Matt Sims:

Welcome to this morning's Cardinal Health third quarter fiscal '24 earnings conference call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar; and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in the statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant, so that we can try and give everyone an opportunity. With that, I'll now turn the call over to Jason.

Aaron Alt:

Thank you, Jason. This morning, we are reporting our financial results on the new financial reporting segment structure we implemented at the beginning of Q3. To that end, we released an 8-K on April 23, which provided the recast historical quarterly results for fiscal year '22, fiscal year '23, and fiscal year '24 through Q2, reflective of the new segmentation for Pharmaceutical and Specialty Solutions, GMPD, and Other. As we called out at the time, the new segmentation is designed to provide greater transparency, focus, and accountability across our businesses, and we are already seeing those benefits. Overall, Q3 was a strong quarter with double-digit operating earnings growth and 20% EPS growth. We accomplished that growth, while at the same time leaning in and making significant investments of time, expense and capital against our longer-term strategic plan. With both continued confidence in our strategies and a resilient business and team, we are pleased to once again raise our EPS guidance for fiscal year '24, more on that shortly. As seen on Slide 4, total company revenue increased 9% to $55 billion, reflecting revenue growth in the Pharmaceutical and Specialty Solutions segment, the GMPD segment, and in all of the businesses making up Other. We were particularly pleased to see the second consecutive quarter of revenue growth in GMPD at 4%. We are also pleased that gross margin increased 9% to $1.9 billion. While consolidated SG&A also increased just under 9% to $1.3 billion in the quarter, the increased amount reflects technology and other purposeful investments against the future of the business and higher costs to support sales growth. With strong broad-based profit growth, we delivered operating earnings of $666 million, 10% higher than last year. Moving below the line, interest and other was generally consistent with the prior year at $26 million, and our third quarter effective tax rate of 20.4% was better than we expected due to positive discrete items. As a result of our prior share repurchases, Q3 average diluted shares outstanding were 245 million, 5% lower than a year ago. As I mentioned earlier, the net result for Q3 was EPS of $2.08, reflecting growth of 20%. Now turning to the segments, beginning with Pharmaceutical and Specialty Solutions on Slide 5. Third quarter revenue increased 9% to $50.7 billion, driven by brand and specialty pharmaceutical sales growth. We continued to see strong pharmaceutical demand across product categories, brand, specialty, consumer health and generics, and from our largest customers. While we again saw robust demand for GLP-1 medications, recall that we had guided that the revenue growth rate would moderate this quarter, as it did, given the acceleration that we started to realize last year during Q3. Excluding GLP-1 sales, the segment's Q3 revenue growth would be 7%. As we previously noted, these sales did not meaningfully contribute to the bottom line. Segment profit increased 4% to $580 million in the third quarter, driven by positive generics program performance. Our generics program continued to see both volume growth and consistent market dynamics. Within our brand and specialty products, demand for COVID-19 vaccines in the quarter was, consistent with our expectations, not a meaningful contributor. As anticipated and guided, lower branded inflation than last year's relative high point was a year-over-year drag on profit growth. So, overall, we were pleased to deliver 4% segment profit growth in Pharmaceutical and Specialty Solutions, solid growth on top of an exceptionally strong quarter a year ago, which grew 23%. Turning to the GMPD segment on Slide 6. Revenue grew for the second quarter in a row by 4% in Q3 to $3.1 billion. This increase was driven by volume growth from existing customers. The GMPD segment delivered segment profit of $20 million, a $66 million year-over-year increase, driven by an improvement in net inflationary impacts, including our mitigation initiatives. GMPD continued its strong turnaround trajectory, achieving its highest level of quarterly profitability in the last two and a half years. We continue to be encouraged by the underlying improvements in the business, driven by the team's efforts against the GMPD Improvement Plan. As a reminder, the components of the former Medical Improvement Plan are now split between GMPD and Other, and the plan continues to be on track. The team achieved notable progress on inflation mitigation in the quarter, and we again saw a year-over-year improvement and growth in Cardinal Health brand volumes, providing continued fuel for the business' ongoing turnaround. Finishing with the businesses that aggregate into Other, as seen on Slide 7. Third quarter revenue increased 14% to $1.2 billion due to growth across all three businesses, at-Home Solutions, Nuclear and Precision Health Solutions, and OptiFreight Logistics. Collectively, the businesses grew segment profit in the quarter by 5%, with OptiFreight Logistics showing particular strength as we worked during the quarter to create the foundations for future profit growth in all of the businesses. Jason will further discuss our excitement around these businesses and some of the recent trends momentarily. Now turning to the balance sheet. We ended the quarter with a strong cash position with $3.7 billion of cash and equivalents on the balance sheet. Year-to-date, we've generated $2.1 billion of adjusted free cash flow and have continued to deploy capital according to our disciplined capital allocation framework, including investing approximately $320 million in CapEx back into the business to drive organic growth and funding the $1.2 billion acquisition of Specialty Networks. Over the past several years, we've made tremendous progress with our balance sheet. At the end of the quarter, we received a further update to our ratings outlook with Moody's moving our outlook to positive. We issued $1.15 billion in new notes during the quarter to refinance our upcoming June and November debt maturities. We plan to hold the cash proceeds and time deposits until the calendar year 2024 maturities come due. I'll note, due to the nature of these contracts, only about half of the total cash received is reflected in our Q3 ending cash balance. The remaining $550 million is recorded in prepaid expenses and other on the balance sheet. We have returned over $1 billion total to shareholders year-to-date, which includes approximately $375 million of quarterly dividend payments and $750 million in share repurchases, which is in excess of our committed baseline repurchase of $500 million. Now for our updated fiscal '24 guidance on Slide 9, beginning with the enterprise. We are raising and narrowing our fiscal year '24 non-GAAP EPS guidance. Our new range of $7.30 to $7.40 reflects a midpoint, which is 27% above our fiscal '23 EPS results. We started the year working to deliver our guidance of 14% EPS growth at the midpoint. What a year it has been so far. Before we turn to the segments, a few comments on our enterprise assumptions. With the year-to-date results, we are improving our fiscal '24 effective tax rate guidance to an updated range of 22% to 23%. And we are reiterating our fiscal '24 expectations for adjusted free cash flow of approximately $2.5 billion, for CapEx of around $500 million, for diluted shares of approximately 247 million, and for share repurchases of $750 million which, consistent with our framework, does not assume further repurchase activity this year. Now turning to the fiscal '24 outlook for our new segment reporting structure, as seen on Slide 10. With another solid quarter from Pharmaceutical and Specialty Solutions, we are raising and narrowing our segment profit guidance for the full year to 8.5% to 9.5% growth, which at the midpoint implies continued mid-single digit profit growth in the fourth quarter. We are reiterating our guide for GMPD segment profit of approximately $65 million for fiscal year '24. We continue to expect to address the impact of inflation as we exit fiscal '24, along with continued Cardinal Health brand volume growth and benefits from our continued cost savings initiatives. Additionally, we anticipate a positive impact from seasonality in Q4 compared to Q3. We are also reiterating our segment profit guide for the Other businesses, 6% to 8% segment profit growth for the full year, given that we expect a strong Q4 for those businesses. On the topline, we now expect Other full year revenue growth of approximately 12%. So, as I highlighted earlier, we are raising our guidance for fiscal year '24 to $7.30 to $7.40. Finally, let me conclude my remarks by providing a guidance preview for fiscal year '25. We will provide formal fiscal year '25 guidance during our Q4 and full year earnings call in August. However, with the benefits of our raised fiscal year '24 expectations and the action plans already underway in response to recent market changes, here is our preliminary perspective. For our largest business, Pharmaceutical and Specialty Solutions, while revenue will reset in the year as we offset a recent customer non-renewal, we notably expect to deliver at least 1% segment profit growth in fiscal year '25 before returning to more normalized growth in fiscal year '26. Looking forward, our commercial and operational teams have been busy, and our value proposition is resonating in the marketplace. Over the past several months, we have had some attractive wins with new customers and some existing customers are expanding their own footprints with us. Some of these are already under contract and ordering and others are scheduled for implementation in the second half of next fiscal year. So, over the course of the upcoming year, we expect new volume coming our way at sustainable margins. We completed the Specialty Networks acquisition quickly, which will be additive to our efforts in fiscal year '25. Separately, we have turned a further eye to optimizing our cost structure across our corporate functional footprint and across the Pharmaceutical and Specialty Solutions portfolio. Regarding environmental factors, we are expecting brand inflation to be roughly equivalent to fiscal '24 levels, while we remain watchful relative to the contribution of COVID-19 vaccines. For the GMPD segment, we expect continued growth in fiscal year '25 on our path to approximately $300 million in segment profit by fiscal year '26, driven by the annualization of inflation mitigation, progress with Cardinal Health brand growth, and continued simplification and cost optimization. We expect approximately $175 million in GMPD segment profit in fiscal year '25. And for the businesses included in Other, we expect the strong demand we've seen across these businesses to continue. With positive industry trends and the strength of our competitive positioning, we expect collective segment profit growth in fiscal year '25 at the top end of our long-term target approximately 10%. During fiscal '25, we will be investing across all of our businesses, with key examples being new facilities like our Consumer Health Logistics Center, at-Home Solutions facilities in Texas and South Carolina, and further geographic reach of our Nuclear and Precision Health Solutions' PET network. We will also continue our build-out of Navista and investments in GMPD supply chain resiliency. Now a few call-outs below the line and with the balance sheet. We anticipate a significant step-up in interest and other next year, primarily due to much lower average cash balances due to cash already deployed for Specialty Networks and due to the one-time unwinding of negative net working capital from the large contract non-renewal. We also expect lower short-term investment rates on cash and higher interest rates on debt resulting from the refinancing of our calendar 2024 maturities, leading to an interest and other range of $160 million to $190 million in fiscal year '25. We expect our fiscal year '25 effective tax rate to be in the range of 23% to 24%, slightly higher year-over-year due to discrete favorability seen this year. Partially offsetting these impacts, we would expect a lower share count between 244 million and 245 million due to the $500 million of baseline share repurchases we've previously outlined. Finally, while we continue to expect to generate adjusted free cash flow of approximately $2 billion on average from fiscal 2024 to 2026, we think it is important to call out that fiscal 2025 will be lower than that average, primarily due to the large contract unwind, as well as quarter end day of week timing. These dynamics will significantly influence our cash flow in Q1 of next year. However, our strong investment grade balance sheet positions us well to manage through these fluctuations. With respect to the long term, it is full speed ahead. We are reiterating our fiscal year '24 through '26 targets for the enterprise and segments and expect to deliver at least $7.50 of non-GAAP EPS in fiscal year '25, which reflects at least 30% total EPS growth on a two year basis. With that, I will turn it back over to Jason.

Operator:

Thank you very much, sir. [Operator Instructions] Our first question today is coming from Lisa Gill coming from JP Morgan. Please go ahead.

Operator:

Very sorry about that, gentlemen. Her line appears just to have dropped. So if she could just maybe dial back in, I will put her back in the queue. But now, we will move to Michael Cherny. Please go ahead.

Aaron Alt:

Good morning. This is Aaron. I appreciate the question, and happy to provide a little more context. I want to start by observing that the PS&S team has got -- have strong plans for '25 as they continue to deliver against what was a very strong fiscal '24. We had provided long-term guidance for PS&S of 4% to 6% profit growth. As we now think about that in comparison to the guidance we provided today of at least 1% profit growth within that segment, the delta, you should think about it is really the impact of profit -- net impact of profit so far relative to the Optum business. And the simple math I do is, if you take the midpoint of our long-term guidance, the 5%, each percentage point is worth about $20 million. You take it down to the 1% -- at least 1% that we've guided, that's about an $80 million net impact so far that we are working through. So that's the profit guide I would give you. On the revenue side, I would observe that we've already provided the impact that fiscal '23 was about 16% of our revenue. Fiscal '24, not yet done, will land somewhere between $35 billion and $40 billion of revenue. Back that out, but recognizing that the portfolio is still growing 10% or so as we push ahead. And then lastly, on the cash flow side of the house, I hope you noted my comments that we are holding to our average of $2 billion of adjusted cash flow each year in the '24 to '26 period. It will be lower in '25 as we work-through the negative working capital position from that non-renewed contract and a days of week impact. But this is manageable and as you -- I hope you take away from the fact we're calling growth as we push ahead for PS&S. We have plans in place. Jason, anything you want to add?

Matt Sims:

Next question, please.

George Hill:

Yeah. Good morning, guys. And Jason, I kind of have a question around the intersection of the competitive environment in specialty. The industry has been pretty stable without any large contract switches for a while, though, we saw two kind of in the last handful of months. And my question is, like, given the composition of assets in the pharmaceutical business right now, are you seeing more of a demand for what I would call like cross functional service where people want to see core pharmaceutical distribution with other parts of specialty with -- as it relates to oncology and just trying to figure out, like, how do you guys deal with the breadth of solutions that you offer as the competitive environment evolves?

Aaron Alt:

George, I would add one further thought, which is, as you see from examples like our acquisition of Specialty Networks, of course, we continue to work to get closer to the ultimate practitioner, so that we are prepared to offer the incremental services that the industry is demanding.

Lisa Gill:

Good morning, and thank you, and hopefully, this time it will work. So my question was actually asked, but I wanted to just really dig in just a little bit deeper. As I think about the cadence for 2025, I know you're not giving specific guidance, but maybe even first half, second half, as we think about some of the comments you made, for example, simplifying costs, right, that'll...

Jason Hollar:

Well -- yeah, I think we can understand where she was going with trying to build out further for first half versus second half. So, the one thing I would stress, let's talk about the puts and takes and the timing of the puts and takes. So this customer migration will be somewhat of a cliff event at the end of the fiscal year. So, the June 30 to July 1, which is exactly the beginning of the fiscal year. So, that first quarter, we'll see that volume drop off fairly precipitously. And then the other business that we've won, some of it is already feathering in, some of it will continue over the course of the year, and we've highlighted in our comments a lot of it will be in the second half of fiscal '25. So, the timing of that, that piece of the puts and takes will be a little bit more second half weighted. Especially networks I referenced, that is a nice tailwind that is going to start benefiting us. It's included in our guidance for the fourth quarter, but we'll have three quarters of year-over-year performance driven by that business being added in and the continued just overall growth of utilization over the course of next year that we expect as well. The other cost actions will be varied. There's some things we've been planning for this for quite some time. And so, some of those cost actions will be in place by the end of the year. Some of those will need to take time to allow our operations to settle with that lower volume. So this is a customer that beyond it being -- it's a large and growing customer. So we definitely liked that volume. At the same time, it was a customer that had a lot of non-standard and customized processes and the demand profile was a bit more volatile. So we'll be able to operate more efficiently as this volume exits, but that won't necessarily be a day one type of thing. It will take us a little bit of time to get the each of the individual sites to be flowing with the new product that is coming in, but also just optimizing with the existing product. So the puts and takes there are all items that we start to see some mitigation at the very beginning of the fiscal year and then build over the course of the year.

Matt Sims:

Next question, please.

Allen Lutz:

Good morning, and thanks for taking the questions. We've heard anecdotally that generic prices are a little bit firmer this time versus maybe last year. Can you talk a little bit about buy side and sell side pricing here of generics and maybe how gross profit dollars in that part of the business in generics are trending versus...

Operator:

Thank you. We'll now move to Kevin Caliendo, calling from UBS. Please go ahead.

Aaron Alt:

Why don't I start with the med cadence and then turn over to Jason to talk further about Red Oak? Look, the med, the -- or rather the GMPD business, we are executing against the plan that we've now been talking about for several quarters. And a couple of numbers on the page. Fiscal year '23, it was a negative $165 million; in fiscal '24 today, we've confirmed we're calling a positive $65 million. That's about a $230 million swing, which puts us halfway to the fiscal '26 target of $300 million. Fiscal '25, we've called today, will be approximately $175 million, really a midpoint between those. How we get there is how we have gotten -- how we've gotten halfway there so far. The single biggest initiative, single biggest impact to those numbers is continuing to achieve the inflation mitigation that we've been talking about for several quarters. We exited Q3 at about 90%. We expect to achieve full mitigation by the end of the fiscal year. But as we move into next year, of course, we'll be lapping the lower percentage execution. So that will be tailwind. That will be significant tailwind for us certainly in the first half and, indeed, the first -- for the full year. It's also important that we continue to see the good revenue growth and, in particular, the good volume and revenue growth tied to the Cardinal Health brand is that is a broader -- that is a more profitable part of our business. I know you noticed that in Q1, we called out a positive change in trend relative to the revenue in that business. Q2, we saw 2% growth. Q4 we saw 4% growth. And so, we're seeing signs of progress that give us reasons to believe that we can achieve both the $65 million this year and the $175 million next year. Lastly, on the cadence and the importance, the team will continue to do what they've been doing around simplification and cost out, right? It's a very complex business and the team has been doing a good job of simplifying and identifying sources of cost this year, and that will continue into next year as well. Jason, anything you want to add or talk about Red Oak?

Kevin Caliendo:

Thank you, sir.

Operator:

We'll now go to Eric Percher, calling from Nephron Research. Please go ahead.

Jason Hollar:

Yeah. So I -- the so far comment was simply to highlight that we are guiding to at least 1% growth. And so, that reference is entirely around, of course, we continue to look for other opportunities to mitigate further. And depending upon our success with those additional actions will be the answer to your question about incentive comp. We'll, of course, appropriately define a target with the alignment with our Board to ensure that we are motivated to drive the business forward. And then, as it relates to Specialty Networks, our underlying assumptions are unchanged. The accretive comment was -- you're right, Eric, that the reference point was a year after the close and that was including the dilutive effect on the interest. So, the lost interest on $1 billion, $1.2 billion is the offset to the operating earnings that we see within the Pharma business. So it's really just the geography of the plus and minus with that.

Matt Sims:

Next question, please.

Stephanie Davis:

Hey, guys. Thank you for taking my question. You called out a few new wins and expansions in the prepared remarks and you did highlight some customer progress that offsets the Optum headwinds. So I was hoping we can dig in there a little bit more. Can you tell us about the nature of these wins? Is this more core? Is it onc (ph)? Is it other ologies? And how much the bridge from FY ‘25 to the three year guidance relies on further progress with these wins versus more of the streamlining and cost-out that you've called out?

Aaron Alt:

I would add a couple of things to that. First, you asked about cost-out, and my response or our response is that simplification has been a priority of ours for the last couple of years, and we will, of course, continue to go looking for ways we can simplify our operations and optimize our cost. But let me be clear, right, we are not backing away from customer support, particularly the new customers coming onboard, so that we do that seamlessly. And we're not backing away from investing in our future across our enterprise. And so, we will continue to talk about the highlights of those as we make them in future earnings calls, but we will optimize as appropriate, while focused on the long term.

Eric Coldwell:

Thanks, and good morning. I wanted to talk a bit about specialty in general and then tie in Specialty Networks. So, in the recent past, you've given a sizing of your overall specialty business in the low-to-mid $30 billion range. You will lose some of that with the Optum roll off, probably $3.5 billion, $4 billion, I'm guessing. You're going to add some with Specialty Networks, and then you have normal market growth. So, netting this all together, what would you anticipate the baseline specialty business to be sized at when you start fiscal '25?

Operator:

Thank you very much. Next question is coming from Elizabeth Anderson, calling from Evercore. Please go ahead.

Jason Hollar:

Yeah. I think the competitive environment, I'm not sure I'd put much into that. Our performance within this industry has improved dramatically. I referenced in my comments, the customer loyalty scores improve -- have improved consistently and dramatically from the bottom of the pandemic a couple of years ago. So, our performance is noticeable. Our customers are feeling it. That customer loyalty index, the scores behind it improving, because we have -- we have the low back order, we have product availability, we have great service levels. We're very engaged from a sales force perspective. So we're out there now selling instead of reacting to the challenges of the pandemic. So our customers are feeling that. We have very stable win/loss types of rates. We're growing at least with the market now. So it's more of us showing up, I think, the right way than the market being overly growing more or growing less. The market utilization continues to be more and more normalized. So there's maybe a little bit of volatility here and there, but it's much more normalized compared to where it has been in the last several years. So, not -- that -- and that's the environment we like. We like to see predictable, consistent lower-single digit type of utilization rates that we can grow a little bit above that through our mix and other actions. And then, of course, as Aaron highlighted, the single biggest driver, not only this past year, but that -- what we expect at least in the first half of next year, would be just the lapping of the inflation impacts and everything we've done to mitigate that. Which -- that's another thing that's helpful for us to get that behind us so that we're focused on selling and talking to our customers about the value that we can help provide them, as opposed to dealing with inflationary fluctuations that have occurred in the past. So we're well-positioned to now drive the other elements of the medical -- the GMPD Improvement Plan, which is the ongoing simplification, the ongoing cost reductions, but just continuing to really prioritize more than anything the Cardinal Health brand volume growth.

Operator:

Yes, sir. The next question will be coming from Stephen Baxter, calling from Wells Fargo. Please go ahead.

Aaron Alt:

So, an answer to your first question, our guide today does confirm the long-term growth within the Pharma business of 4% to 6%. It will be off a lower base in fiscal '25 as we grow at least the 1%. We've not commented on an absolute dollar basis, but we will provide more context on that when we get to our year end results and final guidance for fiscal '25 during our August earnings call. With respect to the Other business, we are pleased with what we're seeing so far. We re-segmented the operation to create additional transparency, focus, and accountability, and I referenced in my prepared remarks that we are already seeing the benefit of that. The topline results are good, right? And we guided 6% to 8% profit growth for this year. We were a little bit lower than that in Q3 for the businesses aggregating in Other so far. And of course, we had the impact of some of the non-recurring adjustments that we called out in Q2 tied to the at-Home business, which reports into Other in the second quarter. But I want to emphasize, we did confirm that we are expecting to achieve the higher results, the 8% to 10% for fiscal '24 and we confirm the high end of that range for fiscal '25, as Jason digs in with the businesses now reporting directly to them and as we invest as an enterprise against setting those businesses up for a higher growth trajectory.

Matt Sims:

Next question, please.

Lucas Romanski:

Hi. This is Lucas on for Charles. I wanted to ask about Cardinal Health brand and get a sense of where we're at on the path to realizing $50 million in targeted growth by fiscal '26. I understand that you've expanded the number of products you offer under private label and that you're starting to see momentum in growing volumes. Can you help us understand how much of that $50 million has already been realized? And then how much we should expect you guys to realize in fiscal '25? Thanks.

Matt Sims:

Next question, please.

Daniel Grosslight:

Hey, guys. Most of my questions have been asked, but I was hoping to just get an update on Navista and any metrics you're able to share on the market adoption you're seeing there, number of providers aligned to it, etc. And I know one of the key strategic objectives of the Specialty Networks acquisition was to kind of integrate some of their technology, notably PSS Analytics (ph) into Navista and other specialty assets. I'm also curious if you can provide an update on how quickly you can integrate that technology and Murphy, you've already kind of started on that path. Thank you.

Operator:

Thank you very much, gentlemen. Ladies and gentlemen, that will conclude today's question-and-answer session. I turn the call back over to Mr. Jason Hollar for any additional or closing remarks. Thank you.

Operator:

Thank you very much. Ladies and gentlemen, that concludes today's presentation. Thank you for your attendance. You may disconnect. Have a good day and goodbye.

Matt Sims:

Welcome to this morning’s Cardinal Health second quarter fiscal ‘24 earnings conference call and thank you for joining us. With me today are Cardinal Health CEO Jason Hollar; and our CFO Aaron Alt. You can find this morning’s press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Before I turn the call over to Jason since we will be making forward-looking statements today. Let me remind you that the matters addressed in the statements are subject to 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 our discussion today, the comments will be on a non-GAAP basis, and once they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today’s call, we kindly ask that you limit questions to one for participants, so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Aaron Alt:

Thanks, Jason, and good morning. Before we begin let me remind you that our Q2 segment commentary will be according to our former segment structure pharma and medical. Let's start with total company results for the second quarter. Q2 delivered another strong quarter across the enterprise with EPS of $1.82, growth of 38%, which included operating earnings growth of 20%. We also delivered strong cash flow and ended the quarter with $4.6 billion of cash, even following incremental share repurchase activity in the quarter. As seen on slide four, total company revenue increased 12% to $57.4 billion, reflecting growth in both the pharma and medical segments. We drove operating leverage for the enterprise despite incremental investments in the business and higher costs to support sales growth. Gross margin increased 11% to $1.8 billion, driven by both segments, and consolidated SG&A increased 8% to $1.3 billion. With the strong profit growth in both segments, we deliver operating earnings of $562 million, 20% higher than a year ago. Moving below the line, interest and other decreased by $26 million to $8 million in income due to increased interest income on cash and equivalents from higher cash balances and higher rates. As we've noted, our debt is largely fixed rate, resulting in a net benefit from rising interest rates in the near-term. Additionally Q2 interest and other benefited from nearly $10 million in income from the quarterly revaluation of our company's deferred compensation plan investments, which as a reminder has a matching offset above the line. Our second quarter effective tax rate of 21.3% was 1.7 percentage points lower than a year ago and better than we anticipated due to positive discrete items in the period. Q2 average diluted shares outstanding were $246 million, 6% lower than a year ago due to share repurchases in each of the last four quarters. And as I mentioned earlier, the net result for Q2 was EPS of $1.82, reflecting growth of 38%. Let's turn to the pharma segment on slide five. Second quarter revenue increased 12% to $53.5 billion, driven by brand and specialty pharmaceutical sales growth from existing customers. We saw strong pharmaceutical demand across product categories, brand, specialty, consumer health, and generics, and from our largest customers. We also continue to see robust demand for GLP-1 medications, which provided a revenue tailwind in the quarter. Segment profit increased 12% to $518 million in the second quarter, driven by positive generics program performance and the higher contribution from brand and specialty products, including distribution of COVID-19 vaccines. Our positive generics program performance continue to reflect volume growth and consistent market dynamics. With respect to COVID-19 vaccines, we saw the strength and demand from September for the fall immunization season carry into October before peaking mid-month and trending to a much lower run rate as we exited the second quarter. The Q2 increase in segment profit includes a partial offset from higher costs to support sales growth driven by increased pharmaceutical volumes. Turning to the medical segment on slide six. Second quarter revenue increased 3% to $3.9 billion, which as Jason alluded to, reflects quarterly revenue growth for the medical segment for the first time in over two years. This increase was driven by growth in both at-Home Solutions and global medical products and distribution, with the GMPD growth primarily related to higher Cardinal Health brand volumes. Medical delivered segment profit of $71 million, a $54 million year-over-year increase, driven by an improvement in net inflationary impacts, including our mitigation initiatives. Consistent with the expectations communicated a few weeks ago, segment profit was generally consistent with Q1, despite some non-recurring adjustments in the quarter. We continue to be encouraged by the underlying performance of the business, which through the first two quarters of the year has tracked consistent with our original plans. Now turning to the balance sheet. We generated robust adjusted free cash flow of $1 billion in Q2, bringing our year-to-date adjusted free cash flow to $2 billion. And as I noted earlier, end of the quarter with $4.6 billion of cash on hand. We remain focused on doing what we said we would, deploying capital according to our disciplined capital allocation framework. Thus far, through the first-half of fiscal ‘24, we've continued to invest against our highest priorities, including investing back into the businesses to drive organic growth with over $200 million in year-to-date CapEx. In the first-half, we have returned $1 billion total to shareholders, which includes our quarterly dividend payments and $750 million in year-to-date share repurchases. These share repurchases are in excess of our committed baseline repurchases of $500 million. And in January, we made certain opioid settlement prepayments of $238 million at a pre-negotiated discount, which is expected to result in a [gap] (ph) only gain of approximately $100 million in the third quarter. Now for our updated fiscal ‘24 guidance on slide eight, beginning with the enterprise. With our strong first-half performance and positive outlook, we are again raising our fiscal ‘24 EPS guidance. Our new range of $7.20 to $7.35 reflects a $0.45 increase at the bottom end and a $0.35 cent increase at the top end from our Q1 guidance range. And a midpoint which is 26% above our fiscal ‘23 EPS results. We are encouraged by the operating performance of our businesses and our strong cash regeneration, which is certainly contributing to the improvements below the line. Interest in other is reduced to a range of $50 million to $65 million, which primarily reflects increased interest income from higher than anticipated cash balances. We expect lower average cash balances in the second-half of the year due in part to the seasonal timing of anticipated cash flows. We are evaluating opportunities to refinance our upcoming 2024 debt maturities in the back half of the year. We are lowering the top end of our effective tax rate guidance to a new range of 23% to 24% to reflect the positive discrete items we've seen in the first-half of the year. We also are lowering our shares outlook to approximately $247 million, which reflects the $250 million accelerated share repurchase program we completed in Q2. No additional share repurchases are assumed in our updated guidance for fiscal year ‘24. Now turning to the fiscal ‘24 outlook for our segments. While we will be transitioning to our new segment structure reporting beginning in Q3, let me start with our former segments as a comparison point for the updated structure. No changes to the outlook for the former pharma segment. We are reiterating the 10% to 12% revenue growth and 7% to 9% segment profit growth. For the former medical segment, the fiscal ‘24 outlook is updated to approximately $380 million a segment profit to reflect the net impact of Q2 non-recurring adjustments. Outside of these, our overall operational expectations are consistent with delivering the prior $400 million in segment profit for the year, as well as the corresponding prior expectation of $650 million in segment profit for fiscal year ‘26. We have consistently highlighted the back half weighting of the medical guidance, driven by progress within GMPD on Cardinal Health brand volume growth, the cumulative impact of inflation mitigation, and some business specific seasonality. Our expectations there continue. For example, with inflation mitigation, we have strong visibility to overall cost improvements in the second-half of the year, driven by reductions we've observed in international freight, which is a reminder reflecting our income statement on a two to three quarter delay and as we exit January the mitigation initiatives necessary to achieve our year-end target are now largely in place. Now as seen on slide 10, let me comment on how this fiscal year ‘24 guidance translates to our updated segment structure. To go along with the preliminary recast fiscal ‘23 actuals and long-term targets we provided a few weeks back. Our new structure went into effect January 1. So beginning in Q3, we will report results and provide drivers reporting to the new segment structure, pharmaceutical and specialty solutions and GMPD and separate from these two segments, nuclear at-Home, an OptiFreight aggregated in other. At that time, we also plan to provide a recast of the results for fiscal ‘22 to ‘24 on the new segmentation. Beginning with the pharmaceutical and specialty solutions segment, the guidance ranges are consistent with the former pharma segment, even excluding our higher growth nuclear business. We expect 10% to 12% revenue growth and 7% to 9% segment profit outlook for fiscal ‘24 and a 4^ to 6% segment profit growth CAGR over the long-term. Turning to GMPD where we remain encouraged by the improvements in this business. For the execution of the medical improvement plan initiatives, we expect to drive GMPD from an operating loss of approximately $165 million in fiscal ‘23 to operating income of approximately $65 million in fiscal ‘24. From the fiscal ‘23 low point, this $230 million year-over-year improvement would position us roughly half way towards our fiscal ’26 target of approximately $300 million for segment profit. Finally we expect the businesses including other, at-Home Solutions, Nuclear & Precision Health Solutions and OptiFreight Logistics to collectively deliver 6% to 8% segment profit growth in fiscal year ‘24. The difference between this fiscal ‘24 growth rate and the long-term CAGR of 8% to 10% for fiscal ‘24 to ‘26 reflects the portion of the Q2 non-recurring adjustments within at-Home Solutions with the remainder residing in GMPD. Before I close a couple of comments on our recently announced acquisition. We've noted that the specialty category has been our highest priority for potential M&A and a primary consideration for our opportunistic capital employment as part of our disciplined capital allocation framework. Given our financial flexibility and strong presence in the other 60% of the specialty market in therapeutic areas outside of oncology, we have evaluated a range of potential acquisition candidates to further accelerate our specialty strategy. We are thrilled to reach an agreement for specialty networks to become a part of the Cardinal Health family. Jason will elaborate on the strategic aspects of the deal, but we plan to include the expected financial impacts of the transaction in our guidance upon closing, which of course is subject to the satisfaction of customary closing conditions, including receipt of required regulatory approvals. For general modeling purposes, we expect the deal to be accretive 12 months following close. So, to wrap up, tremendous progress in the first-half of the year with exciting value creation opportunities still in front of us. We are confident in our plans and grateful for the efforts of our team, who continue to drive our ongoing initiatives and prioritize the needs of our customers. With that, I will turn it back over to Jason.

Operator:

Thank you very much, sir. [Operator Instructions] Our first question is coming from Stephanie Davis, calling from Barclays. Please go ahead.

Jason Hollar:

Okay, great. Thanks. Good morning, Stephanie. Yes, we're really excited about specialty networks. And as I -- I love how you asked the question, Stephanie, because there's a lot that goes into this business, and we love all of it, whether it's the GPO or the analytics and technology behind it. Specifically, PPS analytics is something we thought was really special, not just in terms of how this team has created this capability for their original primary business of urology, but then how they've expanded it into other therapeutic areas, and we felt we could learn from that further and use that technology across potentially other therapeutic areas beyond the three that they're in today. So that was really exciting to us and certainly a key part of the value. So we definitely attributed good value to that technology and where we believe that can go. And not only that good for our business, but importantly we see that technology is really solving a lot of customer both provider and manufacturer challenges and ultimately giving a much better solutions to the end-patient. So it's a win-win across the industry and one that plugs in nicely to our strategy and to be throughout the specialty space. So we feel great about that and I certainly don't want to miss that we are also through this transaction acquiring a fantastic leadership team that will plug in very nicely to our own existing team. And so it's a culture that I think will work very well together. We've had a fantastic, very quick process. We've known specialty networks for quite a while, but from the point that we started talking about a possible tie up, we went from the beginning to the end of course doing a deep and thorough diligence, but nonetheless knowing the business well, so that we could quickly understand the value for us. As it relates to your second question on hurdle rates, I'm not sure exactly which part of the business you're referring to. But generally speaking, I think no matter what part of our business we're talking about it's a competitive, it's stable type of environment and so I'm not normally going to go deeper into that anyways, but generally you know speaking we're not really calling out anything from the overall market perspective today regardless of what our business we're talking about utilization continues to be quite good and predictable so we're in a nice environment for ongoing growth both organically, as well as enable to look optimistically at transactions like this.

Operator:

Thank you, sir. Ladies and gentlemen our next question is going to be coming from Lisa Gill calling from JP Morgan. Please go ahead.

Jason Hollar:

Sure, Lisa. Very clear here. No, there's no change in our commitment to this business. It has been there from the very beginning and continues to be. As I highlighted from the first moment when we talked about medical in the context of the business portfolio review, our number one priority has always been and continues to be turning the business around. Everything that we are working on has been in service of, first of all, the five-point plan to drive Cardinal Health plan volumes to mitigate inflation and drive additional value through simplification and cost reductions. That message and the progress we made is entirely consistent with that. The core operational performance of the business is exactly how we've laid it out. So the only update that we've had today were in recognition of some of those non-recurring items, but the plan and the fiscal year ‘26 aggregate targets that we're going after are absolutely unchanged to this resegmentation. We did have to bucket the medical improvement plan into the various buckets, because we did have the growth businesses that were a component of that. But that was just moving the pieces. The pieces are absolutely unchanged and the overall aggregate profitability in that long-term plan is absolutely unchanged and our commitment is absolutely unchanged to this business. And I'm really excited about the progress that the team is making in service of all those goals.

Operator:

Thank you very much sir. And our next question will be coming from Elizabeth Anderson calling from Evercore ISI. Please go ahead, your line is open.

Aaron Alt:

We're happy to offer some perspective. We're quite pleased with the below the line results of course you know for the quarter. I'm going to start with the fact that as we announced we ended the quarter with $4.6 billion of cash on hand and of course that's driven by the strong cash generation, which was the end part of your question. If you think back to our investor day we had highlighted that further optimization of our cash flow position was something we were focused on doing and the team has delivered against those efforts internally and generated strong cash flow in the first-half for the business thus the balance. Of course the knock-on consequence of that is when we have more cash on hand particularly in the higher interest rate environment, which we've been operating, we'll get a higher return, right? And we have indeed benefited from greater rate of return on the larger cash balances that we've had in place. It's also the case that there is some geography within our statement, because deferred comp was a positive for us below the line. That's an offsetting negative above the line in the quarter as well. And so, it's really the aggregation of those three things, of those several things which led to the results for the quarter. Now you asked about the financing as well. And I should be clear on a couple of things just as we think about our models going forward. We do have maturities coming in June and November. We’re assessing when our opportunities are there, nothing to announce today in that respect that we will address that, you know, at some point as we carry forward. And there is also the case that our cash balances fluctuate seasonally in the back half as well and so we wouldn’t expect the high balance to remain where it is just given the seasonal demand on the business.

Operator:

Yes, sir. Our next question is coming from Mr. Eric Percher of Nephron Research. Please go ahead.

Aaron Alt:

Thank you. We were really encouraged by the underlying performance in Q2 of the medical business. And just to restate the results, the Q2 results were consistent with the expectations we communicated several weeks ago at the JPMorgan Conference and generally consistent with Q1, despite some of those adjustments that we took in the quarter. I want to emphasize that as you move away from the adjustments that we took, the underlying elements of the Medical Improvement Plan, they are on track, right? You heard some of my preferred remarks relative to our progress against the mitigation of inflation and how our cost structure is building. The benefits of each actions we've taken will benefit our cost structure in the back half of the year. You heard us announce that we had revenue growth for the first time in two years in the quarter as well, and we were pleased with the Cardinal Health brand growth that comes with that. And the team continues to execute against the simplification initiatives that have been a core part of the medical improvement plan all along. So let me go back to where I started, which is we were quite pleased with the operational performance in the quarter. I also want to point out that from a guidance perspective, while we updated the guidance for the year to reflect the relative impact of the non-recurring adjustments, that was the sum change of the guidance, to reflect that which is behind us, not that which is ahead. And if you think through how we have guided medical for the year all along, there's always been a very back half focused trajectory for our guidance for the year and that remains unchanged along with how pleased we are with the core operational performance.

Aaron Alt:

Eric, it's probably worth offering one additional point of perspective. We're not reporting on the new segment structure this structure that will follow on Q3, but we can offer the observation that the GMPD core part of the medical business has operated at near breakeven levels in the first-half of fiscal ‘24. And I offer you that in contrast with where they were from a fiscal ‘23 perspective and where we're going from an overall guidance perspective, we view that as a key sign of positive progress.

Erin Wright:

Great, thanks. On the drug pricing front, you do continue to mention generics as a key driver. Are you still seeing that using deflationary dynamics that others have noted too? And how material is that for you and also how sustainable is it you know what are some of the key drivers that you're looking at there? And how are you thinking about that for the balance of the year, as well as we think about the quarterly cadence here for that that U.S. pharma or for the pharma segment particularly with the COVID dynamics too? Thanks.

Operator:

Thank you, sir. We'll now move to Allen Lutz calling from Bank of America. Please go ahead.

Aaron Alt:

Happy to offer some perspective. We were pleased in the quarter to actually achieve operating leverage with gross profit growing faster than SG&A. SG&A did grow, of course volume also grew, and so the primary component of our increase in cost was tied to the variable cost of serving higher volumes. It is also the case though that as Jason has highlighted in his strategic remarks, we are investing against our business and some of the SG&A growth was purposeful relative to the investments we're making in places like the Navista and other elements of our growth plans. But I will end with the fact that we are very focused on SG&A as a whole and the team continues to look for further opportunities as we have in prior years to optimize our cost structure.

Kevin Caliendo:

Thanks. Thanks for taking my question. I have two. Can you give us an update on the progress of the United contracts renewal timing, any updates you have there? And just to follow-up on that SG&A question, were there purposeful investments made when you saw sort of upside from interest in other things in SG&A in the quarter? I'm just trying to quantify how much was in the original plan versus maybe how much was incremental given some of the upside that you saw below the line?

Aaron Alt:

For those working on their models, it's probably worth pointing out that with respect to the Q2 profitability in the business, it was the case that last year we called out unusual strength in the overall farm of demand, particularly from large customers, as well as a very strong cough, cold and flu season, so as you're looking at your comparisons keep that in mind.

George Hill:

Yes. Good morning, Jason and Aaron. And forgive me if I kind of missed this or if you guys talked through this already, but as it relates to the planned restatement of the other segment, it looks like the growth in the near-term is coming in, but termed kind of the long-term targets. I just kind of wonder if you could address kind of or disagree in which sub-segments you're seeing the softness relative to the long-term expectations for the balance of the year or this year versus what you think kind of accelerates coming out and kind of closes the gap in the longer-term guidance?

George Hill:

Thanks.

Operator:

Yes, sir. We'll now take a Stephen Baxter of Wells Fargo. Please go ahead sir.

Jason Hollar:

Yes. So for the vaccine, we just kind of walk through the last couple of quarters and I'll give you a flavor of the benefits and the trends and such. So as we talked last quarter, we've highlighted in Q1 with the FDA approval at the beginning of September we were staged to hit the ground running and we had fairly significant volume in that first quarter, but as anticipated we indicated that point that we would expect it to peak within Q2 and so we expected higher volume, higher contribution in Q2 versus Q1 and that was because we saw October as the largest month within that season. And then as expected, we saw that wind down over the course of November and December, still seeing some level of volume in Q3, but I would expect it to be quite insignificant, compared to what we saw in Q1 and then Q2. Overall, I think the key message is that this is consistent with our expectations, as Aaron highlighted in his comments already. We had multiple drivers of growth for the pharma segment in the second quarter. It was strength with the generics program within brand. It was COVID driving that component and then we had these investments and primarily the cost to serve partial offset to those other two drivers. So overall, Phil feel good about the overall health of the business and the contribution of COVID within it.

Charles Rhyee:

Yes, thanks for taking the question. Just wanted to follow-up on Allen’s question there on the vaccine impact. I understand your saying that it kind of, you expect it to peak in the December quarter. Would you say that the contribution, though, from vaccine was higher than in the first quarter given that you had still three months of overall and if we look at that relative to what you had expected the higher costs that you incurred? Did you use that to fund those kind of investments? Just wanted to get a sense on relative contribution?

Aaron Alt:

Probably worth emphasizing that Jason’s point is that September and October were the high points for COVID for us from a distribution perspective would we tailing off thereafter.

Operator:

Thank you very much, gentlemen. And our last question today will be coming from Mr. Daniel Grosslight of Citi. Please go ahead, sir.

Aaron Alt:

So the first-half of that question, you are thinking about things correctly. I'll go back and emphasize we were really pleased with the operational performance of the business and given that we've adjusted our yearly guidance just to reflect the impact of the non-recurring adjustments in Q2, your conclusion on the math would be reasonable.

Operator:

Thank you very much sir. Ladies and gentlemen, that will conclude today’s Q&A session. I turn the call back over to Mr. Jason Hollar for the additional or closure remarks. Thank you.

Operator:

Thank you so much sir. Ladies and gentlemen, that will conclude today’s conference and thank you for your attendance. You may now disconnect. Good day and goodbye.

Matt Sims:

Good morning, and thank you for joining us for Cardinal Health first quarter fiscal '24 earnings conference call. On the call with me today are Jason Hollar, Chief Executive Officer; and Aaron Alt, Chief Financial Officer. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. As a reminder, during the call, we will be making forward-looking statements. The matters addressed in the statements are subject to 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. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of today’s call, we kindly ask that you limit questions to one for participants so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Aaron Alt:

Thanks, Jason, and good morning. Q1 delivered a strong financial start to the year, with EPS of $1.73, surpassing our expectations in Pharma and Medical. The strength of our pharma business, the progress on our medical turnaround efforts and our disciplined approach to capital allocation contributed to new first quarter highs for the enterprise on both revenue and EPS. We also delivered strong cash flow and ended the quarter with $3.9 billion of cash. Let's start with the consolidated enterprise results, as seen on Slide 4. Total revenue increased 10% to $54.8 billion, driven by the Pharma segment. Gross margin also increased 10% to $1.8 billion, driven by both the Medical and Pharma segments. Consolidated SG&A was generally in line with the prior year at $1.2 billion, reflecting our disciplined cost management across the enterprise. With the significant profit growth in both segments, we delivered total operating earnings of $571 million, growth of 35%. Moving below the line. Interest and Other decreased by $15 million to $12 million, due to 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 first quarter effective tax rate finished at 22.5%, an increase of approximately 5.5 percentage points. We saw positive discrete items in both the current and prior year periods, which were more beneficial a year ago. First quarter average diluted shares outstanding were 250 million, 8% lower than a year ago due to share repurchases. And as I mentioned earlier, the net result was first quarter EPS of $1.73, an all-time first quarter high point, reflecting growth of 44%. Let's turn to the Pharma segment on Slide 5. First quarter revenue increased 11% to $51 billion, 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 trends last year, GLP-1 medications provided a revenue tailwind in the quarter. Segment profit increased 18% to $507 million in the first quarter, driven by a higher contribution from brand and specialty products, including distribution of COVID-19 vaccines, which provided a modest contribution as customers stocked up in preparation for the fall vaccination season. We also saw positive generics program performance with continued volume growth and consistent market dynamics. Turning to Medical on Slide 6. First quarter revenue at $3.8 billion was largely flat to prior year and prior quarter. In the first quarter, we saw lower PP&E volume and pricing, including the impact from the prior year exit of our non-health care gloves portfolio, offset by growth in at-Home Solutions and inflationary impacts, including mitigation initiatives. Medical slightly exceeded our expectations in Q1 and delivered segment profit of $71 million, which represents an approximate $80 million increase from the prior year's first quarter loss. Consistent with the expectations communicated at Investor Day and last quarter, we continue to be encouraged by the indicators of improvement in trends with respect to our Cardinal Health brand product sales. In Q1, we saw a slight year-over-year volume growth. As expected, we saw an improvement in net inflationary impacts, including our mitigation initiatives. We also continue to see normalized PP&E margins, which were impacted by unfavorable price/cost timing in the prior year. In the quarter, we also recorded a $581 million non-cash pretax goodwill impairment charge related to the Medical segment, which is excluded from our non-GAAP results. This Q1 accounting charge is due to an increase in the discount rate used in goodwill impairment analysis. Now turning to the balance sheet. As I alluded to earlier, in the first quarter, we generated robust adjusted free cash flow of $1 billion and ended the quarter with $3.9 billion of cash on hand. We remain focused on doing what we said we would and deploying capital in balanced, disciplined and shareholder-friendly manner. In the first quarter, we continued to invest against our highest priorities, including investing $92 million of CapEx back into the business to drive organic growth. We made our third annual payment on our national opioid settlement obligation. We did not draw on our credit facilities and received a positive change to the outlook on our investment-grade rating from Fitch as well as from S&P in Q2. We returned over $630 million to shareholders through payment of our quarterly dividend and the launch of a new $500 million accelerated share repurchase program, which completed in October. Now for our updated fiscal 2024 guidance, on Slide 8. Today, we are raising our fiscal 2024 EPS guidance to a range of $6.75 to $7, the midpoint of which is 19% above our fiscal 2023 EPS result. This $0.25 increase to our EPS range primarily reflects an improvement to our Pharma outlook as well as some improvement below the line. We are raising our Pharma segment profit guide to 7% to 9% growth for the year and are pleased with the momentum in the business. Our updated guidance reflects the strong first quarter performance, higher than originally assumed contributions from COVID-19 vaccine distribution, which continued into October; the ongoing strength of our business, consistent with a 4% to 6% growth trajectory for the segment on a normalized basis. Finally, as a reminder, on the Pharma quarterly cadence, we continue to assume Q3 branded inflation will not repeat at fiscal 2023 levels. In Medical, we are reiterating our outlook of $400 million of segment profit for the year. Recall, that we previously guided that Medical segment profit would be significantly back-half weighted. That assumption remains unchanged. The first half-second half cadence continues to be driven by progress on Cardinal Health brand volume growth, the cumulative impact of inflation mitigation and some business-specific seasonality. While we are encouraged that the business slightly overperformed relative to our expectation in Q1, due to execution against our plans and our cost management efforts, our expectation for Q2 segment profit is unchanged from our original guidance, which reflected some seasonality in Q2-specific expenses like health and wellness. Altogether, Q2 segment profit should be slightly higher than Q1, which benefited from overdelivery. We expect continued progress from our Medical Improvement Plan initiatives over the course of the year. Below the line, interest and other is reduced to a range of $100 million to $120 million, while we are maintaining an effective tax rate in the range of 23% to 25%. We do expect the tax favorability we saw in the first quarter to be offset in Q2. We are also lowering our shares outlook to approximately $249 million, which reflects the already completed $500 million of our baseline share repurchase. I want to reiterate that, as we shared at Investor Day, neither our fiscal 2024 guidance nor our long-term targets reflect M&A, which is difficult to predict in timing or magnitude, or additional opportunistic deployments of capital to share repurchases beyond our baseline repurchase. We will continue to evaluate both opportunistically to drive long-term value. So, an overall successful first quarter. The Cardinal team is a lot to be proud of with respect to our accomplishments. We are confident in the plans we have in place, and we are excited for our team to realize the significant value creation opportunities still in front of us. With that, I will turn it back over to Jason.

Operator:

[Operator Instructions] Our next question comes from Lisa Gill from JPMorgan. Please go ahead.

Jason Hollar:

Yes. Thanks, Lisa. How I think about the vaccines is, again, we're not going to get into, obviously, product and customer level type of detail. But overall, it all comes down to the value that we provide. And so, when you think about COVID-19 vaccines and vaccines in general, you really have to understand what's the requirements. And so with COVID and with some vaccines, it requires more complex distribution, cold chain capacity and capabilities. And of course, there's also - the unique thing about vaccines is that you scale up and down quickly and so you're spreading a lot of that cost over a pretty short period of time. So it's - there's not a one-size-fits-all answer to your question. And we provided a little bit of color for you in Aaron's comments there, so you can get a general understanding of the benefit that we had. And to go a little bit further, I can say that about one-third of the growth for the Pharma segment this quarter was related to vaccines. So it was a component of it, but certainly not the majority of the driver of the business. The core part of the business remained very strong within the segment for the quarter, and our guidance continues that core to continue to be strong. We do expect the vaccine benefit to be a bit greater in the second quarter because, of course, there's more volume in Q2 than in Q1, just given the nature of the October most likely being the peak volume that we would expect to see for vaccine distribution. And then we'd expect that to ramp down as we get the pipeline. We've got the pipeline pretty full here as we exited October. And now the future volumes will be much more predicated on what the actual demand is, which, of course, at this point in time is hard to anticipate.

Operator:

We'll now move to our next question from Eric Percher from Nephron Research. Please go ahead.

Aaron Alt:

Eric, good morning. It's Aaron. Look, we were really pleased to see Q1 results slightly exceeding our external or rather our expectations. The results of the team doing what they had planned to do as well as being good managers and always looking for optimization opportunities across the portfolio, and so they did what they were expected to on the first part - or first part of the year for the medical improvement plan, and there were no notable one-time items contrary to some earlier quarters that complicated the results. So we were quite pleased with the results that we gave. And we do expect that to continue. You will have noted from our guidance for the year that we do expect slight continued improvement quarter-over-quarter. We are not changing our guidance for the year on medical. I want to emphasize that we've taken a balanced approach and believe that the $400 million profit number for the year is the right target and the right guidance for that business. And the plans also haven't changed, right? It's going to start with the continued execution of the Medical Improvement Plan and inflation mitigation elements that we've been talking about. Jason highlighted that we had hit 70% plus in the quarter as well, and they're going to continue to optimize and grow the Cardinal Health brand We're continuing to focus on driving more out of at home and the other growth businesses as well as simplification and cost optimization and so overall, a great quarter and good expectations for the year to come.

Operator:

Next question from Kevin Caliendo, UBS. Please go ahead. Your line is open.

Aaron Alt:

We're happy to provide a little more context. Look, it was a strong start to the year, and we remain very encouraged about the runway for the pharma business. And we did raise the guidance to 7% to 9%. It's really a result of three factors. First was just the strong Q1. And as Jason alluded to, we did have a contribution from the COVID vaccine distribution. And it was higher - that contribution was higher than what we had assumed in our original plans, just based on the timing of when the approvals came through. And frankly, our team's ability to jump on it and execute the way they did. Third element, though, was just the ongoing strength of the business under - other than the COVID vaccines, which is really consistent from an outlook perspective with the 4% to 6% guidance that we gave previously on a normalized basis. And just to remind you on that, what we had guided previously is that we expected low single-digit growth - profit growth from the core pharma business. We're expecting stability from the generics business, consistent market dynamics you often hear us say. We are expecting double-digit growth in the Specialty and Nuclear business, and Jason highlighted that progress in his comments earlier. And importantly, we are expecting brand inflation more in line with fiscal 2022, not the modest benefit that we saw in fiscal 2023, right? So look, we are early in the year. As we have done, we'll continue to update as we push ahead, but we're pleased with the results so far and the raise to the guidance.

Erin Wright:

Hi. Thanks. Another question on the pharma business. You mentioned the consistent generics environment, but can you elaborate on that a little bit? I guess, can you speak to the generic drug pricing environment? Are you seeing any easing deflationary dynamics across generics? And how material is that for you in terms of your guidance raise across that segment? And does consistent mean essentially a continuation of those favorable pricing trends going forward I guess, throughout the rest of the year?

Matt Sims:

Next question, please.

George Hill:

Good morning guys. And thanks for taking the question. I think like a lot of the other people on the line here, I'm really intrigued by what seems to be going on in the generic drug business. You guys called out Red Oak, GLP-1s were really strong in the quarter, but they have to be significantly margin dilutive. I guess, Jason, I'd love if you could talk about like if anything is changing on the contracting side? Are you seeing like increased rebates for purchasing compliance or supply compliance? Just kind of interesting, any more color that you can provide on what's going on in the generic drug space as it relates to profitability would be super helpful.

Operator:

The next question comes from Elizabeth Anderson of Evercore. Please go ahead.

Operator:

Sorry, if I think we lost the previous caller, and we'll move on to the next question from Daniel Grosslight from Citi. Please go ahead.

Jason Hollar:

You're getting all the value out of your one question. So let me see if I can touch on each one. I think there's some connectivity between these. So overall, for vaccines, I think the best way to think about vaccine distribution is more about it from the customer standpoint. So I think what you'll see is that COVID-19 vaccines like other vaccines typically will follow the distribution network. So the real question is, are our customers getting more than their fair share, and I don't necessarily want to talk about them from that perspective other than to say we are very happy with the customers we have. We've often used a phrase for other situations winning with the winners, and we feel very well aligned with great customers. And so - but I think that's how you should think about it. And that it most likely the vast majority of the volume will follow the distribution network. I think your second element of that question was on the COVID therapeutics. How I think about that is a little bit differently than vaccines in terms of just the rollout, where the vaccines were a bit of an obsolete old product, new product type of situation where all that government stockpile. When we were asked about vaccines nearly a year ago, when it was first communicated to be commercialized, that was part of our response as well. We didn't know the FDA approval date. We also didn't know what was going to happen with the in-stock inventory, which seems to not have been a relevant usage at this stage given the variance evolution. As it relates to therapeutics, you don't have that same challenge, right? There's a lot of product out there still and the rollout will be slower. And you're talking about an oral solid type of brand product, which typically does not carry very - the same type of specialization necessary in the distribution channel that does drive higher-margin products like our specialty products. And then the last question is on the long-term growth outlook. I think one of the key messages that is behind your question and behind how we think about it. And partly why we're calling out those elements that may be a little unusual. Again, just like with GLP-1s COVID vaccines, and other form of innovation. We like innovation. It provides us new opportunities and new growth as an enterprise. And so part of the answer to this question is, well, how do these innovative products evolve and transition over time? Is that a continued opportunity. Is it lumpy? Is this year may be higher or lower than what that volume will be in the future? That - those are all hard questions to answer. But what we saw here is a bit of an influx of innovation that we've been able to benefit from while using the same infrastructure. So one thing that's really important to highlight about our performance this quarter, so we had really nice gross margin growth and we had very flat SG&A. I made the comment about the operating leverage in my comments. That's what I'm getting at is that we were able to execute very efficiently this quarter and whether we're talking about vaccines or other products, having that gross margin because it's an incremental product category for us because, of course, we do not participate in that volume last year but we're able to leverage the same capacity, the same team, that's an efficient use of our distribution channel. And as we get more opportunities like that, then there's some opportunity. But one of the key things that Aaron highlighted in a number of his comments, whether it's his comments, whether it's his comments or his answers to the question, is that our underlying growth and we feel very good about that long-term target. And a lot of what we've seen here was the Q1 overperformance both from vaccines, but also just the core utilization being very strong. That's not the same level of strength that we have indicated, we should be thinking about long-term. It's an opportunity for us, but that's not what we're expecting at this point in time. And it's not what we're guiding for the balance of the year in terms of the core growth. We expect that core growth to still be in that 4% to 6% range. But again, innovation can create some opportunities for us. That's hard to see right now, but we're not planning for that.

Operator:

The next question comes from Charles Rhyee from TD Cowen. Please go ahead.

Jason Hollar:

Yes. No, that's a great question. And it's - so when I step back and think about 18 months ago, what the root issue was, of course, we had international freight that was driving up the cost of everything in a multiple that was crazy, but you also had these other commodities that were - okay, so there are some commodities that are oil-based, so the oil input costs, but then you had the supply-demand factors going on too that I think overemphasized that issue because we don't buy oil, we buy products that contain oil. And so as oil goes up and down, that's often absorbed within the supply chain in a normal steady state, unless it gets outside of a certain band. So it did get outside that band, right? Oil went above $100 per barrel. And then you had other demand factors that were driving those commodity costs well beyond what the input cost impacts were. So you had a bit of an exponential increase in a number of commodities. So today, given that we're in a much more muted demand environment, as a broad industry because this is way outside of healthcare, right? This is a general economy not being as hot as it was at that point in time. When you see these types of input costs going up and down, it goes back to a bit more of a normal model, which is they're not being exaggerated and multiplied, they're just flowing through in a much more normalized steady state. So that's the reason why that I would not expect this under this current environment to get outside of normal bounds. So if you see the input costs going up and you see a heated economic environment that can further compound that impact, that's when we need to start worrying more about this. I know the importance of this will certainly be - day-to-day, we certainly spend a lot of time on this, but we'll continue to provide any insight that we see going forward. Of course, when we get into the very significant changes, that's the changes to our contracting structure that we've put into place. That's never going to be perfect. It's never going to be a one-for-one offset, but it's meant to really be active and impactful when you have those more extraordinary types of impacts that really kind of compound these items like I just referenced, and not just the normal types of more muted movements.

Operator:

The next question comes from Allen Lutz from Bank of America. Please go ahead.

Jason Hollar:

We really haven't provided quarterly guidance at the margin level for the pharma business. We were - we leaned in a bit in describing the impact to Q1 from the COVID vaccine distribution as well as Jason's comments around the expectations for Q2. Beyond that, I think you just need to take into account what we typically say about our business, which is, first, that we expect the consistent market dynamics from a generic perspective, right? And we are not assuming some of the benefits from a brand perspective in Q3 that we have previously seen. And that's how we are offering up today.

Elizabeth Anderson:

Hi, guys. Apologies about the audio issues before. My question was just on the non-operating items, it seems like both on interest expense and maybe on the share count, based on the ASR that you talked about and the interest expense in the first quarter, that there's a little bit of conservatism in that number in those - both of those numbers

Aaron Alt:

I'll answer the question. I think she was seeking to ask. The question from what I heard was interest and other, are we being conservative as well on what's going on with our share count? And I guess I would offer the following. We were pleased to see continued benefit in the quarter from I&O, driven by the fact that we have such high cash balances and the return we're receiving on those cash balances. We are, of course, also benefiting in the quarter from the fact that we are largely fixed rates. We have been now for several quarters. And so we haven't been exposed to the interest rate increases that some other companies may be dealing with, and that's just driven by the good stewardship previously. We do have a maturity coming at the end of fiscal 2024. It's about $750 million or so from recollection. And we've commented that we're likely to refinance that. I haven't commented on the timing of that as we care forward. And so we believe the guide - the updated guide we provided on I&O reflects the benefits and the various trade-offs in that. With respect to the share count, I do think it's important to call out that as we have consistently said, we don't guide for share count changes beyond the baseline share repurchase. We made a commitment at this during our Investor Day in June that our baseline share repurchase was going to be $500 million during fiscal year 2024. We completed that in the first quarter. That is the share repurchase we're talking about today, and our guide reflects the impact of that - of the completion of that share repurchase program. It does not reflect any other changes to share repurchase over the course of the year. As Jason called out earlier, we have the benefit of our cash balance. And having invested, having the plans that we do to invest in the business, CapEx-wise, $92 million in the first quarter, targeting $500 million for the year, and continue to make progress on our investment grade rating and the two outlook changes - positive outlook changes that we received during the quarter, having made our baseline share repurchase during Q1 as well as continuing to pay our dividend. As we are, as a dividend aristocrat and now we have the opportunity and support of the plans to take the resources we have available to us to invest back in the business with that specialty focus that Jason has called out several times to look at M&A in a disciplined manner, as Jason called out, and then to also consider further opportunistic share repurchase in due time as we assess how the year is performing. I think that's where Elizabeth was going.

Jason Hollar:

Yes. Thanks again, everyone, for joining us this morning. As we've said a few times, it was a great start to the year. We're pleased with our broad-based performance and to be in the position that we are today to raise our guidance after just the first quarter. We look forward to, certainly, continuing to update you on our progress against these plans throughout the year. And with that, thank you, and have a great day.

Kevin Moran:

Good morning and welcome. Today, we will discuss Cardinal Health’s fourth quarter and fiscal year end 2023 results, along with our outlook for fiscal year '24. You can find today’s press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer; and Aaron Alt, our Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during the discussion today, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of today’s call, we kindly ask to limit yourself to one question, so that we can try and give everyone in the queue an opportunity. With that, I’ll now turn the call over to Jason.

Aaron Alt:

Thanks, Jason, and good morning. I won't bury the lead. Q4 was a strong finish to a year in which with Jason's guidance, the Cardinal team made significant progress against our strategic initiatives. We delivered fourth quarter EPS of $1.55 and $5.79 for the full year at the high end of our guidance from Investor Day. For both Q4 and the year, our EPS results reached historical high points. We also delivered stronger than expected cash flow, something I will touch on more later. Let's start with the Pharma segment on Slide 6. Fourth quarter revenue increased 15% to $49.7 billion 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-1 medications provided a revenue tailwind in the quarter. Segment profit increased 12% to $504 million in the fourth quarter primarily driven by positive generics program performance. Within our generics program, we saw volume growth and consistent market dynamics, including strong performance from Red Oak. Increased contributions from brand and specialty products along with nuclear were also a positive factor, partially offset by higher investment and operating expenses, including higher costs to support sales growth. Turning to Medical on Slide 7. Fourth quarter revenue was flat at $3.8 billion, an improvement in trend. We saw a decrease in products and distribution sales related to lower PP&E volumes and pricing, partially offset by inflationary impacts, including our mitigation initiatives. This decrease within products and distribution was offset by growth in at-Home Solutions. In the fourth quarter, we delivered Medical segment profit of $82 million, a nearly $100 million increase from the prior year loss. The results for the quarter were consistent with our Investor Day commentary, composed of approximately $60 million or more core performance driven in connection with the Medical Improvement Plan and approximately $20 million of both seasonality and net favorable onetime items. As expected, we saw an improvement in net inflationary impacts, including our mitigation initiatives and the normalization of PP&E margins, which were impacted by unfavorable price/cost timing in the prior year. 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. Though with significant profit growth in both segments, we delivered total operating earnings of $560 million, growth of 24%. Moving below the line. Interest and other decreased by $48 million to $16 million due to increased interest income from cash and equivalents and increased income from our company's deferred compensation plan investments, which, as a reminder, is fully offset above the line in corporate. Our fourth quarter effective tax rate finished at 27% to approximately two percentage points higher than the prior year due to certain discrete items. Fourth quarter average diluted shares outstanding were 256 million, 7% lower than a year ago due to share repurchases, including a $500 million accelerated share repurchase program initiated in the quarter as we announced at Investor Day. The net result of all of this was fourth quarter EPS of $1.55, growth of 48%. Now, transitioning to our consolidated results for the year. We surpassed the $200 billion revenue mark for the first time. Fiscal '23 revenue increased 13% to $205 billion and gross margin increased 5% to $6.9 billion, both driven by the Pharma segment. Total company SG&A increased 6% to $4.8 billion, 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 $2.1 billion. Interest and other decreased 46% to $89 million, 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%. Net result was for fiscal 2023 EPS, $5.79, growth of 14%. As for the segment's full year results, beginning with Pharma on Slide 10. Pharma segment profit increased 13% to $2 billion, driven by positive generics program performance and a higher contribution from brand and specialty products, partially offset by inflationary supply chain costs. Fiscal '23 year-over-year growth also included a modest benefit from branded manufacturer price increases, which we are assuming will not repeat in fiscal '24 as well as a favorable prior year comparison related to higher opioid-related legal costs and costs for technology enhancements in fiscal '22. Moving to Medical on Slide 11. Segment profit decreased 49% to $111 million, primarily due to lower products and distribution volumes and unfavorable sales mix and net inflationary impacts, including mitigation initiatives. This decline was partially offset by normalization of PP&E margins. Now, before I turn to fiscal '24, let's cover the balance sheet. In fiscal '23, we generated robust adjusted free cash flow of $2.8 billion with particularly strong cash flow towards the end of the year. We ended the year with $4 billion of cash on hand. At our Investor Day, we highlighted that cash flow optimization was an area of go-forward focus for our teams, and the Cardinal team delivered across our businesses. This effort will continue in fiscal '24, notwithstanding that it is a tougher calendar from an inflow, outflow days-of-week perspective. We remain focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner. In fiscal '23, we invested approximately $480 million of CapEx back into the business to drive future growth, paid down $550 million in debt to reduce leverage and maintain our strong investment-grade ratings, returned over $2.5 billion to shareholders, including through the dividend that our Board increased in May for the 34th year in a row and $2 billion of share repurchases. Now, for our updated fiscal '24 guidance on Slide 13. Today, we are raising our fiscal '24 EPS guidance to a range of $6.50 to $6.75. This increase reflects the strong finish to fiscal '23, particularly within Pharma where we are now entering the year at a higher jump-off point. We also are tightening our shares range to 250 million to 253 million, which reflects the recent share repurchases as well as our continued expectation of $500 million in base share repurchases over the course of fiscal '24. As you will calculate, the midpoint of our newly raised fiscal '24 EPS guidance is 15% above our fiscal '23 EPS results. There are no changes to the other corporate guidance assumptions provided at Investor Day. Interest and other between $110 million to $130 million, and effective tax rate in the range of 23% to 25% and adjusted free cash flow of approximately $2 billion in fiscal '24. Our segment outlooks for fiscal '24 are also unchanged with one exception, a high 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 '24 outlook for Pharma, our build and grow business. We expect revenue growth in the range of 10% to 12% and segment profit growth in the range of 4% to 6%, which is now on a larger fiscal '23 reference point due to our strong finish to the year. We are reiterating our key assumptions provided at Investor Day. We expect growth from our generics program with volume growth and consistent market dynamics and positive operational execution against our organic specialty efforts. We are not assuming outsized benefits from branded inflation. In contrast, some of the benefits that we did see in fiscal '23. On the Pharma fiscal '24 cadence, we expect the year to follow typical seasonality patterns. As usual, we see our fiscal Q3 being the largest segment profit dollar quarter due to the usual timing of branded manufacturer price increases. Turning to Medical. I want to recognize the progress that the Medical team made during fiscal '23, particularly in Q4, and also acknowledge that we still have blocking and tackling to do against the turnaround to both drive demand and improve our cost. For the full year, we are reiterating our assumptions of revenue growth of approximately 3% and segment profit of approximately $400 million for the year, while providing some additional color. Like fiscal '23, we anticipate segment profit to be significantly back-half weighted. We expect Q1 to be generally consistent with the core performance from Q4 with quarterly sequential 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. First, keep in mind that Q1 is the seasonal low point for our global Medical products and distribution business due to the timing of volume and cost recognition. Second, while we continue to expect to exit fiscal '24 offsetting the impact of gross inflation, those improvements are expected to grow over time, making the impact greater over the course of the year. And finally, we continue to plan for slight Cardinal Health brand volume growth that will largely hit in the second half of the fiscal year. So in summary for Medical for fiscal year '24, continued work in front of us with each quarter improving from our Q1 launching point to get us to the approximately $400 million guidance for the year. Stepping back, we are pleased to see growth across our businesses continuing in fiscal '24. Consistent with our messaging from Investor Day, we are targeting a 12% to 14% EPS growth CAGR for fiscal '24 to 2026, now from the higher fiscal '23 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 million back into the business to drive organic growth, making approximately $500 million of litigation payments, including our third payment under the national opioid settlement back in July, and our $1 billion baseline return on capital, we expect to have strong flexibility as we assess further investments in the business, M&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 '24 guidance or our long-term targets reflect potential opportunistic deployment of capital, including M&A, which is difficult to predict in timing or magnitude or additional share repurchases beyond our $500 million of baseline repurchases each year. We will continue to evaluate both of these levers opportunistically to drive long-term value. To close, the Cardinal team has a lot to be proud of with respect to their accomplishments in fiscal '23. Jason and I are pleased with the progress our teams have made. We are confident in the plans we have in place, and 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.

Operator:

[Operator Instructions] Our first question today comes from Lisa Gill of JPMorgan.

Aaron Alt:

Yes. Good morning, Lisa. Thanks for the question. Yes, the primary reason for the raise in the guidance on the revenue is related to the GLP-1. So we did not call out anything else. 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-1 as a benefit to our revenue from a year-over-year growth perspective in the third quarter. So we have kind of a -- there was growth before that, but not as significant. And so it was more meaningful in Q3 and Q4. So as you look forward to fiscal '24, 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 slope is going to look like into '24, but we would anticipate as you start to lap the second half of 2023 that, that will be more muted in terms of the year-over-year benefit. And I guess what -- as it relates to 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.

Eric Percher:

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 million, not $82 million. And then, can you define seasonality and one-time benefits this quarter, and any expectation that those will recur as we look at that cadence for fiscal year '24?

Operator:

The next question comes from Kevin Caliendo of UBS.

Aaron Alt:

Well, I'll start, and then toss it over to Jason. You are correct in 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 an earlier question, we do have some negative seasonality in Q1 versus Q4. So that's why the jumping off point is core performance versus the Q4 results. Jason?

Operator:

The next question comes from George Hill of Deutsche Bank.

Jason Hollar:

Sure. Yes. Great. Thanks for the question, George. Yes, so when we think about Navista, I think it's important to recognize that we had 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 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 and insights, clinical research support. So we have a lot of the tools. What 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 to be some of the key attributes of this platform and this network that they're demanding. What's key and what we highlighted before is that these are the 1,500 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 health care'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 time frame, we've got the team in place, better definition of what the platform needs to be built out with and continue to work with those prospective customers to make sure that their needs are met. Next question, please.

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I don't know if you could comment on the corporate costs that you just discussed in Medical, the $60 million. Is that something that you also expect to 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 annualizing? A little bit more help there would be very helpful. And then secondarily, can you talk about what is different about getting this next 50% of the inflation offset this year that was not the same last year? We obviously know that you've been getting more price – in your contracts, et cetera, but I'm just looking for any more additional commentary you can provide on what might be different about this remaining 50%. Thanks.

Aaron Alt:

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 million of other benefit coming over the course of the year really driven by the three other pillars within the Med Improvement Plan, the contribution of the growth businesses, the simplification and the Cardinal Health brand work. As I was touching on, that work progresses over the course of the year, and we've seen 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. They have some seasonality as well. They are certainly a strong contributor to the additional $60 million over the course of the year. And then Jason has already touched on Cardinal Health brand, so I won't go there.

Operator:

The next question comes from Daniel Grosslight of Citi.

Jason Hollar:

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 -- and this inflation mitigation was always focused on the incremental inflation because we had spikes, unusual dramatic spikes in inflation. Well, there's normal inflation as well. So this is just a little bit broader language to recognize that over time, it's becoming harder to differentiate between the two. We have a good understanding of the most significant impacts 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 – well, I think the key takeaway with that is we are on track, right, the ultimately, the strategy makes sense. 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 think about the overall segment as well as the generics business. There's a couple of things that have occurred. There is 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 is that a growth rate is 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 '24, 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, and we would expect to participate within that. And we expect our performance to continue with areas like Red Oak Sourcing to continue to 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. 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 '23, it 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 were able to provide when others were short on product. So overall, that was a slight positive for us this year as well. And we expect those types of things to be more normalized in fiscal '24 and feel well-positioned to participate in that growth.

Jason Hollar:

Next question please.

A.J. Rice:

Thanks. Hi, everybody. I know on your Medical side, there's a lot going on, and you're a little more skewed toward inpatient than some of the others that have reported. But we've heard this discussion about an uptick in utilization from 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 that there was 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 when we get back to a normal environment?

Operator:

Our final question today comes from Brian Tanquilut of Jefferies.

Aaron Alt:

Hi, great question. Thank you for putting it on the table for us. Look, we were very focused on our Investor Day in laying out the disciplined capital allocation decision matrix that we apply. And we were also very pleased to see the overall cash generation for fiscal '23 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. 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 in fiscal '23. We've guided we're going to spend about $500 million in CapEx against our business plans across the business. Our second priority, of course, is maintaining our investment-grade balance sheet. And you'll 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 buy back at least $500 million of shares during fiscal year '23. Those are the table stakes parts of how we're going to use our cash. 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 two opportunistic levers that we will also be looking at. The first is active, disciplined and targeted M&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. But 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.

Jason Hollar:

Okay, great. Thanks again for joining us this morning. To summarize, fiscal '23 was a great year. It was a year of inflection, and we are excited to continue this momentum into fiscal '24 and beyond. With that, thank you and have a great day.

Kevin Moran:

Good morning. Today we will discuss Cardinal Health's third quarter fiscal 2023 results, along with updates to our full year outlook. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer; and Aaron Alt, our Chief Financial Officer. During the call we will be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a 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. For the Q&A portion of today's call, we kindly ask to limit yourself to one question so that we can try and give everyone in the queue an opportunity. With that, I'll now turn the call over to Jason.

Aaron Alt:

Thank you, Jason. I am pleased to join you this morning on my first call since assuming the CFO role with nearly 90 days now under my belt. What I could see from the outside has proven to be true on the inside. Cardinal Health is a business with a strong leadership team and engaged board, a defined strategy, a strong balance sheet and plenty of operational opportunities to promote value creation for our stakeholders. I'll begin today with the enterprise's strong results for the third quarter. Total revenue increased 13% to $50.5 billion and gross margin increased 6% to $1.8 billion, both driven by the Pharma segment. Consolidated SG&A increased 4% to $1.2 billion, primarily reflecting inflationary supply chain costs, which were offset in part by our comprehensive enterprise wide cost savings initiatives. Operating earnings of $606 million were 11% higher than the third quarter of last year, driven by significant Pharma segment profit growth with opportunities remaining for us to achieve Medical segment profit increases in future quarters. Moving below the line interest and other decreased 32% to $28 million, driven primarily 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. Our third quarter effective tax rate finished at 22.4%, slightly lower than we had expected, reflecting some positive discrete items in the quarter. Diluted weighted average shares were 258 million, 7% lower than a year ago due to continued share repurchase actions. The net result of the progress against our strategy was adjusted earnings per share of $1.74 in the third quarter growth of 20% versus the prior year. Now turning to the balance sheet. We ended the quarter with strong liquidity with $4 billion of cash on hand. The business generated robust adjusted free cash flow of $1.3 billion in the third quarter. Year-to-date adjusted free cash flow is $2.1 billion. Given our cash balances, we ended the period with no outstanding borrowings on our credit facilities. And in further support of our strong investment grade rating, during the quarter, we paid down $550 million of maturing March 2023 notes with cash on hand consistent with our plans. We also extended our $2 billion revolver of backup liquidity until February of 2028. Earlier in my remarks, I referenced return of capital to shareholders. During the quarter, we returned $378 million to shareholders through a $250 million accelerated share repurchase program and payment of our long standing dividend. Year-to-date, we've returned $1.5 billion through share repurchase and made nearly $400 million in dividend payments. Now I will cover our segment performance beginning with Pharma on slide five. Third quarter revenue increased 14% to $47 billion, driven by brand and specialty pharmaceutical sales growth from existing customers. We saw strong, broad based pharmaceutical demand, particularly from our largest customers. GLP1 medications also provided a revenue tailwind in the quarter. Pharma segment profit increased 23% to $600 million. We were pleased to see that this progress was driven by both positive generic program results, including volume and mix, and by a higher contribution from brand and specialty products. Within our generics program, we continue to see consistent market dynamics and strong performance from Red Oak Sourcing. With regards to branded and specialty products, the higher contribution reflects a modest benefit from manufacturer price increases. As a reminder, while over 95% of our overall branded margin is derived from fixed fee-for-service agreements, the contingent portion is highly concentrated in our fiscal third quarter. Moving to the key growth area of Specialty. We've seen strong double-digit growth across specialty distribution along with our upstream manufacturer services. Our nuclear business, which is tracking ahead of plan, continued its double-digit growth, including benefiting from recent launches of Novel Theranostics. Within our pharmaceutical supply chain, we continue to effectively manage through the incremental inflationary cost pressures seen industry wide. And in the third quarter, these net impacts were not material on a year-over-year basis. Finally, in the quarter, we lapped more significant opioid related legal costs and higher costs related to the now completed ERP technology enhancements. Now turning to Medical on slide six. Third quarter revenue decreased 5% to $3.7 billion, driven by lower products and distribution sales, primarily due to expected PPE volume and price declines. Medical segment profit decreased 66% versus prior year to $20 million, primarily due to lower products and distribution volumes and unfavorable sales mix. Additionally, these results reflect both net unfavorable non-recurring adjustments, including simplification actions and some modest year-over-year improvements in PPE margins. Similar to Q2, we observed normalized PPE margins in the third quarter. Regarding the demand environment, we've previously discussed some overall volume softness in our products and distribution business, including Cardinal Health brand. In the quarter, volumes for our Cardinal Health brand products were roughly flat sequentially. We achieved inflation mitigation of over 40% during the quarter, driven by our continued efforts. We also saw benefits from our ongoing cost savings initiatives such as in our manufacturing and supply chain. Now for our updated fiscal '23 outlook beginning on slide eight. Our team is working hard and we are seeing positive results in key parts of our portfolio. As we move into the final quarter of the year, we are narrowing and raising our non-GAAP EPS guidance range from $5.20 to $5.50 to a new range of $5.60 to $5.80. At the midpoint, this represents a $0.35 cent increase and 13% year-over-year growth. This update primarily reflects an improved outlook for the Pharmaceutical segment for the year, as well as a more modest short-term outlook for Medical. While we will save commentary or updates on long-term segment guidance for our upcoming Investor Day on June 8th, we are sharing today that we are reaffirming the long-term financial guidance in the medical improvement plan for the Medical segment. We are also updating some key enterprise wide assumptions as seen on slide eight. Based on year-to-date performance, we now expect interest and other in the range of $95 million to $105 million, a non-GAAP ETR of approximately 22% to 23% for the year and adjusted free cash flow generation of $2 billion to $2.3 billion for the year. We expect diluted weighted average shares outstanding in the range of 262 million to 263 million, reflecting our year-to-date repurchase activity and continued expectation of $1.5 billion to $2 billion in total share repurchases in fiscal '23. Finally, we now expect capital expenditures of approximately $450 million, reflecting the timing of our continued investment to drive organic growth. Turning to the segments on slide nine. In Pharma, with a strong pharmaceutical demand and performance that we've seen to date, we now expect full year revenue growth in the range of 14% to 15% and segment profit growth between 10.5% to 12% growth. We are extremely pleased with the ongoing resiliency and strength of the business and our plans to drive double-digit profit growth in fiscal year '23. Yet when looking at the more normalized performance of the Pharma business, it's important to note our fiscal '23 outlook includes two non-recurring year-over-year tailwinds. First, as noted, we experienced a modest benefit from branded manufacturer price increases in fiscal year '23 that we assume is unlikely to repeat in future years. Additionally, relative to the prior year comparisons, our previous fiscal year '23 guidance assumed offsetting year-over-year impacts in total between several non-recurring drivers, higher than usual inflationary supply chain costs, lower opioid related legal costs and lower costs for technology enhancements compared to fiscal year '22. However, we now expect the in-year comparison to fiscal year '22 for these items to produce a modest year-over-year tailwind unique to fiscal year '23. We will provide insights into our long-term targets for Pharma during our Investor Day, including some early guidance for fiscal year '24. Turning to Medical, we now expect a revenue decline of approximately 6% and a segment profit decline of approximately 50% for the year. This updated outlook reflects three key changes. First, third quarter actual results, as I've already discussed. Second, updated assumptions around Cardinal Health brand volumes, namely that we will see relatively consistent demand patterns for the remainder of the fiscal year. Third, delayed realization of lower costs, which we have previously incurred primarily related to international freight. Based on our updated volume expectations, we now expect some of the previously anticipated fourth quarter improvements in the P&L to shift into fiscal '24. As a reminder, on the cost side, we've seen significant improvement in incurred international freight costs, which are capitalized into inventory on our balance sheet. These costs are then recognized in our P&L results on a delay as we sell through the products. We continue to have strong line of sight into this eventual benefit. However, due to timing, the impact to our fourth quarter results will be more modest than previously assumed. Importantly, we continue to expect to exit the year, offsetting at least 50% of the gross impact from inflation. Looking ahead to the fourth quarter, the approximate $60 million sequential improvement in Medical segment profit embedded in our guidance primarily reflects the combination of three items. First, the normalization from the non-recurring adjustments from Q3. Second, continued improvement in progress on our mitigation initiatives, including the benefit from the previously incurred international freight costs. Third, and to a lesser extent, normal seasonality improvements in the fourth quarter. So in financial summary, an excellent financial quarter overall, our raise to guidance with opportunities still in front of us. With that, I'll now turn it back over to Jason.

Operator:

Thank you very much, sir. [Operator Instructions] Today's first question is coming from Michael Cherny coming from Bank of America. Please go ahead. Your line is open.

Jason Hollar:

Sure. Thanks, Michael. Yes. Let's break down the inflation into the components as a way of giving you the pieces I think you're asking for there. And we've given you enough of this, you can back into these numbers, but let me just be really explicit around the impact of inflation across the quarters in fiscal '23 and what that then implies for '24 and beyond. And I think that will get at most of your questions. So the first half of the year, namely within Q2, somewhere around Q1, Q2, we saw the peak net impact of inflation, gross inflation net of the mitigation actions. And then specifically in Q2, we had about $100 million included in our reported Medical segment earnings. Now we have had improvements over the course of the last quarter. So in Q3, we saw both the ongoing pricing dynamics as expected and the costs continue to be incurred at lower levels as expected. And what that did then was drove a P&L benefit related to those mitigation actions of $20 million to $30 million for the quarter. The difference in the quarter is that both Q3 as well as Q4, our volumes are now expected to be lower. So what we see in the P&L is a little bit less than what we had anticipated. But what we're spending on those incurred costs are coming in as expected. So again, that's Q2 to Q3, a $20 million to $30 million improvement in the net impact. And then we expect pricing to continue to improve as we roll over more and more contracts into the new permit structure. And then we have ongoing the international freight especially continue to roll through our P&L, again, at a slower pace than originally anticipated, but we still expect that benefit in the fourth quarter, and that's another $20 million to $30 million. So as you think about that Q2 to Q4 journey, that's $40 million to $60 million or let's call it about $50 million of benefit just related to the mitigation actions. So again, the actions are entirely consistent with our expectations. It's just that volume component is effectively delaying the benefit of what we see until some of it spilling over into fiscal '24 more than what we had anticipated. So that's the biggest part of the bridge because our guidance implies an $80 million-ish type of run rate in the fourth quarter. And so getting that Q2 to Q4, $50 million of that, that kind of gets you there. Now to your point, in Q3, there were some nonrecurring items, some puts and takes that we don't anticipate will continue on into Q4, let alone 2024 and 2025. So that's kind of in and out and not really something to think about so much in terms of that overall bridge. Now the last part of this story then is, okay, so that gets you to the run rate of about $80 million in the fourth quarter. And as I said, we started with $100 million at the beginning of the year, Q2 impacted because of inflation. The $20 million to $30 million each quarter takes you down to the $50 million in Q4. That implies that in that $80 million of profit as we exit the year in our Q4 results, still includes $50 million for the quarter related to the net impact of inflation. That's the opportunity that we remain committed to. Nothing we're talking about here is different than our expectations. I continue to expect us to fully mitigate through pricing of the ongoing renewals as well as this cost will continue to come down in terms of what impacts our P&L. We do not anticipate significant further reductions in other commodity areas, but we do expect that international freight will stay at the low levels that it currently is at. Next question please.

Lisa Gill:

Thanks very much and thanks for all the detail. Jason, I know you're going to talk about this at your Analyst Day around the portfolio review. But there's been some speculation around your nuclear business. Can you just talk about the contribution that, that had maybe overall thus far this year and how you see that? Is that a core component of your business going forward? Or is this something that you would think about when you think about your portfolio review? And any insights you have around nuclear would be helpful?

Operator:

Thank you very much, sir. We'll now go to Kevin Caliendo calling from UBS. Please go ahead, sir.

Jason Hollar:

Yes. There's a few components I can provide some additional color on. First of all, we've highlighted the some of the categories. So PPE, we've highlighted the destocking situation still. So we're not seeing anything new or different there. We have some other categories like our lab business, which is actually seeing a little bit of a headwind sequentially. Nothing too significant, but it's certainly with COVID originally and then with flu testing, we had some pretty good volume over the last couple of years, and that's getting more normalized. So we have some headwinds like that. For the other non-PPE type of Cardinal Health brand categories that are important to us, especially from a margin perspective, what we have to go back to is just highlight that a couple of years ago, last year, we saw some very significant supply chain constraints. And at that time, we were not able to get our customers the products that they needed. Fortunately, we've been working very hard on that. Our product availability, our product health, our customer service levels are at levels we've not seen since before the pandemic. So we're in really, really good shape now, but we were not getting all the products to our customers that they needed over that period of time. And we lost some opportunity as a result of that. So that's why we're not benefiting from as much of the growth right now. I do think that the underlying utilization is improving. We're not getting our fair share of that. And that's where we're very focused on further investments in our capacity, further investments and product innovation, but also just making certain that we keep our service levels ever increasing to levels that are really exciting our customers, so that they want to buy more and more of that product from us. And we're in the best position we've been in, in years and have more confidence that we'll get there. This is an important part of the medical improvement plan, right? It's one of the four pillars of growth. And so we are anticipating further improvements. It is about 20% of the actions necessary for us to hit the $50 million-plus target. That's why we're very focused on the other actions as well to see if we can over deliver and derisk this. But we do believe that utilization will continue to improve overall for the market, and we are better positioned now than we've been in a long time to participate in that, and I feel good about our prospects to see that growth, especially as we get into fiscal '24.

Operator:

Our next question is coming from Elizabeth Anderson calling from Evercore. Please go ahead.

Jason Hollar:

Okay. So I'll make a comment on your first part of your question, I'll turn it over to Aaron for the second one. It's nothing that we've explicitly quantified just wanted to highlight the words that we used, again, that it was a modest net negative impact in Q3. So it's one component. It's a number of puts and takes within there. I did highlight that as an example, one of the types of items are some costs for further simplification actions. We had some of that in the first quarter as well. So we're constantly looking at our portfolio and taking action to improve our ongoing profitability and that required us to take some further adjustments within the quarter, but nothing else to really highlight there other than the key is that we just don't expect them to continue, certainly not the long-term or even into the rest of our guidance for fiscal '24. Aaron?

Operator:

Thanks very much, sir. We'll now move to Eric Percher of Nephron. Please go ahead.

Jason Hollar:

Yes. In short, very confident that we'll continue to appropriately be compensated for our activity-based value. So this is not any different than the various other types of adjustments we've had to make over the years, and it's something that I think we've demonstrated makes sense to make the appropriate adjustments. The other thing I'd highlight is the starting point for a product like this is not real strong margins to start with. So there's not a big profit pool from which to draw value from. So we do expect to be compensated for the value that we provide and we'll continue to monitor and follow. One thing we had talked about in the past on this type of topic is where I have the most concern is when we don't have sufficient visibility to changes and that something would just kind of fall in our lab at the last minute because it does require some renegotiation, restructuring in some cases of how the arrangements are made. This one is a little bit more straightforward, and we feel like we can negotiate the appropriate outcome for it. And we certainly have the time for it. But the distinction is if there's ever any really short-term type of impact, and that would be needed to be addressed separately.

George Hill:

Good morning, guys, and thanks for taking the question. I guess, first, as it relates to the Cardinal Health branded products in Medical, I guess, Jason, is there any way to evaluate whether or not you guys are losing wallet share with customers and that guy is impacting volumes? And I guess my quick follow-up on that would be as we know that you guys have historically look forward bought commodity-based products. I guess is there any way to provide any more color around the timing of when Medical in flex as it relates to kind of the forward buying and the commodity impact in the inflation mitigation. Just trying to think about when we kind of like when we see the inflation as it relates to these lower costs really pulling through.

Operator:

Thank you very much, sir. Next question is coming from Eric Coldwell of Baird. Please go ahead, sir.

Jason Hollar:

Thanks, Eric. We called out favorable volume and mix and consistent market dynamics. As we've highlighted many times before, it's important to look at the total of both sides, buy and sell. And we continue to think those overall dynamics are fairly well balanced. And there will be ongoing volatility on one direction or the other, one side or the other, but it's the importance of Red Oak Sourcing and continue to deliver the best-in-class service levels as well as cost. And we feel very good about our competitive positioning there and why we think the margin per unit will continue to be as expected and not as much a part of the story than as the volume in the mix.

Steven Valiquette:

Great. Thanks. Good morning. You might have just touched on this a little bit, but I guess I was curious more just for the overall Pharma segment. You've had obviously a bunch of consecutive quarters now of double-digit top line growth, including 14% this quarter. And you talked about brand inflation, brand volume, generic specialty, all being strong. So I guess my question was related to.

Jason Hollar:

Well, if I could, I think I might know where he's going with the question. I think he was leading up to -- I'm guessing that he's leading up to, were there any deviations from that. I mean what we saw was really broad-based performance throughout our Pharma segment. I meant -- I've asked -- answered questions about nuclear, nuclear was just like our other businesses this quarter. We referenced generics. We referenced brand. We referenced specialty. We saw a strong performance across the board. Utilization is certainly strong across the board. I also wanted to highlight our performance on delivering this very strong volume was also positive. The one thing to maybe add to this as well, the -- we talked about a new customer that was onboarded Q3 of last year. And that was -- they were onboarded in the prior year Q3, but there's always a ramp-up process there. So we did see some benefit this quarter relative to last year in terms of this customer now being fully onboarded. So we had a bit of a benefit there, not to the extent of what we saw in the last couple of quarters. And then the last piece that has been -- was very robust this quarter as well. That was not the case in the prior year, certainly were the GLP-1s that Aaron had mentioned. So it was a combination of strength across customer class customers, trade -- class of trade as well as the individual business units. All right. So now you can go ahead to the next question.

Daniel Grosslight:

Yeah, thanks for taking the question. I had a similar question, but more on the EBIT for Pharma. Nice raise obviously this quarter. But I'm curious if you can kind of break out for us the nonrecurring items in a little more detail in the Pharma EBIT raise and how much will be recurring in fiscal '24? Thanks.

Jason Hollar:

Yes. And I'll just add, the way Aaron put it was perfect as it relates to true nonrecurring items, the only one that we could think of that way would have been -- it depends on your assumption of what you think brand inflation will be next year. That was modest. The other part that we did call out that was a benefit from a growth rate perspective year-over-year is that we do see some of our costs related to opioid legal fees and our ERP implementation running a little bit lower than anticipated. Now those are -- that's nonrecurring, right? It just means that we have gotten to a bit more of a normalized level quicker than what we had anticipated. So I do not expect there to be further significant improvements in the out periods out years related to those costs going down even further. It will be something that we'll continue to evaluate and provide updates if that's the case. But it's for those reasons why our implied growth rate in Q4 is more normalized. It's also why we're not communicating anything differently right now for our longer-term targets. And we'll certainly revisit that point when we come together at the Investor Day on June 8th. But generally speaking, we're seeing the strength, whether it's the new customer, the brand inflation or some of these cost drivers trending in the right direction, are all items that we think we are normalizing now on a go-forward basis and why you should expect more normalized margins from here on out.

Operator:

Thank you very much, sir. Next question is coming from Charles Rhyee calling from TD Cowen. Please go ahead, sir.

Jason Hollar:

Well, I'm not going to go into the mechanics of a product level contracts and structure. Just go back and reiterate that we feel very confident about our process, our experience, our history with any type of change that comes any other product. Again, as a distributor, we play a role. We play the role of getting the product from the manufacturers to those who need it. And with that will always be changes in the structure and how we go about it. But we -- nothing is different in today's environment than what's been present for the last 50 years of our existence when we'll have to continue to adapt and evolve with this and that's enough to be said there.

Jason Hollar:

Next question please.

Jonathan Yong:

Thanks. It's Jonathan Yong on for A.J. here. Just going back to Medical again. I appreciate the comments on the cost improvements that you're doing and how that's going to set up a good framework for '24. But I guess given some of the volume constraints that you're kind of seeing and not seeing the same flow through, how much of improvement related to the cost side, especially on the freight line is tied to actually improving that volume side that you kind of need to flow through. Thanks.

Operator:

Thank you very much, sir. And our last question today is going to be coming from Brian Tanquilut calling from Jefferies. Please go ahead, sir.

Aaron Alt:

Well, we have not provided fiscal year '24 guidance. We're pleased to report the strong performance in Q3. As we've talked about, and indeed, we did raise our guidance overall for Pharma. For the year, we're now expecting the profit guidance to be 10.5% to 12% for the full year. That's in contrast to our earlier guidance of low single digit to mid-single digit. So we are expecting a good finish to the year from this business, and we're excited to see you all on June 8th at our Investor Day presentation.

Jason Hollar:

Yes. Great. Thank you, and thank you, everyone, for joining us today. I know that we threw a lot out at you today, but we have a lot going on as an organization and just wanted to share the progress with you and give you more insight to a lot of the key drivers. If I step back and just think about what we went through, certainly, feel terrific about the progress that we're making across the enterprise. Pharma has, of course, a fantastic quarter, a fantastic year, broad-based as we talked. On the Medical side of the business, we have opportunity. We're very, very focused on driving the medical improvement plan. We feel really good about the progress we made are clearly making in three of those four pillars. We have work to do on the underlying volume. We'll have more confidence in where the market is going for that volume also have confidence in the leading indicators that will take for us to get our fair share of that volume. Of course, also, we're very pleased with the cash performance that we had and that we talked about today and that raising that guidance, narrowing the guidance as well. It highlights both the strong cash management that we have, but also the responsible capital deployment that's going along with that. So just again, thank you for your time today and look forward to seeing you all of you at the Investor Day on June 8th.

Kevin Moran:

Good morning and welcome. Today, we will discuss Cardinal Health's second quarter fiscal 2023 results, along with updates to our full year outlook. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer; Trish English, our Interim Chief Financial Officer; and Aaron Alt, who will take over as our Chief Financial Officer beginning February 10. During the call, we'll 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 our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods 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 limit yourself to one question so that we can try and give everyone in the queue an opportunity. With that, I'll turn the call over to Jason.

Aaron Alt:

Thank you, Jason. Good morning. I am excited to be part of the team here at Cardinal, particularly at such an important time not only for our company but for the entire health care industry. What attracted me to Cardinal Health was the broad portfolio, the overall culture and the leadership team that is motivated to win. While still early days for me, I can already tell that while there's work to do, Jason and the team have a plan and there are significant opportunities for value creation in front of us. I look forward to interacting with all of you further in the weeks and months to come as I continue to ramp up.

Trish English:

Thank you, Jason, and good morning, everyone. I'll begin today with our consolidated second quarter results. Total company revenue increased 13% and gross margin increased 3%, both driven by the Pharma segment. Consolidated SG&A increased 4%, primarily reflecting inflationary supply chain costs. Benefits from our enterprise-wide cost savings initiatives offset some of this increase. Operating earnings of $467 million were in line with the second quarter of last year, this reflects growth in Pharma segment profit offset by the decline in Medical segment profit, which was anticipated. Moving below the line, interest and others decreased nearly 30% to $18 million driven primarily 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. Our second quarter effective tax rate finished at 23%, approximately 3.5 percentage points higher than prior year, primarily due to net positive discrete items in the prior year period. Diluted weighted average shares were $263 million, 6% lower than a year ago due to share repurchases. In the second quarter, we completed our $1 billion accelerated share repurchase program and initiated a new $250 million program, resulting in a total of $1.25 billion deployed year-to-date. We continue to expect $1.5 billion to $2 billion in share repurchases in fiscal 2023, which reflects our continued focus on maximizing shareholder value. The net result for the quarter was earnings per share growth of 4% to $1.32. Now turning to the balance sheet. We generated second quarter adjusted free cash flow of $439 million, bringing year-to-date adjusted free cash flow to $781 million. We ended the period with a cash position of $3.7 billion with no outstanding borrowings on our credit facility. As a reminder, we continue to expect to pay down the $550 million of March 2023 notes at maturity with cash on hand. Now I will cover our segment performance, beginning with Pharma on Slide 5. Second quarter revenue increased 15% to $48 billion, driven by brand and Specialty Pharmaceutical sales growth from existing and net new customers. Pharma segment profit increased 9% to $464 million. This was driven by a higher contribution from Branded Specialty Products and Generics program performance, partially offset by inflationary supply chain costs. During the quarter, we saw strong overall pharmaceutical demand, including from our largest customers, reflecting their strength in the market. To a lesser extent, we also saw year-over-year contributions from the net new customers that we've previously mentioned and a more robust seasonality with cough, cold and flu products as others have noted. Regarding our Generics program, we are pleased with the solid execution and consistent market dynamics we continue to see. This includes strong performance from Red Oak Sourcing, not only controlling costs, but also in maximizing service delivery for our customers. Within our supply chain, we continue to effectively manage through the industry-wide inflationary costs being in the areas of transportation and labor. In the second quarter, these inflationary impacts were generally consistent with our expectations. Similar to last quarter, this headwind was offset by year-over-year tailwinds from our complete ERP technology enhancements and lower opioid-related legal costs. Okay. Turning to Medical on Slide 6. Second quarter revenue decreased 7% to $3.8 billion, driven by lower products and distribution sales, including PPE pricing and volumes. Continued strong growth in our At-Home Solutions business partially offset this decline. Medical segment profit finished in line with our prior commentary, decreasing 66% to $17 million. This was primarily due to lower products and distribution volumes and net inflationary impact, partially offset by an improvement in PPE margin. During the quarter, the net impact from inflation was in line with our expectations, and we achieved inflation mitigation of over 30%. This sequential improvement from the first quarter was driven by the continued acceleration of our mitigation efforts, including the implementation of additional product pricing actions in the quarter. On our last two earnings calls, we have discussed overall volume softness in our Products and Distribution business. In the second quarter, we saw generally consistent overall volumes on a sequential basis, including our Cardinal Health brand products. With respect to PPE, we did see some slight improvement in volumes on a sequential basis. Additionally, we made significant progress in selling through our higher cost inventory on our balance sheet leading to normalized PPE margins in the quarter. Now for our updated fiscal 2023 outlook beginning on Slide 8. We are raising our EPS guidance by $0.15 at the lower end and $0.10 at the higher end to a new range of $5.20 to $5.50, which represents 6% year-over-year growth at the midpoint. This update reflects improved outlooks for the Pharmaceutical segment and for interest in other. We now expect interest in other in the range of $115 million to $130 million with the improvement primarily driven by the increased interest income on cash and equivalents. Our expectations for the remaining items listed on Slide 8 remain unchanged. Turning to Slide 9 in the Pharmaceutical segment. We are raising our outlook for revenue to a new range of 13% to 15% growth and for segment profit to a new range of 4% to 6.5% growth, both of which primarily reflect our strong first half performance. As we look to the second half in pharma, we anticipate the year-over-year profit growth to be fairly balanced between the third and fourth quarters. Turning to medical. We continue to expect a revenue decline of 3% to 6% and segment profit ranging from flat to a decline of 20%. With respect to inflation and our mitigation actions, we continue to expect a net impact of approximately $300 million in fiscal 2023 or a minimal year-over-year impact. On the cost side, while still at elevated levels, we’ve seen a general stabilization across most areas along with improvement in international freight. As a reminder, these product costs are capitalized into inventory and in the current environment of elongated supply chain reflected in our P&L results on an approximate two quarter delay. Importantly, we continue to expect to exit the year with a run rate of at least 50% inflation mitigation. And finally, no changes to the expected cadence of Medical segment profit. We continue to expect segment profit to improve sequentially and be particularly weighted toward the fourth quarter. This sequencing primarily reflects our assumptions around the net impact of inflation, and to a lesser extent, a gradual improvement in overall volumes and the continued implementation of our cost savings measures. For the enterprise, a key factor continues to be the overall utilization and demand environment. In pharma, we expect continued strength in overall pharmaceutical demand in the second half, albeit, at a more moderate rate than we’ve seen to date. In medical, we expect a gradual improvement in overall volume, including with Cardinal Health Brand. Therefore, if the trends from the first half of the year continue, we would anticipate segment profit more towards the upper end of our range in the Pharma segment and more towards the lower end of our range in the Medical segment. With that, I’ll now turn it over to Jason.

Operator:

[Operator Instructions] The first question comes from the line of Lisa Gill calling from JPMorgan. Please go ahead.

Jason Hollar:

Yes. Hi, Lisa. I think you’re connecting all the right points there. That’s what we hear from our customers and broadly from our peers in the industry, is that there continues to be some constraints as to getting to the free level of demand there. And we do think that’s a component of what’s impacting the lack of growth that we’re seeing within medical. It’s impossible to tell definitively, but that’s the anecdotal feedback that we are hearing. To help provide a little bit of color around the impact and that’s why we – Trish had made some comments within her commentary there highlighting that we do anticipate a gradual improvement over the course, so not significant, but getting back to closer to more normalized level of growth. As a reminder, when we provided our medical improvement plan, we highlighted a 3% CAGR total volume growth over the three year period and we anticipated that about half that would be market growth, about half that would be our own innovation and capacity expansion plans for our products. So you’re talking about a couple percent type of growth that would be more normalized and that’s kind of differentiator between our more of a midpoint of our guidance to what would be more in the lower end, and that’s why Trish provided that type of clarity.

Jason Hollar:

Yes. No, I think you have it generally right. Now remember that a lot of the part that we have control over is new product innovation and fast expansion. So that’s always an element of the three year plan I would expect to be weighted a little bit more towards the later end because it takes time to school up those investments and getting those products into the market. So we didn’t ever indicate it was a linear type of plan. And volumes, we have to be careful too that we’ve had a period here last two to three years that’s been incredibly choppy in terms of the volumes. Obviously down during the beginning of the pandemic and has come back for the most part. The last couple of quarters have been very predictable, very consistent types of volumes, but that’s – even that’s a bit of an anomaly from what we’ve had over the last few years. So presuming that that maintains then that’s the range that we should be thinking about. But if we get back to an increased level of volatility, which at this time we don’t foresee but that’s certainly a possibility as well.

Jason Hollar:

Yes. Thanks.

Elizabeth Anderson:

Hi, guys. Thanks so much for the question. I was wondering if you could talk about a little bit more about the pharma improvement in the back half of the year, specifically like as you’ve had time to sort of think through the pharma reorganization and sort of continued cost cutting benefit is that’s what’s improving the operating profit growth. Are you starting to get pricing in certain places where you hadn’t before? You can help us kind of understand that mix. And then secondly on the interest expense guide, it looks like the back half guide has a big sort of step up versus what you did in the first quarter – the first two quarters of the year in terms of interest expense. So is that just sort of changes in cash balance in terms of the net interest contribution or is there – are there other factors going on there? Thank you.

Elizabeth Anderson:

Got it. Thank you so much.

Michael Cherny:

Good morning and thanks for taking the question. So just to parse through your numbers a little bit, I just wanted to get a sense. You’ve had strong outperformance here to date based on typical timing, annualization and what you’re calling for relative to growth rates. It seems like there’s more opportunity for upside on your EPS. I know you talked about medical base list that you see now coming at the low end of the range. But can you give us some of the other potential concerns or headwinds that are built into this number? Just mathematically, you could argue that your EPS baseline should be higher and annualizing it, you’d get there too. So I want to make sure I understand all of the – I guess, takes against the positive puts that you updated in your guidance.

Operator:

The next question comes from the line of Erin Wright calling from Morgan Stanley. Please go ahead.

Jason Hollar:

Sure. Thanks, Erin. Overall, first of all, as I think about fiscal 2023, it’s a fairly normalized level performance that we have in our current outlook. Again, growth for the reasons I highlighted is a little bit stronger in the first half than what is in our longer-term targets. And we’ve seen that very broad strength that I would not expect to continue long-term at that pace, especially when we consider that incremental new customer. The longer-term, I think what this year reinforces is that we’re on track for those long-term growth targets. Specifically to your question around COVID therapies and vaccines, you have it – your inclination is correct. We’ve participated very little on any of that. Over the pandemic, frankly, we’ve had more of a headwind than a tailwind because the volume impacts on our underlying utilization. Of course, we’re all the way through that at this point in time and have been so for about a year. So we’re at a very normalized level at this stage. As it relates to commercialization, I think all data points point to that beginning in the summertime, of course, after our fiscal year, so certainly no impacts for 2023. There would be some opportunities for 2024 and beyond. However, I’d highlight the types of products and vaccines we’re talking about historically outside of the pandemic have not been significant drivers of profitability. So it’s something that should be a tailwind, but I would not jump to the conclusion that it will be as significant as what we’ve seen in the marketplace for others, given how the government had isolated that and procured for that. So something we’ll keep an eye on and clearly something we’ll be providing some context for further as we understand it better and as we get closer to the – that point in time. And the one final point on that is even though the commercialization is scheduled for the summer, there’s certainly a lot of dialogue and uncertainty as to exactly how much a stockpile within the government and how long will it take for that to work through. So while it may go commercial, it could take us some time to actually see a pull in terms of non-governmental sources. Next question, please.

George Hill:

Yes. Good morning, guys. And I appreciate you taking the question. And I guess, Jason, my question’s probably a derivative of Mike’s question, which is kind of given the guidance for the year and the expectation to the back half, it would seem that the Street is probably too high. So I guess maybe could you talk about the big moving pieces just as it relates to the back half of the year? And should we think about the current guidance as probably a little bit on the conservative side? Or are there real areas of weakness, particularly in medical that we should be worried about in the back half of the year as it relates to where the company claims to deliver results, kind of versus where the Street is?

Operator:

The next question comes from the line of Andrea Alfonso calling from UBS. Please go ahead.

Jason Hollar:

Terrific. Happy to do so. So on pricing, I would think about pricing as being a fairly stairstep process beginning back with our first temporary price increase in March 2022 so what we have – and when we first shared was the 20% mitigation of inflation soon after in the fourth quarter of last year, then that went to 25% in the first quarter of this year. And then now we're saying it's over 30%. So you can see that, that's a fairly consistent stairstep. And that's how I think about the pricing side, less on the temporary price increases going forward and more on the rotation to more renewals as they come up, and that's just a national function of where we're at in this process as we get farther away from the initiation of those temporary price adjustments. So a continuation of more of the same. How you get to a widening of that 30% to 50% by the end of the fiscal year is the costs starting to come down. So – and again, that's largely focused on the international freight. So pricing, I would expect to just continue blocking and tackling all the way through to the end of fiscal 2024 is where most of the prices will adjust. And that's why we indicate that we won't get to full mitigation until about that point in time. As it relates to private label, I think it's an interesting related question to pricing. Because yes, we want to work with our customers. All of our customers are dealing with challenges beyond the inflation in this category. They have actually much bigger challenges in other categories. And the desire on our part is to work with them if there's a possible win-win to find value in other ways, whether that is into more private label. It's – of course, we're doing everything we can to offset the increase – of the increases to start with to mitigate the inflation through other nonpricing means. And of course, part of this is also working with the supply base. And we indicated that we're working on the distribution fees as well so that the supply base does their part. We do our part and our customers are going to have to absorb this as well. So if the whole industry has to address this, and that's the collaborative approach that we're taking with it.

Operator:

The next question comes from the line of Charles Rhyee calling from Cowen. Please go ahead.

Jason Hollar:

Yes, let me take that. So that comment was the growth rates were going to be even year-over-year. So you're exactly right, Charles, that there will continue to be the expectation of a normal seasonality. That largely comes from the brand inflation, albeit much lower than what it has been historically. We're still talking less than 5% contribution, but that is all in the third quarter. So sequentially, we would still expect the third quarter to have that element associated with it. Trish's comments were specifically related to the year-over-year growth rates being relatively equal between the two quarters.

Jason Hollar:

Sure. Yes. You can also go to our segments. But note, this is one of the two businesses we, every quarter, provide incremental revenue information on. And that business, I think, last year was $2.4 billion of revenue. And I believe, for both the first and second quarter, we grew it by around 9%. But again, you can look at the segment footnote to get the precise numbers each and every quarter.

Operator:

The next question comes from the line of Steven Valiquette calling from Barclays. Please go ahead.

Jason Hollar:

Sure. Yes, overall, the biggest component for this particular quarter and most quarters that we've seen more recently has been volume. I continue to use the statement consistent market dynamics that's referencing essentially the margin per unit. Yes, there's ongoing deflation, but the buy-side sell side continues to be relatively in balance. And so when we see a year-over-year driver, it's driven often by volume and/or mix. And we continue to see very broad strength across all the products, whether it be generics, brands, specialty – and so this particular quarter, we saw that as well. Again, not the biggest driver. But when I talk about cough, cold and flu, a lot of those products have gone generic. They're more mature products, so they do tend to carry with it a little bit lower margin price points, things of that nature. But that would be a component as well. But again, I'm only highlighting that, given how many questions we get on the topic, not that as a significant driver. But overall, the short answer is volume and mix.

Operator:

The next question comes from the line of Eric Percher calling from Nephron Research. Please go ahead.

Jason Hollar:

Sure. So the theranostics business launched sometime last six, nine months, and we are starting to see now more of that contribution over the last couple of quarters. So it's in the ramp up phase. So we are seeing positive returns already on those investments. This is a business, a business case. And the thing about the nuclear business that is both wonderful and also at times a little bit frustrating is that the business is a long-term business. It means that we have good visibility long-term, but also it means that we have to wait until we can get that benefit. Theranostics has been something we've been working on since, well before I arrived here in the organization three years ago, and it's one that we're now seeing the fruits of all those investments and efforts from that team. As it relates to the second part of your question, Eric, I get lots of questions around trying to link our business, our nuclear business to specific approval, specific other drugs and therapies and how we can attach that. I would say that the beauty of this business and the success of this business is that it's not directly linked to a very specific particular outcome. We have broad expertise capabilities, we are not dependent on any one particular area, and is that diversification and of which we're seeing with the theranostics expansion being even more accentuated because we get to work with so many more manufacturers and partners that it just creates a broad opportunity for us to grow across the spectrum. So our business case for continued growth, our goal of achieving – doubling as a profit in this business from fiscal 2021 to 2026 is predicated on a lot of singles and doubles, not triples and home runs by, by attaching to a blockbuster type of drug. So beyond that, we don't talk about individual drugs, individual manufacturers or products. And so like I said, I just don't think that's the real draw for this business is the breadth that we have and the broad capabilities.

Operator:

The next question comes from the line of Brian Tanquilut calling from Jefferies. Please go ahead.

Jason Hollar:

I wish I had more clarity. I would say that it's a lot more stable than it has been over the last few years, and we have to break apart freight into the components. So within international freight that I believe was an anomaly that is unlikely to occur anytime soon, if ever again we need to be prepared for it. We have diversified our supply chain further as a result of the living through that. But where those costs are, they're still elevated in certain areas, right. The main China to North America channels are much, much lower, but there is now a lot of sourcing through other parts of Asia that are higher than historical levels, but nowhere near the peaks. So we're clearly seeing at least an 80% reduction of what those were at the peak. And certainly much closer to pre-pandemic levels. So as it relates to international freight, it's not my big worry at this point, and it's one that we have to continue to keep an eye on and manage. The more elevated remains the domestic transportation it's still – it's also down from its peak, especially as it relates to anything related to diesel fuel. So that's also off its peak, and we're seeing certain pockets of improvement, but it's still very elevated compared to pre-pandemic. And there, I have less confidence that it's going to materially reduce from here. There's a lot of inputs that go into transportation other than just diesel fuel. You have the equipment and the drivers all which are higher costs and they're not expected to come down any time soon. So I expect domestic transportation to be higher, longer, perhaps forever. And it's why we need to have permanent pricing is because that component. But on the international freight side, that is why we are not pushing for faster price increases right now is because we believe that will be coming down on our P&L this next quarter. And as we get through fiscal 2024, those two lines, the price line and the cost line will finally intersect and we can see that that will be fully mitigated. Question, please.

A.J. Rice:

Yes, thanks a lot. I know growing specialty has been a priority for the company and this management team to set out. And you've mentioned that again today that you're having progress there. I guess, can you just maybe tell us where you're seeing success in the specialty area and is the plan progressing about as expected as it was talked about over the last year or so? Or is that an area not performance for you, or how would you describe that?

Operator:

Yes, there are no further questions. So I will hand you back to host to conclude today's conference.

Operator:

Thank you for joining today's call. You may now disconnect. Hosts, please stay connected on the line.

Kevin Moran:

Good morning, and welcome. Today, we will discuss Cardinal Health's first quarter fiscal 2023 results, along with updates to our full year outlook. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, Chief Executive Officer; and Trish English, Interim Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during the discussion today, 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. 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 in the queue an opportunity. With that, I'll now turn the call over to Jason.

Trish English:

Thanks, Jason, and good morning, everyone. It's great to speak with you all. Today, I'll share details on three areas of focus. Our consolidated first quarter results, the key drivers underlying our segment's performance and our updated fiscal 2023 outlook before turning it back to Jason for final remarks. First quarter total company revenue increased 13%, driven by Pharma segment sales growth. Gross margin decreased 2% to $1.6 billion, due to net inflationary impact in medical and one month impact of the Cordis divestiture, partially offset by our Pharma Generics program performance. Consolidated SG&A increased 7%, reflecting inflationary supply chain costs and other operating expenses such as higher costs to support Pharma sales growth. This increase was partially offset by the Cordis divestiture and benefits from enterprise-wide cost savings initiatives. Operating earnings decreased 20% to $423 million, reflecting the decline in Medical segment profit, primarily due to net inflationary impact, and partially offset by growth in Pharma segment profit. Now moving below the line. Interest and Other decreased 25% to $27 million, 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. Our first quarter effective tax rate finished at 16.9%, approximately 7 percentage points lower than prior year due to certain favorable discrete items. Diluted weighted average shares were $273 million, 6% lower than a year ago due to share repurchases. We are focused on balanced disciplined and shareholder-friendly capital deployment and in mid-September, we initiated a $1 billion accelerated share repurchase program that we expect to complete in the second quarter. The net result for the quarter was earnings per share of $1.20. Now, turning to the balance sheet. We generated first quarter operating cash flow of approximately $25 million. This includes total litigation payments of approximately $390 million, primarily consisting of the second payment under the national opioid settlement. Adjusted free cash flow in our first quarter was $342 million. We ended the period with a cash position of $3.5 billion, with no outstanding borrowings on our credit facility. Now turning to the segments, beginning with Pharma on slide 5. First quarter revenue increased 15% to $46 billion, driven by branded pharmaceutical sales growth from existing and net new Pharmaceutical Distribution and Specialty customers. Pharma segment profit increased 6% to $431 million, driven by Generic program performance and a higher contribution from Brand and Specialty products, partially offset by inflationary supply chain costs. During the quarter, we were pleased to see strong execution and continued consistent market dynamic in our generic program including Red Oak. As we previously note, inflation continue to impact supply chain cost across the industry, particularly within transportation and labor. We saw an approximate $20 million year-over-year headwind from these areas, which was consistent with our expectations. This headwind was effectively offset by year-over-year tailwind on from our completed ERP technology enhancements and lower opioid-related legal costs. Okay. Turning to Medical on slide 6. First quarter revenue decreased 9% to $3.8 billion, driven by lower products and distribution sales, primarily due to PPE pricing and volumes, and to a lesser extent, the Cordis divestiture. Continued strong growth in our at-Home Solutions business offset some of this revenue decline. Medical segment loss of $8 million was due to net inflationary impact in products and distribution, as well as a lower contribution from PPE, both of which I will discuss in more detail. Importantly, these results reflect approximately $20 million in total inventory charges related to our previously announced simplification actions. This includes the sale of our gloves portfolio that is primarily utilized in non-health care industries. As a reminder, this non-core product line has been a source of volatility and distraction in recent years. These actions, despite the one-time costs are an example of our ongoing commitment to strengthening the medical product and distribution business through simplification. During the quarter, the growth impacts from * incremental inflation in our product and distribution business was in line with our expectations of approximately $150 million, and we successfully achieved our inflation mitigation target of 25%. Our mitigation efforts have continued to accelerate, most notably with the implementation of the second wave of product pricing actions in July. Jason will elaborate on our plans for further mitigation shortly. Now, a quick update on the overall utilization environment. We've previously noticed some overall volume softness in our products and distribution business, including a lower demand for PPE, which we believe primarily reflects customers' higher inventory levels. In the first quarter, we saw generally consistent overall products and distribution volumes sequentially, including with PPE. While we do anticipate gradual improvement in volumes relative to these recent lows, we continue to expect choppiness in demand levels going forward. Now for our fiscal 2023 outlook, beginning on slide eight. We are reiterating our EPS guidance of $5.05 to $5.40. This includes our updated medical segment outlook, which has been adjusted for the impact of simplification actions in the first quarter and a few below-the-line improvement. Based on the first quarter performance, we are confident in lowering the top end of the ranges for interest and other, our effective tax rate and diluted weighted average shares for the fiscal year. We now expect I&O in the range of $140 million to $160 million, an ETR between 23% and 24% and diluted shares between $262 million to $264 million. Our expectations for the remaining items listed on slide eight remain unchanged. We are also reiterating our fiscal 2023 outlook for the Pharma segment seen on slide nine. We continue to expect revenue growth in the range of 10% to 14% and segment profit growth in the range of 2% to 5%. Before transitioning to medical, two key call-outs on the Pharma cadence. First, with stronger start to the year, we now expect more balanced year-over-year profit growth between the first and second half of fiscal 2023. And specifically, for the second quarter, we expect segment profit dollars to be similar to the first quarter. Now turning to Medical. We expect segment profit ranging from flat to a decline of 20%, which, as I indicated, reflects the impact of the simplification actions in the first quarter. With respect to inflation and our mitigation actions, there is no change to our expectation of a net impact of approximately $300 million in fiscal 2023 or a minimal year-over-year impact. The macroeconomic environment remains dynamic. And while we've seen some decreases in spot rates of certain cost drivers, such as international freight, other areas such as commodity costs remain significantly elevated. As a reminder, these product costs are capitalized into inventory. And in the current environment of elongated supply chain reflected in our P&L results on an approximate two-quarter delay. While we now expect growth inflation in the second quarter to be similar to what was seen in Q1, we are implementing additional actions and working proactively to mitigate these pressures. It's important to note that, we continue to expect that as we exit the year, the run rate of our mitigation actions will offset at least 50% of the growth impact from inflation. On Medical's quarterly cadence, in Q2, we expect similar segment profit dollars since the first quarter, excluding the impact of the first quarter simplification actions. As we have noted before, we continue to expect a substantial majority of segment profit to come in the second half of fiscal 2023 and particularly in the fourth quarter. This sequencing primarily reflects our assumptions around inflation, inflation mitigation and PPE. With that, I'll now turn it over to Jason.

Operator:

Thank you. [Operator Instructions] We will take the first question from Elizabeth Anderson with Evercore.

Jason Hollar:

Sure. And as your question, Elizabeth, specific to any particular business, or are you just talking generally?

Jason Hollar:

Okay. Yeah. For Medical specifically, it's the biggest driver by far will be the mitigation actions to address inflation. That's – as we talked, our first pricing actions went in place March 1st, of fiscal 2022. And then we had another wave in July of fiscal – the very beginning of fiscal 2023, and then another price adjustment that occurred October 1. We do expect further price adjustments in the third quarter of the fiscal year. And then at the same time, we would expect, especially in the fourth quarter of fiscal 2023 to start to see some of the lower costs, especially with the international freight piece, finally starting to hit our P&L. As Trish highlighted in her comments, the supply chain remains very elongated. And so we would anticipate, it's going to take, again, at least a couple of quarters before lower costs actually come through the P&L. But as we indicated in our comments, the international freight is really the only area of any significance that we're seeing cost reductions at this point. We do see some of the other commodities coming down, but not to the same extent. The other key component from a first half, second half perspective for Medical is just the normalization of PPE. We talked about the higher-cost PPE being on our balance sheet when volumes fell quite a bit at the latter part of fiscal 2022, that meant that higher cost save in our balance sheet longer, and while we're pleased to see that it feels like we've come off the lows here from the fourth quarter in terms of demand, it remains still something that will take a few quarters to work through. And then beyond that, really for all of our businesses, it's just a normal cost reduction and other growth initiatives over the course of the year, just build up. Within Pharma, the specific item to remember from a first half, second half, specifically the third quarter is always just the recognition of the brand inflation. While that continues to be a small portion of our overall brand margin less than 5%. It does remain highly concentrated in the third quarter. And that's the biggest driver for that particular business. Next question, please.

Lisa Gill:

All right. Thanks very much. Jason, I want to spend a couple of minutes on the pharmaceutical distribution side of your business. So a few things. One of the things that really stuck out to me is you talked about strong performance in your generic program, and having enhancing programs going forward. I kind of think of where we need to be in generics. So maybe can you talk about what you're seeing in the market and incremental opportunities? And then secondly, when I look at the revenue on pharmaceutical distribution, you're coming in well above where the industry is. Can you maybe just talk about where you see that over time? And again, even your guidance is above where industry rates are? Like what's the key drivers there?

Kevin Moran:

Next question, please.

Kevin Caliendo:

Great. Thanks for taking my question. I wanted to talk a little bit about the contracting. I think the last time Cardinal went through a lot of contracting through COVID, it ended up kind of working against you, as things reverse. So I just want to understand more about how you're amending these contracts. Are customers comfortable with this? Is there any pushback? There seemingly is efforts on amongst almost all hospital companies to reduce their supply costs right now or reduce costs in general. So just wondering how it works? Does it -- is it impacting you immediately, or is this more of a cushion for longer term? Anything there would be helpful. And then one other follow-up. I read that there was a real estate transaction done, and now that was part of the business review potential outcomes was to maybe monetize some real estate. Can you talk about the opportunity size to be able to do that in terms of generating capital for the business?

Kevin Caliendo:

Yeah.

Operator:

The next question comes from Erin Wright with Morgan Stanley.

Jason Hollar:

Yeah. Well, first and foremost, absolutely, I appreciate and understand the question. This is a key reason for our recent reorganization within the Pharma segment. We have structured the team to have specialty in PD altogether, reducing the complexity, driving not just productivity, but more importantly, simplifying how we go to market with both our customers as well as the manufacturing partners. So this is all to recognize the importance of driving that favorable mix. The market is going to, in part, be a rising tide but we definitely want to do as much as possible to participate as much of that growth as there is. We did just recently acquired Bendcare that gives us additional exposure here. We have invested organically in all the different businesses and tools that I referenced in my script. So we're investing both inorganically as well as organically and have now a structure and a leadership team that's intensely focused on this. So we feel like we're really well positioned to be able to take advantage of that into the future. On biosimilars, that is absolutely a component of this as well. The same point. We've invested into our capabilities and our team. We participate in that today. It is a nice driver for our business, not large enough that we have called it out specifically. But nonetheless, it is an area that, as we continue to see evolution of the sites of care in the therapeutic areas, then we would anticipate that to be further opportunities for us, and it fits nicely into our capabilities. I know we get a lot of questions specifically about Humira and how that is going to benefit us. There's a lot to be still played out here in terms of how all participants drive the different processes for this, specifically the payers and PBMs, how they go to market and work with the market to implement these evolutions. So a lot to be learned there. But the point is, we are positioned very well, we're able to take advantage of that. But there's some level of uncertainty, but we do have confidence there will be a tailwind for us going forward as it has been in the last few years as well.

Operator:

Our next question comes from Michael Cherny from Bank of America.

Jason Hollar:

Sure. As it relates to the ASR, the -- your technical question. Yes, about 80% is what you would expect for the immediate benefit. And like you appropriately referenced, it was implemented in mid-September, so a relatively small impact to the current quarter. As it relates to the guidance changes, well, hey, it's the first quarter. It's certainly early. We're also talking about -- still a fairly uncertain macroeconomic environment. We're also talking about a lot of news out there that we're always looking at in addition to our own data in terms of utilization. So as our comments highlighted, we did not see a lot of surprises as it relates to utilization in either of our businesses, either our segments this particular quarter. And that was certainly welcome, given what the last couple of years have looked like. But nonetheless, we continue to see more data points on that through a lot of external references, and that's something that we continue to look at. But mathematically, I don't think there's that much difference in terms of the offsets that we took, both in the takedown with medical driven in part by that simplification efforts, but then also those other items where we took the top end down. It's still a reasonable range considering how early it is in the year as well as the drivers that are all around us.

Operator:

Our next question comes from Eric Percher with Nephron Research.

Jason Hollar:

So just make sure I understand the question. So we have our gross inflationary impacts and then we have the mitigation actions that get us to the net. You're specifically asking about the mitigation actions, and how to think about what's driving those, both for 2023 and 2024?

Jason Hollar:

Yeah. By far, it's pricing. That is – there's opportunity. And of course, what we want to do is work with our customers as much as possible to reduce what is necessary to flow through in terms of pricing, but the amount that can be moved on those items as well as others is relatively small. So, pricing will be the predominant element there. The other component is just the cost coming down naturally as well. So we have two things happening between now and the end of the fiscal year. Pricing will continue to go up period-to-period, quarter-to-quarter. And our costs will, at some point here, peak, which we're pretty close to that. We believe we indicated similar gross costs in Q1 as what we expect in Q2, and especially into Q4 with the international freight piece, that's the one area that we have some confidence is going to come down. And so I know your question is specifically on the mitigation items, but the gross will come down is expected to come down right now, specifically because of the international freight. The other components to inflation and other commodities, especially, we are seeing them come down a little bit in some areas, but not very significantly, and certainly at a pace less than what we had thought. And a handful of them are actually going up. But overall, I would expect to exit the year, with a little bit lower cost run rate than what we have coming into the year. Next question.

George Hill:

Yeah. Good morning, guys, and thanks for taking the question. Jason, I'm going to come back to the MedSurg segment again. I was just wondering if there's kind of a way to quantify like what part of the book has the new contracting terms in place? And I don't know if you can talk about kind of the actions taken by peers. And then kind of – I kind of roll that into kind of timing of implementation like you kind of talked about the two quarter lag between – not really the lag, but like kind of the timing of the supply chain in that segment of the book. So I'm just trying to think about how long it takes the entire book to get re-contracted into the new terms? And kind of what is the end date by which we should expect the full MedSurg book to kind of be operating under the new model?

Kevin Moran:

Next question, please.

A.J. Rice:

Hi. Good morning. I might just ask, obviously, you've got a lot of things going on and seemingly having some success with your simplification and mitigation strategies. Now you have this business review committee. Are the -- and that's -- I know it's still early in getting up and running and going. Are the guardrails as to the things you're already doing to improve performance versus what the business review committee is doing pretty clear? And did I hear you right in the prepared remarks that you think a review committee will have an update at the calendar 2023 Investor Day? I assume that would be preliminary if there's anything to share them.

Operator:

Our next question comes from Charles Rhyee with Cowen.

Jason Hollar:

Sure. Yeah. In terms of Medical, it's – the underlying performance that we are anticipating for the business is really unchanged. The key item we highlighted is the simplification cost that has been wrapped into this. But the underlying business volume utilization, other performance elements are relatively unchanged. There's always puts and takes. Not a lot of new news there for really either business. In both businesses, we had a few non-recurring items, a little bit of timing in medical. But overall, not too many surprises there. As it relates to any type of product shortages, there's always some of that in any of our business. There's a few items that are being chased within the Pharma segment. Nothing that, I would call very unusual and certainly. Nothing at this stage that I would anticipate being a significant impact or really any noticeable impact for the segment for the current quarter or the fiscal year. But that's why we believe that, obviously, just sourcing in general is an incredibly important function, specifically to Generics, it's the Red Oak Sourcing is a huge driver for not just cost control, but for delivery. And certainly, there's been some strong demand for some of those products like amoxicillin that you just referenced for respiratory challenges that we're seeing some drive for in the marketplace. But again, it's something that we don't think will be either lasting or any type of impact for us. Next question, please.

Steven Valiquette:

Great. Thanks. Good morning. So you guys touched on this topic a little bit, but this quarter, we saw your largest publicly traded hospital distribution and self-manufacturing MedSurg competitor really struggle with delayed product reorders by their acute care hospital customers who chose to deplete the stockpiled items. So I know you have a different set of SKUs versus that competitor for the self-manufacturing component. But can you just confirm that you generally are able to successfully track the level of inventory sitting within your health system customers in the Medical segment and currently, we hopefully not seeing a similar inventory destocking trend within the health system customer base that could be a risk factor for the recovery as the fiscal year progresses? Thanks.

Kevin Moran:

Good morning, and welcome. Today, we will discuss Cardinal Health's Quarter and year-end fiscal 2022 results along with our outlook for fiscal year 2023. You can find today's press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Mike Kauffmann, Chief Executive Officer; Jason Hollar, Chief Financial Officer; and Chief Accounting Officer. During the call, we will be making forward-looking statements. The matters addressed in the statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in schedules attached to our press release. During the Q&A portion of today's call, we kindly ask that you please 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.

Jason Hollar:

Thanks, Mike. I really appreciate the kind words and the opportunity to work closely with you these past few years. Let me start by saying how excited I am to be taking on this new responsibility. I am grateful for the trust and the confidence the Board of Directors is placing me. I would also like to thank you, Mike, for the leadership and the many contributions to the company over the years. I hope to preserve the culture that you've helped ingrain into the fabric of our organization, and I look forward to what I know will be a smooth transition. I also want to welcome Trish English, who will be serving as our Interim Chief Financial Officer. Trish most recently served as our Chief Accounting Officer and has been a valuable member of the Cardinal Health family for over 16 years. I look forward to continuing to work with her in this new capacity while we conduct an external search for a permanent CFO. Before stepping into the details of our financial performance for the quarter, let me step back and summarize the key points this past year. Within our Pharma segment, while we experienced the effects of industry-wide inflation and incurred incremental technology investments. We grew the business 5%, consistent with both our original guidance for the year as well as our long-term growth targets. The Medical business was more significantly impacted by these inflationary dynamics, which drove a significant impact on our results. However, we have strong mitigation actions in place, including pricing and will present a plan to you today that mitigates all of the inflationary and global supply chain constraint impacts plus an additional 8% of compounded annual growth by fiscal '25. Underlying these operating results this past year was a significant focus on cash flow, which results in increased financial flexibility. We are absolutely focused on shareholder value and intend to deploy these incremental funds to additional share repurchases for fiscal '23. While we remain in a dynamic environment, I'm excited to share further details of our plans with you today, and commit to continue to provide increased [indiscernible] drivers and the key metrics underlying our performance. So let's now turn to some of the details driving our results in the fourth quarter, beginning with the Pharma segment on Slide 6. Fourth quarter revenue increased 13% to $43 billion, driven by branded pharmaceutical sales growth from existing and net new PD and specialty customers. Segment profit increased 26% to $451 million driven by generics program performance and a higher contribution from brand sales mix, partially offset by inflationary supply chain costs. As we've previously noted, this also reflects a favorable comparison due to the prior year inventory adjustments. During the quarter, our generics program, including Red Oak, saw strong performance and continued to experience consistent market dynamics. Regarding the inflationary supply chain costs, we saw impacts in areas that expectation and labor, which we expect to continue into next year. We also incurred higher cost supporting sales growth. And with ongoing progress in opioid litigation matters, we saw a decrease of approximately $15 million in opioid-related legal costs. Turning to Medical on Slide 7. Fourth quarter revenue decreased 11% to $3.8 billion due to the divestiture of the Cordis business and lower products and distribution volumes. Medical segment loss of $16 million in the fourth quarter was due to net inflationary impacts on global supply chain constraints and products and distribution. On a year-over-year basis, the favorable comparison to the prior year of $197 million PPE inventory reserve was mostly offset by the net inflationary and global supply chain constraint impacts, a lower contribution from PPE and the Cordis divestiture. During the quarter, our products and distribution business saw an approximate $100 million impact from net incremental inflation and supply chain constraints. This reflects a gross impact of approximately $125 million and approximate $25 million offset from our mitigation actions, which includes our initial wave of price increases on 5 Cardinal Health brand categories that went into effect back in March. I'll elaborate on our plans for further mitigation in fiscal '23 and beyond shortly. As mentioned, it continues to be a highly dynamic medical environment, and our Q4 results came in lower than we had previously expected. This primarily reflects overall volume softness in our products and distribution business, including a lower contribution from PPE. Stepping back, Demand for PPE has fluctuated significantly over the past couple of years. We saw lower volumes as we exited Q3 and the fourth quarter experienced further declines. We believe this primarily reflects customers' higher inventory levels and to a lesser extent, some PPE category-specific customer losses driven by supply constraints during the pandemic. We continue to have strong conviction in our overall value proposition, which includes leading brands and clinically differentiated products. For context, PPE represents approximately 15% of sales in our overall Cardinal Health brand portfolio, as you'll see on Slide 20. Moving below line. Interest and other increased by $36 million to $64 million due to a decrease in the value of our deferred compensation plan investments compared to gains in the prior year. As [indiscernible] deferred compensation gains or losses reported in interest and other are fully offsetting corporate SG&A and net neutral to our bottom line. Additionally, in the fourth quarter, a onetime write-down of an equity investment impacted EPS by $0.06 per share. The increase in other expense was partially offset by lower interest due to debt reduction actions. As indicated, we repaid the $280 million of remaining June 2022 notes at maturity. Our fourth quarter effective tax rate finished at 25.4%, approximately 3 percentage points higher than the prior year. The net result was fourth quarter EPS of $1.05, an increase of 36%, primarily reflecting the growth in pharma segment profit. Now transitioning to our consolidated results for the year. Fiscal '22 revenues increased 12% to $181 million, driven by the Pharma segment. Gross margin decreased 3% to due to the Cordis divestiture. Total company SG&A increased 1%, reflecting inflationary supply chain costs, our previously mentioned IT investments and higher costs to support sales growth, mostly offset by the Cordis divestiture and benefits from cost savings initiatives. Operating earnings decreased 12%, which primarily reflects a year-over-year headwind of approximately $300 million related to net inflationary impacts and global supply chain constraints in medical, partially offset by Pharma segment profit growth. Interest and other increased 24% to $165 million, largely due to the items affecting the fourth quarter. Of note, this came in higher than our guidance primarily due to equity investment write-down in the quarter. Our annual effective tax rate finished at 22.1%. The net result was fiscal '22 EPS of $5.06. Now turning to the balance sheet. In fiscal '22, we generated robust operating cash flow of $3.1 billion. This includes the previously defined tax refund of nearly $1 billion and favorable timing of working capital. Additionally, in fiscal '22, we made approximately $500 million in litigation payments, primarily related to opioid settlements. In July, we made our second annual payment under the national opioid settlement agreement of approximately $375 million, which will be reflected in Q1 fiscal '23 operating cash flow. We are focused on deploying capital in a balanced, disciplined and shareholder-friendly manner. This year, we invested approximately $385 million of CapEx back into the business to drive future growth, paid down approximately $850 million in debt to reduce leverage and returned $1.6 billion to shareholders through share repurchases and dividends. We ended the year with a cash position of $4.7 billion, which does reflect some timing favorability with no outstanding borrowings on our credit facilities. As for the segment's full year results, beginning with Pharma on Slide 10. Pharma revenue increased 14% to $165 billion, reflecting consistent drivers with the fourth quarter. Pharma segment profit increased 5% to $1.8 billion, driven primarily by generics program performance and an improvement in volumes compared to the prior year. This was partially offset by investments in technology enhancements and inflationary supply chain costs. To be helpful, the tailwind from improved volumes and the headwind from incremental IT investments effectively offset in fiscal '22, each approximately $80 million on a year-over-year basis. Additionally, we saw an approximate $50 million headwind from inflationary supply chain costs, primarily in the second half of the year. Moving to Medical on Slide 11. Fiscal 22 medical revenue decreased 5% to , primarily due to the divestiture of the Cordis business. To a lesser extent, lower products and distribution volumes were partially offset by growth in at-home solutions. Segment profit decreased 63% to $216 million, primarily due to the net inflationary impacts in global supply chain constraints in products and distribution. Additionally, the favorable comparison to the prior year PPE inventory reserve was offset by a lower contribution from PPE and the divestiture of the Cordis business. Now for our fiscal '23 guidance. On Slide 13, we expect earnings per share in the range of $5.05 to $5.40, which reflects the following assumptions

Lisa Gill:

I want to say best of luck to you, Mike Kaufmann, it's been great working with you all these years. And I look forward to hopefully staying in touch. And congratulations, Jason, on becoming CEO. I really want to start with -- obviously, you talked about this huge ramp getting the medical side of the business back to $650 million of profit. And Jason, you just talked about 4 different areas. I really want to just focus on the first area, and that's growing Cardinal brand products. And obviously, for someone like myself that's followed the company for a long time, has kind of ebbed and flowed as far as the focus of the company? Can you talk about, one, why now you think that you can really accelerate that? Two, I think you talked about nutritional. We've had others that have had problems in that area, right? Why do you think that, that's a good area for Cardinal to go into? And then secondly, when we think about physician preference, et cetera, what are you hearing in the market around private label product to give you some of the insights as to the opportunities that you see here specific to Cardinal brand products. So I'll stop there.

Operator:

Our next question comes from George Hill of Deutsche Bank.

Jason Hollar:

I certainly will not attempt to speak for the Board, but what I will say is that my time both here as well as elsewhere in industry, I'm very focused, very tenured on driving operational performance within the business. I have made a mark within this organization. I've been very focused on capital deployment, driving cash in the company and have made that impact. When I think about what -- why I feel like I'm the right person going forward here, we have a lot of great assets within the organization. We have a wonderful culture. We have wonderful products, leading positions, great growth areas. But with the pandemic has shown us is that we need to go back to some level of basics here in terms of the operational core and driving efficiency, driving simplification, so probably doing fewer things, but doing them better. And that focus and that attention to derisking the model and driving this profit improvement plan for the Medical business. The pharma business has been very resilient. We hit our both short- and long-term goals this year. We need to keep doing more of the same, while also continuing to grow those growth areas, of which, of course, specialty is the largest one. So we're in a very different phase there. And then with this plan today, we're really highlighting how aggressive we're going to be with our capital deployment that when we generate that cash, $3.1 billion in '22, we're going to deploy it effectively. I'm well positioned to take us through those challenges that we've been faced with and I am going to be absolutely focused on taking the next steps here.

Unidentified Analyst:

It's [indiscernible] on for A.J. I just want to echo my congrats on Jason and Mike as well. So you mentioned the various costs have been coming down within the Medical segment and understanding there is a lag between when the spot prices come down versus when it flows through your P&L. Should we take it that any further decline in the spot prices would be upside to the medical outlook for FY '23 and beyond? And then alongside that, you talked about the 3% revenue CAGR for the Cardinal Health brand products. I guess what are you assuming in terms of pricing growth moving forward and alongside that utilization?

Operator:

Moving to Michael Cherny of Bank of America.

Jason Hollar:

Yes. So when I step back and think about that plan, the area that is -- there's a couple of areas that could be impacted that have connectivity there. Probably the first one is the simplification and continued cost optimization. Those types of initiatives are wide ranging. And as we implement a particular project to reduce cost. It's a lot of cherry picking between the segments and the corporate functions, when one person has a good idea, we push those across all of them. And in some cases, we're leveraging that scale. We're doing a lot of centralization of work to standardize and offshore back-office activities, things of that nature, using digital tools that when we can invest in those types of technologies and capabilities essentially and blow that out to the whole organization. So that's certainly a piece of it. And then when we talk about the -- growing our Cardinal Health brand portfolio, while there's not a lot of crossover selling, we do have the same customers. And so those relationships, those discussions can spot into a variety of different opportunities. So that's not a huge enabler of that type of item, but it could be a component of it. And I would say that, that's probably the areas that there's the most overlap.

Elizabeth Anderson:

Best wishes, Mike and excited to where we see in your new role. As I have a question just in terms of -- you talked about, I think, on the last call that you had gotten sort of 50% of SKUs sort of at a higher you've been able to pass through higher costs there. I was wondering if you could update that because I know you said in your slides, obviously, you were going to have offset about 50% of that gross impact exiting '23, and I know there are a variety of things in there. So I was just wondering if you could update us on that.

Operator:

We now move to Steven Valiquette of Barclays.

Jason Hollar:

[Indiscernible].

Jason Hollar:

Sure. Well, yes, no, yes, okay. Got it. I think there's a couple of key points. First of all, it's very consistent with what we've done this past year and that was driven by a couple of key drivers. And I think you should think about the drivers as being similar because one of the drivers we've referenced a few times is some net new business that we referenced team in beginning in the third quarter of '22. So that would be a little bit more of a front-end loaded type of revenue benefit as we see fiscal '23. And then we've also been highlighting the strength in our large customers large book PD specialty. And we've seen some really good volume in the brand category. And so as you know, some of that larger customers and some of the brand volume doesn't always bring with it a tremendous amount of margin, but that's one of the reasons why you see very robust revenue growth and still profit growth well within the range of what we've indicated for both our short- and long-term goals. But those are the biggest drivers.

Rivka Goldwasser:

And Mike, on my very best wishes and Jason, congrats and good luck. So a couple of follow-up questions here. So just to get a sense -- and Jason, thank you for clarifying the $150 million in a headwind -- in gross headwind in the first quarter versus the $125 million. So as we think about it seems like you're -- in your guidance, right, you're assuming that the headwinds are going to get worse in the first quarter versus the run rate, the run rate? I just want to make sure that I'm thinking about this correctly, and then we'll will slowly improve throughout the year. As we think about the mitigation, I think your numbers imply about $38 million, right, in mitigation from better pricing in the first quarter. When you're saying 50%, should we assume basically double from that to $75 million. I just wanted to kind of like understand the reference of that 50%. And then an additional question on the the Cardinal brand because it seems that that's a really important part of sort of the longer-term plan. It seems that it's about 29% of revenue for the segment that comes from Cardinal Health brand. So one, how do you envision this revenue mix, what it will be by 2025? And then -- how should we think about sort of the EBIT mix? It's 29% of revenue? What percent is it of profits today?

Operator:

We now move to Eric Percher of Nephron Research. We move to our next question, Charles Rhyee of Cowen.

Jason Hollar:

Okay. So the short answer for the medical improvement plan is no, M&A is not a cornerstone of that plan. We will be looking to always augment, especially our growth businesses. So when I -- when we talk about that second point, accelerating our growth business primarily at Home Solutions, that is very much an organic investment story. We are investing in distribution capacity, that 10% growth does mean that we have some constraints and we need to invest in that to ensure that, that business can continue to grow profitably. So that is not a cornerstone. In fact, I would say maybe a little bit of the opposite. A lot of what this plan is, is very focused on the core. It's very focused on -- we have -- we just increased our CapEx guidance this year from where it's been in the past. That was hinted at and signaled last quarter where we talked about some of these capacity investments that, again, we still are relatively low risk and a good return. So it's more of that type of investment that we're focused on and that we believe is a better balance of risk and return as we drive this plan forward. We won't ever ignore it, and it could be a pillar -- or I'm sorry, it could be an enabler at some point later on, but it's not the focus and not necessary for what we're doing. As it relates to PPI, I think just one maybe I kind of talked about a lot of the pieces, but one area that is often referenced as a key driver for a lot of our cost is just oil in general. That has come down. So PPI in general, I don't pay much attention to. I do look at the price of oil at least 2, 3 times today. It does have an impact on a lot of input costs and we talk about polypropylene, polyethylene, polystylene, all these poles have some input costs that are petroleum based that does impact it. But the supply demand dynamics are so wonky right now that it's hard to see a one-for-one transition of these input costs. And I think at some point, that will come through, but we're really not seeing it that much. We are seeing lower diesel costs. So that's going in the right direction. That I would expect at some point will help with the transportation rates, but we're not necessarily seeing those elements, where it is most striking is the international freight. And that continues to be the one that is clearly running lower but it's just going to take time for that to run through our P&L. But I wouldn't call that an inflation-driven or input cost-driven point, the cost of diesel fuel for a freight as small. It's the supply and demand dynamics that we're all out of whack early on the pandemic that appear to be getting a bit more in line. That's why at this point, I believe that, that cost will maybe not keep going down at the pace of that going down, but it does feel like we're seeing more flat and down days for those costs than updates everything else, we're going to have to get more data to be able to provide additional input.

Kevin Caliendo:

Again, congrats to both you, Mike and Jason. I guess my question is going back to the Medical segment. There's a lot of execution that needs to take place between now and 2025 to hit these targets. Are you happy with the team in place? How do you enhance your probability of success here internally? Is it bringing in new people, more people? Or do you feel the team in place can do it? And the second part of that question is a lot of this is price increases, which you've talked about, how are you competitively position now when it comes to price? You talked earlier about losing some share in medical because of PPE capacity and availability earlier. How are you now positioned competitively when it comes to pricing? And are customers asking for any offsets anywhere else? I know you talked about some guarantees and the like, but I just want to understand the competitive positioning as well.

Operator:

We now take our last question today from Eric Percher of Nephron Research.

Michael Kaufmann:

Yes.

Jason Hollar:

Yes. So let me start. Whenever I step into any project let alone a role, it is always about defining we're the best opportunity to create value. Where is the opportunities, what are the challenges? And what is clear to me is that until we can get better evidence of the progress on our medical business, we're going to be challenged. And so that is why I'm so focused on this medical improvement plan, why we provided such clarity on it is that it is absolutely one of, if not my greatest focus especially in the near term. And when you think about kind of any type of process to fix anything, it has to be, first and foremost, defining what the challenge is. And I do want to step back for a moment. When you think about the challenges in the medical, I know there's been a lot of adjustments. I know there's been a lot of noise. But when you think about the vast majority of the issues, they do stem from one very common theme, it is related to the supply chain. Now I can start and highlight all the external influences with that and blame things that have happened to us, and then it's very, very true. But when you think about where we were pre-COVID, this type of business, this type of industry was extremely stable. Our volume is predictable, especially in areas like PPE to think about going up 5x, 10x in terms of demand overnight and then not having a supply chain that could adjust with that, it really impacted our ability to execute in that environment in our diverse, low-cost global footprint what went from a strength to a challenge pretty much overnight. So now we've learned from that. That's what this plan is talking about. It's building in resiliency and capacity into our system so we can be a lot more flexible. We can derisk the model while also growing profitable categories. So this is very much a cornerstone of what needs to be the focus, but it's not not just cost. It's simplification to reduce cost. It's also about driving the right time, driving organic binding high-margin volume in simplifying everything about how we operate so that we can be more nimble and we can derisk. And then, again, within both segments, there is an absolute need to continue to grow our growth businesses. What you heard me say today was more of an emphasis on specialty and on at home. Of course, we love all of our growth businesses. But what I'm really indicating here is for us to achieve the $650 million what we need are those 2 businesses to continue to grow the top line and to have a good flow-through on that incremental volume that comes with it. And with that, then we have high confidence that we'll be able to get the pieces of growth for both segments necessary to hit their longer-term objectives. So that is very much a growth-based story, but it's about, again, prioritization and being really, really focused on the core of both businesses so that these 2 growth businesses can build from there. In terms of the portfolio, it's something that I believe in continually evaluating our portfolio for all of our businesses. And the company has demonstrated this in the past. You know about China and not of health and more recently, ports. We've monetized several billion dollars over the last several years through those activities and was responsible with the capital deployment thereafter. I'm not going to attempt to define what the appropriate long-term course of action is for this business for the medical business. But under all scenarios, what's really, really clear to me that the near-term actions need to be very focused on this improvement plan and then that will set us up for the best actions thereafter.

Michael Kaufmann:

Thank you. Before Jason ends the call, I would like to say that I appreciate all of your congratulations and comments and enjoyed working with all of you. I look forward to a smooth transition with Jason, and have complete confidence in his leadership. Jason, to you.

Operator:

Thank you ladies and gentlemen that will conclude today's conference call. Thank you for your participation. You may now disconnect.

Kevin Moran:

Good morning. Today, we will discuss Cardinal Health third quarter fiscal 2022 results along with an update to our FY’22 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 Kaufmann, Chief Executive Officer, and Jason Hollar, Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliation 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 will now turn the call over to Mike.

Jason Hollar:

Thanks, Mike, and good morning, everyone. Beginning with total company results, third quarter revenue increased 14% to $45 billion driven by sales growth from existing and net new pharma customers. Total gross margin was $1.7 billion a decrease of 7% due to the elevated supply chain costs in medical and the Cordis divestiture partially offset by generic program performance. Consolidated SG&A increased 2% to $1.1 billion reflecting higher operations expenses and previously anticipated IT investments, partially offset by the Cordis divestiture in cost savings initiatives. Third quarter operating earnings decreased 21% to $545 million, primarily reflecting the elevated supply chain costs in medical. Moving below the line, interest and other increased by $8 million, which reflects one-time gains and other income in the prior year, partially offset by lower interest expense from debt reduction actions. The third quarter effective tax rate finished at 20.1%, 11 percentage points lower than the prior year due to certain discrete items affecting both periods. Average diluted shares outstanding were 277 million, 6% lower than a year ago due to share repurchases. During the quarter, we initiated a $200 million share repurchase program which was completed in April and brings our year-to-date repurchases to $1 billion. The net result for the quarter was EPS of $1.45, a decline of 5%. In the quarter, we also recorded a $474 million non-cash pre-tax goodwill impairment charge related to the medical segment, which is excluded from our non-GAAP results. This accounting charge reflects an increase in the discount rate used in our goodwill impairment analysis. Third quarter operating cash flow was a use of $490 million and we ended the quarter with a cash balance of $2.4 billion and no outstanding borrowings under our credit facilities. Looking ahead to the fourth quarter, in addition to expecting strong operating cash flow generation, we received the previously defined tax receivable of approximately $1 billion in April. Timing, including the day of the week in which any period ends, affects point in time cash flows and fiscal '22 is unfavorably affected by this dynamic. Additionally, we expect approximately $550 million in total litigation payments this year, primarily related to opioid settlements, which includes the initial payments for the national settlement already made. Now turning into segments beginning with pharma on Slide five. Revenue increased 17% to $41 billion, driven by branded pharmaceutical sales growth from existing and net new pharmaceutical distribution and specialty customers. Segment profit decreased 5% to $487 million driven by higher operations expenses and previously anticipated investments in technology enhancements, partially offset by generics program performance. During the quarter, we incurred higher costs supporting sales growth, including some initial customer onboarding costs and inflationary impacts in areas like transportation and labor. Importantly, we also completed the launch for our planned technology enhancements. As Mike mentioned, we continue to see resiliency in pharmaceutical demand and our generics program continued to experience generally consistent market dynamics including strong performance from Red Oak. Turning to medical on Slide six. Third quarter revenue decreased 7% to $3.9 billion due to the divestiture of the Cordis business and lower products and distribution volumes, which includes the impact of global supply chain constraints. Segment profit decreased 66% to $59 million, primarily due to net inflationary impacts and global supply chain constraints in products and distribution. During the quarter, our U.S. medical products and distribution business continued to experience significant inflationary impacts across the global supply chain, particularly in the areas of international and domestic transportation and commodities. Additionally, increased pressures from global supply chain constraints affected the volume of some of our higher margin Cardinal Health brand products. To a lesser extent, the third quarter decline in segment profit also reflected a lower contribution from PPE as well as the Cordis divestiture. On PPE, we saw unfavorable price cost timing in the quarter as well as lower volumes as we exited the quarter. We were encouraged, however, by the resiliency in surgical product demand related to elective procedures, which was generally consistent with recent quarters and improved from a year ago. And we continue to see strong performance from our lab business. We continue to take actions to address the inflationary cost challenges and manage through the temporary supply disruptions including pricing adjustments, cutting costs throughout the organization, and investing in our supply chain network which Mike will elaborate on momentarily. Now, transitioning to our updated fiscal '22 outlook on Slide eight. We now expect EPS in the range of $5.15 to $5.25 per share, reflecting updated expectations for medical and a few of our corporate assumptions. With the favorability seem to-date from discrete items, we now expect our annual effective tax rate to be in the range of 22% to 23%. We expect diluted weighted average shares outstanding of approximately 281 million which reflects the $1 billion in share repurchases completed to-date. And with one quarter to go, we expect CapEx of approximately $400 million. We continue to expect interest and other in the range of $140 million to $160 million. As for the segments on Slide nine. For pharma, no changes to our outlook. We continue to expect low double-digit revenue growth, mid-single digit segment profit growth, and as previously indicated a strong fourth quarter segment profit growth. With the combination of our planned technology enhancements, we will now be lapping elevated expense levels from the initial deployment a year ago, which has been a year-over-year headwind last several quarters. We are also lapping a few one-time items that we called out last year, which will create a favorable fourth quarter comparison and we expect strong underlying performance in the quarter. For medical, we now expect revenue at the low end of our previous range down mid-single digits and segment profit to be down 45% to 55% in fiscal '22, which includes a net incremental headwind of nearly $300 million due to inflationary and global supply chain constraints. Additionally, based on volume trends, the update from our previous medical outlook primarily reflects a lower contribution from PPE. Now, let me spend some time sharing a few high-level thoughts on fiscal '23 from our vantage point today, ahead of providing our usual guidance in early August. In pharma, the business is tracking consistent with our long-term targets of low to mid-single digits segment profit growth. With respect to a couple of other notable pharma puts and takes for next year, we do anticipate higher operations expenses based on recent inflationary trends, particularly in the first half of the fiscal year. Additionally, with the finalization of the global opioid settlement, we anticipate lower opioid related legal costs partially offset by higher costs for implementation of the settlement’s injunctive relief terms. Together, we expect these litigation items to be a modest net tailwind in fiscal '23. For reference, we are currently estimating opioid related legal costs of approximately $115 million in fiscal '22. We expect a further reduction in opioid related legal costs in subsequent years. In medical, we are highly focused on the inflationary impacts and global supply chain constraints affecting our U.S. medical products and distribution business. At this time, we expect a similar to modestly higher net impact from inflation and global supply chain constraints in fiscal '23 as in fiscal '22. Embedded in these are two key assumptions. First, with visibility generally limited to the first half of the year, we are assuming key cost drivers such as international freight and commodities have flattened and will begin to decrease slowly over the course of the next fiscal year, affecting our results in a one to two quarter delay. This would result in a greater absolute impact from inflation and global supply chain constraints in fiscal '23 due to the amortization of higher costs in the second half of fiscal '22. Second, we also expect a greater impact for mitigation initiatives with various waves of price increases going into effect throughout the year. In total, these two assumptions result in a similar to modestly higher net impact from inflation and global supply chain constraints as in the current year. As we exit fiscal '23, we anticipate a run rate where our pricing actions will offset approximately half of the gross impact. Though these inflationary impacts are persisting for much longer than originally anticipated, we remain committed to mitigating the effects on our medical business over time. We continue to believe the majority of these impacts will prove temporary once global supply chain pressures eventually abate or pricing will adjust accordingly. Below the line, we anticipate a year-over-year headwind in our fiscal '23 effective tax rate with the discrete favorability seen in fiscal '22 not expected to repeat. And with our strong balance sheet, we see the potential for accretive capital deployment through a similar level of share repurchases over the course of the year, supported by the $2.7 billion of authorization remaining on our existing share repurchase program expiring at the end of 2024. In summary, while there's obviously moving parts for fiscal '23, or any particular year, we continue to believe our previously announced long-term targets for our businesses and for double-digit combined EPS growth and dividend yield are achievable over normalized longer periods. With that I'll turn it back over to Mike.

Operator:

Thank you. [Operator Instructions] We'll go ahead and take our first question from Charles Rhyee with Cowen.

Jason Hollar:

Yes. This is Jason. Let me go ahead and start. There's a number of questions. Hopefully, we can catch them all. So in terms of the IT enhancements, what we mentioned at the beginning of the year, and it's still very consistent with what we've seen rollout is about $80 million of incremental costs that we saw in '22 versus '21. And we indicated that would be spread somewhat evenly over the first three quarters of the fiscal year. So you can kind of think of roughly that 1/3rd per quarter is what we've been experiencing all year. First two quarters, we had other actions that drove growth above and beyond that headwind. But that was with the inflation included in the third quarter drove that 5% reduction. As it relates to the fourth quarter, the other unusual items -- beyond that lapping so there's very little year-over-year change as relates to IT enhancements in the fourth quarter. So that headwind goes away in Q4. But we also referenced last Q4' 21, that we had some unusual items that were adversely affecting us. So that becomes a year-over-year tailwind for us this Q4. And then in addition to that, we indicated here on the call today, just before this, that we're also seeing some volume underlying operational improvements that are expected for the fourth quarter that then would also continue on at that point. As it relates to inflation, what we saw here in the third quarter was elevated, it was a little bit higher than what we had expected. It is consistent with the range of our guidance. But nonetheless, it's an item that does impact our Q3 and we're expecting it to impact Q4. And then, carry over our comments for the first half of fiscal '23 are just presuming that costs will continue on at a similar elevated level and be a year-over-year headwind such that by the time we get to the second half of fiscal '23. It would then lap it at that point in time. Think I captured all your questions there.

Eric Percher:

Thank you. I recognize you had some unprecedented headwinds, but throughout the guidance has appeared to assume stabilization or improvement. And so we've seen step downs of 100 to 125, 150, 175 and now 300. It sounds like for '23, you're trying to let us know that we're going to be lapping and it doesn't get better, though there are actions being taken. Can you give us a feel for what actions you would take if it turns out that things continue to get worse? And have you thought about the profitability of elements of the business what might need to change or even whether the business might be better positioned for rebound if it's a multi-year rebound under someone else's ownership?

Operator:

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

Jason Hollar:

Yes. So let me start with that. This is Jason. And the 23 elements that we are providing here for medical entirely focused on the inflation component, that is clearly going to be the most significant item that we are focused on for both the current year and what we know will impact us this next year. We have not -- this is not a full comprehensive guidance. And this is not meant to be complete with all the moving pieces. As Mike indicated, we're very focused on all those growth businesses that he mentioned, there's going to be other operational elements that we'll be working through. And that will provide more color on. As it relates to inflation that $300 million impact this year, is by far the most significant item. And when we think about our long-term targets, the reason we use the phrase normalized is items like that $300 million do need to be adjusted. But as it relates to other moving pieces for fiscal '23, that will come at our normal guidance update next quarter.

Lisa Gill:

Hi. Thanks very much. Good morning. Staying on the medical supply side of the business, I just want to better understand just a couple of things. Mike, you talked about the opportunity now to mitigate some of this by taking some price increases. Is there any reason I mean; we've been talking about all of these headwinds and pressures for several quarters now? Is there any reason why one, you haven't been able to do that historically? And why now you'll be able to do it. And then secondly, can you maybe just talk about the competitive landscape? Is there anything in the competitive landscape that has prohibited you from taking mitigating price increases during this time?

Operator:

And our next question comes from Ricky Goldwasser with Morgan Stanley.

Mike Kaufmann:

Thanks for the question. Appreciate it. Couple of things. As we've said before, we do see some synergies between M&P. We go to market together with our GPO selling teams. We share corporate overhead together. We work on our innovation and technology group. Together, we work together on back-office types of things. Clearly, acute care customers are common to both segments. We don't see as much synergy as between the large distribution businesses, obviously, because we maintained separate warehouses. And there's different needs for the customers there in terms of specific go-to-market strategies. But we do see it a lot with our complementary businesses. Our at-home business works with our pharma distribution business, our OptiFreight business works with them. So we do see working together there. So that being said, we do see opportunities, but as I've always said, we will always look at our portfolio. We will always look to see what is the best opportunity to create shareholder value. And so at this point in time, we feel good about where we are and where we're headed. But there's nothing off the table when it comes to looking forward in order to create value for shareholders.

Elizabeth Anderson:

Hi, guys, thanks so much for the question. I was wondering if you could talk a little bit more about the medical utilization assumptions embedded in sort of 4Q and then your comments regarding 2023, both maybe on the surgical side and at-home volumes? Thanks.

Operator:

And we'll take our next question from George Hill with Deutsche Bank.

Jason Hollar:

Yes. The area I can probably be a little more helpful is on the timing associated with that the impact of that inflation from a year-over-year perspective will be more unfavorable in the first half of the year. If you think about what we had in fiscal '22, Q1 had much less of an impact actually hitting the P&L, we had seen the cost start to come -- start to build in terms of what was procured, but what actually hit the P&L escalated much more greatly in the second quarter and as increased from there in Q3 and Q4. So that comparison from a year-over-year perspective will be unfavorable for those elements, all things being equal. But given the magnitude of what we're talking about, I would expect that to be one of the more significant items, especially in Q1. And then, as we get to the back half of the year, as I indicated in my comments and Mike reiterated a few moments ago, with the expectation that we are able to offset about half of the run rate at the end of the fiscal year as we jump into '24, that would imply especially over the second half of the year, that would be trending more favorably, and then we would have a much more of a tailwind associated with those items. There are always other moving items within each year in our guidance. As you go back and look at all of our commentary this year, there have not been too many significant items referenced other than inflation. So this one singular item is going to be the key driver of the year-over-year results for the medical business next year. There will be other color, of course back to the growth businesses and other changes in underlying assumptions. But this will be driving the underlying performance for the segments very significantly from a year-over-year perspective. Again, in a general similar magnitude, perhaps, a modest headwind associated with it, based upon those underlying assumptions.

AJ Rice:

Hi, everybody. Thanks. Just on the medical, I don't think you've given in a while, how much of the revenues there is Cardinal branded products at this point, roughly. And then, as you're talking about the offset that will come from pricing -- your price increases, offsetting about 50% by the end of next year of fiscal year. Are there any other things that are meaningful that could be impactful? I mean, I don't know diversification of sourcing, maybe toggling back and forth in the Cardinal brand and products. Anything else beyond just pushing through price increases? Or are we basically waiting for the backdrop to improve from a macro perspective?

Operator:

We will take our next question from Eric Coldwell with Baird.

Jason Hollar:

Yes. The primary item that we referenced last Q4 was inventory adjustments. We did not provide any specific number; I think we might have referenced modest. And so it was a reasonable number that you can look at the growth rates there and how that was impacted to provide a range. The key again, was that we no longer have the headwinds of that 20 million, 30 million per quarter that we've seen over the first three quarters related to the IT enhancements. And then, we have had some incremental volume through, we referenced some net new customer volume within the pharma business that started to ramp up in the third quarter and is more significant in the fourth quarter. And those will be the most significant items that drive at year-over-year.

Steven Valiquette:

Great thanks. So regarding the elevated operating expenses in the pharma segment exiting '22, and into the first half of fiscal '23. I guess it's still not clear, which elevated cost categories you're able to pass through to customers, versus which ones you're absorbing in your own margins, when thinking about fuel costs, other transportation costs, higher labor expense, et cetera. So I guess just to confirm in which cost categories, are you seeing the greatest increase in the operating expenses that you're not able to pass through to the pharma customers? Thanks.

Jason Hollar:

And just to be really clear in this point. We're not talking about any type of product cost inflation that's flowing through pharma business that is very much captured in the pass through.

Mike Kaufmann:

Just want to thank everybody for their time to be on the call today and I appreciate all the questions. I will just reiterate that we are taking action to mitigate these inflationary impacts and global supply chain constraints. And we're focused on driving improved performance across all of our businesses. Take care and I hope to talk to all of you soon. Bye-bye.

Kevin Moran:

Good morning and welcome. Today, we will discuss Cardinal Health Second Quarter Fiscal 2022 results along with an update to our FY’22 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 Kaufmann, Chief Executive Officer, and Jason Hollar, Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a 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 reconciliation 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 will now turn the call over to Mike.

Jason Hollar:

Thanks, Mike, and good morning, everyone. Beginning with total company results, second quarter revenue increased 9% to $45 billion, driven by sales growth from existing pharma customers. Total gross margin was $1.6 billion, a decrease of 9%, primarily due to the Cordis divestiture and elevated supply chain costs in Medical. Consolidated SG&A was flat to the prior year at $1.2 billion, as the Cordis divestiture and benefits from cost savings initiatives offset IT investments and higher operations expenses. Second quarter operating earnings were $467 million. Outside of the incremental inflationary impacts of Medical, these results were generally in line with our expectations. Moving below line, interest and other decreased by 30% to $24 million, driven primarily by lower interest expense from debt reduction actions. The second 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 second quarter rate this year included some timing favorability. Average diluted shares outstanding were $281 million, 5% lower than the prior year due to share repurchases. Of note, we initiated a $300 million share repurchase program in the quarter, which was recently completed and brings our total year-to-date repurchases to $800 million. The net result for the quarter was EPS of $1.27. Second quarter operating cash flow was strong at $1.2 billion. As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We ended the quarter with a cash balance of $3.2 billion, and no outstanding borrowings under our credit facilities. In the quarter, we also recorded a $1.3 billion 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’ll discuss shortly. Now turning to segments, beginning with Pharma on Slide 5. Revenue increased 11% to $41 billion, driven primarily by branded pharmaceutical sales growth from large pharmaceutical distribution and specialty customers. Segment profit increased 3% to $426 million, driven by generics program performance. This was partially offset by our previously discussed investments and technology enhancements and higher operations expenses, including cost 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 generic 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. Turning to Medical on Slide 6. Second quarter revenue decreased 5% to $4.1 billion, primarily due to the divestiture of the Cordis business. Segment profit decreased 79% to $50 million, 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. 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’re taking to address these macro challenges and drive performance in our core Medical business. With respect to COVID-19 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 and various geographies, demand for surgical products related to elective procedures was comparable to both the first quarter and prior year. Now transitioning to our updated fiscal 2022 outlook on Slide 8. We now expect EPS in the range of $5.15 to $5.50 per share, primarily reflecting our updated expectations for Medical. We also now expect an annual effective tax rate in the range of 23% to 24.5% and interest and other in the range of $140 million to $160 million, with the improvement in I&O, including deferred compensation favorability which, as a reminder, is fully offset above the line in corporate SG&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 digit and segment profit to be down 30% to 45%. Consistent with the financial update provided a few weeks ago, we expect increased inflationary impacts on global supply chain constraints as well as lower than expected pricing offsets to result in an estimated incremental $150 million to $175 million headwind to Medical segment profits for the full year. This, in addition to our November 9 update regarding the pressures and international freight and polypropylene, now reflects a total net incremental headwind of approximately $250 million to $300 million to Medical in fiscal 2022. While these impacts are 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’re committed to mitigating the impacts of inflationary pressures and will 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 in the back half to be heavily weighted to the fourth quarter due to the lapping of some prior year items including higher costs for the deployment of IT investments and the general sequencing of our growth initiatives. In Medical, we continue to expect an unfavorable year-over-year impacts due to timing of selling higher cost PPE in the second half of fiscal 2022, 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 fourth quarter. Finally to close, a few reminders on the capital deployment. We continue to expect the pay down to approximate $280 million of remaining June 2022 notes at maturity and continue to expect approximately $1 billion 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 billion share repurchase authorization. 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’re targeting. With that I’ll turn it back over to Mike.

Operator:

Thank you. [Operator Instructions] And we will go ahead and take our first question from Charles Rhyee with Cowen & Company. Please go ahead.

Jason Hollar:

Sure. I'll definitely start here, it’s Jason, and then I'm sure Michael has some thoughts as well. But generally speaking, the vast majority of these costs that we've outlined are product-related cost or cost to get the products shipped to 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 one to two-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&L. And that's I think fairly typical for the - what we saw with PPE as well last year in terms of that type of cadence. Now there is some of this, a smaller portion is related to the volume impact of the supply chain constraints, so that's obviously going to be at the time that volume freeze up. There's a small part that the period cost, but it's much less significant. Again, the biggest buckets when you step back and think about the $250 million to $300 million, that's an aggregate that we're talking about, is that international freight is the biggest piece and it's very much inventoried as I just described. And then the second largest would be the general commodities we talked about, commodities like oil-based commodities like polypropylene, that is the big driver that again those would all be inventoried cost and then flowing through. As it relates to the overall impacts 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 the 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 than on an absolute basis this quarter, but it's more significant, the comparison to the favorability of last year. And that's about $60 million in this quarter. 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 million 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.

Operator:

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

Mike Kaufmann:

Yes, that's a great question. We've now put that out there. I will give you a couple of things. Obviously at the inflation goes away and as we said, we believe this 250, the 300 that the vast majority of that is temporary. So you can add that back to our margin rates as the biggest driver. Second 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 in a positive way. We're getting after expenses, that's going to drive our margins to for the segment. And we're growing our growth business, which do have higher margin. So all of our key initiatives not only will drive bottom line, but they all should drive margin rates up significantly. But at this point in time, we're not putting target margin rate out there that we're going after.

Eric Percher:

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 may be built into the year or your view on duration? And I separate kind of freight commodity and then the sales volume and duration on how long you pass 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 trend pressures?

Operator:

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

Mike Kaufmann:

Jason will talk about the tax rate then I can talk about the margin.

Mike Kaufmann:

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 in 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. So again I want to say it's margined 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 gown, that does give us more ability to sell our own product which is we drive mix that would increase our overall margin rate.

Jailendra Singh:

Thank you, and good morning. A run up. With respect to the third, 250 million to the 300 million impact in medical segment, can you be a little bit more specific on how much impact did you see in fiscal first half and how much is expected in second half. And a follow-up to an earlier question, how should be modeled the split between 3Q and 4Q on the remaining impact. I'm trying to better understand if all these initiatives you're putting in place are more focused on positioning the company in better next time you see these kind of pressure or do you think there's a possibility these initiatives result in some near term offsets and are you capturing those in your outlook?

Mike Kaufmann:

Yes. Things I would add be helpful here is 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. Also as we mention, we are working on our commercial contracting strategies. And so, as we work through those contracts, our goal is to give us more flexibility. So that in the future if there is another instance like this, we are able to react a quicker and address our pricing and work with our partners in a very transparent and productive way because our customers are obviously some of the thing 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 do that.

Operator:

We will then and move on to your next question from Michael Cherny with Bank of America. Please go ahead.

Mike Kaufmann:

That's a great question. Yes, we're -- 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. That these are things that we're going to have to work together. Key things that we've learned to those discussions that we'll be helpful as one, our willingness to be transparent with them so that we understand as costs come up why are they going up and 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 still a lot of work to do as we work on changing our commercial strategies.

Elizabeth Anderson:

Hi guys, thanks so much for the question. I was wondering if you could comment on as we sort of have gone through a month in the new quarter. Just now you're seeing sort of volumes come back particularly on the surgical side and also on to the home care just so sort of we think about the cadence for that going through the back half of the year?

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 Kaufmann for closing remarks.

Operator:

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

Kevin Moran :

Good morning and welcome. Today we will discuss Cardinal Health First Quarter Fiscal 2022 results. You can find today's press release and presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Mike Kaufmann, Chief Executive Officer, and Jason Hollar, Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in these statements are subject to the risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statements slide at the beginning of our presentation for a full description of these risks and uncertainties. Please note that during our discussion today, our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliation 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 will now turn the call over to Mike.

Jason Hollar:

Thanks Mike and good morning everyone. I will review our first-quarter results and updated expectations for fiscal '22 before closing with some comments on capital deployment. Beginning with total Company results, first quarter revenue increased 13% to $44 billion driven by sales growth from existing customers. Total gross margin decreased 4% to $1.6 billion driven by the Cordis divestiture and the net impact of elevated supply chain costs in Medical. As a reminder, the sale of Cordis was completed in August second and impacted the quarter's results by approximately two months. SG&A increased 1% reflecting information technology investments in higher costs to support sales growth, partially offset by the Cordis divestiture and benefits from cost savings initiatives. Overall, first quarter operating earnings track in line with our expectations, down 15%. Moving below the line, interest and other decreased by $2 million driven primarily by lower interest expense from continued debt reduction actions. During the first quarter, we exercised a make-whole call provision to redeem $572 million with outstanding June 2022, debt maturities. We continue to expect to repay the approximately $280 million of remaining June 2022 notes upon maturity. Our first quarter effective tax rate was approximately 24%. Average diluted shares outstanding were 289 million, about 4 million shares fewer than the prior year. This reflects prior year share repurchases, as well as the $500 million share repurchase program initiated in the first quarter and recently completed. The net result for the quarter was EPS of $1.29. We ended the first quarter with a cash balance of $2.5 billion and no outstanding borrowings under our credit facilities. This cash balance also reflects our first annual settlement payment into escrow under the proposed opioid settlement agreement. Now, turning to the segments beginning with Pharma on Slide 5. Revenue increased 13% to $40 billion, driven primarily by branded pharmaceutical sales growth from large Pharmaceutical Distribution and Specialty customers. Segment profit grew 1% to $406 million, which reflects an improvement in volumes compared to the prior year quarter, which was adversely impacted by COVID-19. This was largely offset by investments in information technology enhancements. As a reminder, last quarter we began deploying new technology platforms across our Pharmaceutical Distribution business as a part of a multi-year journey to enhance our IT infrastructure. This rollout is tracking according to plan, and we continue to expect incremental implementation and depreciation costs through the first 3 quarters of fiscal '22. As Mike mentioned, during the quarter, we saw broad-based sequential improvement in pharmaceutical demand, including generics. We continue to expect a recovery in generic volumes to pre-Covid levels by the end of the calendar year. Outside the volumes, our generics program continue to experience generally consistent market dynamics along with strong performance from Red Oak. And during the quarter, Pharma saw double-digit contributions from our growth businesses, specialty, nuclear, and outcomes. Transitioning to the Medical segment on Slide 6, Medical revenue increased 5% to $4.1 billion driven primarily by PPE sales, partially offset by the Cordis divestiture. Segment profit decreased 46% to $123 million, primarily due to elevated supply chain costs. To a lesser extent, this also reflects the impact of the Cordis divestiture, as well as net favorability in the prior year attributed to COVID-19. As Mike mentioned, Medical segment profit was negatively impacted by increased product costs due to significant inflationary pressures in our global supply chain, particularly in the areas of commodities and international freight. In commodities, we have seen spikes in some key resins, such as polypropylene, that are inputs into our self-manufactured and source products, with recent index prices nearly double where they were last year. And with international freight, we're seeing ocean container costs at roughly 8 to 10 times pre -COVID levels. We believe the majority of these headwinds are temporary, but we do not expect them to abate this fiscal year. We are taking action, including through pricing and aggressive cost management. I will discuss these impacts to our full-year medical outlook look shortly. To wrap up the quarter, despite some impact from the Delta variant on elective procedure volumes, overall, our customers continue to manage effectively and total elective volumes exited the quarter near 95% of pre-Covid levels. Additionally, lab testing volumes remained significantly elevated above pre-Covid levels, but was not a material driver to the quarter due to the strong performance in the prior year. Next on slide eight, a few updates to our fiscal 22 outlook. We are reiterating our EPS guidance range of $5.60 to $5.90 per share. This reflects updated expectations for the Medical segment, as well as lower ranges for our tax rate and share count. We now expect our annual effective tax rate in the range of 23% to 25%. We also now expect diluted weighted average shares outstanding in the range of 280 million to 282 million. As for the segment outlooks on Slide 9, first we are adjusting our Pharma revenue outlook to low double-digit growth to reflect the strong branded pharmaceutical sales growth that we're seeing from large customers. For medical, we now expect fiscal '22 segment profit to be down mid-single to low double-digits. This change is driven by the significant increases in supply chain costs inflation that I previously discussed, which is expected to result in an incremental net headwind of approximately $100 to $125 million on the year. Given the anticipated timing of realizing these cost increases and our mitigating actions, as well as the timing of selling higher cost PPE, we expect a sequential decline in medical segment [Indiscernible] Stepping back, the only large operational item that we see meaningfully different today compared to our original fiscal '22 guidance is the incremental impact of elevated supply chain costs [Indiscernible] medical. Notably, we do not anticipate any material net impact in Pharma from inflationary supply chain costs. And as noted last quarter, we still expect the cadence of our EPS guidance to be significantly back-half weighted. Now to close, an update on capital deployment. We are focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner, and we'll continue to allocate capital through the lens of our priorities, which are unchanged. We have been on a journey to improve our balance sheet and our portfolio, and have made tremendous progress. As we look forward, we see our debt paydown beginning to moderate, which will provide an increased ability to be more opportunistic with our return of capital to shareholders. On that note, 2 important updates. Our board recently approved a new three-year authorization to repurchase up to an additional $3 billion of our common stock, expiring at the end of calendar year 2024. And we now expect approximately $1 billion of share repurchases in fiscal 22, which includes the $500 million of share repurchases executed to date. We believe that capital deployment, along with the future growth that we expect in both our segments, will be a key driver to the double-digit combined EPS growth and dividend yield that we're targeting in the long term. With that, turn it back over to Mike.

Operator:

Thank you [Indiscernible] [Operator Instructions]. We'll pause for a moment to assemble the queue. And our first question will come from Lisa Gill with JPMorgan, please go ahead.

Mike Kaufmann :

Thanks, Lisa. Thanks for the question. Tough questions to answer, because these aren't things we have historically given. Obviously I can say this. We believe there is plenty of room to grow. Some of our accounts were significantly penetrated in and others obviously were less penetrated in. So we do have good target by account that we're going after. So we think there's plenty of opportunity in there. It's one of the key reasons we believe in our longer-term guidance for Medical is the fact that we can do that. As far as margin rates go, generally, they are much more higher as a percentage and dollars and national brand. There are times and certain preferred brand programs, which is why we have them that we do prefer national brand. But in general, as a rule of thumb, our margin rates are much more significant on our Cardinal sourced or Cardinal manufactured products. And then lastly around Cordis, we're always looking at our entire portfolio of businesses to make sure we have the right type of businesses where we are positioned to win. There's nothing that sticks out to me in terms of a certain product category or that, but we are, as I mentioned in my prepared remarks that we are exiting 36 countries. So not only do we look at products, we look at products by country and countries, and where we don't believe we have significant growth opportunity, whether it might be too much risk versus benefit, etc. We have made real conscious decisions to aggressively manage the number of countries and which is why we are exiting 36 countries to help simplify the model.

Charles Rhyee :

Yeah. Thanks for taking the question. Mike and Jason, I want to just talk a little bit about the long-term growth targets a little bit here. I guess first is when we're starting the jump off point for these -- for the earnings and earnings growth, are you starting from fiscal '22. And is that a 5-year target that we should be thinking about or are we jumping off from fiscal '21 as the baseline year? And then secondly, within that, can you just remind us again, what the -- obviously the earnings this year are back half-way -- just remind us what the tailwinds that we should be considering as we build our model for the remainder of this fiscal year. And then lastly, those higher freight and shipping costs, do you assume those go away after this year as we think about it in relation to the long-term targets? Thanks.

Operator:

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

Mike Kaufmann :

Yeah. Thanks for the question. So let me see if I could help. First of all, we as you know, called out in our fourth quarter of last year that we did expect elevated supply chain costs. So in our guidance for this year for the medical segment, we already assumed a certain amount of elevated supply chain costs, some of which we have plans already to offset through cost reductions, pricing actions, and those types of things, and that was originally built-in. What we saw during the quarter, particularly as the quarter went on, was a significant increase in those supply chain costs, most notably in international freight, high containers that we talked about, as well as commodities. And those we feel will create an incremental $100 to a $125 million of costs for us. Roughly, I would say that $100 to a $125 is split relatively evenly between the impact of commodities and the impact of freight costs. So they were both very, very significant and we saw other minor ones in other areas, but those were the really 2 big ones, both of which we believe are temporary because 1. as Jason said earlier, they are at all-time highs for the most part, significantly higher than where they were and we believe that over time, the market will adjust and those will be able to come back down. So what are we doing about that? That is a net number, the $100 to $125 obviously since we called that out as the adjustments of Medical guidance, is that we are getting after it through pricing actions, passing some of it through. It's hard to really talk about exactly which once you can pass through or not. The market is very complicated. There are contracts that we have to work through. We have to work with our partners, both the hospitals and the GPOs. We have to understand the supply and demand dynamics of each item in the environment. And so we are working through and understanding all of those factors but there is some additional pricing action built into that number. And then obviously since we maintain guidance for the entire Company, we are taking aggressive cost actions across the Company. We are leveraging our improved balance sheet. And we're also focusing on our growth businesses, and pushing our teams to do more faster there. So those are some -- I hope some helpful comments.

Operator:

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

Jason Hollar :

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

Operator:

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

Mike Kaufmann :

Yeah. I really appreciate the question. It's a really good one. So let me step back and hit a couple of different pieces, and I'll finish with your question on medical, but I'll take a shot here to emphasize a few others. So there's really, I would say, 3 obviously components to our long-term target, which our long-term target we're talking about is having a double-digit combined EPS growth and dividend yield on averages as Jason mentioned. In Pharma, the -- to your point, we don't really see those fluctuations in commodities and costs affecting their business generally, because if it does, it generally happens in the form of the drugs having increases, which in that model, are able to be passed on and work through the model. And so our goal of low single-digit to mid-single-digit growth in Pharma is really focused on strengthening that [Indiscernible] balance, getting that right mix of generics, making sure we're managing the balancing through of our margin initiatives and all that as well as then driving our growth businesses, specialty nuclear in out comes, and we gave some color on those. Hopefully, you found helpful and exciting for instance nuclear doubling in the next five-years especially, continuing and outcomes continuing with double-digit growth. We believe the combination of getting that PD business stabilize, which we're seeing and then seeing the growth there is really what's going to drive that. And then of course we mentioned in the use of capital being able to having our debt lower commitment to our dividend, and then the share repurchases. On medical as you mentioned, it's a couple of different things that simplify our operating model, focusing on driving mix and filling our growth businesses. I won't go into those details because we did in the comments. But to your question rollout kind of changes can we make that help. It's really one of the things we are working on with customers right now is how do we change our contracts with our customers to give us more flexibility when there is sudden significant changes in the supply chain, that there is some ability to raise price. Our discussions with our customer -- our customers are being very transparent. We want to be able to make sure that if we're able to do that, we're very willing to tie those things -- indexes and things so they understand that as they come back down. We're not -- we're going to pass lower-cost back on to them, because we don't want to look at this as a necessarily a chance to improve our margins. We'd like to do that through driving mix and launching more products, not on the backs of our customers during a supply chain. So we are working with them to create contracting methods that will allow us to be able to pass those on, as well as help them understand what are the metrics we will do to be able to know for them when they're changed the other direction too.

AdamHeussner:

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

Operator:

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

Mike Kaufmann :

Yeah. The -- there was a little bit of a reduction in that base -- in that level of elective procedures in the first quarter. We started the quarter at close to pre -COVID levels. And as we indicated, we exited in the back at about 95%. And we think that's primarily attributed to the Delta variant. So we see that trending in the right direction. And with the pace of the virus since then, we feel that will continue to improve. And importantly, what we saw in the quarter is we saw an improvement in our Lab business that effectively offset that modest deterioration in the amount of elective procedures. So what we're seeing right now is that those two items tend to generally offset both good and bad depending upon the pace of the virus. So it's nothing significant that we saw in the quarter and as a result, we don't anticipate there being wild fluctuations going forward. Next question.

Stuart Hill:

Good morning, guys and this is the second time this earnings season has been [Indiscernible] Jason and Mike, just a quick question on the long-term guide, which is, over the long term, how do you think about the underlying operating earnings growth contribution versus the capital deployment or inorganic growth contribution?

Operator:

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

Jason Hollar :

Sure. Good morning, Ricky. This is Jason. I'll start. As we talked about our long-term target, it's not expected or intended to be each and every year. There's a reason that we do a highlight that is an average over that period of time. So we're not providing fiscal '23 guidance with the statement. With that said, we think that there are over these longer periods of time that these would be the primary drivers and expectations we would have for our businesses. And how you described at about the normalized level as an example that 100 to 125 five were -- we indicated that we anticipate these costs remain elevated for the balance of fiscal '22, we're not taking a position at this point as to how much, if any, carries over into fiscal '23, that is a terrific example of an important element of fiscal '23 guidance that we will provide in the future that is not at this point something that we feel comfortable being able to identify. And then your question about labor is a great one. We did not call it out because it is very consistent with what we had last quarter. So while labor, inflation, and those pressures are very real for us, like the whole industry, we are not seeing anything new and unique this quarter versus last quarter, and so we're not adding in any additional costs for that. But I would also highlight that even what was included in the original guidance was not nearly as substantial as the cost that we're referencing for and what was included before for commodities and international freight. Those are clearly the most significant items that drive that fluctuation, and items like labor as well as more domestic related costs such as domestic transportation and other fuel are all relatively low compared to those other 2 primary items, the international freight and commodities.

Mike Kaufmann:

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

Kevin Moran:

Good morning and welcome. Today, we will discuss Cardinal Health's 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 Web site 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 these 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. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedule 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.

Jason Hollar:

Thanks, Mike, and 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 six, 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 fiscal '20 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 in renewals was in line with our expectations, and generally consistent with prior quarters. However, there were some other items, including inventory adjustments and opioid-related legal costs that are 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 results 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 '22. As we highlighted last quarter, we continued to experience softer volumes in certain therapeutic classes within our generics program. Our generics program continue to see generally consistent market dynamics. With respect to other product types, including brand, specialty, and consume health, we largely saw volumes at or above pre-pandemic levels during the fourth quarter. 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 elected 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 elected procedure volumes. Additionally, benefits from cost savings initiatives were offset by elevated supply chain costs. During the quarter, we were encouraged to see elected 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. 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 turn your attention 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. Including COVID-19 operating earnings would have grown in the low-single digits in fiscal 2021. Moving below line, interest and other decreased 44% to $133 million driven by multiple items, including lower interest expense from debt reduction actions and increasing the value of our deferred compensation plan and one-time investment gains. As a reminder, deferred compensation gains or losses reported an interest in 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 continued to operate with high networking 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. As a reminder, the day of the week in which the quarter ends effects point in time cash flows. We continued to deploy capital according to our priorities, investing $400 million back into the business and CapEx to drive organic growth, strengthening our balance sheet through approximately $550 million in debt pay down, which occurred primarily in the fourth quarter and returning nearly $800 million to shareholders through dividends and share repurchases. As for the segments full-year results, beginning with Pharma on slide 10, Pharma revenue increased 6% to $146 million 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 fiscal 2021. Turning to Medical on slide 11, 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. Additionally, the team delivered strong cost savings with putting 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. While our fiscal 2021 results fell short of our expectations. The underline growth we saw in both segments, excluding COVID-19 is this competence as we move into next year and the pandemics 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 to $5.90. This reflects incremental technology investments of approximately $120 million to drive growth in efficiencies across the enterprise, the Cordis divestiture and other assumptions by we will detail momentarily. We expect interest in other in the range of $150 million to $180 million. We anticipate continued reduction in interest expense with the increase or the prior year, primarily result of the fiscal 2021 capability in deferred compensation, not expected to repeat. We're assuming a non-GAAP effective tax rate in the range of 23.5% to 25.5%. We expect alluded weighted average shares outstanding in the range of $287 million to $292 million and CapEx of $400 million to $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. Adjusting for the COVID-19 related impacts and 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 and 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 '21 with continued left dollar contribution each year. And we expect opioid related legal costs of approximately $125 million, an increase of $10 million versus fiscal '21. For Medical on slide 15, we expect revenue to be approximately flat in fiscal '22, primarily due to the prior year COVID-19 comparison with low double-digits segment profit growth. 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 modern headwinds in fiscal '22 related to timing of selling higher costs PPE products and lower lab testing utilization versus the prior year. And we anticipate a year-over-year comparison benefit related to the PPE inventory reserve. Outside of COVID-19, we expect an approximate $80 million impact segment profit due to the Cordis divestiture. Note, the anticipated reported impact for fiscal '22 is higher than previously communicated, primarily due to the exchange rate capability and other operating improvements within the business in the prior year. Additionally, we expected investment 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 fiscal '22. Finally, as seen in the fourth quarter, we expect elevated supply chain costs to persist, particularly in the first-half of the year. 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. Now a few additional comments on the expected cadence next year, we expect profit growth to be significantly back halfway to 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 '22 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 '21, which was of a similar magnitude. Throughout 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 paid down, which is expected to offset the earnings dilution on a pro forma basis. We expect share repurchases in the range of $500 million to $1 billion in fiscal '22. In addition, we expect total debt pay down of approximately $850 million reflecting the completion of the remaining June 2022 dead tower at or before maturity. With that, I'll now turn it over to Mike.

Operator:

Thank you. [Operator Instructions] And our first question will come from Michael Cherny with Bank of America. Please go ahead.

Mike Kaufmann:

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

Operator:

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

Mike Kaufmann:

Yes, 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 right now, where we have a comprehensive settlement out there. But it does have a few more steps left in it. So, 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. And so, we do have some time left on that to make sure we understand exactly with clarity where that's going to be. But we're pleased with where we are as far as an initial step of finally getting something out there for people to consider. And then let me now turn it over to Jason to go into a little bit more the other detail that you asked about.

Operator:

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

Jason Hollar:

Sure. Yes, so I'll go and start it and -- so, as Mike mentioned, the key thing here is there's been 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 time. And that happened while there was; obviously, increasing demand, higher prices, and longer than normal types of supply chains. And then we step back, at every quarter we step back and do our analysis and determine what the net realizable value that is, and then make any adjustments that may be necessary. So, as Mike highlighted, there were some highly commoditized products, so [indiscernible] is a subset of our PPE, that think of it as those products that would have more volatile type of pricing. We saw that move more dramatically over the period. And 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. And again, we're not getting into all the details product by product, but it was that type of product that had a little bit of the value add, and therefore as 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?

Kevin Moran:

Next question, please.

Ricky Goldwasser:

Yes, 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 into guidance, so specifically, you talked about the customer renewal, seems like it's CVS, can you maybe help us quantify what the impact is in 2022, and also is there any other renewals that we should be considering in the next 12 to 18 months? And then, 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 resource of investments to support future growth?

Jason Hollar:

Yes. It's 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. And then we have the year-over-year COVID benefit that I mentioned would be a key part of that. But as Mike mentioned that the customer renewals is not something that we would anticipate to be significantly different year-over-year. And then your question regarding investments, those investments are next year of -- we've spent quite heavily over the last couple of several years on the capital side of getting these IT systems in place. We are finalizing a multi-year journey now, and are starting to depreciate those assets. So there will be elevated appreciation that of course is more fixed in nature, but there's also a component of the final testing and rollout launch of the system tends to be more expensive versus capital. And so, as we're riding that roll out stage that expense will be elevated. And that far we would expect to reduce longer term certainly beyond fiscal '22, but for the balance of this year, we would expect it to be elevated and then thereafter some portion of that will come down later on.

Operator:

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

Mike Kaufmann:

Yes, thanks for the question. So, a couple things on that, we did see some sequential growth from Q3 to Q4 on generic volumes. So 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. So again, expect them to be back to pre-COVID levels by the end of the year, but 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 should back then.

Operator:

And next we'll hear from Steven Valiquette with Barclays. Please go ahead.

Kevin Moran:

Mr. Valiquette?

Steven Valiquette:

Yes. So I knew at some point it would happen. I would get paying to ask two questions on two calls at the same time. That just happened. So, I guess I'm curious to -- curious to if you could provide more color on the elevated supply chain costs, you mentioned for the Medical segment and 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 the international as well, in addition to some other color, just that mechanically what's happening there and that's a sale of Cordis alleviate this in any way into a fiscal 2022. Thanks.

Operator:

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

Jason Hollar:

Sure. Yes, I would say it's very much continuation of what we've done to date, as you certainly recall our initial target was the $500 million and we've come close to accomplishing that after the -- just the first three years. And that was in varied areas everywhere from manufacturing, our footprint worked there to our distribution work all the way up to our functional areas. As we go forward, what we're seeing this next stage is the ability to go from more of the transactional first order benefits of like 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. That's a -- that's an enabler for us to continue to go after additional opportunities there and then just continue on and all fronts given that we've got good momentum in place already for the existing initiatives.

Kevin Moran:

Next question please.

Lisa Gill:

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 profits growth over the longer term, and where are our specific opportunity that you see to maybe further accelerate that growth beyond 2022 at that'd be kind of my first question, and do things like specialty and nuclear that you talk about returning to double-digit. I know they're on the smaller side. Did they help to accelerate that, that low-single digit to mid-single digit normalization? Just any drivers or help you can get around that on a longer-term basis.

Kevin Moran:

Next question please.

George Hill:

Hey, good morning, guys, and 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? And then number two, you guys called out contingent brand inflation in the pressure -- I'm sorry, 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 profits exposed to our brand price inflation?

Operator:

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

Mike Kaufmann:

Yes. Thanks for the question. So you're right. And so the total number that is accrued assumes all 50 states, cities and counties are in. So 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 states. So it will decline that states not -- 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 what about cities and counties and the subdivisions are. And after all of that, we will take a look at what we'll call -- we're calling critical mass. There is no set number. So there's no minimum. 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 in anything less than that, then we as a group, we'll 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. So we'll have to really step back and look at it as an overall -- from an overall standpoint, and make a decision on whether or not to move forward.

Mike Kaufmann:

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

Operator:

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

Kevin Moran:

Good morning and welcome. Today, we’ll discuss Cardinal Health third quarter fiscal 2021 results, along with an update to our FY 2021 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 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 statements 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. 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 will now turn the call over to Mike.

Jason Hollar:

Thanks Mike. Good morning everyone. Before I dive into the current quarter as a reminder, we are now comparing against a prior year quarter that included a benefit from accelerated pharmaceutical sales and increase PPE demand due to the onset of COVID-19. Now for our consolidated third quarter results, total company revenue of $39.3 billion was in line with the prior year, consolidated gross margin for the period was $1.8 billion. SG&A decreased nearly 4% to $1.1 billion, demonstrating our enterprise-wide commitment to disciplined expense management. The net result for the quarter was operating earnings of $689 million, a decrease a 4%, 4% due to the impact of COVID-19, primarily concentrated in the Pharma segment. Adjusted for COVID-19, we estimate operating earnings would have grown mid-single digits in the quarter Moving below the line, interest and other income and expense, decreased significantly in the quarter, driven by multiple items, including an increase from the value of our deferred compensation plan investments, lower interest expense from prior period debt reduction and one-time investment gains. As we previously mentioned, deferred compensation gains or losses reported in interest and other are fully offset in corporate SG&A and net neutral to our bottom line. Average diluted shares outstanding were $294 million. Of note, during the quarter we repurchased $200 million of shares. Third quarter EPS was $1.53, which reflects an effective tax rate of 31.2%, approximately 5.5 percentage points above the prior year, due to the timing of discrete items. This includes adjustments for the resolution of all open issues with the IRS for fiscal years 2008 to 2010, as well as certain transfer pricing matters for fiscal years 2011 to 2014, which also impacted reserves for later years. Turning to cash flow in the balance sheet. We generated operating cash flow of $277 million, bringing our year-to-date operating cash flow to $1.8 billion. As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We ended the quarter with a cash balance of $3.5 billion, and no outstanding borrowings on our credit facilities. Now for the segment results, beginning with Pharma on slide 5. Pharma segment revenue was flat at $35.1 billion. This reflects sales growth from pharmaceutical distribution and specialty solutions customers compared against the previously mentioned COVID-19 related sales acceleration in the prior year. Segment profit decreased 4% to $511 million, primarily due to COVID-19 related volume declines in our generics program, which was partially offset by a higher contribution from brand sales mix. Excluding the volume impacts, our generics program continued to see generally consistent market dynamics. Additionally, we were encouraged to see our Nuclear business continue its recovery as we saw an improvement in volumes as we exited the quarter. In Specialty, we continue to see year-over-year growth and our excited about recent wins in our 3PL and Hub business. And the Pharma team remained focused on diligent expense management, delivering strong cost savings in the quarter. Now, I'm transitioning to Medical on slide six. Medical segment revenue increased 3% to $4.2 billion, driven primarily by a net positive impact from COVID-19 on products and distribution. As in prior quarters, we saw higher selling prices and volumes and PPE, as well as higher volumes in our Lab business partially offset by lower demand for surgical products resulting from reduced elective procedures. Segment profit decreased 2% to $174 million. During the quarter cost savings, including global manufacturing efficiencies were offset by a decline in products and distribution. Additionally, segment profits experienced a slight net negative impact due to COVID-19, driven by the sell-through of PPE safety stock in the prior year. Now, let me step back to help frame our performance sequentially within the context of the previously discussed factors. During the third quarter, demand for surgical products used in elective procedures average approximately 90% of pre-COVID-19 levels compared to the 95% average in the prior quarter. We saw choppiness, especially early in the quarter, consistent with the evolution of the virus in various geographies. But as we exited the third quarter, collect the volumes rebounded back to around 95%. Our Lab business continued to experience a tailwind from increased demand for COVID-19 testing products. So, as expected, not quite at the peak level seen last quarter. Regarding PPE, we continue to see elevated volumes. In the quarter, we were successful in managing the significant cost increases that we've incurred to procure select PPE products. As we previously mentioned, many of our customers have chosen to leverage our supply assurance program to manage market uncertainties and we continue to expect timing variability, as we support our customers through this dynamic environment. Next, on slide eight, I will review updates to our fiscal 2021 outlook. Based on our performance to-date and increased visibility for the balance of the fiscal year, we are narrowing our EPS guidance to $5.90 to $6.05, which continues to reflect 10% EPS growth at the midpoint. We are making the following changes to our corporate assumptions. We now expect interest and other in the range of $145 million to $160 million, driven primarily by the deferred compensation favorability to-date, which as a reminder is all set above the line. We are narrowing our effective tax rate to 23.5% to 25%, reflecting the previously mentioned IRS resolutions. We expect diluted weighted average shares outstanding of approximately 294 million shares, which includes the repurchases completed during the quarter. Additionally, capital expenditures are now expected in the range of $400 million to $430 million. Moving to the segment outlooks on slide nine, we are updating our Pharma segment profit outlook to flat to down low single-digits due to updated expectations for COVID-19. Based on our third quarter exit rates and what we saw on April, we still expect brand pharmaceutical volumes to be at or near pre-COVID-19 levels as we exit the fiscal year, but we now expect the volume recovery of certain therapeutic classes within generics to extend into the end of calendar year 2021. As for the Medical segment, we continue to expect elective procedures to be at/or near pre-COVID levels by the end of the fiscal year, as well as segment profit growth in the low to mid 20s percentage range for fiscal 2021 With respect to the enterprise, we now expect COVID-19 to be a minimal net year-over-year driver. This guidance assumes a meaningful year-over-year COVID-19 headwind for the Pharma segment, and a similar tailwind for the Medical segments. Before I conclude, let me take a moment to provide an update on capital allocation. We continue to manage our portfolio, and the balance sheet in a prudent manner, consistent with our priorities, while at the same time driving improved financial flexibility. We expect the sale of Cordis to close in the first quarter of our fiscal 2022. This transaction, along with a previously announced tax receivable is expected to generate nearly $2 billion of incremental proceeds in the first half of our fiscal 2022. We expect to utilize these proceeds in a manner consistent with our stated capital allocation priorities, investing in the business, maintaining a strong balance sheet, and returning cash to shareholders. With respect to our first priority, investing in the business to enable our strong pipeline of organic growth opportunities, we continue to be excited by the projects implied. We expect this to remain our highest focus for capital deployment and to continue to prioritize investments in these areas. Regarding the balance sheet, as previously communicated, we expect to repay $1.4 billion of debt on/or before June 2022. Combined with prior repayments, this would represent a total debt reduction of nearly $5 billion over five years. While we will continue to evaluate additional opportunities to reduce debt, we anticipate our future repayments will be more modest as we approach our leverage target. At the same time, we are committed to our dividend, which remains an important component of our capital allocation strategy. With that in mind, our Board recently approved a 1% dividend increase for fiscal 2022. Outside of these three key priorities, we'll continue to evaluate tuck-in M&A within our strategic growth areas, an opportunistic share repurchases. As I mentioned, our improving financial flexibility enabled the deployment of capital for share repurchases during the third quarter. With that I'll turn it back over to Mike.

Operator:

Thank you. [Operator Instructions] And we'll go ahead and take our first question from Michael Cherny from Bank of America. Please go ahead.

Jason Hollar:

Sure. Yeah, this is Jason. Let me start with your first question there. And your math is very accurate. That would represent right around $60 million of overall enterprise impact due to COVID. That is entirely in the Pharma segment. Within Medical, there was a very insignificant impact in the quarter due to COVID. Now there were a lot of moving pieces, pluses and minuses, but netted out for no significant impact within the quarter. As it relates to the Pharma business, that driver is driven by the generic volumes that Mike referenced in his comments and I referenced in my comments. And I think maybe, Mike, you can provide a little bit more color behind the second part of that question.

Jason Hollar:

And I'd just like to add one more thing that $60 million, remember, there was a pull ahead last year. So, only about half of it is an adverse impact in the current year The other half is related to the comparison to the prior year.

Kevin Moran:

Next question.

Charles Rhyee:

Yes, thanks for taking the question. If I could follow-up on that. When you say certain therapeutic classes related to COVID, so are we talking like cold, cough, and flu like kind of flu and antibiotics, these kind of generic that might have been -- we're not seeing it because we had a weak flu season and you wouldn't expect that until maybe this coming flu season?

Charles Rhyee:

Thanks. And if I could just follow-up real quick. Were we seeing these dynamics last quarter? And is it more that -- more of this was prescribed last year during COVID versus this year? And so that's what we -- or is it the depression that people haven't been going to the doctors and you don't see people still really going back to the doctor as much that that's driving this? Thanks.

Charles Rhyee:

Great. Thank you.

Operator:

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

Mike Kaufmann:

Yeah. Thanks, Ricky. Thanks for the question. As you know, it's really hard to get into individual components of the generics program, because as we've said for a while now, just calling out sell-side deflation without talking about the buy-side, the cost improvements or launches or overall volumes, it's -- you're really not giving a complete story. And that's why we've really been focused on just discussing how we see our overall generics program performing. And we really are seeing market dynamics are generally consistent with the only driver in the programs I just mentioned being COVID-related volumes in certain categories.

Mike Kaufmann:

Yeah. As far as contract renewals go, on the ones that we specifically talk about our three largest ones, which we have disclosed, those still have a couple of years left on them before there's any renewals of those contracts. And everything else as it relates to contract renewals for this year is generally tracking as expected. It's always one of those headwinds as a year-over-year basis, but everything is tracking as we expected at the beginning of this year.

Operator:

And we'll move on to our next question from Robert Jones from Goldman Sachs. Please go ahead.

Jason Hollar:

Yes. This is Jason. Thanks for the question. I'll start. Within -- let's just step back from a COVID perspective overall for the medical business. As I mentioned in my prior answer, overall, for the quarter, there was an insignificant impact in the quarter related to COVID, a lot of moving pieces, and I'll get into a couple of the key drivers. As a reminder, just like the Pharma comment earlier, there was a prior year pull-forward for PPE volume that we sold out of inventory we do have a slight negative year over year impact which is related to the prior year tailwind that did not repeat in the current quarter. So the pieces within the quarter that we saw was ongoing elective volume headwinds. And what we did see in the quarter was a little bit of a deterioration from the prior quarter. So we saw -- in my comments in the prepared remarks, we saw that the utilization went down from 95% in the second quarter to closer to 90% in the third. But as I highlighted, it did improve at a tail end and back to the 90%. And that was very consistent with what we saw with the surge in the virus. And so, we feel better about how we exited that quarter. And why we did not change our guidance for the medical business as it relates to this topic as well, just that we expected to be at or near pre-COVID levels by the end of the year. We did continue to see strength in our lab business, although it was a little bit less than what we had in the prior quarter, but still strength. And that was an offset. And then we continue to see strong volumes with PPE. But again, you're comparing against a strong volume quarter last year. And we did have some favorability still for the timing of the recognition of the pricing cost associated with the much higher cost with PPE. And those dynamics continue to be somewhat fluid, but we do definitely still see higher costs, higher prices for some of the PPE products, especially gloves, some moderation, but generally still elevated and anything else to add, Mike?

Robert Jones:

Great. Thanks.

Steven Valiquette:

Hey, thanks good morning guys. So -- usually, when there is some negative supply/demand imbalance on commoditized products, it can impact price. So with the softer generic volume on those categories that you mentioned, the antibacterials, antibiotics, etcetera, I guess for me, I would just visualize that both the buy side and the sell-side pricing would maybe come down simultaneously on those products in conjunction with the softer Rx demand. I'm just curious if that's consistent with what you saw. I just want to confirm that one way or the other. So not to beat this topic to death, but just wanted to get some confirmation around that? Thanks.

Steven Valiquette:

Okay. All right, thanks.

Operator:

And we'll move on to our next question from Lisa Gill from JPMorgan. Please go ahead.

Mike Kaufmann:

Sure. Yes. I can start and then turn it over to -- turn it over to Jason. As you know, our practice is that we're -- we're not -- we don't provide formal guidance on 2022 until August, but we'll try to give you a little bit of color to be helpful. I'll start with the fact that we still feel really good about our growth areas. So when we think about specialty, at home, nuclear, medical services and outcomes, we feel really good about all of these businesses. We think they all have strong industry trends, strong outlooks, complementary capabilities to our businesses and our -- we continue to adapt their offerings to focus on our customers' needs. So, I would say, we would still expect all of those growth areas to be positive drivers for next year. And then, let me have Jason give you a little bit of color on maybe a few of the other dynamics.

Lisa Gill:

Very helpful. Thank you.

Eric Percher:

Thank you. Question on the Specialty business, It sounds like you're expecting that trend to normalizing in that business. I want to ask how the profitability levels have been running in that business, whether you're seeing benefits from biosimilars. And of late, there's been a call out of maybe some of the oral solid products that are more specialty generic and biosimilars. Are you participating in economics on those?

Kevin Moran:

Next question please.

Jailendra Singh:

Thanks and good morning. I was wondering if you could double click into manufacturing efficiencies you highlighted in the Medical segment. Can you provide some details there? And are any of those efficiencies in the Cordis business that will be rolling off versus your core business?

Jailendra Singh:

Okay. Thank you.

George Hill:

Good morning guys. Thanks for taking the question. Jason, you kind of alluded to this already, but have you been able to fully capture the pricing gap that occurred earlier this year as it related to PPE and supplies and the bed business? And I guess also, could you update us on the supply side as we think about your things like access to gloves and gowns to provide for your customers? And then I tack on at the end to relate to Jailendra's question, are there any dissynergies from the Cordis divestiture?