Hello, and welcome to the Fourth Quarter Fiscal Year 2025 Cardinal Health Inc. Earnings Conference Call. My name is George. I'll be the coordinator for today's event. Please note that this conference is being recorded. [Operator Instructions] I'd like to hand the call over to your host today, Mr. Matt Sims, Vice President, Investor Relations, to begin today's conference. Please go ahead, sir.

Good morning, and welcome to Cardinal Health's fourth quarter fiscal '25 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 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 these statements are subject to risks and uncertainties that could cause our 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, 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. [Operator Instructions] With that, I will now turn the call over to Jason.

Thanks, Matt, and good morning, everyone. We closed fiscal '25 with momentum, delivering excellent fourth quarter results in what was a transformative year for Cardinal Health. Our consistent performance with all 5 operating segments delivering double-digit profit growth for both the year and Q4 reflects the significant progress we've made against our strategic priorities. As we outlined at Investor Day, our strategy is clear, and we continue to deliver on our commitments, reflecting disciplined execution across each of our operating segments. Our relentless focus on driving simplification and operational efficiencies in our core, along with strategic investments for growth, are enabling us to evolve to meet the needs of our customers and drive long-term value creation. Before I get into the specifics and Aaron takes us through the financials, I want to recognize the hard work and dedication of our teams around the world. Their commitment to our mission and our customers is essential to strengthening our position as health care's most trusted partner at a time when reliability, resiliency and access are more important than ever. Within Pharmaceutical and Specialty Solutions, our largest and most significant business, we continue to see robust pharmaceutical demand and strong underlying performance. Our path forward remains well defined and consistent: prioritize the growth and resiliency of this business by building upon our strong core foundation; and further expanding in Specialty, as you saw on our press release this morning. We're thrilled to announce the acquisition of Solaris Health, the country's leading urology managed services organization. This greatly accelerates our progress in building the Specialty Alliances multi-specialty MSO platform, significantly expanding the reach of our urology alliance physician network. We see substantial opportunity ahead with Cardinal Health positioned as the multi-specialty leader, and I'll elaborate on this shortly. In GMPD, our improvement plan initiatives are driving results, delivering $70 million in profit for the fourth quarter. The team continues to navigate the current environment to optimize our global footprint and increase supply chain resiliency for our customers. We see further opportunities ahead to continue to drive the GMPD improvement plan. Our differentiated growth businesses within Other made substantial contributions this quarter, capping off a year of meaningful momentum. The performance was broad based with strong growth across at-Home Solutions, now including the acquisition of ADS, Nuclear and Precision Health Solutions and OptiFreight Logistics. As we close out fiscal '25 and look ahead, we have great optimism in what we will achieve in fiscal '26. We continue to make strategic investments to optimize the business and position us for success. I'll dive deeper into these and other updates shortly, but will now turn it over to Aaron to take us through the financials.

Thank you, Jason, and good morning. I am delighted to share more details on our Q4 financial results and the significant year that we have had at Cardinal Health. Here are some of the key financial headlines. At the enterprise level, we grew operating earnings 19% in the quarter and 15% on the year. We grew EPS by 13% in the quarter and over 9% on the year. We delivered $2.5 billion of adjusted free cash flow in the year, $500 million ahead of our increased expectations from Investor Day. We invested nearly $550 million in CapEx, returned to shareholders nearly $500 million for our growing dividend, repurchased $750 million of shares at an average price of $117 per share and completed 4 strategic acquisitions, 3 in Specialty and 1 in at-Home Solutions to drive our future growth. And we got all of this done in parallel with the previously announced customer contract expiration, a significant focus on cost mitigation, the onboarding of new customers and managing through regulatory uncertainty and the implementation of tariffs. Let's go through the Q4 results. Total company revenue was relatively flat at $60.2 billion on a reported basis. Adjusting for the contract expiration, revenue at the enterprise level increased 21% versus the prior year, led by strong demand across Pharma and for growth businesses in Other. Gross profit grew 17% to $2.2 billion, with rate improving by approximately 50 basis points, reflecting favorable product, customer and business mix. Gross profit growth again outpaced consolidated SG&A growth, which increased 16% to $1.5 billion in the quarter, primarily driven by the inclusion of our acquisitions of ION, GIA and ADS in our results. On an organic basis, SG&A increased a more modest 4%, reflective of both our investing for the future and our continued focus on…

Thanks, Aaron. Now let's take a closer look at our strategic progress across the businesses. Our Pharmaceutical and Specialty Solutions strategy centers on strengthening our core and expanding in Specialty, both of which are essential for unlocking long-term value. Our execution of this strategy was evident in our strong fiscal '25 performance. Our focus on customer experience continues to be a key differentiator. In fiscal '25, as we previously confirmed, we successfully onboarded new customers, contributing approximately $10 billion in new business and have made significant strides in streamlining and accelerating the onboarding process. Our sustained core distribution growth has allowed us to finalize our multiyear plan for expanding and modernizing our distribution footprint. We are making great progress on our multistate search for our new fully automated pharma distribution center as we announced at Investor Day. Our new Consumer Health Logistics Center, the first of its kind hub for consumer health and over-the- counter health care products, has successfully launched and is now fully operational. These strategic investments, along with the modernization of our core technology platforms, enhance the service and capabilities we can provide to customers and support our long-term growth trajectory. This includes our new ordering platform, Vantus HQ, where we continue to seamlessly migrate customers, offering them new capabilities to create value for their business. Last month, we hosted our 33rd Annual Retail Business Conference, the largest in the industry, signaling our continued strong role as a trusted partner to retail pharmacies through our commitment to providing solutions, consultative support and advocacy. As an example, during this year's conference, we announced the formation of our One Voice Initiative to support state advocacy efforts for independent pharmacies, reinforcing our commitment to their success and the vital role they play with patient care in their communities. Turning to…

[Operator Instructions] Our very first question today is coming from Lisa Gill calling from JPMorgan.

I just have a numbers question. If I look at the updated guidance for the Pharmaceutical and Specialty Solutions division, it's up by 100 basis points. And Aaron, I think you talked about $0.05 coming from the change in NCI, so that would be about half of that. Can you talk about where...

I'm very sorry, but it appears that her line just dropped. Please go ahead, sir.

I'll proceed with the answer. Lisa, thank you for the question. You're right to call out that we did raise our guide for the year by $0.20, and roughly half of that is tied to the liability classification and roughly half of that is tied to higher expectations for both Pharma and the Other business. It's a higher percentage off a lower base in Pharma and the same percentage off a higher base in Others. And so we are pleased with what we saw in Q4, as you no doubt took from Jason's and my comments on the demand we're seeing across the business, and that's reflected in our raise to the guide.

Our next question will be coming from Allen Lutz of Bank of America.

One for Aaron. SG&A was up a bit quarter-over-quarter, and I know there's a lot of moving pieces here. You just said the closing of ADS. There's some R&D investments you talked about at the Investor Day. But can you talk about or frame the high-level drivers of that quarterly step-up and then how we should think about SG&A heading into fiscal '26?

Really appreciate the question. First, I want to point out that we actually saw gross margin improvement as well. And so we're pleased with the benefits we're seeing really across the mix of the business, whether it's product, customer or part of the business. SG&A is really a story of us investing for the future, offset by extensive efforts to simplify and optimize our operating costs. But you're right, we are making investments in technology, et cetera, that's hitting expense. But I do want to point out that the vast majority of the increase in SG&A is tied to the inclusion of the recent acquisitions. And as you can imagine, when you have acquisitions, we also have synergy opportunities that develop over time. And so we see opportunity there as well.

The next question will be coming from Elizabeth Anderson of Evercore ISI.

Maybe just to follow up on what Allen was asking. Can you just confirm that the -- when you were talking about the things that moved the Pharma numbers versus I think your expectations of above that high end of the AOI guide for 4Q, and you talked about bad debt and routine contractual items, that does not include -- those items do not include the things you called out in your Investor Day about like the Consumer Health, Logistics Center, MSO investments? And then two, could you maybe double-click a little bit more on the Pharma AOI guidance increase, sort of the specific drivers that kind of caused you to go from your prior guide 1.5 months ago to the new guide?

Sure. Let me take it in reverse order. What I would observe is we are really pleased with the Pharma business performance in the fourth quarter and indeed for the entire year. And while the numbers came in a little bit lighter than what we had expected when we issued our updated guidance 3 weeks before the end of the fiscal year, the fact of the reality is we are seeing strong demand really across the business. And that was why we were comfortable raising our guide for next year for Pharma as well. And then to -- on your point about the -- what led to the Pharma results for Q4, there were a number of individually immaterial items like bad debt, some contract resolution points with vendors and suppliers that aren't terribly exceptional. They are individually immaterial, and they all happened at our -- as we approach the year-end. And so I don't want to -- I don't want people to read too much into it. What you should focus on is the strong demand we are seeing across the business from a go-forward perspective.

Yes. And the only thing I'd add within that is when you dive down deeper into all the different KPIs, metrics and operational performance of not only the Pharma business, but the rest of the enterprise, it's reflective of these updates that we saw confidence in that we have a lot of momentum in exiting fiscal '25 that we expect to continue into fiscal '26. And that increasing confidence allowed us to tweak that up just a little bit.

Elizabeth, the -- those items did not include the investments that you referenced either.

Next question is coming from Michael Cherny of Leerink Partners.

Maybe if I can just dive in a little bit on the gross profit performance in the quarter. You talked about the margin expansion. Obviously, some of that is mix driven because of MSOs. How are you thinking about the gross margin trajectory you're seeing within your core distribution business? And what are some of the moving pieces, particularly in the quarter, that drove some of the performance, if it did increase on an underlying basis?

We are very focused on driving profit improvement across the enterprise. And so we look at it on a total enterprise and total business segment perspective. And so while I'm not going to comment on the gross margin elements just to the core distribution business, I do want to point out that our emphasis on Specialty Distribution, which is a higher-margin business, growing double digits, our emphasis on the additional revenue streams coming out of our MSO acquisitions like Solaris, all of those things are helpful to our overall gross profit profile. And of course, we can't lose sight of the rapidly growing other parts of the business, the Nuclear and Precision Health, the at-Home, the OptiFreight, et cetera. Those are also helping our overall profit profile.

The next question will be coming from Erin Wright calling from Morgan Stanley.

Great. So I'll switch to GMPD. And just more broadly, what are you seeing in terms of utilization trends across the segment? And then on the tariff front, I think you said no change to your expectations there. But just speak to how maybe some of the mitigation efforts are playing out relative to your expectations on that front. You spoke a little bit about that quarterly cadence. Is that how you were thinking that it would play out for the year? And just can you kind of remind us how meaningful of a component and some of the mitigation efforts around price increases across that segment?

Sure. Yes, sure. Overall, there's not a lot of new news as it relates to the GMPD business overall, whether we're talking utilization. That remains relatively consistent. We've always said we're targeting the overall market growth and then a little bit of extra as it relates to increasing the penetration of our Cardinal Health branded products, and that's exactly what you saw in the quarter. So not much is changing there. Within the tariffs, also not much is changing there. Absolutely, there's some puts and takes in terms of the different changes to the tariff rates by country, but they've been relatively small in that regard. The overall aggregate gross impact as it relates to the tariffs remains in that around $100 million -- $450 million that we've referenced before. We continue to anticipate that we can mitigate $250 million to $300 million of that. So up to 2/3 of that, we are working through mitigation actions -- operational mitigation actions that do not impact either us or our customers. And it's that remainder then, that $150 million to $200 million that we're working through, part of that is included in this guidance. That remains also the same of that $50 million to $75 million. And then the remainder is in the form of pricing that we only take as a last resort for those items that are under particular pressure and are unique to where it's sourced that we feel that that's appropriate. So we'll continue to work that. What's really important is that when we had the incremental inflation 3 years ago or so, 3, 4 years ago, we -- it took us about 3 years to get to a run rate that was acceptable. As it relates to this, we're targeting trying to get our run rate to be back to much closer to parity as we exit fiscal '26, and we're making really good progress on that. I'll turn it over to Aaron here to walk through a little bit more on the cadence as it relates to how to think about all this over the course of fiscal '26.

Sure. Thanks, Jason. Erin, look, Jason and I are really proud of what the GMPD team has accomplished this year, and for them to deliver a $70 million profit number in Q4 is an excellent result for that business, given the -- given how it's evolved over the last couple of years. From a quarterly cadence perspective, though, I do want to point out that in each of the fiscal year '24 and '25, they were very back half-weighted years. And that's what we anticipate happening again in fiscal year '26. In my prepared remarks, I called out that we expect the profit to be roughly 1/3 H1, 2/3 H2. Q2 is probably going to be -- may well be the lowest -- low point from an absolute dollar perspective because of when we'll realize the impact from the early rounds of tariffs as well. And Q4, again, we expect to be the high point of the year. And so very similar profile for the last 2 years as we look -- from a cadence perspective as we look ahead.

We'll now go to Eric Percher of Nephron Research.

A question on Solaris. So I think at 750 providers, this is about double what you started with not so long ago. I know you've been adding. So I'd be interested to hear what they may be adding in terms of capabilities or opportunities versus what you're adding. And then, Aaron, what I'd ask you, I know we don't have accretion beyond the initial view, but what is your view on where accretion will ultimately come from relative to the MSO share versus distribution versus new revenue streams?

Okay. So let me go in, start, and then Aaron can clean up here afterward. So really pleased with the partnership and acquisition we see here with Solaris. It fits very well to what we laid out at Investor Day. You're right, Eric, that this is 750 providers, and you add it to the other recent acquisitions in urology for Urology America, Potomac Urology and Academic Urology & Urogynecology, those combine to nearly 1,000 providers within urology. And specifically, what are we bringing? The Cardinal Health side, urology is a real sweet spot for this enterprise. When you think about our leadership and our strengths across the enterprise, so much of it fits well within autoimmune and urology, which is why we laid out the strategy we did. Think Specialty Networks, our first acquisition in the specialty space in quite some time, nearly now 2 years ago. They were borne, and their strength remains in urology while they're expanding quickly into other therapeutic areas like oncology. Think about our Nuclear business. Long known for strength in leadership in oncology, but urology is more and more an area of strength and growth. As you heard this quarter, we're growing our Theranostics business more than 30% and even faster in the urology space. At-Home Solutions, it's a real strength. We have a key role within delivering those urology products to people's homes. And then, of course, the addition of all that. So we really like how it fits into our portfolio. And when you think about what they're bringing beyond 750 fantastic specialty providers -- specialty physicians and providers throughout the United States, what they're able to bring is that very diverse revenue stream. So while there's a drug component spend to this, it's pretty similar to the ratios we've talked about before. So this is an additional $1.5 billion of revenue and less than 1/3 of that being in the drug spend. And so that real breadth of revenue and strength of providers fits nicely into the MSO structure that we have at GI Alliance. A lot of those capabilities will carry over. This will be managed by a common leadership team, but having a very specific focus on the urology space to ensure that those physicians have the added attention and specialization they need for their practices. So what did I now miss?

Let me offer up a couple of additional insights. First, some data points for you, Eric. Jason called out the revenue for Solaris at being about $1.5 billion. From a modeling purpose -- for modeling purposes, assume EBITDA of, call it, $125 million. We've got some questions on purchase price. Our cash out the door will be $1.9 billion, as you see in our press release, that we get about a 75% stake. The enterprise value or transaction headline value is $2.4 billion. And as we call that, we will fund our portion of that through a combination of cash on hand as well as some incremental financing that will follow in coming days, and we expect to close it by the end of the year. Last thing I observed, really to build on Jason's point about accretion, it's coming from a couple of different places. One, scale, right? This is the fifth business now that is urology, MSO related, that will be part of our portfolio. We have -- and we have efficiencies across the various businesses that are being added to the Specialty Alliance, the Urology Alliance, part of the Specialty Alliance. And don't forget there are also opportunities across the Cardinal portfolio as well. We started our acquisition efforts in support of our strategy and by acquiring Specialty Networks, which had a very strong urology platform as well.

We'll now move to Kevin Caliendo of UBS.

Just want to confirm one thing. On the noncontrolling interest, is that being added back to AOI? Or is that just $0.05 less below the line? I'm just trying to understand if it actually impacts the operating income, the change of accounting on this actually changes the operating income increase in guide in the Pharma segment or not. It was just unclear to me.

The liability classification is exactly what we called it, so it will adjust.

But no direct impact to that above the line operating income.

Our next question will be coming from George Hill from Deutsche Bank.

Aaron, can you walk us through, I guess, 2 things I wanted to follow up. One, I think was Kevin's question on the accounting treatment. And are there any marks on the liability that will run through the income statement in future periods? Kind of like what's the offset for the NCI going away? And are you able to quantify the value of the assets from Specialty Networks, either from a revenue or earnings perspective, that are being contributed to the new JV that you guys will own 75% of?

On your last point, Specialty Networks is now being contributed into the broader core part of our operation. And indeed, as we've highlighted on earlier calls, Specialty Networks has become a much larger piece of the overall Cardinal profile.

If I could jump in there to make sure I connect all the dots. When I was referencing what we bring to the relationship with Solaris Health, it is we bring these capabilities. We're not contributing anything to that business. It's the broader infrastructure of everything that we have as it relates to what Specialty Networks brings, what we bring for distribution and what we bring more broadly with the relationship with GI Alliance, which is now the Specialty Alliance.

And then with respect to the liability classification, I think you just heard me call out that from an update to our overall guide perspective, we raised it by $0.20, and roughly half of that is tied to the liability classification and half of it is tied to our expectations for the underlying new business. You will see further details in our 10-K, which we encourage you to take a look at. And if you have more questions on that, Matt and team were happy to take it.

The next question will be from Daniel Grosslight of Citi.

Can you talk about some of the potential pricing headwinds in home solutions, particularly I'm thinking about competitive bidding coming back maybe in a couple of years from now? Can you just help size what percent of your at-Home revenue is subject to competitive bidding and how you're thinking about potential CGMs and pumps being included in that program?

Yes. Well, first of all, we feel very good about our overall product portfolio and our payer portfolio. When you think about the payer mix, it's quite diverse. We had relatively little Medicaid type of reimbursement within the prior portfolio. It is higher with government payers within the recent acquisition. But overall, we have a very diverse product as well as payers that, overall, we feel quite comfortable with. As it relates to where we think the administration is going, we are uniquely positioned to help support that. In terms of our capabilities, when you think about we're the only scaled distributor and provider together, so we provide that unique capability. And what's really important to the administration as well as to us is ensuring that access for patients to those products that are clearly creating a lot of value for them. So that overall is a nice setup, and we feel like we will be indispensable in any solution or changes going forward. In fact, Daniel, I read your note, and I think there's some elements within that, that are pretty consistent with what I'm going to say here. Overall, I think the setup for the CGMs is one where, while there's likely to be this competitive bidding process, is a category that is already seeing fairly low rates relative to commercial rates. And we see it as a fairly concentrated, just 2 manufacturer type of environment. So the setup feels a little bit different than some of the other historical precedents. And to answer your question specific to the CGMs across our at-Home Solutions portfolio, it represents for Medicare only about less than 15% of our total revenue for at-Home Solutions. So overall, something that is important to us is important to our customers and to patients, and we'll be managing very tightly and closely and advocating for them with the administration, but feel pretty good about the overall setup. And when you think about what they're really trying to accomplish, it is the taking out the fraud, waste and abuse. And we run a pretty tight ship, and we are very focused on compliance and running strong processes. And so the more pressure there may be, I think the more opportunities we may have to pick up an even greater leadership role within this important category.

We'll now move to Stephen Baxter of Wells Fargo.

Just a couple of quick numbers ones. Just wanted to see if you might be willing to size the cumulative impact of the Pharma items that you called out in the quarter. I think your commentary was potentially above the midpoint of the range ex those items. So I think it potentially implies $10 million to $15 million, but interested if you potentially could speak to that. And then Other income in the quarter was elevated, and heard the call-out on revaluation, but I think there's also some impact from GIA as well in Other income. Would love to just try to think about what the impact from revaluation was, so we could maybe have a cleaner look at the EBIT line in the quarter.

I think you heard me correctly on your estimate around the impact of the Other items. I did say in the prepared remarks that it would have been above the midpoint of the guide we called on June 12, just before the end of our fiscal year, relative to that. And then on the revaluation points, as I pointed out earlier, there will be a lot of detail in our 10-K, which is about to be filed. You can take a look at the accounting disclosures there.

Our next question will be coming from Charles Rhyee of TD Cowen.

Maybe just a couple of clarification. I think, Aaron, to Elizabeth's question earlier, I kind of missed your answer at the end. The -- you're saying that these -- and maybe to follow up on this last question, which is the extra expenses, these were not part of the kind of investments that you talked about at Analyst Day. And then secondly, when we think about the $0.05 change for the liability, is that also includes like the catch-up from the fiscal third quarter since GI Alliance was closed back then? So it's really think of it as the like roughly $0.025 per quarter, and that's why we're only seeing about $0.10 in fiscal '26.

There was a lot there. Let me attempt to catch the pieces, and the team will tell me what I miss. At Investor Day, we provided an updated guide, and that included the impact of a variety of look-forward investments we're making across our portfolio. Those are not what I'm referencing today when calling out that there were a number of individually immaterial items that took us to the bottom end of our Pharma guide. Had those individually immaterial items like some bad debt adjustments or some other ordinary course contractual resolutions not occurred in the last couple of weeks of our quarter, we would have been above the midpoint. And so you can -- I think you can size it from there. I lost track of the second piece.

Just the $0.05 and as it relates to...

Right, the quantification. And really, the best way to think about that is to look forward. And we called out a $0.20 increase to our guide for fiscal year '26. And I said roughly half of that is tied to the liability classification and half of it's tied to our adjustments on a higher percentage on Pharma, a lower base, and a same percentage on a higher base on Other. And so that will give you a view of how to roll it across the year. GIA closed in February.

Your next question today will be coming from Steven Valiquette calling from Mizuho.

Yes. Most of the questions have been answered here. But really, just a quick confirmation just on that last topic again. Given the change in the liability classification, what should we expect for just the total net earnings or loss attributable to noncontrolling interest on the P&L for FY '26? Is that going to be pretty close to 0 now? I just want to make sure I'm understanding the mechanics of that properly.

I guess, the -- all I can reference to is the fact that, a, we believe the business is set up for great success, continued growth as we carry into fiscal year '26. We have raised our guidance overall reflective of the liability classification as well as the updates into our views of the underlying business. And so while there are some puts and takes across the P&L, you'll see the details of that within the 10-K, which is about to be filed.

We have one more question in the queue, and that question -- today's last question will be coming from Brian Tanquilut of Jefferies.

Maybe just hitting on Sonexus specifically. Can you talk about the services that are driving the growth in that segment right now? Is it prior authorization? Or is there any other to call out on what's pushing Sonexus higher?

There's not any particular area I would call out other than the breadth of new products that we're supporting. It is within the Biopharma Solutions piece of the business that we called out at Investor Day that has a 20% expected growth CAGR over the next 3 years, which takes that overall business from $550 million in '25 to about $1 billion by fiscal '28. And we called out Sonexus is expected to -- is currently growing faster than that type of rate, and that's why we called it out. We'll provide more color as to some of those drivers in future quarters.

So ladies and gentlemen, we have no further questions at this time. I will turn the call back over to Mr. Jason Hollar for any additional or closing remarks.

Yes. Thanks, everyone, for joining us, and thanks to the Cardinal Health team for another great year and the fantastic momentum we have exiting '25. As we've laid out here today, we have a clear plan in place for '26, very consistent with the Investor Day strategies that we laid out just a month or so ago. And importantly, we see the momentum taking us to at least those levels in the near term, which is why we felt comfortable in raising our broader operational and EPS targets for today. And just looking forward to providing additional updates over the course of the year.

Ladies and gentlemen, that will conclude today's conference. We'd like to thank you for your participation. You may now disconnect. Have a good day, and goodbye.