Cardinal Health Q2 2022 Earnings Call Transcript

Quartr
Provided by Quartr
February 2, 2022

There are 9 speakers on the call.

Operator

Good day, and welcome to the Cardinal Health, Inc. 2nd Quarter Fiscal Year 2022 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kevin Moran, Vice President of Investor Relations. Please go ahead.

Speaker 1

Good morning and welcome. Today, we will discuss Cardinal Health's 2nd quarter fiscal 2022 results along with an update to our FY 'twenty two outlook. You can find today's press release and presentation on the IR section of our website at ir. Cardinalhealth.com. Joining me today are Mike Kauffman, Chief Executive Officer and Jason Holler, Chief Financial Officer.

Speaker 1

During the call, we will be making forward looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward looking statement slides 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. GAAP to non GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release.

Speaker 1

During the Q and A portion of today's call, we please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity. With that, I will now turn the call over to Mike.

Speaker 2

Thanks, Kevin, and good morning, everyone. Today, Jason's and my comments will be consistent with the update we provided a few weeks ago. Let me start with a few high level thoughts. At an enterprise level, we continue to focus our efforts on 3 strategic priorities optimizing our core businesses, Investing for growth and innovation and deploying capital efficiently. We continue to believe the long term targets we announced in November are appropriate.

Speaker 2

And we remain on track to meet our $750,000,000 enterprise cost savings target by FY 'twenty three. Our pharma business is performing as planned. We've seen volumes continue to improve sequentially And we are encouraged by the growth we saw again in Q2. Looking ahead, we continue to expect pharma to realize mid single digit growth and FY 2022. In our Medical segment, we continue to experience unprecedented inflationary impacts and global supply chain constraints in our core U.

Speaker 2

S. Medical and products distribution business. These impacts combined with lower than expected offsets from pricing actions will significantly impact Medical segment profit Consistent with our update a few weeks ago, while we believe these impacts are temporary, the timing of when they will abate remains difficult to predict. Consequently, we are urgently working to mitigate the effect of these external macroeconomic challenges on our business. We are seeing progress in other areas of the Medical segment, including our lab business in growth areas, And we recently extended several key acute care distribution customers.

Speaker 2

Looking ahead, I'll elaborate on the actions we are taking to drive performance, particularly for Medical after Jason reviews our Q2 results and updated outlook.

Speaker 3

Thanks, Mike, and good morning, everyone. Beginning with total company results, 2nd quarter revenue increased 9% to $45,000,000,000 driven by sales growth from existing pharma customers. Total gross margin was $1,600,000,000 A decrease of 9% primarily due to the Cordis divestiture and elevated supply chain costs in medical. Consolidated SG and A was flat to the prior year at $1,200,000,000 as the Cordis divestiture and benefits from cost savings initiatives offset IT investments and higher operations expenses. 2nd quarter operating earnings were $467,000,000 Outside of the incremental inflationary impacts in Medical, these results were generally in line with our expectations.

Speaker 3

Moving below line, interest and other decreased by 30 percent to $24,000,000 driven primarily by lower interest expense from debt reduction actions. Our 2nd quarter effective tax rate finished at 19.4%, 6 percentage points higher than the prior year due to certain discrete items, which primarily benefited the prior year period. Additionally, our 2nd quarter rate this year included some timing favorability. Average diluted shares outstanding were 281,000,000, 5% lower than the prior year due to share repurchases. Of note, we initiated a $300,000,000 share repurchase program in the quarter, which was recently completed and brings our total year to date repurchases to $800,000,000 The net result for the quarter was EPS of $1.27 2nd quarter operating cash flow was strong at $1,200,000,000 As a reminder, the day of the week in which the quarter ends affects point in time cash flows.

Speaker 3

We ended the quarter with a cash balance of $3,200,000,000 and no outstanding borrowings under our credit facilities. In the quarter, we also recorded a $1,300,000,000 non cash pre tax goodwill impairment charge related to the Medical segment, which is excluded from our non GAAP results. This accounting charge primarily resulted from additional inflationary impacts and global supply chain constraints I will discuss shortly. Now turning to segments beginning with Pharma on Slide 5. Revenue increased 11% to $41,000,000,000 driven primarily by branded pharmaceutical sales growth from large pharmaceutical distribution and specialty customers.

Speaker 3

Segment profit increased 3 percent to $426,000,000 driven by generics program performance. This was partially offset by our previously Investments in technology enhancements and higher operations expenses, including costs supporting sales growth such as transportation and labor. During the quarter, we were encouraged to see continued broad based improvements in pharmaceutical demand consistent with our expectations, including a return of generics volumes to approximately pre pandemic levels. Our generics program continued to experience generally consistent market dynamics, including continued strong performance from Red Oak. Outside of generics, we've seen brand inflation trending in line with our expectations.

Speaker 3

Turning to Medical on Slide 6. 2nd quarter revenue decreased 5% to $4,100,000,000 primarily due to the divestiture of the Cordis business. Segment profit decreased 79 percent to $50,000,000 primarily due to inflationary impacts and global supply chain constraints in products and distribution. This also reflects the timing of selling higher cost PPE, including the net positive impact from this dynamic in the prior year and to a lesser extent the divestiture of the Cordis business. During the quarter, our products and distribution business Continued to be impacted by significant inflationary pressures in the global supply chain, primarily in the areas of polypropylene and international freight.

Speaker 3

Additionally, in the quarter, we saw broader inflationary impacts across the business such as domestic freight and other commodities, as well as global supply chain constraints affecting the volume of some of our higher margin Cardinal Health brand products. I'll discuss these impacts with respect to our full year medical outlook momentarily and Mike will elaborate on the actions we are taking to address these macro challenges And dry performance in our core medical business. With respect to COVID-nineteen and the omicron variant, we continue to see strong performance from our lab business, including significant testing demand generally consistent with levels seen a year ago. And despite some impacts from Omicron in various geographies, Demand for surgical products related to elective procedures was comparable to both the Q1 and prior year. Now transitioning to our updated fiscal 'twenty two outlook on Slide 8.

Speaker 3

We now expect EPS in the range of $5.15 23% to 24.5 percent and interest and other in the range of $140,000,000 to $160,000,000 with the improvement in I and O including deferred favorability, which as a reminder is fully offset above the line in corporate SG and A. As for the segments on slide 9, For Pharma, no changes to our outlook. We continue to expect low double digit revenue growth and mid single digit segment profit growth. For Medical, we now expect revenue to be down low single to mid single digits and segment profit to be down 30% to 45%. Consistent with the financial update provided a few weeks ago, we expect increased inflationary impacts and global supply chain constraints as well as lower than expected pricing offsets to result in an estimated incremental $150,000,000 to $175,000,000 headwind to Medical segment profit for the full year.

Speaker 3

This, in addition to our November 9 update regarding the pressures in international freight and polypropylene, Now reflects a total net incremental headwind of approximately $250,000,000 to $300,000,000 to medical in fiscal 2022. While these impacts have persisted for longer than previously anticipated, we continue to believe the majority will be temporary as global supply chain pressures eventually abate. While it will take time, we are committed to mitigating the impacts of inflationary pressures and we'll continue to work through these dynamics with our customers. Now a few other things to keep in mind in terms of the fiscal 2022 cadence. For pharma, we expect the year over year growth The back half could be heavily weighted to the 4th quarter due to lapping of some prior year items, including higher costs for the deployment of IT investments and the general sequencing of our growth initiatives.

Speaker 3

In Medical, we continue to expect an unfavorable year over year impact due to timing of selling higher cost PPE In the second half of fiscal twenty twenty two, though not to the same magnitude as in the second quarter. We also will be lapping the large prior year PPE inventory reserve in the 4th quarter. Finally, to close, a few reminders on capital deployment. We continue to expect to pay down the approximate $280,000,000 of remaining June 2022 notes at maturity And continue to expect approximately $1,000,000,000 in total share repurchases in fiscal 2022. As we said, we see our increasing balance sheet flexibility supporting more opportunistic return of capital to shareholders as our debt pay down begins to moderate enabled by our recent $3,000,000,000 share repurchase authorization.

Speaker 3

We continue to believe that capital deployment along with the future growth that we expect in both our segments will drive the long term double digit combined EPS growth and dividend yield that we are targeting. With that, I'll turn it back over to Mike.

Speaker 2

Thanks, Jason. In Medical, we're continuing to take action to drive performance and maximize the differentiated strengths we have in this business. We are vertically integrated with distribution through our comprehensive medical products portfolio, which is generally oriented around the operating room and the intensive care unit. We also have an advantage of lab products portfolio and higher margin growth businesses. With our diverse customer base, We cross sell products and services spanning our portfolio.

Speaker 2

To address the challenges in our medical business, We're focused on 3 things. 1st, evolving our commercial contracting strategies and driving mix. Historically, costs have been relatively stable and industry participants have committed to longer term multiyear contracts. However, the rapid escalation of today's inflationary pressures demonstrate that our contracting strategy needs to change. We are in the process of working with our customers to adjust certain contracts to ensure we have more pricing flexibility for factors beyond our control.

Speaker 2

With regards to mix, as I noted in the prior quarter, we have made important changes to align our commercial organization structure and incentives. We are underpenetrated in Cardinal Health brand mix relative to our potential, which remains a significant mid to long term profit As we move past the pandemic and associated supply chain challenges. Within our medical products portfolio, We are actively improving our key category product offerings. For example, in our incontinence product line, We have launched a new Cardinal Health brand Stretch Breathe and a comprehensive breathable platform. These enhancements directly support And meet our customers' needs.

Speaker 2

2nd, we are simplifying our operating model and optimizing our international footprint. We remain on track regarding the timing of the previously announced exits in certain commercial markets, With 35 of the 36 completed to date, we are also focused on the modernization of our distribution facilities, Including breaking ground on a new distribution center in the Midwest with nearly triple the space of the existing facility enabling future growth. We believe that a diverse global sourcing network is important to remain competitive on cost and are investing in additional Manufacturing capabilities, including increases in annual production of safety needles and syringes, Isolation gowns and surgical and procedure mask in our own North American facilities. Specifically for surgical gowns, We have efforts underway that will double our North American finished goods production and enhance our supply chain resiliency. 3rd, we continue to invest across the Medical segment, including in our growth businesses, at home solutions and medical services, which are aligned with industry trends and positioned to grow double digits in FY 2022 and beyond.

Speaker 2

In At Home Solutions, we continue to see strong demand as care continues to shift into the home. We recently announced an additional strategic investment in Medically Home, a technology company that enables health systems and other partners Life Cardinal Health to safely bring the hospital home where patients increasingly prefer to receive their care. Not only does this hospital at home model benefit patients, it also provides needed capacity for hospitals and delivers care in a lower cost setting. And in our higher margin medical services businesses, Optifreight Logistics and WaveMark, We continue to enable clinically integrated and digitally automated supply chains and are seeing growth driven by an expanded customer base and Diversified Solutions. We've invested in additional technology capabilities to increase our offerings in both businesses.

Speaker 2

In OptiFreight, we've invested in additional technology capabilities focused on building automated, technology driven solutions that innovate the way healthcare supply chain leaders manage shipping spend and take control over their transportation logistics. These efforts are connecting suppliers and customers at over 22,000 shipping locations. In WaveMark, we've launched a cutting edge supply automation solution for clinical labs, which automates previously manual inventory management This enables clinical lab staff to focus on patient care and better manage increased testing demand due to COVID-nineteen. Our pharma business remains on track to deliver mid single digit growth in FY 2022. We continue to make progress on our 2 primary objectives.

Speaker 2

1st, strengthening our core pharma distribution or PD business. This quarter's segment profit was driven by the performance in our scale and expertise of Red Oak Sourcing, a partnership We also recently extended through FY2029 and which positions us well to meet customers' needs. In addition, our multiyear technology investment to modernize our systems is on track. We plan to complete the rollout By the beginning of our Q4 and look to benefit from the conversion in FY2023 and beyond. 2nd, we're fueling our growth businesses, Specialty, Nuclear and Outcomes.

Speaker 2

In Specialty, We continue to experience momentum in our oncology physician office business, driven in part by Navista TS, Our technology platform for value based care. Just this week, we announced a partnership with Ember Technologies As biopharma continues bringing cold chain biologic products to market, including cell and gene therapies, this partnership will help ensure product integrity throughout the supply chain. This is a differentiated offering and one that will reduce landfill waste by 1,000,000 of pounds annually. And with biosimilars, We are well positioned to support the next phase of growth as biosimilars expand into new therapeutic areas and sites of care. In nuclear, we expect continued double digit profit growth, which would result in a doubling of our profits in this business by FY 'twenty six.

Speaker 2

We continue to build out our multimillion dollar center for theargnostics advancement in Indianapolis, where we partner with several pharma companies to develop and commercialize novel diagnostics and we're investing in our pet capabilities to support robust pet diagnostics. For example, with the FDA approval of Telix's Radiopharmaceutical in Q2, we are positioned to drive nationwide accessibility and broad adoption of prostate specific pet imaging for physicians and eligible patients across the United States. And in outcomes, we are adding new payers in PBMs and expanding clinical solutions for both independent pharmacies and retail chains. Outcomes recently activated its 20,000,000th user on its digital patient engagement platform, which enables two way communication between pharmacies and patients to increase medication adherence. With respect to the enterprise, we continue to aggressively review our cost structure as we work to streamline, Simplify and strengthen our operations and execute our digital transformation.

Speaker 2

We're pairing cost reduction efforts with balanced, Discipline and shareholder friendly capital allocation with a focus on investing in the business, maintaining a strong balance sheet and returning cash to shareholders. Long term, we're targeting a double digit combined EPS growth and dividend yield. These expectations are driven by our growth targets for our segments, our commitment to our dividend and our $3,000,000,000 share repurchase authorization. Now let me provide an update on the proposed opioid settlement agreement and settlement process. As of today, 46 out of 49 states have indicated their intent to join the global settlement.

Speaker 2

The sign on period for political subdivisions within participating states concluded on January 26. Now each of the participating states are in the process of determining whether there is sufficient subdivision participation to proceed. After we receive notice from the states regarding their decision, each of the distributors will make final determinations by February 25. If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid losses filed by the state and local governmental entities. This is an important step forward for our company.

Speaker 2

As we've consistently said, We remain committed to being part of the solution to the U. S. Opioid epidemic and believe that settlement will provide relief for our communities and increased certainty for our shareholders. In closing, our aspiration has been It continues to be that we are healthcare's most trusted partner. We will do this by focusing on our customers' needs and delivering the products and solutions that advance healthcare and improve the lives of people every day.

Speaker 2

We bring life changing healthcare innovation to market, Harnessing the power of technology, data and insights to optimize care delivery. We're investing in technology and analytics to drive future growth in evolving areas of healthcare and address healthcare's most complicated challenges. What we do matters, And we're focusing our resources on building solutions to meet the needs of our customers and their patients now and in the future. And now Jason and I will take your questions.

Operator

Thank you. And we'll go ahead and take our first question from Charles Rhyee with Cowen and Company. Please go ahead.

Speaker 4

Yes. Thanks, guys. Mike and Jason, I want to talk about the issues with supply costs here. And We're obviously challenged at the moment, but can you talk a little bit more about As let's say these pressures ease, let's say hopefully later this year or whenever, Can you talk about how those expenses that you are incurring today roll off? Do they kind of roll off fairly quickly?

Speaker 4

Or is it that these kind of knock on effects of delays and everything for all your supplies and equipment Just kind of just drag even further beyond if we were to see reports that, hey, the ports are working as normal. How long is that kind of Follow on effects before everything really would return to normal. And from a P and L perspective, are these kind of Expenses kind of overshadowing, let's say, sort of the underlying performance of the division or a little more color on that would be helpful. Thank you.

Speaker 3

Sure. I'll definitely start here, Jason, and then I'm sure Mike will have some thoughts as well. But Generally speaking, the vast majority of these costs that we've outlined are product related costs or costs to get the products Shipped to the United States where our customers typically are. And as such, most of those costs are included in inventory and then expensed as they're sold. So that means that there would be a 1 to 2 quarter delay in terms of when those costs begin to come down And when you would start to see that offset then in the P and L.

Speaker 3

And that's, I think fairly typical for what we saw with PPE as well Last year in terms of that type of cadence. Now there's some of this smaller portion is related to the volume impacts, the So that's obviously going to be at the time that volume frees up. There's a small part that's a period cost, but it's much less significant. Again, the biggest buckets when you step back and think about the $250,000,000 to $300,000,000 that's in aggregate that we're talking about It's that international freight is the biggest piece and is very much inventoried as I just described. And then the 2nd largest would be the general commodities we've talked about, Commodities like oil based commodities like polypropylene, that is a big driver of that.

Speaker 3

Again, those would all be inventory costs and then flowing through. As it relates to the overall impact to the business, just using Q2 as the example, From a year over year perspective, this overall aggregate impact of the inflation and net of pricing is the greatest driver of that year over year reduction. We did, as a reminder, have favorability last Q2 as it relates to the timing of PPE pricing cost. So it's a little bit of a headwind on an absolute basis this quarter, but it's more significant the comparison to the favorability of last year. That's about $60,000,000 in this quarter.

Speaker 3

So that's a relevant piece to the year over year impact. And then the final piece, as you know, Cordis is Running at roughly last year was roughly $20,000,000 a quarter. So the absence of that business as was divested is that last piece. So I think that gives you most of the key pieces. Yes.

Speaker 2

The only thing I would add Charles is that while everything Jason said is true, the 1 to 2 quarters and all that, One thing I want to make sure people understand is, we're actively getting after this now. So we're not going to have a strategy of just Waiting for these to come down. So we are evolving our commercial and contracting strategies. That is something we're actively doing, working with customers To be able to either pass on some of these prices, change our contracting, driving our mix as we talked about And continuing to aggressively get after our cost and invest in our growth businesses. So while we will Hopefully, see these come down because we do believe these are temporary.

Speaker 2

We're also at the same time getting after things that we need to do to manage to operate the business aggressively. Thanks, Chris.

Operator

We will go ahead and move on to our next question from Lisa Gill with JPMorgan. Please go ahead.

Speaker 5

Thanks very much. Mike, can I just first start with just a follow-up to what you just talked about? When we think about your medical business longer term, I know you previously had A goal of north of 5% operating margin for MedSurg. I know part of that was the higher margin of Cordis. But when we get back to a more normalized basis, How do we think about what the margin should look like in that business?

Speaker 2

Yes. It's a great question. We've not put that Out there, I will give you a couple of things. Obviously, as the inflation goes away and as we said, we believe this 250 to 300, the vast majority of that is temporary. So you can add that back to our margin rates It's the biggest driver.

Speaker 2

2nd of all, the second thing I would add is we said we want to drive mix. And what we mean by that is selling more of Cardinal Health branded Products versus National Brand, that's going to also drive our mix a positive way. We're getting after expenses that's going to I'm sorry, that's going to drive our Margins too for the segment. And we're growing our growth business, which do have higher margins. So all of our key initiatives Not only will drive bottom line, but they all should drive margin rates up significantly.

Speaker 2

But at this point in time, we've not put a target Margin rate out there that we're going after.

Operator

And we'll go ahead and move on to our next question from Eric Percher with Nephron Research. Please go ahead.

Speaker 6

Thank you. I want to stay on this topic. And my question is, can we talk a little bit about your expectations for some of these Specific items, maybe built into the year or your view on duration and I'd separate kind of freight, commodity And then the sales volume and duration on how long you passed this on given the new contracting methodology. Can you just give us your take on either expectations today or based on prior experience and what you know today, the duration of those pressures?

Speaker 3

Yes. Again, this is Jason. I'll start. So to your point, it will Potentially differ not only by type of cost, but also the magnitude of what we're talking about. So as it relates to, first of all, just the international Great.

Speaker 3

One thing to highlight is that that particular area of cost has remained at very elevated levels. So at this point, we're We're not seeing much of a change from where we have been. And so that's something that is a clear part of our pricing focus is To make sure we can get at least a good portion of that recovered, as it relates to some of the other commodities, they've been more volatile. We have seen some that have started to appear to come down that cost curve. It looks like they may have plateaued and started to reduce Others that have been choppier.

Speaker 3

And so in that environment where the costs are moving around a lot, it is provides more challenges as it relates to getting that Pricing more established. I think the key is as you think about the cadence of what this impact is on a net basis, That $250,000,000 to $300,000,000 we have already incurred about $100,000,000 of that year to date. That $150,000,000 to 200,000,000 Remaining within our guidance, we see that peaking in the 3rd quarter and that's a combination of not only the costs we Expect to be at its highest and then as they start to come down and it takes that delay to get it actually flowing through our inventory to our P and L, That then would start to benefit us later in the year, but also that's also the timing of when we would start to see some of the pricing actions that we Have already begun to start to come through. It is just the beginning. It's not offsetting enough of that and there's more activity that will need to still occur, But it all depends on exactly what that cadence is of cost and the key is that we remain very close to both the GPOs as well as our customers To manage through that on a item by item, customer customer basis to get to an answer then that will give us the right cadence exiting the year.

Speaker 3

With all that said, given the 1 to 2 quarter lag, even if costs do come down and even if we have more success with the pricing, We would expect there to be a carryover into fiscal 'twenty three. There will be some impact that carries over into that year, but we need to see the cadence of both The cost and the pricing before we can establish that more clearly.

Speaker 4

And we'll

Operator

go ahead and move on to our next question from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Speaker 3

Hi, good morning.

Speaker 6

This is Dan on for Ricky. Two questions from us. 1, as we think about your move to move more finished goods production back to North America, How should we think about that in terms of margin, both sort of in a pre COVID environment and then the impact to margin as we think about your margins in recent quarters? And then as a follow-up, just wanted to confirm, was the updated tax rate interest expense guidance that came out today, was that included in

Speaker 5

the early January update or is that incremental? Thank you.

Speaker 2

I'll have Jason talk about the tax rate and then I can talk about the margin.

Speaker 3

Yes. And so the There were some small differences in this latest update. The tax rate was just bringing down the top end a little bit low end was the same. So it's not much of a difference there. The interest and other change I highlighted was in part related to deferred comp.

Speaker 3

And as a reminder, that's Just geography between interest and other as well as corporate SG and A. So yes, it was largely considered in our prior assumptions, but there's a lot of it Just geography anyway, so there's no material difference in those other updates.

Speaker 2

And as far as moving capacity to our North American Operations, I would say a couple of things. Generally, I wouldn't say that we would expect much of a margin difference If it was manufactured outside of North America versus manufactured here, that is not something I would say would be a margin driver. It's more about Supply chain integrity, which is why we moved them there. So if there are disruptions in the future, we obviously then have certain key items Closer here. So we've chosen as items that can be highly automated, make a lot of sense and freight is a big piece of it so that we can still stay cost competitive.

Speaker 2

So again, I wouldn't say it's margin generating in and of itself. However, by increasing the capacity on some of these items, like we mentioned, doubling our ability to manufacture our own Gowns, that does give us more ability to sell our own product, which as we drive mix, that would increase our overall margin rate.

Operator

And we'll move on to our next question from Jalendra Singh with Credit Suisse. Please go ahead.

Speaker 7

Thank you and good morning everyone. With respect to this $250,000,000 to $300,000,000 impact in Medical segment, can you be a little bit more specific on how much impact did you In fiscal first half and how much is expected in second half? And a follow-up to an earlier question, how should we model the split between 3Q and 4Q on the remaining impact? Trying to better understand if all these initiatives you're putting in place are more focused on positioning the company better next time you see these kind of pressure Do you think there's a possibility these initiatives result in some near term offsets? And are you capturing those in your outlook?

Speaker 3

Yes. If I understood the question, Rachel, Linda, I think I'd answered it before, but I'll go and repeat that. The $250,000,000 to $300,000,000 was has already been incurred in the first half. Think about it as kind of a sequential step up. So Q2 was higher than Q1 and Q3 is expected to be higher than Q2.

Speaker 3

And then that's the period that peaks before it starts to come back down. So there's It depends on if we're talking sequential or year over year. From a sequential perspective, from Q2 to Q3, Within the medical business, there's just the ongoing cost reductions that we would expect to be Always in place that continue. Those initiatives we've talked fairly consistently about are there. Within the other Type of PPE impacts, like I said, from a year over year perspective in the second quarter, it was $60,000,000 headwind.

Speaker 3

There was a Small headwinds in an absolute basis in the second quarter that we think will be less in the Q3. So that's a bit of an offset, not Significant, but generally speaking, it's the inflationary impacts are the most pronounced from a year over year as well as expected to be A little bit greater than in

Speaker 2

the Q3. The things I would add to be helpful here is, as Jason mentioned, As we expect some of the inflation impacts to start to hopefully come down some and that will give us a little bit of benefit In Q4, we also see our pricing actions ramping up, some in Q4 too, because we are continuing to Implement additional pricing actions. We have some going into effect here very soon that have been agreed to. So we're working through those. So I would say that that would be a positive item going forward for us.

Speaker 2

Also, As we mentioned, we are working on our commercial contracting strategies. And so as we work through those contracts, our goal is to give us Flexibility, so that in the future, if there is another instance like this, we are able to react quicker and address our pricing and work with our partners In a very transparent and productive way because our customers are obviously something that we have to always have in the front of our mind, But we do need some more flexibility in the business and we are working aggressively to work with the GPOs and our customers to do that.

Speaker 3

And Jalendra, as you do your modeling for the balance Just remember in the prior year, we had the significant inventory charge in Q4 that would of course not be expected to replicate here this year.

Operator

And we'll go ahead and move on to our next question from Michael Cherny with Bank of America. Please go ahead.

Speaker 8

Good morning. Thanks for the details. Mike, you mentioned in your remarks how you had a few customer extensions with some of your key customers on the medical side, Especially against this backdrop of your focus on re contracting, would love to know a little more detail about how qualitatively those discussions Went and in terms of your thought process about recontracting, were you able to test out what you were able to get through and not get through and what customers were willing to accept Relative to that changed contracting dynamic, especially given that these are obviously extensions on customers that have worked with you, I assume, for at least a long time?

Speaker 2

That's a great question. Yes, we are working aggressively on that. It's not just the individual customers. In fact, It's just as important to be able to work with our GPO partners to allow us because you really have to coordinate between all three of them. So there's still absolutely work to do, but we're seeing some positive signs from both the GPOs And the customers that understand the importance of having a strong supply chain and strong supply chain partners in medical distribution These are things that we're going to have to work together.

Speaker 2

Key things that we've learned through those discussions that will be helpful is, 1, a willingness to be transparent with them So that they understand as costs come up, why are they going up, but also when costs come down so that they know that you're not continuing to charge A high price when things have got better and we're very willing to work with them on this transparency piece, which I think will help both parties understand the importance Of what we need to do here from a pricing standpoint. So I would say early indications have been positive, but it's still a lot of work to do As we work on changing our commercial strategies.

Operator

And our last question comes from Elizabeth Anderson with Evercore. Please go ahead.

Speaker 5

Hi, guys. Thanks so much for the question. I was wondering if you could comment on as we sort of I've gone through a month of the new quarter. Just how you're seeing sort of volumes come back, particularly on the surgical And also on sort of home care, just as sort of we think about the cadence for that going through the back half of the year.

Speaker 3

Yes. And maybe I'll just take the opportunity to just talk about volumes in general because I think whether it's pharma or medical, The general response is about the same. Within medical, while there has been certain level of choppiness over the last 3, 6 months. Largely, it's been very consistent with our expectations. We indicated before we are back to near pre COVID levels And this quarter was pretty consistent with our expectations and sequentially from the Q1 as well as year over year, there were not many differences.

Speaker 3

And so there's noise, but the key is that state by state, geography by geography, different regions are impacted at different times to different But we're just not seeing big impacts and that's because our customers continue to do a wonderful job of providing great service to their patients And that's providing a better balance underneath the volume than what we saw earlier on in the pandemic. On the pharma side, we continued to talk in today's prepared remarks as well as a couple of weeks ago, just that we continue to see that widespread improvement back And we have largely gotten back to that point at the end of the second quarter. And so we're just not seeing a lot of variability there as well.

Operator

And with that, that does conclude our question and answer session for today. I would now like to turn the call back over to Mike Kauffman for closing remarks.

Speaker 2

Thanks, Ali. I want to thank everybody for taking the time to be on the call today and I'd like to conclude by reiterating that we are taking action to mitigate these inflationary impacts and supply chain constraints, And we're laser focused on driving improved performance across all of our businesses. So please stay safe and we'll speak with you again soon. Take care everybody.

Operator

And with that, that does conclude today's call. Thank you for your participation. You may now disconnect.

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Earnings Conference Call
Cardinal Health Q2 2022
00:00 / 00:00