Cardinal Health, Inc. (NYSE:CAH) Q1 2024 Earnings Call Transcript

Cardinal Health, Inc. (NYSE:CAH) Q1 2024 Earnings Call Transcript November 3, 2023

Operator: Good day, and welcome to today’s First Quarter Financial Year 2024 Cardinal Health Earnings Conference Call. This meeting is being recorded. At this time, I’d like to hand the call over to Matt Sims, Vice President of Investor Relations. Please go ahead, sir.

Matt Sims: Good morning, and thank you for joining us for Cardinal Health first quarter fiscal ’24 earnings conference call. On the call with me today are Jason Hollar, Chief Executive Officer; and Aaron Alt, Chief Financial Officer. You can find today’s press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. As a reminder, during the call, we will be making forward-looking statements. The matters addressed in the statements are subject to risks and uncertainties that could cause actual results to differ materially from those projected or implied. Please refer to our SEC filings and the forward-looking statement slide at the beginning of our presentation for a description of these risks and uncertainties.

Please note that during the discussion today, our comments will be on a non-GAAP basis, unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of today’s call, we kindly ask that you limit questions to one for participants so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Jason Hollar: Thanks, Matt, and good morning, everyone. Overall, it was a great start to our fiscal year, with strong first quarter results and an improved outlook for the year, we are continuing our operating momentum into fiscal 2024. In the first quarter, we delivered significant profit growth in both segments. In Pharma, the results were driven by the strength across our business, including continued positive performance from our generics program. We also benefited from our role distributing the recently commercialized COVID-19 vaccines, which I’ll elaborate on later in my remarks. Macro trends in the core distribution business remains stable, and we continue to see strong pharmaceutical demand, including the GLP-1 medications.

And both our higher-growth specialty nuclear businesses tracked ahead of plan in the quarter. In Medical, the first quarter was another proof point of the inflection we began to see last Q2 in this business. Recall, the segment was unprofitable only a year ago. Overall, results tracked slightly ahead of our expectations, and we continue to execute our Medical Improvement Plan initiatives to drive better and more predictable financial performance. In particular, we made notable progress on inflation mitigation in the quarter. At an enterprise level, we realized notable operating leverage from our efforts to manage costs across the segments. And below the operating line, our favorable capital structure and responsible capital deployment provided tailwinds, enabled by our strong cash flow generation.

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Q&A Session

In short, the broad-based performance to-date gives us confidence to raise fiscal 2024 EPS guidance only a quarter into the year. Our team continues to prioritize focused execution to best serve our customers and create value for shareholders. I’ll update you on our progress in advancing our three key strategic imperatives shortly, but first, let me turn it over to Aaron to review our results and updated guidance in more detail.

Aaron Alt: Thanks, Jason, and good morning. Q1 delivered a strong financial start to the year, with EPS of $1.73, surpassing our expectations in Pharma and Medical. The strength of our pharma business, the progress on our medical turnaround efforts and our disciplined approach to capital allocation contributed to new first quarter highs for the enterprise on both revenue and EPS. We also delivered strong cash flow and ended the quarter with $3.9 billion of cash. Let’s start with the consolidated enterprise results, as seen on Slide 4. Total revenue increased 10% to $54.8 billion, driven by the Pharma segment. Gross margin also increased 10% to $1.8 billion, driven by both the Medical and Pharma segments. Consolidated SG&A was generally in line with the prior year at $1.2 billion, reflecting our disciplined cost management across the enterprise.

With the significant profit growth in both segments, we delivered total operating earnings of $571 million, growth of 35%. Moving below the line. Interest and Other decreased by $15 million to $12 million, due to increased interest income from cash and equivalents. As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates in the near-term. Our first quarter effective tax rate finished at 22.5%, an increase of approximately 5.5 percentage points. We saw positive discrete items in both the current and prior year periods, which were more beneficial a year ago. First quarter average diluted shares outstanding were 250 million, 8% lower than a year ago due to share repurchases. And as I mentioned earlier, the net result was first quarter EPS of $1.73, an all-time first quarter high point, reflecting growth of 44%.

Let’s turn to the Pharma segment on Slide 5. First quarter revenue increased 11% to $51 billion, driven by brand and specialty pharmaceutical sales growth from existing customers. We continue to see broad-based strength in pharmaceutical demand spanning across product categories brand, specialty, consumer health and generics and from our largest customers. Similar to trends last year, GLP-1 medications provided a revenue tailwind in the quarter. Segment profit increased 18% to $507 million in the first quarter, driven by a higher contribution from brand and specialty products, including distribution of COVID-19 vaccines, which provided a modest contribution as customers stocked up in preparation for the fall vaccination season. We also saw positive generics program performance with continued volume growth and consistent market dynamics.

Turning to Medical on Slide 6. First quarter revenue at $3.8 billion was largely flat to prior year and prior quarter. In the first quarter, we saw lower PP&E volume and pricing, including the impact from the prior year exit of our non-health care gloves portfolio, offset by growth in at-Home Solutions and inflationary impacts, including mitigation initiatives. Medical slightly exceeded our expectations in Q1 and delivered segment profit of $71 million, which represents an approximate $80 million increase from the prior year’s first quarter loss. Consistent with the expectations communicated at Investor Day and last quarter, we continue to be encouraged by the indicators of improvement in trends with respect to our Cardinal Health brand product sales.

In Q1, we saw a slight year-over-year volume growth. As expected, we saw an improvement in net inflationary impacts, including our mitigation initiatives. We also continue to see normalized PP&E margins, which were impacted by unfavorable price/cost timing in the prior year. In the quarter, we also recorded a $581 million non-cash pretax goodwill impairment charge related to the Medical segment, which is excluded from our non-GAAP results. This Q1 accounting charge is due to an increase in the discount rate used in goodwill impairment analysis. Now turning to the balance sheet. As I alluded to earlier, in the first quarter, we generated robust adjusted free cash flow of $1 billion and ended the quarter with $3.9 billion of cash on hand. We remain focused on doing what we said we would and deploying capital in balanced, disciplined and shareholder-friendly manner.