Cardinal Health Q4 2023 Earnings Call Transcript

Quartr
Provided by Quartr
August 15, 2023

There are 12 speakers on the call.

Operator

Day, and welcome to the 4th Quarter FY 2023 Cardinal Health, Inc. Earnings Conference Call. Please note this conference is being recorded and for the duration of the call, your lines will be on listen only. However, you will have the opportunity to ask questions at the end of the call. This can be done by pressing star 1 on your telephone keypad to register your question.

Operator

I would now like to hand the call 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 4th quarter fiscal year end 2023 results along with our outlook for fiscal year 2024. You can find today's press release Officer and Aaron Alt, our Chief Financial Officer. During the call, we will be making forward looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied.

Speaker 1

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 the discussion today, all our comments will be on a non GAAP basis unless they are specifically called out as GAAP. GAAP to non GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q and A portion of today's call, we kindly ask to limit yourself to one question, so that we can try and give everyone in the queue an opportunity. With that, I'll now turn the call over to Jeet.

Speaker 2

Thanks, Kevin, and good morning, everyone. Fiscal 2023 was an inflection point for Cardinal Health with improved performance, Strong execution and notable progress against both our short and long term plans. We delivered record financial performance, including our highest non GAAP EPS ever, reflecting 14% growth from the prior year. We grew Pharma segment profit an impressive 13 and generated $2,800,000,000 of adjusted free cash flow. And in Medical, we drove significant sequential improvement in operating performance From a segment loss in the Q1 to over $80,000,000 of segment profit in Q4, this year we took decisive action to advance our 3 strategic imperatives, Building upon the resiliency of our Pharma segment, executing our medical improvement plan and maximizing shareholder value creation, Consistent with what you heard at our June Investor Day, these results were achieved through our team's commitment to ruthlessly prioritize the core of our business and to better serve our customers so they in turn can focus on caring for patients.

Speaker 2

We simplified how we operate by streamlining our organizational structure, Exiting non core product lines and rationalizing our geographic and manufacturing footprints, we made key leadership changes and governance enhancements, Adding talent in key positions across the enterprise and to our board. We formed and extended the business review committee tasked with evaluating our strategy, Portfolio, Operations and Capital Deployment. On that note, we completed our review of the Pharma segment, including announcements at Investor Day Further invest in our Nuclear and Precision Health Solutions business and launch our new Navista network supporting community oncologists, which I will discuss more later in my remarks. We recently closed our outcomes merger with BlackRock's transaction data systems, which we see as a big win for pharmacies and an important opportunity to accelerate the business' future growth. We also deployed capital responsibly with a continued eye on maximizing value And we are positioned with the financial flexibility to continue driving value for shareholders.

Speaker 2

At Investor Day, we provided preliminary guidance for fiscal 2024. With a strong finish to the year and increased confidence as we look ahead, I am pleased that we can raise our fiscal 2024 outlook. Later in my remarks, I will share further details on our 3 strategic priorities. But first, let me hand it over to Aaron to walk you through our financial results and guidance.

Speaker 3

Thanks, Jason, and good morning. I won't bury the lead. Q4 was a strong finish to a year in which, with Jason's guidance, the Cardinal team made significant progress against our strategic initiatives. We delivered 4th quarter EPS of $1.55 $5.79 for the full year, at the high end of our guidance from Investor Day. For both Q4 and the year, our EPS results reached historical high points.

Speaker 3

We also delivered stronger than expected cash flow, something I will touch on more later. Let's start with the Pharma segment on Slide 6. 4th quarter revenue increased 15% to $49,700,000,000 driven by brand and specialty pharmaceutical sales growth from existing customers. We continue to see broad based strength in pharmaceutical demand Spanning across product categories, brand, specialty, consumer health and generics and from our largest customers. Similar to Q3, GLP-one medications provided a revenue tailwind in the quarter.

Speaker 3

Segment profit increased 12% to $504,000,000 in the 4th quarter, primarily driven by popular generics program performance. Within our generics program, we saw volume growth and consistent market dynamics, including strong performance from Red Oak. Increased contributions from brand and specialty products along with nuclear were also a positive factor partially offset by higher investment and operating expenses, including higher costs to support sales growth. Turning to Medical on Slide 7. 4th quarter revenue was flat at $3,800,000,000 an improvement in trend.

Speaker 3

We saw a decrease in products and distribution sales related to lower volumes and pricing partially offset by inflationary impacts, including our mitigation initiatives. This decrease within products and distribution was offset by growth in At Home Solutions. In the Q4, we delivered Medical segment profit of $82,000,000 A nearly $100,000,000 increase from the prior year loss. The results for the quarter were consistent with our Investor Day commentary Composed of approximately $60,000,000 of more core performance, driven in connection with the medical improvement plan Approximately $20,000,000 of both seasonality and net favorable one time items. As expected, we saw an improvement in net inflationary impacts, Including our mitigation initiatives and the normalization of PP and E, margins, which were impacted by unfavorable price cost timing in the prior year.

Speaker 3

Of note, we achieved our target of exiting fiscal 2023 with at least 50% inflation mitigation. Consistent with the expectations communicated at Investor Day, we were encouraged to see early indicators of an improvement in trend With respect to our Cardinal Health brand product sales, we also saw a positive overall contribution from our growth businesses, including At Home Solutions and OptiFreight and from our ongoing cost optimization measures. So with significant profit growth in both segments, We delivered total operating earnings of $560,000,000 growth of 24%. Moving below the line, Interest and other decreased by $48,000,000 to $16,000,000 due to increased interest income from cash and equivalents and increased income from our company's deferred compensation plan investments, which as a reminder is fully offset above the line in corporate. Our 4th quarter effective tax rate finished at 27%, approximately 2 percentage points higher than the prior year due to certain discrete items.

Speaker 3

4th quarter average diluted shares outstanding were 256,000,000, 7% lower than a year ago due to share repurchases, including a $500,000,000 accelerated share repurchase program initiated in the quarter as we announced at Investor Day. The net result of all of this was 4th quarter EPS of $1.55 growth of 48%. Now transitioning to our consolidated results for the year. We surpassed the $200,000,000,000 revenue mark for the first time. Fiscal 2023 revenue increased 13 percent to $205,000,000,000 and gross margin increased 5% to $6,900,000,000 both driven by the Pharma segment.

Speaker 3

Total company SG and A increased 6% to $4,800,000,000 Primarily reflecting inflationary supply chain costs and higher investments in operating expenses, such as higher costs to support sales growth, which were partially offset by our comprehensive enterprise wide cost savings measures. Operating earnings increased 3% to $2,100,000,000 Interest and other decreased 46 percent to $89,000,000 primarily driven by increased interest income from cash and equivalents. As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates in the near term. Our annual effective tax rate finished at 23%. The net result was for fiscal 2023 EPS $5.79 Growth of 14%.

Speaker 3

As for the segment's full year results, beginning with Pharma on Slide 10. Pharma segment profit increased 13% partially offset by inflationary supply chain costs. Fiscal 2023 year over year growth also included a modest benefit from branded manufacturer price increases, which we are assuming will not repeat in fiscal 2024, as well as a favorable prior year comparison related to higher opioid related legal costs Including mitigation initiatives, this decline was partially offset by normalization of PT and E margins. Before I turn to fiscal 2024, let's cover the balance sheet. In fiscal 2023, we generated robust adjusted free cash flow of $2,800,000,000 with particularly strong cash flow towards the end of the year.

Speaker 3

We ended the year with $4,000,000,000 of cash on hand. At our Investor Day, we highlighted that cash flow optimization was an area of go forward focus for our teams and the Cardinal team delivered across our businesses. This effort will continue in fiscal 2024, notwithstanding that it is a tougher calendar from an inflowoutflow days of week perspective. We remain focused on deploying capital in a balanced, disciplined and shareholder friendly manner. In fiscal 2023, we Invested approximately $480,000,000 of CapEx back into the business to drive future growth.

Speaker 3

Paid down $550,000,000 in debt to reduce leverage And maintain our strong investment grade ratings. Returned over $2,500,000,000 to shareholders, including through the dividend that our Board increased in May for the 34th year in a row and $2,000,000,000 of share repurchases. Now for our updated fiscal 2024 guidance on Slide 13. Today, we are raising our fiscal 2024 EPS guidance to a range of $6.50 to $6.75 This increase reflects the strong finish to fiscal 2023, particularly within Pharma, where we are now entering the year at a higher jump off point. We also are tightening our shares range to $250,000,000 to $253,000,000 which reflects the recent share repurchases as well as our continued expectation A $500,000,000 in base share repurchases over the course of fiscal 2024.

Speaker 3

As you will calculate, The midpoint of our newly raised fiscal 2024 EPS guidance is 15% above our fiscal 2023 EPS results. There are no changes to the other corporate guidance assumptions provided at Investor Day. Interest and other between $110,000,000 to $130,000,000 An effective tax rate in the range of 23% to 25% and adjusted free cash flow of approximately $2,000,000,000 in fiscal 2024. Our segment outlooks for fiscal 2024 are also unchanged with one exception, a higher revenue range for pharma driven by the continued acceleration of GLP-1s, which as a branded product category do not meaningfully contribute to segment profit. Slide 14 shows our fiscal 2024 outlook for Pharma, Our Build and Grow business.

Speaker 3

We expect revenue growth in the range of 10% to 12% and segment profit growth in the range of 4% to 6%, which is now at a larger fiscal 2023 reference point due to our strong finish to the year. We are reiterating our key assumptions provided at Investor Day. We expect growth from our generics program with volume growth and consistent market dynamics and positive operational execution against our organic specialty efforts. We are not assuming outsized benefits from branded inflation, in contrast some of the benefits that we did see in fiscal 2023. On the pharma fiscal 2024 cadence, we expect the year to follow typical seasonality patterns.

Speaker 3

As usual, we see our fiscal Q3 being the largest Segment profit dollar quarter due to the usual timing of branded manufacturer price increases. Turning to medical, I want to recognize the progress that the medical team made during fiscal 2023, particularly in Q4 And also acknowledge that we still have blocking and tackling to do against the turnaround to both drive demand and improve our costs. For the full year, we are reiterating our assumptions of revenue growth of approximately 3% and segment profit of approximately $400,000,000 for the year, While providing some additional color, like fiscal 2023, we anticipate segment profit to be significantly back half weighted. We expect Q1 to be generally consistent with the core performance from Q4 with quarterly sequential improvements thereafter driven by our medical improvement plan initiatives. There are a couple of factors for why Q1 is the low point in the year.

Speaker 3

First, keep in mind that Q1 is the seasonal low point for our global medical products and exit fiscal 2024 offsetting the impact of gross inflation. Those improvements are expected to grow over time, making the impact greater over the course of the year. And finally, we continue to plan for slight Cardinal Health brand volume growth that will largely hit in the second half of the fiscal year. So in summary for Medical for fiscal year 2024, continued work in front of us with each quarter improving from our Q1 launching point to get us to the approximately $400,000,000 guidance for the year. Stepping back, we are pleased to see growth across our businesses continuing in fiscal 2024.

Speaker 3

Consistent with our messaging from Investor Day, we are targeting a 12% to 14% EPS growth CAGR for fiscal 2024 to 2026, Now from the higher fiscal 2023 baseline of $5.79 Now regarding our intended deployment of cash, which is consistent with our disciplined capital allocation framework as seen on Slide 18. After investing approximately $500,000,000 back in the business drive organic growth. Making approximately $500,000,000 of litigation payments, including our 3rd payment under the National Opioid settlement back in July and our $1,000,000,000 baseline return of capital, we expect to have strong flexibility as we assess further investments in the business, M and A and the possibility of incremental return of capital to shareholders. I want to reiterate that as we shared at Investor Day, Neither our fiscal 'twenty four guidance or our long term targets reflect potential opportunistic deployment of capital, including M and A, Which is difficult to predict in timing of magnitude or additional share repurchases beyond our $500,000,000 of baseline repurchases each year. We will continue to evaluate both of these levers opportunistically to drive long term value.

Speaker 3

To close, the Cardinal team has a lot to be proud of with respect to their in fiscal 2023. Jason and I are pleased with the progress our teams have made. We are confident in the plans we have in place We are excited for our team to realize the significant value creation opportunities still in front of Cardinal Health. With that, I will turn it back over to Jason.

Speaker 2

Thanks, Aaron. Let's now dive deeper into the actions we are taking to execute our 3 strategic priorities, beginning with priority number 1 and building upon the resiliency of the Pharma segment. In our largest most significant business, the pharma segment has been performing well by prioritizing what matters most, focusing on the core and delivering for our customers and their patients. The business is positioned at the forefront of favorable secular industry trends and has also benefited from our specific actions and performance. We are pleased to recently raise our long term segment profit target to 4% to 6% growth, solidly in the mid single digits and consistent with the segment profit growth we Our growth is enabled by a scaled, stable and resilient core pharmaceutical distribution business growing in the low single digits and double digit growth from our higher margin specialty and nuclear businesses.

Speaker 2

Within the core, Our generics program remains a critical component of our overall offering and performance enabled by Red Oak Sourcing. In addition to its leading scale, Red Oak's proprietary analytical tools and deep industry expertise puts us in the best position possible whenever product shortages occur to continue servicing customers. We're committed to providing customer focused solutions across our many classes of trade as we noted at Investor Day. More recently, we hosted our 31st Annual Retail Business conference where we brought together nearly 4,500 attendees from across the country to celebrate the critical role independent pharmacies play Square, to help independent pharmacies seamlessly manage business operations, integrate flexible payment options and reduce payment processing costs. We've conveyed that specialty is our priority area of focus and a key enabler to our long term growth.

Speaker 2

We're continuing to invest to expand downstream across key therapeutic areas such as oncology, rheumatology and other emerging areas. We're excited to build upon our existing capabilities with the recent launch of our Navista network, A specific suite of offerings for community oncologists supporting their growth and desire to remain independent. To ensure the Nivista network success and development, We've recently appointed new leadership with deep industry and clinical experience and continue to build out the organization with internal and external talent. We continue to seek input from customers and have created an advisory board. While still early innings, I'm pleased with the engagement from current and potential customers.

Speaker 2

Upstream and specialty, we're expecting continued double digit growth from manufacturer services. In our leading 3PL, We're expanding our ambient and cold chain space to keep up with our business' strong growth. At SynXis Access and Patient Support, We delivered on a record number of new client implementations and continue to launch new innovative products to streamline the patient journey. We're also supporting the growth of pharmaceutical manufacturers in the cell and gene therapy space through our advanced therapy solutions offerings. For example, we're partnering with TraxCell to bring visibility and tracking capabilities to biopharma companies by helping them navigate cell therapies through multiple stages of development and commercialization.

Speaker 2

Overall in specialty, we're confident that the connection between our downstream and upstream strategies, We call our specialty growth cycle will drive double digit growth well into the future. Our nuclear business, which is on track to double profits by fiscal 'twenty six As of our fiscal 2021 baseline, is strategically positioned for growth at the center of precision medicine. We're further investing in this space with a Phase 2 investment of $30,000,000 over the next several years to expand our Center For Theranostics advancement and support our manufacturer partners' projects as they advance through the commercial development pipeline. We're encouraged to see pharmaceutical innovation the breadth of conditions that are being addressed with emerging therapies such as Celngene and precision medicine. As the future of healthcare continues to evolve, our breadth of capabilities from pharmaceutical and specialty distribution, radiopharmaceuticals and theranostics The biopharma and manufacturer services enables us to offer multiple touch points

Speaker 3

for

Speaker 2

manufacturers, providers and patients to realize value from these promising new treatment options. Now turning to medical and priority number 2. When we introduced the medical improvement plan last August, our immediate focus was turning around the performance in the core, products and distribution, where we've achieved tremendous progress over the past 12 months. We are on track to address the impact of Inflation and global supply chain constraints by the time we exit fiscal 2024. This is the number one key to returning to a more normalized level of profitability And we are now over halfway to our target.

Speaker 2

We continue to execute our mitigation initiatives to offset elevated inflation and make progress with our commercial Contracting efforts and we are exploring other offsets with urgency such as our manufacturing excellence and sourcing initiatives. While overall costs remain elevated, international freight has generally returned to pre pandemic levels and we expect this improvement to be reflected in our fiscal 2024 results. We're driving significant progress through our 5 point plan to grow Cardinal Health brand volume and seeing improvements in our leading indicators. This includes better portfolio health for key product categories and higher service levels, customer loyalty index scores and retention rates for distribution. We're driving enhanced customer experience through investments in product availability and automation, while optimizing costs.

Speaker 2

At Investor Day, we highlighted our 2 pronged approach to portfolio lifecycle management, which has enabled us to completely exit our non healthcare portfolio And we are in the process of reducing over 2,000 SKUs across our Cardinal Health branded product categories to simplify the business. We're focusing our investments in new product development and capacity expansion in key growth areas such as compression, enteral feeding and incontinence. Within our products that are core to distribution, we've seen continued stabilization with PPE, a smaller part of our portfolio, but a source of volatility during the pandemic and growth in our presourced surgical kitting category. In our specialty products portfolio comprised of clinically differentiated products Leading brands like Kangaroo, Kendall and Protexas. We're investing in innovation to meet customers' needs and drive sustainable growth.

Speaker 2

For example, the launch of our new Kangaroo Omni enteral feeding system this month. As a result of our combined efforts, commercial momentum is accelerating. During Q4, we renewed several key distribution customers and saw positive net new wins during the quarter. These leading indicators give us confidence Moving forward, we'll participate in the growth from an overall improving medical utilization environment. Outside the core, we're on track to accelerate our growth businesses.

Speaker 2

In At Home Solutions, we're investing in DC network expansion to keep pace with increased demand as care continues to shift into the home. For example, we recently began construction for a new 350,000 Square Foot Greenville, South Carolina DC. This facility, the 11th in our national network, will be fully operational in 18 to 24 months and equipped with advanced automation technology and robotics drive operational efficiencies. In OptiFreight, we provide premier logistics management powered by our technology capabilities and expertise. We're continuing to invest in digital tools to support core volume growth and sustain our strong performance.

Speaker 2

Finally, Continue to execute our simplification and cost savings initiatives, such as optimizing our global manufacturing and supply chain and our international footprint. For example, we exited 4 additional countries and 2 additional manufacturing sites this year. In short, We are making progress with our medical improvement plan. While there is still execution in front of us, I'm excited for the business to return to more significant profitability in fiscal 2024. Finally, priority number 3, maximizing shareholder value creation.

Speaker 2

We're maximizing shareholder value creation through operational performance, Robust cash flow generation and the responsible allocation of capital. At Investor Day, Aaron detailed our new long term capital allocation framework, which builds upon our long standing priorities with some notable enhancements. We're pleased that with our strong cash flow profile and the significant progress we've made on our balance sheet, We have the flexibility for share repurchases each and every year. And with the residual cash flow that we anticipate, We'll continue to opportunistically evaluate disciplined M and A in specialty and potential additional share repurchases. While our team has made significant progress over the past year, particularly in realigning our operations for focus and simplicity, there is still work and opportunity in front of us.

Speaker 2

We continue to evaluate additional value creation initiatives, including the progress we're making with our ongoing business and portfolio review. To wrap up, I want to acknowledge our dedicated Cardinal Health employees for fulfilling our essential role in healthcare serving customers and their patients. Thank you for your determination in advancing our key priorities and moving healthcare forward. I'm excited for the opportunities still to come. With that, we will take your questions.

Operator

Our first question today comes from Lisa Gill of JPMorgan.

Speaker 4

Thanks very much. Good morning and congratulations on the quarter. I just really want to start with the GLP-one comments. So I understand you're raising revenue by 200 basis points. 1, is that all GLP-one?

Speaker 4

And 2, My understanding is that they are a lower margin, but they are contributory to overall margin dollars. Is that not the case when you're keeping the profit the same and when I think about the Pharmaceutical segment for 2024?

Speaker 2

Yes. Good morning, Lisa. Thanks for the question. Yes, the primary reason for the raise in the guidance on the revenue It is related to the GLP-1. So we did not call out anything else.

Speaker 2

We saw a strong finish to the year as it relates to that. And looking forward, we see that there's nothing that we can foresee in the near term that will change those trends. As a reminder, we did Call out for the first time GLP-one as a benefit to our revenue from a year over year growth perspective in the Q3. So we have kind of a There was growth before that, but not as significant. And so it's more meaningful in Q3 and Q4.

Speaker 2

So as you look forward to fiscal 2024, You would expect that revenue growth to be stronger in the first half of the year as that's more of a contributor. Now of course, we don't know what that Looks going to look like into 2024, but we would anticipate as you start to lap the second half of twenty twenty three that that will be More muted in terms of the year over year benefit. And I guess what as it relates your second part of your question, I would just reiterate that these are branded products and as such they're just not a meaningful contributor to segment profit and just leave it at that. Next question please.

Operator

The next question comes from Eric Percher of Nephron Research.

Speaker 5

Thanks for all the commentary on medical performance. I want to make sure we're kind of precise on the core performance And the stepping off point there would be around $60,000,000 not $82,000,000 And then can you define seasonality of one time benefits this quarter and Any expectation that those will recur as we look at that cadence for fiscal year 2024?

Speaker 3

Good morning. Good to hear your voice and happy to give you a little more context on that. Look, we were quite pleased with the results For Medical, as you can imagine, delivering that $82,000,000 of results, that was $60,000,000 of what we're referring to as core performance And $20,000,000 in aggregate combined positive seasonality and one time items in the 4th quarter. And I call it out purposely that way because it does impact how we think through the cadence of quarters during fiscal 24. Now before giving you a little more context on the quarterly guidance, I do want to go back and just observe that We are reiterating the $400,000,000 profit target for the medical segment from the year.

Speaker 3

The medical improvement plan, the Key components that remain unchanged from our description at the Investor Day as well. But we are providing a little more color relative to how we see the year Playing out, given the number of moving pieces, the blocking and tackling, as I referred to in my prepared remarks, as we carry forward. So Look, from a full year perspective, the way I would have you think about it is this. As I said at Investor Day, if you take $60,000,000 of Performance, and multiply that by 4, that gets you to $240,000,000 of profit, right? If you add $100,000,000 of Incremental inflation net on top of that, that gets you to $340,000,000 in total.

Speaker 3

And as we talked about at Investor Day, That leaves about $60,000,000 of contribution from other elements across the year, the simplification, the Cardinal Health brand, etcetera. That's a full year view of how to think about it. Now as we think about the cadence though, we Our being clear that the profit will be back half weighted during the year just like it was in fiscal year 'twenty three. Our view is that Q1 We'll have similar core performance with Q4 with sequential performance thereafter. Q1 is the seasonal low point for the Med Products and Distribution business, due to both the timing of volume As well as our cost recognition.

Speaker 3

That's an important point. And similarly, we do expect that continued of inflation mitigation over the course of the year as well. So that will push the profits from a waiting perspective in the back half. And then don't forget that While we were very pleased to call out a sign of change in trend in Cardinal Health brand, we're also clear at Investor Day that the Cardinal Health brand volume growth It is largely back half weighted. Hope that helps.

Speaker 1

Next question please.

Operator

The next question comes from Kevin Caliendo of UBS.

Speaker 6

Thanks. Maybe to follow-up on that a little bit. So if we're thinking about 82, the baseline is really 60, the Q1 is likely because of the $20,000,000 in seasonals and one timers, the Q1 is likely to be down So you then grow off that base to get to the $400,000,000 I just want to make sure that that's what you're committing to or commenting on. And then Secondly, or incrementally, the new products to the Cardinal brand products, is that the increase

Speaker 1

in the back half of

Speaker 6

the year, that because of new product launches or manufacturing capabilities? Is it contractually like new contracts coming on that are higher weighted? Can you just sort of Explain the dynamics of the Cardinal brand products as well. I'll

Speaker 3

start and then toss it over to Jason. You are Correct. And that the way we're thinking about this is that core performance Q4 to Q1 will be roughly in line. And if you interpret what I was just saying in response to earlier question, we do have some negative seasonality in Q1 versus Q4. So that's why the jumping off point is That core performance versus the Q4 results.

Speaker 3

Jason?

Speaker 2

Yes. I'd think about the Cardinal brand volume growth being back half loaded Through a couple of different lenses. First of all, we do think that the underlying utilization will be for the market will We continue to be relatively consistent. So we do see same store sales growth out there and we anticipate that that will continue. And within our performance within that, we highlighted that our comparison point to the prior year is becoming easier As we did lose some business over the last 18 months or so that we now are lapping and our 5 point plan is working.

Speaker 2

Our 5 point plan to improve, that includes improving the customer experience and importantly that supply chain health. We're seeing strong progress as it relates to service levels, CLI scores that gave us very good customer retention in the quarter, net new wins That were positive in the quarter. That gives us the foundation that gives us confidence that we'll grow with the underlying market, So all the leading indicators are going as anticipated and consistent with how we laid it out at the Investor Day and gives us the visibility and the confidence that we'll be able to participate in Market growth that we anticipate that will be there over the course of this next year. Next question please.

Operator

The next question comes from George Hill of Deutsche Bank. Yes.

Speaker 7

Good morning, guys, and thanks for taking the question. I'll take it in a little bit different direction. Jason, I'd love to hear the kind of the progress that you guys have made on the Navista offering it was first announced at the Analyst Day and I guess given the growth and the size of the specialty market particularly in oncology, I guess how should we think about the ramp of that business Maybe through fiscal 2024 and beyond, so just kind of progress and ramping contribution. Thank you.

Speaker 3

Sure. Yes, great. Thanks for

Speaker 2

the question, George. Yes. So when we think about Navista, I think it's important to recognize that we have a foundation in place. We have a foundation in place Built off of our existing specialty business, we had plenty of programs and initiatives in place, Platforms like our Navista TS where we are already providing capabilities to the community oncologists to help support their Value based care initiatives, of course, other data insights, clinical research support. So we had a lot of the tools.

Speaker 2

What the Navista network is Doing is bringing that all together in the form of a business with new additional senior leadership brought in place. So that's one of the key things that's happened since the announcement a couple of months ago is we have brought in additional leadership, to bring on top of The strong team that we already had in place that were already serving these important customers and their patients. So we are building that out further with both internal as well as external talent. We also created an advisory board to ensure that we are working directly with both current and prospective customers, More than anything to make sure that they have a strong voice as to where we go next with the development of this platform in this business. We continue to listen and be out in the field doing a lot of research, but we're also building what we're already notably Some of the key attributes of this platform and this network that they're demanding.

Speaker 2

What's key and what we highlighted before is that These are the 1500 that we're focused on here, are very strongly interested in maintaining their independence. We're also hearing a strong desire for ongoing transparency, which as healthcare's most trusted partner, we feel like we're really well positioned for. So it's only been a couple of months since we rolled this out, but in that timeframe, we've got the team in place, better definition of what the platform It needs to be built out with and continue to work with those prospective customers to make sure that their needs are met.

Speaker 1

Next question please.

Operator

Next question comes from Elizabeth Anderson of Evercore.

Speaker 8

Hey guys, thanks so much for the question. I don't know if you could comment on the corporate cost that you just discussed in medical, the $60,000,000 Is that something that you also Like ramp ratably over the course of the year, is that something that has gone through, those cuts are going through have gone through already and are just analyzing A little bit more help there would be very helpful. And then secondarily, can you talk about what is different about getting the next 50% of the inflation offset this year that was not the same last year. We honestly know that you've been getting more prices inside your contracts, etcetera. But I'm just looking for any more Additional comments that you can provide on what might be different about this remaining 50%?

Speaker 8

Thanks.

Speaker 2

Okay. I think I caught the essence of at least part of that. So let me start. I believe part of the question was related to the next Part of the inflation mitigation, the second half, I think the other question is related to the corporate cost ramp. So Let me start with the second part and then throw it over to Aaron for the first part.

Speaker 2

So as you think about the inflation mitigation in the next piece, there's It's really the same for the second 50% as it was the first 50%. So in both cases, what we've seen is A moderation of the international freight. That spiked significantly about 2 years ago And started coming down about a year ago and got back down to pre pandemic levels maybe 6 to 9 months ago. So that has started to benefit us as we especially exited fiscal 2023. So we did start to see that.

Speaker 2

It, of course was inventoried into our inventory and capitalized those costs into our inventory. So it took a little while for that to benefit our P and L as it As our cost reduced. And along the way in parallel with that, of course, we were pricing mainly on a temporary basis the 1st year For those increases as well as increases in other commodity costs and transportation, domestic transportation, increased labor and all those other costs, All those other costs have plateaued. They are not coming down. We don't see any signs of them coming down.

Speaker 2

And so we have to price permanently for those items. We priced temporarily for the international freight. And as those costs on international freight roll off, we need to maintain higher prices. And so we Are continuing to price, and some of those temporary prices are now being rolled into the permanent prices. And so we would expect that as those contracts renew that we'll continue to see more and more of that pricing recognized.

Speaker 2

Let me be very clear, we're not rolling back We've not increased prices beyond the point of our costs. At the 50% level, we're still only being compensated for Half of that overall gross impact that we've incurred, but over the course of this year, we do expect the international freight to come down. And by the time we exit fiscal 2024, The prices will continue to increase as we go through the course of the year, as we get more of those contracts renewed permanently And then that will cross over with the lower cost and then we'll exit in that manner at the end of the year. Aaron, on the first question.

Speaker 3

Sure. I think I heard a couple of different things. And so I'm going to answer the question I think I heard. And it goes something like this. So we did I did comment earlier that In addition to the annualization of the core performance and indeed the inflation mitigation that Jason just touched on that there was $60,000,000 of Other benefit coming over the course of the year really driven by the 3 other pillars within the Med Improvement Plan, The contribution of the growth businesses, the simplification and the Cardinal Health brand work.

Speaker 3

As I was touching on, that work Progresses over the course of the year and we see more benefit towards the back half of the year. I want to emphasize the simplification efforts. Steve and the team are working really hard at that every day. We just see the benefit coming more in the back half. The growth businesses are making good progress.

Speaker 3

They have some seasonality as well. They are certainly a strong contributor to the additional $60,000,000 over the course of the year. And Jason has already touched on Cardinal Health brand, so I won't go there.

Speaker 2

Next question please, operator.

Operator

The next question comes from Daniel Grossleis of Citi.

Speaker 9

Hi, thanks for taking the question. I just have one quick Housekeeping question and then I'll ask my real question. There was a slight change in the language around your inflation mitigation efforts From your eye day presentation to your current presentation, you went from fully mitigating by the end of 'twenty four to just mitigating. Curious if there's been some change in how you're thinking about things or if it was just kind of a simplification of the language. And then my real question is around the generics It seems like you and your competitors have all benefited from a more favorable environment.

Speaker 9

And it seems like it might have accelerated towards the end of your fiscal year. So I'm just curious to get your thoughts on the generics market, potential shortages and how you're thinking about the benefit or tailwind of generics in your fiscal 2024 guidance visavis the strength you saw in fiscal 2023? Thanks.

Speaker 2

Sure. So in terms of the language change for inflation mitigation, I think you said it best, it's a simplification language. The one thing I would highlight is similar To our disclosures with COVID, over time, those became more difficult to precisely measure. So now we are in this inflation mitigation was always focused on the incremental inflation because we had spikes, unusual dramatic Spikes and inflation. Well, there's normal inflation as well.

Speaker 2

So this is just a little bit broader language to recognize That over time it's becoming harder to differentiate between the 2. We have a good understanding of the most significant impact Like the international freight, but when you get into labor, what's normal, what's incremental, it becomes more challenging and we just have a little bit broader language to recognize that it is Going to be less precise than it was early on in our measurement. We're still doing as deep of analytics as possible to get a reasonable understanding of it. As it relates to I think that well, I think the key takeaway with that is we are on track, Right. Ultimately, the strategy makes sense.

Speaker 2

It should be pushed down to the final customer, the final User of the products and services given the business model. And so we believe that the basic tenets are absolutely unchanged. It's just reflecting the level of precision. On your second question as it relates to generics, as I step back and think about performance for the Pharma segment this year inclusive of generics, I think you can kind of think about the overall segment as well as the generics business. There's a couple of things that have occurred.

Speaker 2

There's the overall market utilization has been very strong and our Performance has been very good within that. And it's at levels that for all the reasons Aaron highlighted, it's at a growth rate that's a bit Higher than what normal is and certainly higher than what our long term growth targets are. And as I think forward to fiscal 2024, we expect that to normalize. We expect it to still be Favorable growth. We indicated during Investor Day in the 2% to 3% type of range from a unit volume growth We would expect to participate within that and we expect our performance to continue with areas like Red Oak Sourcing to community drive Both the cost as well as to your other related point, the product shortages, they have a dual mandate to drive performance for both cost as well as Service levels to customers.

Speaker 2

So while there are product shortages sporadic within the overall Pharmaceutical distribution supply chain, that's not a new phenomenon. There's various demand driven spikes and supply driven spikes. Our goal of course is to minimize those challenges within that to give our customers the best possible service. And what we saw, in fact in fiscal 2023 was a little bit of a benefit by being able to supply products as a second distributor, As not the primary distributor, but we had some opportunities where we're able to provide when others were short on product. So overall, that was a slight positive for us this year as well.

Speaker 2

And we expect those types of things to be more normalized in the fiscal 'twenty four and feel well positioned To participate in that growth.

Speaker 3

I would just add one thought, which is in Q4, we saw strong volume, as Jason highlighted, but overall consistent market dynamics. And indeed, as we look forward, Jason called out the unit growth, but we are also guiding to consistent market dynamics for the upcoming year as well.

Speaker 2

Next question please.

Operator

The next question today comes from A. J. Rice of Credit Suisse.

Speaker 10

Thanks. Hi, everybody. I know on your medical side, there's a lot going on and you're a little more You toward inpatient and some of the others that have reported, but we've heard this discussion about an uptick in utilization some of the providers and I wondered if I peel back everything that's going on in medical, did you see any Change in behavior on the part of your customers to suggest

Speaker 2

that there was

Speaker 10

an uptick in utilization? And then just on the PPE comment, You're calling it normalization of profits from here. Do you think sequentially from here We're pretty steady and as we return to a normal environment, is there any seasonality around that category to call out to remember and when we get back to a

Speaker 2

Yes, the utilization we think has been fairly consistent. I wouldn't call it an acceleration or anything. We're seeing pretty consistent underlying same store sales type of growth. So It's sufficient within our business model and where we've laid it out for Investor Day, but I wouldn't call out anything unique there. As it relates to PPE normalization, a couple of points.

Speaker 2

So Normalized is good for us. This is not a category that we've ever made a tremendous amount of money and value. It is an important category for our customers and we do everything we can to satisfy their needs. So going forward, our objective is to ensure that we Get customers the product they need and minimize the volatility that goes along with that. But I just don't see it being a material driver one way or the other.

Speaker 2

Recall that the challenges with PPE was that we had volatile price, cost and volume all at once. What you have right now is A normalization that's been occurring over the last couple of years of both price and cost has been coming down somewhat steadily. And they've been standing staying in relative type of spread close enough to one another that that's been manageable. And it's that volume that's been a little bit more challenging. We've highlighted that there was destocking beginning about well over a year ago now In terms of the underlying volume there, but given the margins are relatively tight for this type of product, Getting those margins right and relatively low margins means that the volume volatility or the lack of volume growth It is not much of an issue for us because it's just not a large contributor of incremental volume or incremental margin.

Speaker 2

So We're at a level that I think is fairly stable and it's our objective to keep it that way. Next question please, operator.

Operator

Our final question today comes from Brian Tanquilut of Jefferies.

Speaker 11

Good morning. This is Noor Roble in for Brian. I had a question about your capital allocation priorities for the fiscal year 2024. Generated quite a bit of free cash flow this fiscal year, and I'm just curious if there's any specifics you can get into with regards to Where you see capital allocation in the next fiscal year? Thank you.

Speaker 3

Great, great question. Thank you for putting on the table for us. Look, we were very focused at our Investor Day in laying out the disciplined capital allocation decision matrix that we And we were also very pleased to see the overall cash generation for fiscal 2023 and Q4 in particular. Here's the simple answer. We're going to do what we said we were going to do at Investor Day in that respect.

Speaker 3

And just as a quick reminder, There are a couple of things which are table stakes for us, which is first we're going to invest back into the business to drive the organic growth. We spent $480,000,000 in fiscal 2023. We've got it. We're going to spend about $500,000,000 in CapEx against our business plans across the business. Our second priority, of course, is maintaining our investment grade balance sheet.

Speaker 3

And you will recall from our Investor Day that We don't have short term maturities. We have some bonds coming due at the end of the year that we will likely just refinance. But we're feeling good about our investment grade balance sheet. And then we've committed to a baseline of return of capital to shareholders, Continuing to grow the dividend, we've raised it 34 years in a row. Similarly, we committed to buyback at least $500,000,000 of shares During fiscal year 'twenty three, those are the table stakes parts of how we're going to use our cash.

Speaker 3

As we then move through the year, as we assess the opportunities in front of us as we assess how the business is performing, we have 2 opportunistic levers that we will also be looking at. The first is Active, disciplined and targeted M and A largely in specialty, and we have opportunities there that we're looking at as well. And then on top of that, we will also continue to look at incremental return of capital to shareholders. Nothing additional to announce today on either of those two levers, Bob, we want to be clear that we are going to do what we said we were going to do with respect to our disciplined capital allocation strategy.

Operator

And that does conclude the question and answer session of today's call. I would now like to turn the call over to CEO, Jason Holler, for any additional or closing remarks.

Speaker 2

Okay, great. Thanks again for joining us this morning. To summarize, fiscal 2023 was a great year, the year of inflection, and we are Excited to continue this momentum into fiscal 'twenty four and beyond. With that, thank you and have a great day.

Operator

And that does conclude the Q4 full year 2020 We thank you all for your participation and you may now disconnect.

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Earnings Conference Call
Cardinal Health Q4 2023
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