The Vice President of Investor Relations, Kevin Moran, welcomed everyone to Cardinal Health Inc.'s Fourth Quarter FY 2023 Earnings Conference Call. He was joined by Chief Executive Officer, Jason Hollar, and Chief Financial Officer, Aaron Alt. During the call, they discussed Cardinal Health's fourth quarter and fiscal year end 2023 results, as well as their outlook for fiscal year '24. They cautioned that their comments were subject to risks and uncertainties, and that all comments would be on a non-GAAP basis. They concluded by noting that fiscal '23 was an inflection point for Cardinal Health, with record financial performance and strong execution.

The company took decisive action to advance their strategic imperatives, streamlining their organizational structure, making key leadership changes and governance enhancements, and forming and extending the business review committee. They also completed their review of the Pharma segment, closed the Outcomes merger, and deployed capital responsibly. They provided preliminary guidance for fiscal '24.

Cardinal Health finished the year with a strong fourth quarter, posting an EPS of $1.55 and $5.79 for the full year, both of which were historical highs. The Pharma segment saw a 15% revenue increase due to brand and specialty pharmaceutical sales growth, as well as positive generics program performance. Medical segment revenue was flat, with a decrease in products and distribution sales due to lower PP&E volumes and pricing, partially offset by inflationary impacts.

In the fourth quarter, the Medical segment saw a profit of $82 million, a $100 million increase from the prior year. This was due to the Medical Improvement Plan, seasonality, and net favorable one-time items. There was also a positive contribution from at-Home Solutions, OptiFreight, and cost optimization measures. Below the line, interest and other decreased due to increased interest income and income from investments, while the effective tax rate was two percentage points higher due to discrete items. Shares outstanding were 7% lower than a year ago due to share repurchases.

The company achieved a fourth quarter EPS of $1.55, a growth of 48%, and surpassed the $200 billion revenue mark for the first time in Fiscal '23. The Pharma segment profit increased 13% to $2 billion due to positive generics program performance and higher contributions from brand and specialty products. The Medical segment profit decreased 49% to $111 million due to lower products and distribution volumes and unfavorable sales mix and net inflationary impacts. The company's annual effective tax rate finished at 23% and the net result was for fiscal 2023 EPS, $5.79, growth of 14%.

Cardinal Health achieved strong cash flow in fiscal '23, with $2.8 billion in adjusted free cash flow and $4 billion of cash on hand. The company invested $480 million in CapEx, paid down $550 million in debt, and returned $2.5 billion to shareholders. For fiscal '24, Cardinal Health has raised its EPS guidance to a range of $6.50 to $6.75 and tightened its share range to 250 million to 253 million, with a midpoint of 15% above fiscal '23. Additionally, the company expects an effective tax rate of 23% to 25%, interest and other between $110 million to $130 million, and adjusted free cash flow of approximately $2 billion.

The company is expecting revenue growth in the range of 10-12% for Pharma and segment profit growth of 4-6% in fiscal '24. For Medical, they are expecting revenue growth of 3% and segment profit of $400 million for the year, with the low point being in Q1 due to the Medical Improvement Plan initiatives.

Q1 is the seasonal low point for the global Medical products and distribution business, and the company is expecting to exit fiscal '24 offsetting the impact of gross inflation. The company is targeting a 12% to 14% EPS growth CAGR for fiscal '24 to 2026, and plans to invest approximately $500 million back into the business, make approximately $500 million of litigation payments, and have a $1 billion baseline return on capital. They will also evaluate opportunistically the possibility of additional share repurchases and M&A to drive long-term value.

Cardinal Health has a lot to be proud of with their accomplishments in fiscal '23. Jason Hollar and Aaron are confident in the plans they have in place and excited for the value creation opportunities still ahead. In the Pharma segment, they are prioritizing what matters most, focusing on the core, and delivering for customers and their patients. They have raised their long-term segment profit target to 4-6% growth and are enabled by a scaled, stable, and resilient core Pharmaceutical distribution business growing in the low single digits and double-digit growth from their higher-margin specialty and Nuclear businesses. Red Oak Sourcing's proprietary analytical tools and deep industry expertise also puts them in the best position possible to service customers whenever product shortages occur.

At their 31st Annual Retail Business Conference, McKesson showcased their commitment to customers through modern payment solutions and investments in specialty areas such as oncology, rheumatology, and emerging areas. They have launched the Navista Network specifically for community oncologists and appointed new leadership with industry and clinical experience. They are also expanding their 3PL and launching new products for patient support. Finally, they are supporting the growth of pharmaceutical manufacturers in the cell and gene therapy space with their advanced therapy solutions.

Cardinal Health is investing in various healthcare fields such as cell and gene therapies, radiopharmaceuticals, and theranostics. They are partnering with TrakCel to bring visibility and tracking capabilities to biopharma companies and have invested $30 million in the space. They have also introduced a Medical Improvement Plan with the goal of addressing inflation and global supply chain constraints by fiscal '24, and they are over halfway to their target.

Cardinal Health is executing initiatives to offset inflation and is making progress with commercial contracting. International freight has returned to pre-pandemic levels, and the company is driving progress through its five-point plan to grow the Cardinal Health brand volume. They are investing in product availability and automation and are exiting their non-healthcare portfolio and reducing SKUs. They are investing in new product development and capacity expansion in key growth areas and are launching new products like the Kangaroo OMNI Enteral Feeding System. As a result, commercial momentum is accelerating.

During Q4, the company renewed several key distribution customers and saw positive net new wins, indicating growth in the medical utilization environment. Additionally, the company is investing in DC network expansion and digital tools to support core volume growth and sustain performance. They are also executing simplification and cost savings initiatives, such as optimizing their global manufacturing and supply chain and their international footprint. Finally, they are maximizing shareholder value creation through operational performance, cash flow generation, and capital allocation.

Cardinal Health has seen strong growth in their GLP-1 revenue, which has led them to raise their revenue guidance for the year. They are keeping their profit the same, but the GLP-1 revenue is contributory to overall margin dollars. Aaron Alt acknowledges the dedication of their employees for helping move healthcare forward and is excited for the opportunities that lie ahead.

Jason Hollar explains that Medical delivered $82 million in results in the fourth quarter, with $60 million of that being core performance and $20 million being seasonality and one-time items. Hollar emphasizes that this will have an effect on the cadence of quarters in fiscal year '24.

The Medical segment is still on track to reach its $400 million profit target for the year, and the Medical Improvement Plan remains unchanged. The full year view is that $60 million of core performance and $100 million of inflation net will make up $340 million in total, leaving $60 million from other elements. Profit will be back-half weighted with Q1 having similar core performance to Q4 and inflation mitigation accelerating over the course of the year. The Cardinal Health brand volume growth is also back-half weighted.

Aaron Alt and Jason Hollar of the company discussed the baseline of $60 million for the first quarter and that the core performance would be roughly in line with the fourth quarter. They also discussed the growth of the Cardinal brand in the back half of the year due to continued same-store sales growth, the lapping of lost business, and the five-point plan to improve the customer experience and supply chain health.

Jason Hollar discusses the progress that has been made with Navista since it was announced at the Analyst Day. He explains that they had a foundation in place, with programs and initiatives in place to help support value-based care initiatives, data and insights, and clinical research support. He believes that they will be able to participate in market growth in the next year.

Navista Network has recently brought in additional senior leadership to serve customers, created an advisory board, and is listening and researching customer needs. They are focused on maintaining customer independence and transparency. In the past couple of months, they have established a team and platform to meet customer needs. Corporate costs of $60 million are expected to ramp ratably over the year.

Jason Hollar explains that the second 50% of inflation mitigation is the same as the first 50%, which is due to the moderation of international freight costs that have been back to pre-pandemic levels for the past 6-9 months. This has benefited the company's P&L, but they have had to price permanently for other costs such as commodity costs, transportation, labor, and other costs that have plateaued and are not coming down.

In order to maintain higher prices, the company is not rolling back prices and is only being compensated for half of the gross impact. Over the course of the year, the international freight costs are expected to go down and prices will continue to increase as contracts are renewed. Additionally, there is a Med Improvement Plan in place which will bring in $60 million of other benefit over the course of the year, with more benefit towards the back half of the year. This is driven by the three other pillars of the plan, which are contribution of the growth businesses, simplification and the Cardinal Health brand work.

Jason Hollar clarifies that the change in language around inflation mitigation from the ID presentation to the current presentation is simply a simplification of language. He also explains that the inflation mitigation efforts are focused on incremental inflation, as there is already normal inflation, and that it is becoming harder to differentiate between the two. Finally, he addresses the question of generics market potential shortages and how the benefit of generics is factored into the fiscal '24 guidance.

The performance of the Pharma segment this year has been strong due to high market utilization, and this growth rate is higher than the long-term growth targets. Going forward, this growth rate is expected to normalize to a 2-3% unit volume growth. Red Oak Sourcing has a dual mandate to drive performance through cost and service levels, despite product shortages in the Pharmaceutical distribution supply chain.

Jason Hollar answered a question from A.J. Rice of Credit Suisse about utilization and PPE. He stated that utilization has been fairly consistent and that same-store sales growth has been steady. He also noted that profits in the PPE category should normalize, and that there may be some seasonality when the environment returns to normal.

In terms of PPE normalization, the price and cost have been steadily decreasing and staying close to each other, however volume has been more challenging. The margins are relatively tight, so the lack of volume growth is not a major issue. The objective is to keep the situation stable, and for fiscal year 2024, the capital allocation priorities will be determined by the amount of free cash flow generated.

Aaron Alt explains the company's capital allocation plans for the next fiscal year. They will prioritize investing back into the business, maintaining an investment-grade balance sheet, and returning capital to shareholders through dividend payments and share buybacks. They will also consider active, disciplined, and targeted M&A opportunities and additional returns of capital to shareholders.

CEO Jason Hollar concluded the fourth quarter full year '23 Cardinal Health, Inc. earnings conference call by summarizing the success of the year and expressing excitement for the momentum going into fiscal '24 and beyond. He also reiterated the company's commitment to its disciplined capital allocation strategy.

This summary was generated with AI and may contain some inaccuracies.