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Text: Today, we will discuss Cardinal Health's first quarter fiscal 2022 results.
Please note that during our discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as GAAP.
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.
Our first quarter results were in line with our expectations.
As we continue to manage through the global pandemic, we're staying focused on the near-term priorities and long-term strategies to drive growth and momentum across our businesses.
In Pharma, we continue to see sequential volume improvement and are encouraged by the profit growth that we saw in the first quarter.
We believe our Pharma business, inclusive of our strategic growth areas of Specialty, Nuclear and Outcomes, is well positioned for growth in FY '22 and beyond.
Our Medical segment continues to be impacted by the disruptions in the global supply chain that we called out last quarter.
Recently, these pressures have rapidly escalated and we are experiencing significantly elevated product costs due to international freight and commodities.
While we believe the majority of these elevated supply chain costs are temporary, we do not expect them to return to normalized levels this fiscal year.
As a result, we are lowering our FY '22 outlook for Medical segment profit to adjust for these increased headwinds.
We are taking action to mitigate these impacts across the enterprise and we are reaffirming our FY '22 earnings per share guidance of $5.60 to $5.90 per share.
We have been on a journey to simplify our portfolio and strengthen our core businesses, so we are positioned for broad-based sustainable growth as noted in the long-term targets we're announcing today.
We are prioritizing investment in our strategic growth areas and in innovative solutions to meet our customers' needs today and tomorrow.
And with our improved balance sheet, commitment to our dividend and now an additional $3 billion share repurchase authorization, we're positioned to return capital to shareholders.
Looking ahead, we remain confident in our strategy.
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 on August 2 and impacted the quarter's results by approximately two months.
SG&A increased 1%, reflecting information technology investments and higher costs to support sales growth, partially offset by the Cordis divestiture and benefits from cost savings initiatives.
Overall, first quarter operating earnings tracked 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 of 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 earnings per share 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 multiyear 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 three 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 the recovery in generic volumes to pre-COVID levels by the end of the calendar year.
Outside of volumes, our generics program continued 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 sourced products with recent index prices nearly double where they were last year.
And with international freight, we were seeing ocean container costs at roughly 8x to 10x 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 shortly.
To wrap up the quarter, despite some impact from the Delta variant on elective procedure volumes, overall, our customers continued 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 8; a few updates to our fiscal '22 outlook.
We are reiterating our earnings per share 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 are 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 cost inflation that I previously discussed which is expected to result in an incremental net headwind of approximately $100 million 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 profit in the second quarter.
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 in 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 earnings per share 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, two 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 earnings per share growth and dividend yield that we are targeting over the long term.
Throughout the pandemic, we have responded to challenges with resilience and agility, approaching every situation with a focus of delivering for our customers so they can care for their patients.
We are continually reviewing our business and seeking areas to improve as we navigate the dynamic macroeconomic environment.
We're taking action to mitigate elevated costs and manage through temporary supply chain disruptions in Medical.
These actions include pricing adjustments, cutting additional costs throughout the organization and accelerating additional growth opportunities.
Outside of a continual focus on the customer, we are directing our efforts to the three main areas that will support our long-term target of mid-single to high single-digit growth for the Medical segment.
First, we are simplifying our operating model.
We continue to take decisive action to reposition the business for growth.
We divested the Cordis business and have begun significantly reducing our international commercial footprint.
We have announced and are in the process of exiting 36 initial markets which will allow us to focus on the markets where we have a competitive advantage.
Additionally, we are further streamlining our medical manufacturing footprint and modernizing our distribution facilities.
We expect these simplification initiatives to contribute to our $750 million enterprise cost savings target and position us to generate sustained long-term growth.
Second, we are focused on driving mix through commercial excellence.
Our Cardinal brand portfolio has significant breadth with leading brands and clinically differentiated products such as Kendall compression, Kangaroo enteral feeding and Protexis surgical gloves, among others.
While we have made important changes to align our commercial organization structure and incentives, we recognize that we are underpenetrated in Cardinal Health brand mix relative to our potential.
An increase in private-label penetration across our U.S. and in-channel customer base represents a significant profit opportunity with even further opportunities out of channel and internationally.
As we move past the pandemic, we see this as a significant opportunity to both deliver savings for our customers and grow our business over the mid to long term.
And third, we're fueling our Medical segment growth businesses, at-Home Solutions and Medical Services which includes OptiFreight Logistics and WaveMark.
These growth businesses are aligned with industry trend and positioned to capture market share and grow double digits in FY '22 and beyond.
We continue to invest in technology enhancements and innovative solutions that give our businesses a competitive edge.
In OptiFreight, we continue to expand our customer base and offerings.
And in at-Home Solutions which is now a $2.2 billion business, we continue to see volume growth as care is rapidly shifting to the home.
We are investing in new technologies to drive operational efficiencies and enhance data visibility.
Moving to Pharma; we have two primary objectives to achieve our long-term guidance of low to mid-single-digit segment growth: continuing to strengthen our core Pharma Distribution business; and fueling our growth businesses, Specialty, Nuclear and Outcomes.
We will continue to strengthen our core business by focusing in three primary areas.
First, supporting our diverse customer base.
Over 50 years, we honed our distribution expertise and develop a strong customer base across multiple classes of trade with leaders in chain pharmacy, direct mail order, grocery and retail independent customers, all of whom play critical roles in providing healthcare access to their local communities.
Along those lines, during the quarter, we extended our distribution agreement with CVS Health through FY '27.
Second, we're managing our generics program to ensure consistent dynamics which we continue to see and expect.
Our generics program is anchored by the scale and expertise of Red Oak Sourcing, a partnership we also recently extended through FY '29.
Third, we've been investing heavily in our technology to enhance customer experience and drive efficiencies.
We are approaching the end of a multiyear investment journey to modernize our IT infrastructure which will yield meaningful working capital improvements and operational efficiencies.
As for our second overall Pharma objective, fueling our growth businesses, we continue to expect these three businesses to realize double-digit growth over the next several years.
And as these businesses grow, it will become a bigger portion of the overall Pharma segment.
In Specialty, key downstream and upstream initiatives will enable our growth.
In oncology, we are competing differently downstream by transforming from a distribution-led orientation to a focus on supporting independent oncology practices with solutions to thrive in a value-based care environment.
We are seeing commercial momentum with Navista TS, our technology platform that helps oncology practices improve their performance in value-based care.
We have a strong presence in other therapeutic areas, such as rheumatology which today is a $4 billion distribution market growing double digits.
We are also encouraged by the anticipated growth in biosimilars as more products come to market such as the FDA's approval for the first interchangeable biosimilar insulin product.
We're well positioned to support the next phase of biosimilar growth as adoption increases in areas outside of oncology.
Upstream, we are expecting strong growth from higher-margin services supporting biopharma manufacturers.
We operate a leading 3PL supporting hundreds of manufacturers that continue to see wins and support new products coming to market, such as in the area of cell and gene therapy.
In Nuclear, we are expecting continued double-digit profit growth resulting in a doubling of our profits in this business by FY '26.
We continue to build out our multimillion dollar center for Theranostics advancement in Indianapolis and are investing to expand our tech capabilities.
We're partnering with several companies to grow the pipeline of novel Theranostics.
For example, through our agreement with TerraPower, we will produce and distribute Actinium-225, a radionuclide involved in creating targeted therapies for several cancer types.
And in Outcomes, we continue to see and expect strong growth.
This business has added new payers and PBMs and is expanding clinical solutions for both independent pharmacies and retail chains to include solutions for medical billing, point-of-care testing and other clinical capabilities.
With respect to the enterprise, we continue to aggressively review our cost structure as we work to streamline, simplify and strengthen our operations and execute our digital transformation.
As I mentioned earlier, we recently increased our total cost reduction goal to $750 million by FY '23 and we are on track to deliver those savings.
We're pairing cost reduction efforts with balanced, disciplined and shareholder-friendly capital allocation with a focus on investing in the business, maintaining a strong balance sheet and returning cash to shareholders.
Long term, we're targeting a double-digit combined earnings per share growth and dividend yield.
These expectations are driven by our growth targets for our segments, our commitment to our dividend and our new $3 billion share repurchase authorization.
Now, let me provide an update on the proposed opioid settlement agreement and settlement process.
In September, we announced that enough states agreed to settle to proceed to the next phase.
And each participating state is offering its political subdivisions the opportunity to participate in the settlement for an additional 120-day period which ends on January 2, 2022.
At that point, each of the distributors and the states will have the opportunity to determine whether there is a sufficient participation to proceed with the agreement.
If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by the state and local governmental entities.
This is an important step forward for our company.
As we've consistently said, we remain committed to being part of the solution to the U.S. opioid epidemic and believe that settlement would provide relief for our communities and certainty for our shareholders.
Turning to ESG; these priorities remain critical to achieving a healthier, more sustainable world.
In closing, what we do matters and it is our privilege to serve our customers, their patients and their communities around the world.

user
q1 non-gaap earnings per share $1.29.
q1 revenue rose 13 percent to $44 billion.
reaffirms fy non-gaap earnings per share view $5.60 to $5.90.
fy22 non-gaap earnings per share guidance reaffirmed, long-term financial targets announced.
board of directors approved a 3-year authorization to repurchase up to an additional $3 billion of cardinal health common shares.
first-quarter revenue for pharmaceutical segment increased 13% to $39.8 billion.
expectation that we will see greater inflationary pressures in medical segment for remainder of year.

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