Good day, and welcome to the Fourth Quarter FY 2023 Cardinal Health Inc. Earnings Conference Call. Please note this conference is being recorded. [Operator Instructions] I would now like to hand the call over to Kevin Moran, Vice President of Investor Relations. Please, go ahead.

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.

Thanks, Kevin, and good morning, everyone. Fiscal '23 was an inflection point for Cardinal Health with improved performance, strong execution and notable progress against both our short and long-term plans. We delivered record financial performance, including our highest non-GAAP EPS ever, reflecting 14% growth in the prior year. We grew Pharma segment profit an impressive 13% and generated $2.8 billion of adjusted free cash flow. And in Medical, we drove significant sequential improvement in operating performance from a segment loss in the first quarter to over $80 million of segment profit in Q4. This year, we took decisive action to advance our three strategic imperatives; building upon the resiliency of our Pharma segment, executing our Medical Improvement Plan and maximizing shareholder value creation. Consistent with what you heard at our June Investor Day, these results were achieved through our team's commitment to ruthlessly prioritize the core of our business and to better serve our customers so they, in turn, can focus on caring for patients. We simplified how we operate by streamlining our organizational structure, exiting non-core product lines and rationalizing our geographic and manufacturing footprint. We made key leadership changes and governance enhancements, adding talent and key positions across the enterprise and to our Board. We formed and extended the business review committee tasked with evaluating our strategy, portfolio, operations and capital deployment. On that note, we completed our review of the Pharma segment, including announcements at Investor Day to further invest in our Nuclear & Precision Health Solutions business and launched our new Navista Network supporting community oncologists, which I will discuss more later in my remarks. We recently closed our Outcomes merger with BlackRock's Transaction Data Systems, which we see as a big win for pharmacies and an important opportunity to accelerate the business' future growth. We also deployed capital responsibly with a continued eye on maximizing value, and we are positioned with the financial flexibility to continue driving value for shareholders. At Investor Day, we provided preliminary guidance for fiscal '24. With a strong finish to the year and increased confidence as we look ahead, I am pleased that we can raise our fiscal '24 outlook. Later in my remarks, I will share further details on our three strategic priorities. But first, let me hand it over to Aaron to walk you through our financial results and guidance.

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…

Thanks, Aaron. Let's now dive deeper into the actions we are taking to execute our three strategic priorities, beginning with priority number one and building upon the resiliency of the Pharma segment. In our largest most significant business, the Pharma segment has been performing well by prioritizing what matters most, focusing on the core and delivering for our customers and their patients. The business is positioned at the forefront of favorable secular industry trends and has also benefited from our specific actions and performance. We are pleased to recently raise our long-term segment profit target to 4% to 6% growth, solidly in the mid-single digits and consistent with the segment profit growth we expect in fiscal '24. Our growth is enabled by a scaled, stable and resilient core Pharmaceutical distribution business growing in the low single digits and double-digit growth from our higher-margin specialty and Nuclear businesses. Within the core, our generics program remains a critical component of our overall offering and performance, enabled by Red Oak Sourcing. In addition to its leading scale, Red Oak's proprietary analytical tools and deep industry expertise puts us in the best position possible whenever product shortages occur to continue servicing customers. We're committed to providing customer-focused solutions across our many classes of trade as we noted at Investor Day. More recently, we hosted our 31st Annual Retail Business Conference, where we brought together nearly 4,500 attendees from across the country to celebrate the critical role independent pharmacies play in caring for their communities and showcase our commitment to our customers through our newest innovations. For example, we are offering modern payment solutions through our collaboration with Square to help independent pharmacies seamlessly manage business operations, integrate flexible payment options, and reduce payment processing costs. We've conveyed that specialty is our priority area of…

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

Thanks very much. Good morning and congratulations on the quarter. I just really want to start with the GLP-1 comment. So I understand you're raising revenue by 200 basis points. One, is that all GLP-1? And two, my understanding is that they are a lower margin, but they are contributory to overall margin dollars. Is that not the case when you're keeping the profit the same and when I think about the Pharmaceutical segment for '24?

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.

The next question comes from Eric Percher of Nephron Research.

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?

Eric, good morning. Good to hear your voice and happy to give you a little more context on that. Look, we were quite pleased with the results for Medical, as you can imagine, delivering that $82 million of results. That was $60 million of what we're referring to as for performance and $20 million in aggregate combined positive seasonality and one-time items in the fourth quarter. And I called -- I call it out purposely that way because it does impact how we think through the cadence of quarters during fiscal '24. Now before giving you a little more context on the quarterly guidance, I do want to go back and just observe that we are reiterating the $400 million profit target for the Medical segment from the year. The Medical Improvement Plan, the key components, that remain unchanged from our description at the Investor Day as well. But we are providing a little more color relative to how we see the year playing out, given the number of moving pieces on the blocking and tackling as I referred to in my prepared remarks as we carry forward. So look, from a full year perspective, the way I would have you think about it is this. As I said at Investor Day, if you take $60 million of core performance and multiply that by 4, that gets you to $240 million of profit, right? If you add $100 million of incremental inflation net on top of that, that gets you to $340 million in total. And as we talked about at Investor Day, that leaves about $60 million of contribution from other elements across the year, the simplification of the Cardinal Health brand, et cetera. That's a full year view of how to think about it. Now as we think about the cadence, though, we are being clear that the profit will be back-half weighted during the year just like it was in fiscal year '23. Our view is that Q1 will have similar core performance with Q4 with sequential performance thereafter. Q1 is the seasonal low point for the Med Products and Distribution business due to both the timing of volume as well as our cost recognition. That's an important point. And similarly, we do expect that continued acceleration of inflation mitigation over the course of the year as well. So that will push the profit from a weighting perspective in the back half. And then don't forget that while we were very pleased to call out a sign of change in trend in Cardinal Health brand, we're also clear at Investor Day that the Cardinal Health brand volume growth is largely back-half weighted. Hope that helps. Next question, please.

The next question comes from Kevin Caliendo of UBS.

Thanks. Maybe to follow-up on that a little bit. So if we're thinking about $82 million , the baseline is really $60 million, the first quarter is likely because of the $20 million in seasonals' and one-timers. The first quarter is likely to be down sequentially and then grow off that base to get to the $400 million. I just want to make sure that, that's what you're committing to or commenting on. And then secondly, or incrementally, the new products or the Cardinal brand products, is that -- the increase in the back half of the year? Is that because of new product launches or manufacturing capabilities? Is it contractually like new contracts coming on that are higher weighted? Can you just sort of explain the dynamics of the Cardinal brand products as well?

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?

Yes. I'd think about the Cardinal brand volume growth being back half-loaded through a couple of different lenses. First of all, we do think that the underlying utilization will be -- for the market will continue to be relatively consistent. So we do see same-store sales growth out there, and we anticipate that, that will continue. And within our performance within that, we highlighted that our comparison point to the prior year is becoming easier as we did lose some business over the last 18 months or so that we now are lapping and our five-point plan is working. Our five-point plan to improve -- that includes improving the customer experience and importantly, that supply chain health. We're seeing strong progress as it relates to service levels, CLI scores that gave us very good customer retention in the quarter, net new wins that were positive in the quarter. That gives us the foundation that -- that gives us confidence that we'll grow with the underlying market, especially as we continue to lap that prior year impact, which we think will be more impactful in the second half of the year. So all the leading indicators are going as anticipated and consistent with how we laid it out at the Investor Day and gives us the visibility and the confidence that we'll be able to participate in that market growth that we anticipate that will be there over the course of this next year. Next question, please.

The next question comes from George Hill of Deutsche Bank.

Yes. Good morning guys. And thanks for taking my questions. I'll take it in a little bit different direction. Jason, I'd love to hear the kind of the progress that you guys have made on the Navista offering, since it was first announced at the Analyst Day. And I guess, given the growth and the size of the specialty market, particularly in oncology, I guess how should we think about the ramp of that business maybe through fiscal '24 and beyond, so just kind of progress in ramping contribution? Thank you.

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.

Next question comes from Elizabeth Anderson of Evercore.

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.

Okay. I think I caught the essence at least part of that. So let me start. I believe part of the question was related to the next part of the inflation mitigation in the second half. I think the other question related to the corporate cost ramp. So let me start with the second part and then throw it over to Aaron for the first part. So as you think about the inflation mitigation and the next piece, there's -- it's really the same for the second 50% as it was the first 50%. So in both cases, what we've seen is a moderation of the international freight. That spiked significantly about two years ago and started coming down about a year ago and got back down to pre-pandemic levels maybe six to nine months ago. So that has been -- started to benefit us as we especially exited fiscal '23. So we did start to see that. It, of course, was inventoried into our inventory, capitalized those costs into our inventories. So it took a little while for that to benefit our P&L as a cost reduce. And along the way, in parallel with that, of course, we were pricing mainly on a temporary basis the first year for those increases as well as increases in other commodity costs and transportation, domestic transportation, increased labor and all those other costs. All those other costs have plateaued. They are not coming down. We don't see any signs of them coming down. And so we have to price permanently for those items. We priced temporarily for the international freight. And as those costs on the international freight roll off, we need to maintain higher prices. And so we are continuing to price and some of those temporary prices are now being rolled into the permanent prices. And so we would expect that as those contracts renew that we'll continue to see more and more of that pricing recognized. I mean, to be very clear, we're not rolling back prices. We've not increased prices beyond the point of our costs. At the 50% level, we're still only being compensated for half of that overall gross impact that we've incurred. But over the course of this year, we do expect the international freight to come down. And by the time we exit fiscal '24, the prices will continue to increase as we go through the course of the year as we get more of those contracts renewed permanently, and then that will cross over with the lower cost, and then we'll exit in that manner at the end of the year. Aaron, on the first question?

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.

Next question please, operator?

The next question comes from Daniel Grosslight of Citi.

Hi. Thanks for taking the question. I just have one quick housekeeping question, and then I'll ask my real question. There was a slight change in the language around your inflation mitigation efforts from your ID presentation to your current presentation. You went from fully mitigating by the end of '24 to just mitigating. Curious if there's been some change in how you're thinking about things? Or if it was kind of a simplification of the language? And then my real question is around the generics business. It seems like you and your competitors have all benefited from a more favorable environment. And it seems like it might have accelerated towards the end of your fiscal year. So I'm just curious to get your thoughts on the generics market potential shortages and how you're thinking about the benefit or tailwind of generics in your fiscal '24 guidance vis-a-vis the strength you saw in fiscal '23. Thanks.

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…

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

Next question please.

Next question today comes from A.J. Rice of Credit Suisse.

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?

Yes. The utilization, we think, has been fairly consistent. I wouldn't call it an acceleration or anything. We're seeing pretty consistent underlying same-store sales type of growth. So it's sufficient within our business model and where we laid it out from Investor Day, but I wouldn't call out anything unique there. As it relates to PPE normalization, a couple of points. So normalized is good for us. This is not a category that we've ever made a tremendous amount of money and value. It's an important category for our customers. And so we do everything we can to satisfy their needs. So going forward, our objective is to ensure that we get customers the product they need and minimize the volatility that goes along with that. But I just don't see it being a material driver one way or the other. Recall that the challenges with PPE was that we had volatile price cost and volume all at once. What you have right now is a normalization that's been occurring over the last couple of years of both price and cost has been coming down somewhat steadily. And they've been staying in a relative type of spread close enough to one another that, that's been manageable. And it's that volume that's been a little bit more challenging. We've highlighted that it was destocking beginning about -- well, over a year ago now in terms of the underlying volume there. But given the margins are relatively tight for this type of product, getting those margins right and relatively low margins means that the volume volatility or the lack of volume growth is not much of an issue for us, because it's just not a large contributor of incremental volume or incremental margins. So we're at a level that I think it's fairly stable, and it's our objective to keep it that way. Next question, please operator.

Our final question today comes from Brian Tanquilut of Jefferies.

Good morning. This is [indiscernible] in for Brian. I had a question about your capital allocation priorities for the fiscal year '24. Generated quite a bit of free cash flow this fiscal year. And I'm just curious if there's any specifics you can get into with regards to where you see capital allocation in the next fiscal year? Thank you.

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.

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

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.

And that does conclude the fourth quarter full year '23 Cardinal Health, Inc. earnings conference call. We thank you all for your participation and you may now disconnect.