see some choppiness, we expect volume recovery in certain generic therapeutic classes by the end of the calendar year. As mentioned, we are investing in technology enhancements to drive growth and efficiencies, which we expect will lead to an $80 million segment profit headwind in fiscal 2022, including the annualization of the investments made in the fourth quarter.

[Jason Hollar, CFO at Cardinal Health Inc]

Adjusting for the COVID-19 related impacts on the incremental technology investments, we see pharma normalized growth in the low to mid-single digit range. We believe normalizing for these impacts provides a better approximation for the long-range growth trajectory of the business. As for other assumptions, we continue to expect consistent market dynamics in our generics program. We expect increased contributions from our growth areas, specialty, including biosimilars, nuclear, and outcomes. We anticipate a similar contingent brand inflation rate as in fiscal 2021, with continued less dollar contribution each year. We expect opioid-related legal costs of approximately $125 million, an increase of $10 million versus fiscal 2021. For medical on slide 15, we expect revenue to be approximately flat in fiscal 2022, primarily due to the prior year COVID-19 comparison with low double-digit segment profit growth.

[Jason Hollar, CFO at Cardinal Health Inc]

With respect to COVID-19, we expect an approximate $100 million year-over-year tailwind to medical segment profit. We are assuming elective procedures will remain at or near pre-COVID levels for the duration of the year. We expect moderate headwinds in FY 2022 related to timing of selling higher cost PPE products and lower lab testing utilization versus the prior year. We anticipate a year-over-year comparison benefit related to the PPE due to exchange rate favorability and other operating improvements within the business in the prior year. Additionally, we expect to invest an incremental $20 million in technology enhancements in our at-home business to drive growth and efficiencies. Adjusting for these items, we see normalized medical segment profit growth of mid to high single digits in FY 2022. Finally, as seen in the fourth quarter, we expect elevated supply chain costs to persist, particularly in the first half of the year.

[Jason Hollar, CFO at Cardinal Health Inc]

We anticipate these elevated costs will be partially offset by the continued benefits from our global manufacturing and supply chain transformation, which will ramp up throughout the year. A few additional comments on the expected cadence next year. We expect profit growth to be significantly back-half weighted in both segments. In Pharma, this is primarily driven by the timing of the previously mentioned incremental technology investments being more weighted towards the front half, as well as stronger expected second half performance in our generics program, including the impact of COVID-19. In Medical, in addition to the elevated supply chain costs, we also anticipate the total unfavorable fiscal 2022 COVID-19 impact of approximately $50 million to occur primarily in the first half of the year. As a reminder, we also experienced favorable COVID-19 impact in the first half of fiscal 2021, which was of a similar magnitude.

[Jason Hollar, CFO at Cardinal Health Inc]

Across the organization, we continue to place a high priority on cash flow generation, as well as allocating capital in a balanced, disciplined, and shareholder-friendly manner. Our strong cash flow and improving capital position will enable our capital allocation priorities, support our company's obligations, and provide increased flexibility and the ability to be more opportunistic in our capital deployment. Along those lines, we anticipate deploying the Cordis proceeds through a combination of share repurchases and debt paydown, which is expected to offset the earnings dilution on a pro forma basis. We expect share repurchases in the range of $0.5 billion-$1 billion in FY 2022. In addition, we expect total debt paydown of approximately $850 million, reflecting the completion of the remaining June 2022 debt tower at or before maturity. With that, I'll now turn it over to Mike.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Thanks, Jason. To be clear, we are disappointed with this finish to the year and are moving forward with a sense of urgency to improve our operations and execute our strategy. We're prioritizing investment in our strategic growth areas and expect these businesses to collectively realize double-digit growth in FY 2022. Across our business, we're enhancing our IT infrastructure in key areas to increase capabilities and digitization, improve the customer experience, and drive productivity. While we expect to benefit from these investments this fiscal year, the majority of these benefits will materialize in FY 2023 and beyond. In pharma, we're investing an additional $80 million in technology infrastructure to create additional operational efficiencies, improve data insights, and drive cost synergies to enhance our ability to grow and generate better outcomes for our customers. Our generics program remains a critical priority.

[Mike Kaufmann, CEO at Cardinal Health Inc]

This week, we extended our Red Oak agreement with CVS Health for an additional five years, which takes the term of our generic sourcing joint venture through June 30th, 2029. This ensures that we can continue to deliver best-in-class sourcing capabilities for our customers well into the future. We are also investing in data and analytics, including our pricing capabilities, as we continue to focus on managing all components of our generics program and expect market dynamics consistent with the last few years. We remain committed to supporting the retail pharmacy community. At our recent annual retail business conference, we connected virtually with over 4,000 retail independent pharmacy customers and launched two new digital offerings, NavixRx and E-Commerce Storefront, to help independent pharmacies expand their services and improve healthcare outcomes.

[Mike Kaufmann, CEO at Cardinal Health Inc]

In specialty, we're investing in our Sonexus patient hub, where our technology solutions help biopharma customers remove barriers to patient care. In our third-party logistics business, we're expanding our cold chain storage space to accommodate the growing number of temperature-sensitive products, including cell and gene therapies. In nuclear, we received FDA approval to use our radioactive diagnostic agent, LYMPHOSEEK, in pediatric patients one month and older. We continue to build out our multimillion-dollar Center for Theranostics Advancement in Indianapolis and are also investing to expand our PET capabilities. We expect double-digit profit growth in nuclear over the next several years. In outcomes, we also expect double-digit profit growth as we expand our direct-to-patient digital footprint and implement new patient adherence programs.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Turning to medical, we have been taking quick, decisive action throughout the fiscal year to streamline and simplify our medical business, and this work remains a top priority heading into FY 2022. We've recently restructured our organization to establish clearer lines of ownership and accountability and made some management changes, including appointing a single leader to manage U.S. medical products and distribution, as well as a single leader to manage international. With the divestiture of Cordis, we plan to significantly reduce our international commercial footprint and have initially identified 36 markets we intend to exit so we can focus on the locations where we have a competitive advantage and can generate sustained long-term growth. We're laser-focused on enhancing supply chain resiliency, improving business continuity, and investing in advanced planning capabilities to drive forward-looking insights to better serve our customers and their patients.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Our medical services businesses, OptiFreight Logistics and WaveMark, continue to enable clinically integrated and digitally automated supply chains. Our at-home business continues to focus on enabling and supporting comfortable home-based care for patients with acute and chronic conditions. We continue to see volume growth as care is rapidly shifting to the home. For FY 2022, we're investing an additional $20 million in technology infrastructure to create operational efficiencies and better data visibility. With respect to the enterprise, we're aggressively reviewing our cost structure to continue streamlining our operations and processes and intend to reinvest a portion of these savings to fuel future growth. In FY 2022, we plan to launch initiatives that will deliver at least an additional $250 million savings by FY 2023.

[Mike Kaufmann, CEO at Cardinal Health Inc]

As Jason discussed earlier, we take a balanced, disciplined, and shareholder-friendly approach to capital deployment with a focus on investing in the business, maintaining a strong balance sheet, and returning cash to shareholders. In closing, I want to thank our employees for their hard work and contributions that make it possible for Cardinal Health to fulfill its mission of improving the lives of people every day. Now Jason and I will take your questions.

[Operator]

Thank you. And if you would like to ask a question, please signal by pressing star one on your telephone keypad. If you are using a speakerphone, please make sure your mute function is turned off to allow your signal to reach our equipment. Once again, everyone, to ask a question, please press star one on your telephone keypad. We'll pause for a quick moment to assemble the queue. Our first question will come from Michael Cherny with Bank of America. Please go ahead.

[Michael Cherny, Analyst at Bank of America]

Good morning. Thanks so much for the question. I want to dive a little bit more into the capital deployment priorities as you think about into 2022. Obviously, you have the Cordis proceeds that are coming in about $1 billion. I believe, the tax receivable agreement, if I recall, is about $1 billion or so. I could double-check that in the last quarter's transcript. When you think about that, think about your cash position as you sit now and the free cash that you're going to generate this year, even with the investments that you're making, do you think there's an opportunity to be a bit more aggressive either on the buyback, given where your stock sits in the market, on M&A, given that you talked about a number of growth priorities, of which I assume there's some bolt-on transactions?

[Michael Cherny, Analyst at Bank of America]

Curious about that philosophy, where you sit now, given that the company is in as strong a balance sheet position as I can recall seeing in a while.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Thanks, Mike. I appreciate the question, and we are really excited about the work we've done around that. I'm going to have Jason give you a little bit more color on it.

[Jason Hollar, CFO at Cardinal Health Inc]

Yeah. Thanks, Mike. First of all, yeah, I think we had some really great cash flow this last year, so $2.4 billion of operating cash flow, and that resulted in $3.4 billion ending cash balance, which does include the $500 million debt paydown that we completed in the fourth quarter. As you indicated perfectly, we're stepping into this year with a lot of flexibility even before the Cordis transaction closed, which was just a few days ago, which does add another $1 billion to that balance. As we highlighted in some of those comments this morning, we do expect to pay down the $850 million that's coming due by the end of the fiscal year or before the end of the fiscal year. That will be some of those uses.

[Jason Hollar, CFO at Cardinal Health Inc]

Then, of course, we guided towards the $0.5 billion-$1 billion for the share repurchases, which is a fairly wide range and reflective of some of the flexibility that we talked about. As I think about the Cordis proceeds, of course, cash is somewhat fungible. Essentially, that $1 billion, how we're thinking about it is accelerating some of that debt paydown and a portion of that $0.5 billion-$1 billion. We feel real good about that as we entered into the first quarter here. You referenced the tax receivable, and I don't think we provided any updated comments on that so far. Last quarter, I referenced that we expect it by the end of the calendar year. That's still our expectation.

[Jason Hollar, CFO at Cardinal Health Inc]

Like I think a lot of different organizations throughout the world right now, I think COVID-19 has impacted some of the processes and a little bit less certainty as to the precise timing. We still feel pretty good that that's a good approximate timeframe. When you think about receiving those proceeds perhaps late in the calendar year, there will be less time to actually deploy those to the balance of this year. That's certainly still a potential opportunity to get us maybe to some of the higher ends of that range. Nonetheless, there's a lot of flexibility that goes along with that. As you indicated, when we talk about the opportunistic uses, essentially we have increased flexibility here.

[Jason Hollar, CFO at Cardinal Health Inc]

M&A is always on that list, and it depends on the opportunity, the valuation, and what we see it delivering to us strategically, and so that will be another thing that we evaluate along the year. Thanks for the question.

[Operator]

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

[Kevin Caliendo, Analyst at UBS]

Great. Thanks. I just want to expand on that a little bit. I guess I don't understand why you're not being more aggressive with the buybacks, given the settlement looks like it's largely done. The cash on hand is greater. The stock's going to come under pretty meaningful pressure today, most likely. What's stopping you from going out and buying $2 billion of stock or more? Are there any credit issues or anything else that you're concerned about? Also, on the buyback, if I'm doing the math right, it feels like the numbers don't entirely jibe to get to that $0.21. Is it just simply the timing that it would happen so late in the year is why the buyback wouldn't cover the sort of $0.21 of dilution from Cordis?

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah, let me start, Kevin, and then I'll turn it back over to Jason. I'll just comment specifically on the opioid piece and then let Jason give you a little bit more information. The opioid, as we said, we're pleased to get to the point where we are right now where we have a comprehensive settlement out there, but it does have a few more steps left in it. We do have to wait and see if we get the states and cities and counties to sign on to get enough critical mass in order to make a final decision. We do have some time left on that to make sure that we understand exactly with clarity where that's going to be. We're pleased with where we are as far as an initial step of finally getting something out there for people to consider.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Let me now turn it over to Jason to go into a little bit more of the other detail that you asked about.

[Jason Hollar, CFO at Cardinal Health Inc]

Yeah. As it relates to dilution on the quarters that was implied or referenced within there, it's just a matter of the timing of which you assume when we pay down the debt and when we would complete the share repurchases. So there's an opportunity for that to have a reasonable range, and that guidance range, we think, reflects what we think that possibility may be. The key thing on a pro forma basis is that extra $1 billion will be deployed in some manner, and we will see, and certainly within fiscal 2023 run rate, there will not be dilution expected for that divestiture. As it relates to yet another question, somewhat as it relates to credit issues, there's nothing there. We're on a glide path to getting to our targeted leverage ratio.

[Jason Hollar, CFO at Cardinal Health Inc]

A key part that I referenced last quarter is that this remaining debt that's coming due at the end of this fiscal year is a key part of getting us towards those targets. I indicated last quarter that I would anticipate the level of debt paydown to begin to diminish after this fiscal year. That continues to be our expectation. There's a lot of factors, as Mike just referenced, that could play into that. Overall, that remains our viewpoint, and there's nothing here that is, I'll say, overly constrictive from that point. Just a little bit of prudence until we get some of these risks and uncertainties defined, and we also need to see underlying performance and cash flow over the course of the year. As I mentioned before, we do have some additional flexibility as it relates to the precise timing of the tax receivable.

[Operator]

Up next, we will take a question from Jailendra Singh with Credit Suisse. Please go ahead.

[Jailendra Singh, Analyst at Credit Suisse]

Thank you, and good morning, everyone. I want to go back to your inventory reserve impact on PPE in the quarter. Can you elaborate a little bit more on what products this relates to? Is there a potential that you might have another write-down in fiscal 2022? What kind of initiatives you are putting in place to ensure that this does not happen again?

[Jason Hollar, CFO at Cardinal Health Inc]

Sure. Yeah. I'll go ahead and start it. As Mike mentioned, the key thing here is that there's a lot of uncertainties with the pandemic, and we were first and foremost going to put our customer commitments in front of us, and that resulted in a higher level of inventory that we carried over that period of time. That happened while there was obviously increasing demand, higher prices, and longer than normal types of supply chains. Every quarter, we would step back and do our analysis and determine what the net realizable value of that is, and then make any adjustments that may be necessary. As Mike highlighted, there were some highly commoditized products. It's a subset of our PPE that, think of it as those products that would have more volatile type of pricing.

[Jason Hollar, CFO at Cardinal Health Inc]

We saw that move more dramatically over the period. Given it was a subset of our inventory, it was relatively defined. It was a relatively large percentage reduction within that, but it was contained to a certain subset. Again, we're not getting into all the details, product by product, but it was that type of product that had a little bit less of the value add, and then therefore, a little bit easier to get more supply into the market, and that drove the prices down quicker than other products. Anything else to add, Mike?

[Mike Kaufmann, CEO at Cardinal Health Inc]

Only I'd reiterate that our focus has always been, and will continue to be on our customer, and it was important to us from the very beginning of this pandemic to acquire critical PPE for our customers. As Jason says, we did ramp up during a period of higher demand and higher prices and longer supply chains.

[Jason Hollar, CFO at Cardinal Health Inc]

Next question, please.

[Operator]

Next we will hear from Ricky Goldwasser with Morgan Stanley. Please go ahead.

[Ricky Goldwasser, Analyst at Morgan Stanley]

Yeah. Hi, good morning, and thanks for all the details you provided in the prepared remarks. Just a couple of follow-up questions to understand sort of the moving parts in the guidance. Specifically, you talked about the customer renewal. Seems like it's CVS. Can you maybe help us quantify what the impact is on 2022, and also if there are any other renewals that we should be considering in the next 12 months-18 months? The second question in terms of the moving parts are on the investment that you're making, should we think about them as sort of a one-time investment in 2022, or should we now factor just kind of like ongoing levels of investments to support future growth?

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah. I'll start to talk about the renewals, and then I'll have Jason make a comment on the investment. The renewal that we're talking about, the Red Oak renewal is not at all included in what Jason was talking about on customer renewals. That's considered in our overall generics program performance, which we expect to be something that we would expect to be a tailwind next year, and we feel really good about where we're headed with all the various components of our generics program, and excited to continue to partner with CVS moving forward on Red Oak. What Jason was talking about in renewals was just the normal renewals. There was nothing unexpected in the fourth quarter customer renewals. They basically came in as planned. That was not anything I would consider as we look forward.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We don't see customer renewals being any different or unusual for us in FY 2022.

[Jason Hollar, CFO at Cardinal Health Inc]

Yeah. As it relates to the other moving pieces for pharma that are a part of that underlying guidance, our growth businesses we expect to contribute. As Mike mentioned, we expect double-digit growth for our growth businesses, top line as well as bottom line, and for the pharma business, that would be, of course, specialty, nuclear, and outcomes. We have the year-over-year COVID-19 benefit that I mentioned would be a key part of that. As Mike mentioned, that the customer renewals is not something that we would anticipate to be significantly different year-over-year. Your question regarding investments. We've spent quite heavily over the last couple several years on the capital side of getting these IT systems in place. We are finalizing that multi-year journey now and are starting to depreciate those assets.

[Jason Hollar, CFO at Cardinal Health Inc]

There will be elevated depreciation that, of course, is more fixed in nature. There is also a component of the final testing and rollout and launch of these systems tends to be more expense versus capital. As we're right in that rollout stage, that expense will be elevated. That part, we would expect to reduce longer term, certainly beyond fiscal 2022. For the balance of this year, we would expect it to be elevated. Thereafter, some portion of it will come down later on. Next question.

[Operator]

Up next, we'll hear from Eric Percher with Nephron Research. Please go ahead.

[Eric Percher, Analyst at Nephron Research]

Thank you. I wanted to ask about the generic volume commentary around certain classes. I know that we saw a clear increase in acute volumes from March into April in the quarter. What are the classes where you're seeing this and any other specifics on how that's impacting the generic program?

[Jason Hollar, CFO at Cardinal Health Inc]

Yeah, thanks for the question. A couple things on that. We did see some sequential growth from Q3 to Q4 on generic volumes. That continues to be a positive sign. We do expect our impact from COVID-19 on all generic volumes to be back at pre-COVID levels by the end of the calendar year or by the end of our Q2. What we're referring to here is we're still seeing, again, ramping up, but we're still seeing some less than pre-COVID volumes on areas like anti-infectives, antibacterials, antibiotics, antivirals, and some pain medications that we've not seen. Our thoughts are as life continues to get more and more back to normal, if that's the right word, kids are back in school, et cetera, we would start to see those drugs being needed more than they probably have historically been needed.

[Jason Hollar, CFO at Cardinal Health Inc]

Again, expect them to be back to pre-COVID levels by the end of the year. That's really what we're talking about. Very similar to the exact same thing we talked about last quarter, and it's kind of continuing to play out as we mentioned back then.

[Operator]

Next question, please. Next, we'll hear from Steven Valiquette with Barclays. Please go ahead.

[Steven Valiquette, Analyst at Barclays]

class work as cost categories that are trending above baseline. I'm curious if you're seeing those same trends as well. Thanks.

[Operator]

Mr. Valiquette.

[Jason Hollar, CFO at Cardinal Health Inc]

I'm sorry, we didn't catch the beginning of your question, so if you could try it again. Thank you.

[Steven Valiquette, Analyst at Barclays]

Yeah, sorry. I knew at some point it would happen. I would get pinged to ask two questions on two calls at the same time. That just happened. I guess I'm curious if you could provide more color on the elevated supply chain costs you mentioned for the medical segment in fiscal 4Q. You cited that in the press release. I guess I'm curious geographically, is this cost pressure mainly in the U.S. or is it international as well? In addition to some other color just on mechanically what's happening there. Does the sale of Cordis alleviate this in any way into fiscal 2022? Thanks.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Thanks. I'll start with your second piece first. Really, I don't see Cordis alleviating that, at least towards the guidance we said. Of course, there could have been elevated costs on some of their raw materials and products. Cordis being more international, obviously, it had more FX potential fluctuations. Don't see Cordis being a factor there. As far as the elevated supply chain cost, what we started seeing in the fourth quarter is I think what you're hearing a lot of companies talking about. We're seeing increased fuel costs. We're starting to see the cost of, for instance, containers could be 3x-10x what they cost to ship in prior to COVID, just due to ports being plugged, things like that. Wages, et cetera. It's just those types of things that we're seeing general elevated supply chain across the board.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We saw that in Q4. We expect that to continue in for the first couple of quarters, as we think things get back to more normal, we'll be able to see some either reductions in those, or we'll be able to take some of those costs and where possible, then appropriately pass it through to customers if it's a more permanent type of thing. We'll be monitoring that and keeping our eyes on that.

[Operator]

All right. Our next question will come from Elizabeth Anderson with Evercore ISI. Please go ahead.

[Eduardo Ron, Analyst at Evercore ISI]

Hi, good morning. This is Eduardo on for Elizabeth. Can you guys maybe provide some more color on the $250 million of additional cost savings opportunities? I guess what areas of the enterprise you expect to generate those savings from?

[Jason Hollar, CFO at Cardinal Health Inc]

Sure. Yeah, I would say it's very much a continuation of what we've done to date. As you certainly recall, our initial target was the $500 million. We've come close to accomplishing that after just the first three years. That was in varied areas, everywhere from manufacturing, our footprint work there to our distribution work, all the way up to our functional areas. As we go forward, what we're seeing in this next stage is the ability to go from more of the transactional first-order benefits of rate negotiation in areas like transportation and going further into really redesigning networks and getting into more augmented intelligence and things of that nature. We have one area that is allowing us to unlock additional value in this next stage is the Cordis divestiture. We talked about the simplification of our international operating structure.

[Jason Hollar, CFO at Cardinal Health Inc]

That's an enabler for us to continue to go after additional opportunities there, and then just continue on in all fronts, given that we've got good momentum in place already for the existing initiatives.

[Mike Kaufmann, CEO at Cardinal Health Inc]

The only thing I would add is that just to emphasize something Jason mentioned is around the use of digital to really get after being able to use bots, AI, RPA, et cetera, to get after our cost structure. We've been investing a lot of time on that. Our IT team has done a nice job of building out both people, resources, and our businesses and functions are all embracing this, as well as making sure we're doing work in the right locations are all other important factors that we see being able to give us some tailwinds going forward on cost savings.

[Jason Hollar, CFO at Cardinal Health Inc]

Next question, please.

[Operator]

All right. Up next, we'll hear from Lisa Gill with JPMorgan. Please go ahead.

[Lisa Gill, Analyst at JPMorgan]

Thanks so much. Good morning. I just really want to understand, as we think about normalization in your Pharma segment, so beyond the renewal, do you see low single-digit to mid-single-digit normalization in Pharma segment profit growth over the longer term? Where are specific opportunities that you see to maybe further accelerate that growth beyond 2022? That would be my first question. Do things like Specialty and Nuclear that you talk about returning to double-digit, I know they're on the smaller side, do they help to accelerate that low single-digit to mid-single-digit normalization? Just any drivers or help you can get around that on a longer term basis.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah, thanks, Lisa. Appreciate it. Actually, you hit a lot of it right there in your question, is that we did want to provide a normalized growth so that we could share with you what we do believe are achievable longer-term growth rates for both of the businesses that we provided the normalized growth on. Specifically the Pharma, I think you said it well, we do expect continued double-digit growth from Nuclear and Specialty in our Outcomes businesses. We see all of them next year being able to grow top and bottom lines by double digits, and we continue to see those businesses continue to be a bigger and bigger portion of the overall Pharma segment. As they continue to grow at those rates and are a bigger portion of the segment, obviously, they're going to continue to have more and more impact.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We feel really good about the pipeline of products in nuclear. With the work we're doing in the Center for Theranostics Advancement, we already have a significant amount of manufacturers committed to joining us in that center when we open it, and working together on some new both treatments and diagnostics for cancer and other areas. We feel good about all of those businesses. As far as the core PD business goes, we think we are well positioned with some very large and important customers that you're aware of. We've got eight more years now on our agreement related to Red Oak, and we feel good about that partnership, and that's continued positive impact on our generics program. Those are some of the things I would say make us feel good about that growth going forward.

[Jason Hollar, CFO at Cardinal Health Inc]

Next question, please.

[Operator]

Next we'll hear from George Hill with Deutsche Bank. Please go ahead.

[George Hill, Analyst at Deutsche Bank]

Hey, good morning, guys. Thanks for taking the questions. I guess, Mike, first I would ask you, with the renewal of the Red Oak agreement, are there any substantive changes to the economics of that agreement? Number two, you guys called out contingent brand inflation in the presentation. As the business is starting to mix back towards brand growth, are you seeing any changes in the underlying economics of the brand relationships and the amount of profit that's exposed to brand price inflation?

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah. Two very good questions. First of all, on brand, what we're seeing there is we're expecting the overall inflation rate to just be similar to the last couple of years. We're not seeing any real changes there. As Jason mentioned, the reason he said getting less dollars is because more of the suppliers that were contingent to inflation have moved to non-contingent, and we've renegotiated a couple of those DSAs over the last year so that we will no longer be contingent to inflation. As far as overall rates go, I would say we continue to feel very good about our overall value proposition.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We have very strong relationships with manufacturers. As you know, anytime there's changes in their portfolios, sometimes that means they should get a lower price when they have higher-cost drugs coming out, and sometimes they need to pay more fees when they lose, say, a high-priced item to a patent expiration. Those types of moving parts in terms of volume and average line extension are taken into account with each negotiation, and the team has done an excellent job working with our manufacturer partners to continue to have what I consider to be a fair market rate for that and feel very good about that, being able to be something that we can continue going forward. As far as the Red Oak, we know we won't be able to get into any specifics there, but as you can imagine, it's been an excellent seven-year relationship.

[Mike Kaufmann, CEO at Cardinal Health Inc]

The team there continues to remain intact. They have decades of generic buying experience. The leadership there and the team, it's just a great group of individuals, again, with experience that continues to bring new ideas together to the market to be able to help us continue to get the best cost in the marketplace. We continue to partner well with CVS at board meetings, et cetera, to continue to drive that. We feel that both companies look into, in the context of all the market conditions on generics when we renegotiate it, we feel very good about where we are with our Red Oak extension. Take one last question.

[Operator]

Our last question will come from Charles Rhyee with Cowen. Please go ahead.

[Charles Rhyee, Analyst at Cowen]

Thanks for squeezing me in here. Maybe a question on opioids and the settlement here. I think there's 150 days or so for the plaintiffs to accept the terms of the settlement. What's the minimum participation that's required under this settlement for it to go into effect? In other words, is it like half the participants have to at least participate? It's my understanding that the amount that you would pay out would scale down depending on the number of participants. Just wondered what that minimum requirement is and what happens if you don't hit that threshold. Thanks.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah, thanks for the question. You're right. The total number that is accrued assumes all 50 states, cities, and counties are in. If any single state or cities and counties within states do not elect to be part of it, the number will come down based on agreed-upon proration by state. It will decline if states and cities and counties do not participate. Second thing, to your point, it is multi-steps. There's a point where we get some insights to where the states are, then there'll be another point where we'll get to understand where the cities and counties and the subdivisions are. After all of that, we will take a look at what we're calling critical mass. There is no set number, so there's no minimum.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Our goal has been and continues to be to get 100% participation on all 50 states in order to have the most clarity. That may not happen, and anything less than that, then we, as a group, will have to sit down and determine if that's enough clarity and participation. It's highly dependent on the states that do and don't participate. We'll have to really step back and look at it from an overall standpoint and make a decision on whether or not to move forward.

[Jason Hollar, CFO at Cardinal Health Inc]

One thing I'd like to just clarify, as Mike indicated, if not all 50 states choose or we come to an arrangement to join, that would mean the cash payments would be lower under that structure. It does not necessarily mean the accrual would change. We look at the facts and circumstances of the situation to determine what the proper accounting would be at that time. There could certainly be a difference there that we would need to evaluate.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Good clarification.

[Operator]

That concludes our Q&A session for today. I will now turn the conference back to Mike Kaufmann for closing remarks.

[Mike Kaufmann, CEO at Cardinal Health Inc]

Yeah, I want to thank everybody for taking the time to be on the call and for the very helpful questions. I know there was a lot of noise in this quarter, but I just want to end with a few thoughts to keep in mind. First, we did see underlying growth in FY 2021 in both of our segments, if you exclude COVID-19, which gives us confidence as we move forward, going forward with the impacts of the pandemic hopefully beginning to dissipate. Our guidance is for growth next year in each segment. Also, if you take normalized growth in each segment, when you normalize for noise like COVID-19 and Cordis divestiture, we will grow in both segments. We have tailwinds behind our growth businesses. We really expect all of our growth businesses as a group to really grow at least double digits on the top and bottom line.

[Mike Kaufmann, CEO at Cardinal Health Inc]

We have taken some significant actions, such as getting after an additional $250 million in cost savings, closing the Cordis transaction, which will enable us to simplify our operating model, and extending our agreement with CVS are just a few of the examples. As the first question was in Jason's comment, we do have very strong cash flow generation, which gives us a lot of flexibility to be more opportunistic in our capital deployment. With that, thanks again, and have a good day.

[Operator]

This concludes today's call. We thank you for your participation. You may now disconnect.

Participants

Executives

• Jason Hollar, CFO
• Kevin Moran, VP of Investor Relations
• Mike Kaufmann, CEO

Analysts

• Charles Rhyee, Analyst at Cowen
• Eduardo Ron, Analyst at Evercore ISI
• Eric Percher, Analyst at Nephron Research
• George Hill, Analyst at Deutsche Bank
• Jailendra Singh, Analyst at Credit Suisse
• Kevin Caliendo, Analyst at UBS
• Lisa Gill, Analyst at JPMorgan
• Michael Cherny, Analyst at Bank of America
• Ricky Goldwasser, Analyst at Morgan Stanley
• Steven Valiquette, Analyst at Barclays