Operator: Thank you very much, sir. We’ll now go to Kevin Caliendo calling from UBS. Please go ahead, sir.
Kevin Caliendo: Thanks. Thanks for taking my question. I want to — I appreciate all the color around the things that you can control on the Medical side. But it’s a little confusing to understand why market demand has been stagnant the last couple of quarters for your products. Given what we hear from at least the public hospitals and the like who clearly are doing better, is there a geographic issue? Is it a customer issue that you’re not seeing increased demand? Is purchasing changing at the hospital level? Just — or is it a product portfolio issue? Like what’s actually happening in the marketplace that’s kind of kept your private portfolio stagnant?
Jason Hollar: Yes. There’s a few components I can provide some additional color on. First of all, we’ve highlighted the some of the categories. So PPE, we’ve highlighted the destocking situation still. So we’re not seeing anything new or different there. We have some other categories like our lab business, which is actually seeing a little bit of a headwind sequentially. Nothing too significant, but it’s certainly with COVID originally and then with flu testing, we had some pretty good volume over the last couple of years, and that’s getting more normalized. So we have some headwinds like that. For the other non-PPE type of Cardinal Health brand categories that are important to us, especially from a margin perspective, what we have to go back to is just highlight that a couple of years ago, last year, we saw some very significant supply chain constraints.
And at that time, we were not able to get our customers the products that they needed. Fortunately, we’ve been working very hard on that. Our product availability, our product health, our customer service levels are at levels we’ve not seen since before the pandemic. So we’re in really, really good shape now, but we were not getting all the products to our customers that they needed over that period of time. And we lost some opportunity as a result of that. So that’s why we’re not benefiting from as much of the growth right now. I do think that the underlying utilization is improving. We’re not getting our fair share of that. And that’s where we’re very focused on further investments in our capacity, further investments and product innovation, but also just making certain that we keep our service levels ever increasing to levels that are really exciting our customers, so that they want to buy more and more of that product from us.
And we’re in the best position we’ve been in, in years and have more confidence that we’ll get there. This is an important part of the medical improvement plan, right? It’s one of the four pillars of growth. And so we are anticipating further improvements. It is about 20% of the actions necessary for us to hit the $50 million-plus target. That’s why we’re very focused on the other actions as well to see if we can over deliver and derisk this. But we do believe that utilization will continue to improve overall for the market, and we are better positioned now than we’ve been in a long time to participate in that, and I feel good about our prospects to see that growth, especially as we get into fiscal ’24.
Kevin Caliendo: Thanks so much.
Operator: Our next question is coming from Elizabeth Anderson calling from Evercore. Please go ahead.
Elizabeth Anderson: Hi, guys. Thanks so much for the question. One, I was hoping, thanks for all the details on the Medical business. I was wondering if you could just help us on one more thing and sort of exclusively tell us what the contribution of — or the hit from onetime items was in the quarter on Medical? And then two, can you talk about the pushes and pulls on the Pharma operating profit in the fourth quarter? Because it seems like it could be a little bit of a bit conservative there. So I just want to make sure that we have all the dynamics down there. Thank you.
Jason Hollar: Okay. So I’ll make a comment on your first part of your question, I’ll turn it over to Aaron for the second one. It’s nothing that we’ve explicitly quantified just wanted to highlight the words that we used, again, that it was a modest net negative impact in Q3. So it’s one component. It’s a number of puts and takes within there. I did highlight that as an example, one of the types of items are some costs for further simplification actions. We had some of that in the first quarter as well. So we’re constantly looking at our portfolio and taking action to improve our ongoing profitability and that required us to take some further adjustments within the quarter, but nothing else to really highlight there other than the key is that we just don’t expect them to continue, certainly not the long-term or even into the rest of our guidance for fiscal ’24. Aaron?
Aaron Alt: Good morning. Happy to talk about the Pharma business. First, just let me repeat a little bit of what I said in my prepared remarks, which is we are really pleased with the performance of the Pharma business and what the team is accomplishing in that core part of our business the resiliency and the strength that they showed in Q3 based on the progress on the generics platform as well as some strength in the brand portfolio and the double-digit growth in specialty allowed us to be able to lean forward and raise our guidance for the year for the Pharma business. I want to highlight a couple of things as you think about Q4, which I think was the point of your question, which is, while we expect to see continued good news relative to the operational performance and a stable macro environment, with the strong underlying fundamentals we laid out, it is important to note that Q4 last year was a strong quarter for us, and so we’re lapping a higher point.
It’s also the case that we’ll have less benefit from some nonrecurring items that we called out in our prepared remarks earlier as well. And so overall, strong performance in Q3, looking forward to a good Q4. But careful in our expectation setting.
Operator: Thanks very much, sir. We’ll now move to Eric Percher of Nephron. Please go ahead.
Eric Percher: Thank you. Staying on the Pharma side, I wanted to ask whether the changes we’re seeing to list prices around the insulin products and the potential for more changes in front of the AMP Cap Sunset next year is significant. I understand this is a change to fee-for-service economics, and that gives you a right to renegotiate. But how would you characterize renegotiations that type when they come up? And are you confident you can maintain absolute profit or something close to it?
Jason Hollar: Yes. In short, very confident that we’ll continue to appropriately be compensated for our activity-based value. So this is not any different than the various other types of adjustments we’ve had to make over the years, and it’s something that I think we’ve demonstrated makes sense to make the appropriate adjustments. The other thing I’d highlight is the starting point for a product like this is not real strong margins to start with. So there’s not a big profit pool from which to draw value from. So we do expect to be compensated for the value that we provide and we’ll continue to monitor and follow. One thing we had talked about in the past on this type of topic is where I have the most concern is when we don’t have sufficient visibility to changes and that something would just kind of fall in our lab at the last minute because it does require some renegotiation, restructuring in some cases of how the arrangements are made.
This one is a little bit more straightforward, and we feel like we can negotiate the appropriate outcome for it. And we certainly have the time for it. But the distinction is if there’s ever any really short-term type of impact, and that would be needed to be addressed separately.
Operator: Thanks very much, sir. Next question is coming from George Hill of Deutsche Bank. Please go ahead.
George Hill: Good morning, guys, and thanks for taking the question. I guess, first, as it relates to the Cardinal Health branded products in Medical, I guess, Jason, is there any way to evaluate whether or not you guys are losing wallet share with customers and that guy is impacting volumes? And I guess my quick follow-up on that would be as we know that you guys have historically look forward bought commodity-based products. I guess is there any way to provide any more color around the timing of when Medical in flex as it relates to kind of the forward buying and the commodity impact in the inflation mitigation. Just trying to think about when we kind of like when we see the inflation as it relates to these lower costs really pulling through.
Jason Hollar: Yes. So as it relates to share I think when you look back at our volume, we had a step down in volume in Q3 and Q4 of last year. And again that was — there was a lot of PPE that came out there. We clearly lost share there. It is a business that’s a commodity business for us. It’s important for our customers. We participate as needed. We source most of that product. So it’s a category that’s not our priority. What’s most important is that we take care of our customer needs. In the non-Cardinal volume, and we also saw some weakness there, as I mentioned before, the supply chain constraints. So as other providers had capacity then we would have had a lower share as a result of that. Again I think there’s been very little of that change since then.
Our service levels and our product health have improved dramatically even over the course of fiscal ’23. So I do not believe that we have everything that we’re seeing from a new contracting perspective has been consistent with our expectations here this year. So I don’t see anything new there. But we are dealing with some impacts that happened over the last couple of years. That part is the case. Your second question, I think, I answered it before in terms of the timing associated with the commodity impact is really the international freight is the big one that’s reduced. And that reduced significantly six to nine months ago. And that’s why right now, we’re on the cusp of having to hit our P&L favorably or benefit our P&L is because we typically have two to three quarters’ worth of inventory.
Why it’s spilling over into ’24 is that our volumes have been lower than anticipated. And so it’s taking a little bit longer for us to recognize that benefit. I’ve not called out any significant movements on other commodities. There’s clearly movement. There’s some better. There’s some that have not improved. Overall, it’s consistent with our expectations. We expected a little bit of an improvement across the board, and we just haven’t seen anything more than that outside of international freight. We do have some categories that are just staying very high like nonwovens, where there’s a bit of a geopolitical impact on those types of costs and not just on raw input costs. And so that is something that may or may not change in the future. It’s why we have to have the right structure in the contract, if there’s a further shock to be able to have more flexibility with our price adjustments.
But overall, we’re seeing the other commodities continue to be pretty stable, admittedly at fairly high levels, but they’re not changing enough to really impact our overall message here. And by the way, as those change, our pricing will change. Our objective is to offset this. We’re not expecting to make a margin on this. But if those come down more quickly, then at some point, I would imagine that those costs will adjust — those prices will adjust consistent with that. But right now, we are still absorbing $50 million, well, $50 million to $75 million right now per quarter of those costs, and that’s why our prices do need to still keep increasing until those two lines converge, which we think will be, again, closer to the end of fiscal ’24.
Operator: Thank you very much, sir. Next question is coming from Eric Coldwell of Baird. Please go ahead, sir.
