CEO Jason Hollar and CFO Aaron Alt. First off, thank you both for joining us today. Now, Jason, you've been with the company since COVID began, and we're finally entering a more normalized operating environment. I guess, as we sit here today, what are you most excited about for the next year?
Yeah. Yeah, thanks, Allen. Great to be here. Thanks for having us. Real quick, if I could just take care of a real quick housekeeping item. We will be making forward-looking statements today, which are subject to risks and uncertainties that could cause our actual results to differ materially from those projected or implied. For a description of these factors, please review our SEC filings, which can be found on our investor relations website at ir.cardinalhealth.com. Thank you for your patience. Yeah, so there's— I put everything into two key buckets in terms of our excitement. First of all, just the underlying utilization in the industry continues to be very strong.
You know, ever since COVID, as you mentioned, but even during COVID, it showed the resiliency, especially of our largest, most significant business, the Pharma business, having such strong demographic trends underlying the utilization. The aging America will continue for at least the next 40 years, more and more adults over the age of 65 that drive the healthcare industry. Those trends, as well as secular trends, whether it's precision health, care into the home, things of that nature, innovation in general, adds a really strong foundation ballast underneath this industry, which volume is the key thing that drives our opportunity to leverage that scale, to make our products even more competitive, more value for our customers and ultimately our patients, their patients.
The industry dynamics continue to be quite robust and quite consistent with an environment that allows us to invest into it and to grow our business, which is the second piece of it. We continue to grow in all aspects of our business. Within our Pharma business, excited about that resiliency that continues to play through, about our individual performance within the marketplace continuing to be strong is, you know, certainly a testament to this year's results. The recent acquisition, especially Specialty Networks, shows an opportunity to grow organically as well as inorganically with that acquisition. Within our GMPD business, the biggest piece of the former Med segment, there's a lot of opportunities still with that segment. We've demonstrated fantastic growth this year.
Our guidance is for a $230 million improvement from last year's results, driven by the improvement plan there to mitigate inflation and to drive Cardinal Health Brand products. And then, to top it all off, we have these three very interesting growth businesses within our Other segment, each of them riding a different wave of the secular trends within healthcare. That's some strong areas, each of them leaders in their space, so our Nuclear business, at-Home Solutions, and OptiFreight Logistics, all well positioned to continue to grow well into the future.
So when you look at the operational results, you add it all up, what we're also just really excited about is the free cash flow that comes along with that has allowed us to really invest into organic as well as inorganic growth, but also gives a great opportunity to return capital back to shareholders. So we're going to continue to be really focused on that and responsible with that, back to our investors, to make sure that all benefit.
That's great. I want to start with the Pharmaceutical business, and you recently reiterated 4%-6% long-term segment profit growth recently. We're entering, or we're not entering, we're kind of getting through this post-COVID normalization period, where revenue and operating profit growth is really normalizing, you know, after some of the things we saw during COVID, and even more recently, maybe a little bit slower growth in GLP-1s.
You know, as we enter this normalized environment, can you talk about the high-level drivers that are impacting this growth algorithm, and how we should think about it, or how you're thinking about 4%-6% operating income growth as we see some of these things that are changing in real time, things like GLP-1 growth, insulin pricing, and then obviously, there's operating expense growth in there as well. So just how do you kind of—what are the building blocks to that 4%-6%?
Sure. Yeah, so I think the most important message is the algorithm behind that 4%-6% growth, and the actions behind it are unchanged from what we've been talking about since the investor day about a year ago. That 4%-6% growth, why we've reiterated it more recently, is that those drivers and those actions are largely unchanged. So to build out a little bit further, you know, within the largest part of our business, again, our Pharma segment within that, the Pharmaceutical Distribution, the PD non-specialty side, we expect that to continue to grow in the low single- digit type of growth.
That goes back to the utilization that I just referenced, that there is, is this rising tide of volume and of needs from patients that, that business will be able to continue to satisfy. But as I mentioned, both organic growth with Navista, with our, our other Specialty assets, the more recent inorganic growth with, Specialty Networks, all enablers to further grow our Specialty business, which has historically grown at, double- digit type of rates, and where we expect that to, to continue growing, above the market type of rates and, and close to that double digits as a result of that ongoing demand from the market, but also those investments that we're making. So that blended average gets you into that 4%-6% type of range, and those are all the same actions that we talked about, a year ago.
Now, more recently, we've highlighted that with that key customer non-renewal, that we expect that growth to be a little bit less in fiscal 2025. Our guidance right now is for at least 1% growth in 2025, but you still have that 4%-6% over the course of those three years because of the very significant midpoint guidance that we have for 2024 of 9%. So it averages out to that same type of growth, and we think those investments in each of those areas will continue to drive you know that growth well into the future.
Now, I would say the competitive environment through COVID was relatively stable. You referenced a competitive shift from one of your customers, and there's been a couple others that we've seen in the market. As we think about the growth algorithm of the industry and your business, what's the biggest risk to the or disruption of that growth algorithm as you sit here, kind of thinking forward maybe a year or two years, what are the things that, you know, could go wrong?
Well, first of all, I think the underlying competitive dynamics are relatively unchanged. It's always been a competitive, yet stable type of market, and that's where we still see it. And what is most important to us, and what we hear is most important to our customers is the value that they're receiving. And so that's why these investments, both organic and inorganic investments, are very important to make sure they're getting the tools, the capabilities for them to be competitive. And that's where we're most focused. Examples being our InteLogix and Atrix platforms to help health systems be more competitive and manage their business better, back to Specialty Networks.
You know, these are tools that not only help physicians operate their businesses more efficiently, more productively, but more importantly, they're helping their patients have better outcomes, their customers' patients have better outcomes. And so, all of these are again, investments that are helping our customers treat their patients better, create more value for them, and that's the moat that is built around any successful business. And there's a lot of opportunities for us to continue to differentiate. A lot of the business model questions that we get on this topic of what can change, whether it's IRA or whether it's regulatory this or that, what I keep coming back to is our mandate to safely, securely, and efficiently deliver pharmaceutical products to our customers.
That has never changed, and we create a lot of value in the healthcare ecosystem, in service of that. And none of these models, to date, have demonstrated a desire or even the intent to take out that very valuable, source in, in the middle of this infrastructure that does add value, both upstream, with the manufacturers, as well as downstream to the, to the customers. And I continue to see, each one of the, these, evolutions of the model really relying on the distributors, and that's where our role is, to continue to, to invest into it and be even more relevant.
I wanna talk about the Specialty business. You mentioned, Navista and the acquisition of Specialty Networks, before. But I think we were talking a little bit beforehand, when I started covering Cardinal 12 years ago, I think the Specialty business was sub-$1 billion in revenue or around $1 billion in revenue. So you guys have done a phenomenal job growing that. As we think about the growth opportunity for Specialty, and why community oncologists wanna partner with Cardinal, what are your conversations like with them? How can— and also, how can Cardinal solutions help them remain independent?
Mm-hmm.
Just what are those conversations like?
Yeah, well, first of all, there's a bit of a self-selection in the marketplace. Those 2,000 on community oncologists that are independent are independent probably for a reason at this stage, so there are other solutions for them. And when we talk to them, that's exactly what we're hearing. They're fiercely independent because they're wanting to be more entrepreneurial, they're wanting to solve those patient challenges and issues themselves, and they wanna be driving all aspects of their business. So just like what we've done with other parts of our business and what we've done with retail independence, as one specific example, we are looking to build the infrastructure behind them so that they can continue to be independent and give them even more tools and capabilities to be successful well into the future.
So what we've done with Navista is a great example of that, where we didn't start with what we had. We started with talking to those current and prospective community oncologist customers and said, "What is it that you're looking to accomplish? Yes, we know you wanna be independent, but what are the capabilities, the specific value drivers that you need support with? And then we'll go out there and either build it or we'll partner with someone else." You don't have to have all aspects, but you need to work with partners that are strong in each of these areas, and that's what we've done with building of Navista, is to create the solution for their challenges and for their opportunities, and not just give them what's already on the shelf and we're trying to sell them.
And so that's really appreciated by those oncologists and why, you know, ongoing, we are getting a lot of pull from them to continue to listen and continue to act on other opportunities that may exist for them. Now, we, as you mentioned, we've also expanded outside of that inorganically with Specialty Networks, more in neurology than in oncology. But those types of capabilities, specifically PPS Analytics, is a great example of a technology that's at the heart of that business, that today provides a lot of value by taking that EMR and other medical record data and providing actual insights, both upstream with the manufacturers as well as downstream with the providers, to run their business better and to create better outcomes for their patients.
Those are examples of the type of technology capabilities, partnerships, even within our own company, that we'll be leveraging to make sure that community oncologists have the full access and benefit from the leverage and the scale that we can bring.
That's great. And, Aaron, I wanna bring you in, as well here. As we think about brand inflation, generic inflation, I think on your call, you talked about insulin prices impacting, revenue growth and obviously GLP-1s impacting revenue growth. But I guess the more important factor here is really gross profit dollar growth and if there's any change in that. So as you think about the different, drivers impacting the U.S. Pharmaceutical business from a top-line, perspective, GLP-1s, insulin prices, brand inflation, generic inflation, what are the biggest drivers that you see, and how is that, if at all, impacting gross profit dollar growth in the business?
Sure, it's a great question. Let me cover a little bit of ground here. First, from a top-line perspective, we are very supportive of innovation across the industry, and so we're looking for the new therapeutics, the new drugs to work their way through the distribution channels. We wanna put the right drugs in the right place at the right price for the patients that are supported by our ultimate customers. GLP-1 is a great example of that. It's innovative, it's been driving significant profit growth. We called out in Q3 that it was about 200 basis points of revenue growth, sorry. We called out it was about 200 basis points of the growth in the quarter, but it's not a real contributor to the bottom line for us.
And so we have to we have to meter and measure what we're supporting from an industry growth perspective relative to how it supports our, our bottom line. Now, you asked in your question about the brand inflation, right? And it's, it is a practical reality that our fiscal Q3, the calendar Q1, that is where we see most of the brand inflation in any given year. And this year was, as there was not a lot of new news, and that it was as we expected it would be, where it did not achieve the heights that we saw in fiscal 2023, which was a higher point, if you will, but it was otherwise as expected. And similarly, from a generics perspective, we are pleased with the relatively stable macro there.
Prescription demand has been strong, volume has been strong, and we like to talk about consistent market dynamics, and indeed, we manage our business to the—on both the buy and the sell. And so long as we have consistent market dynamics, which is effectively average, stable average, price per unit or profit per unit, rather, if volume is growing, then things are going well for us, and that's what we're seeing in the industry.
Yeah, that, that makes sense. Appreciate all the color there. One question for either of you. It's a question that I've been starting to ask more, and I feel like it's too early to get a real quantitative answer here, but the Inflation Reduction Act is obviously becoming, you know, it's coming into scope here. How do you think about this legislation as it pertains to your business? Are there opportunities? Are there threats? Does it create more of an opportunity to work upstream with your manufacturer partners? I'm just curious if there's anything that you've identified from the legislation that, that could impact your business in one way or the other.
Yeah, the short answer is not really. Now, that's, that's kind of the end answer to everything. Let me step back, that, there's a couple of references we made already today. We, we like, affordability in the industry. We like transparency. We like innovation. These are some of the themes that we've already been talking about this morning. These are all—w hy we like them? Well, first of all, it's good for the patient, and ultimately, what's good for the patient backs up and requires additional volume, then that's good for our business. And then, of course, you know, we, we like that healthcare is actually solving more problems for patients. So with, with IRA, that's an example of, yeah, there's going to need to be some price changes that work its way through the industry.
But as I already mentioned, safely, securely, and efficiently delivering products to our customers and ultimately to patients is our role. That role has a certain amount of value that's somewhat irrespective of the actual price. And we've demonstrated over long periods of time that evolutions in pricing structures and mechanisms, ultimately, it essentially gets translated to a fee for service for the role that we play for a lot of our business. Now, certainly, there's some services in other parts of our business that are outside that question, but as it relates to the core part of the distribution, there's the very valuable service that we provide, and we expect to continue to receive the appropriate compensation for that in the future and be adaptive to whatever model evolution occurs.
Got it. Fair enough. So one area, you know, a relatively small part of the distributor business in terms of customers, is the independent pharmacy cohort, but obviously, they're a very important customer cohort for you and your peers. I think Cardinal's Medicine Shoppe has about 400 independent pharmacies in the franchise. Can you just talk high level, how you think about, you know, these pharmacies, where they fit within your business, and whether or not this is an area where you're focusing on growth, if you're focusing on improving the user experience? What is—
Mm-hmm.
What's the strategy for that cohort?
Yeah, there's a lot of correlations to this discussion, as with the community oncologist discussion that we just had recently as well. First of all, the 400 on Medicine Shoppe, that's a small subset of the retail independents that we service, so there's about 8,000 strong that we service today. And I would put them all in the same category as that again, they are very entrepreneurial, they're very business savvy and minded, but they also have their customers, the patient's interests in mind, first and foremost. And so we support them just like what we're doing with Navista on the oncology side. We help them operate their business more efficiently.
We give them capabilities to leverage our volume and scale in a way that makes them more, more competitive and be able to be of more value to their patients. Areas like back office support, you know, with dispensing capabilities, with inventory management, things of that nature. One new project, relatively new, we announced about a year ago, that we're really excited about, is our new consumer health hub, which will benefit other classes of trade, but it will probably benefit most the retail independents. By taking all of our over-the-counter products, our consumer health products, and centralizing them into one location with very high automation capabilities will and inventory levels, will allow us to even better service those customers into the future.
These are just some examples of the investments that we have made and continue to make that will continue to drive that class of customer well into the future.
And I think the last question I have here on the Pharma side, the generics program, Red Oak, has been wildly successful, and it's still contributing, it's still a tailwind to earnings. Is there any way to quantify how material the incremental benefits are from Red Oak here, and kind of what the outlook looks like for that business? Is your expectation that Cardinal can continue to gain margin from this business over time, or are we getting to a point where maybe it's gonna be less likely moving forward?
Well, our participation in Red Oak with CVS is a foundation of our business. It has provided a significant benefit to our customers over a long period of years, and we're excited about both what has gone before and what's to come from a Red Oak partnership, you know, with CVS perspective. Red Oak's mission is really twofold. It's to ensure that, you know, we have low cost relative to the generic acquisition, but also to ensure that we have access. And a key element of what has enabled our success, and indeed, Red Oak's success, has been they've gotten really good at doing that, right? We are pleased with the cost profile of our generics program. It's part of what leads to that consistent market dynamics that we've talked about before.
And we believe we're second to none when it comes to access to generic drugs in the face of shortages that others may be facing. And so while we haven't quantified recently the dollar impact of that enterprise, what I would say is that we continue to value that partnership with CVS. We continue to value the Red Oak participation, and we're looking for additional ways to take advantage of the skills that that team has built in service of Cardinal's overall mission.
Let's shift gears to GMPD. Revenue growth for the second straight quarter was positive, and it accelerated. Cardinal Health's brand is improving, and I think on the call, you spoke about the Customer Loyalty Index has been improving. Can you talk about, you know, what's driving the better experience from your customers, the investments you've made there, that's driving that improvement?
Yeah. Yeah, thanks. It's a great question, and, you know, when we think about the Customer Loyalty Index, it's really kind of at the end of the process from their perspective. It's how the customer feels about their support. So you have to go earlier in the process to really understand how we got there. So we've invested heavily in the supply chain. We've made it a lot more resilient. Areas like, you know, not just inventory levels, but more importantly, our own manufacturing capacity, redundancy with diversification of our supply base.
So we've created a much better product flow, which has improved the service levels, then, along with our in-person type of customer experience with them, then have resulted in them feeling much more valued and seeing the better service and less stockouts and things of that nature. So our customers feel better, which they need to do, in order to give us the opportunities to grow with them. And so when we had the year-over-year headwinds in volume, it was when we were not getting that done. We had service levels that were not satisfactory, so we ended up invested into it heavily, and now they're seeing it, they're feeling it, and we're winning and maintaining business at a good rate that allows us to grow at least at the rate of the market.
So, you know, the inflection point that we saw was earlier this fiscal year. So a couple of quarters ago, you saw us go from flattish type of revenue growth to a couple percent two quarters ago to 4% growth this last quarter. So clearly, we have inflected, and customers are telling us, not just with their scores in the CLI index, but more importantly with their orders, that, they believe in where we're going and are driving, you know, more and more volume our direction. So we feel, you know, really good with that, and that's a component of that, that plan.
One comment I'll— You didn't ask it, Allen, I don't know if it's further down your list, but this point around supply base diversification, I did want to touch on one thing, because there's been some news this morning around some tariffs that, and I'm not sure—w e've been in here, in this conference the whole time, so I'm not sure what kind of questions we may be getting from investors on it. But I do want to touch on that there's some new Chinese tariffs that have been proposed by the White House. It's still too early, because it was just this morning that they were announced, to really understand all the aspects of it.
But at least based upon some initial discussions, my own reading of some of the material this morning, it does appear to be China-specific, and it does seem to be specific to a relatively small subset of medical products. So the main point is, because of our diversification of our supply base over the last several years, we have a relatively low percentage coming out of China. We don't do any self-manufacturing in the country. And so while there is some product there that we'll manage and look through, there's also alternative countries and sourcing. So there may be some activity that we need to work through with that, and it is too early to determine exactly which product classes and codes and everything that would flow through and the exact timing of it.
But just wanted to highlight that we, we have managed the supply base to be more diverse. We have managed our contracts to be more flexible, and we'll look at this along with every other change in our business to, you know, continue to manage through it like we have before and make sure that we're putting our customers first, but also taking care of the financial demands that we have.
Really appreciate that color. Sticking to, the same segment here. On operating profit growth, it seems like visibility, continues to improve. You're 90% through inflation mitigation. Own branded products are aiding in the margin. I guess one for Aaron: Besides the, 10% remaining in inflation mitigation, what else needs to happen to hit that $175 million segment profit target?
Yeah. The beautiful thing about the GMPD improvement plan is what will get us there is what has gotten us here so far. And while you're right, we'll achieve, you know, 100% runway by the end of this fiscal year, we'll be moving into a year where the first couple of quarters, it was much lower percentage of inflation mitigation. And so the biggest contributor to fiscal 2025 will continue to be inflation mitigation, right, and the rolling impact, and we're very pleased with the results we're seeing in that respect. You called it out, the continued contribution of the Cardinal Health brand. I was pleased that you noticed the change in trend, followed by then the two quarters of growth as well.
That certainly supports the growth in profit because Cardinal Health Brand is a higher profit margin portion of our business, of course. And then something which we've been doing a lot of, which sets the business up for success as we carry forward, is just the relentless focus on simplification. It's a complex business operating around the world. We're a self-manufacturer as well as a distributor, and the teams continue to find great ways to simplify how we operate, which helps to drive incremental profitability. And those that benefit comes quarter- after- quarter- after- quarter.
So those three criteria, those three characteristics, if you will, will help us land this year, as we have guided, at $65 million of operating income for GMPD, as well as help us then get to $175 million and ultimately, the $300 million that we've guided for fiscal 2026, for that segment of our business.
Very helpful. Switching gears to the Other segment here, you know, three businesses, Nuclear, at-Home, OptiFreight. A lot of tailwinds that you've talked about. I guess, to support double-digit growth here, as you think about those businesses, can you rank order your excitement for those three segments? Or maybe just talk about some of the things you're most excited about within the Other segment here, as it relates to revenue growth.
So I happen to have three kids, and you're trying to ask me to figure out which one I love the most and talk about that. So, they are hard to compare. They each have their own leadership in their portion of the industry, and they each have their own secular trends that benefit them, so I'm gonna have to talk about each one. And, in no particular order for those that are on those teams that are listening to me. So Nuclear, it's in the name, Nuclear Precision Health Solutions. The precision element with theranostics and where that is going is just a fantastic growth opportunity. We've referenced that we have 60 different opportunities in the pipeline.
They all won't make it, and that's fine, because this is a business that succeeds on singles and doubles, not home runs, and they have such a fantastic level of support and capability. They're going to continue to grow well into the future and are on that, that appropriate secular trend. The other secular trend I've referenced was care moving into the home. Very different type of business than Nuclear within our at-Home Solutions business, growing very nicely but also investing heavily. We're now just recently announced our third new distribution center here in the course of the last year. We're kind of in the ramp-up phase of our one in Ohio.
We announced that we'll be nearly into production here or distribution by the end of this calendar year for the one in South Carolina, and we're consolidating a few different sites in Texas and increasing capacity further there. But these investments are fantastic for us, 'cause not only do they create the capacity to continue to grow the business very aggressively, but it also gives us a lower cost to serve because we're increasing the level of automation and technology with each of these. And it's a lot easier to do when you have a new footprint versus adapting one that's already in place, which we're going to continue to work with and evaluate as well. And that leaves our OptiFreight Logistics business.
You know, certainly the smaller, smallest by revenue, but still very mighty in terms of the value it provides customers by helping them manage their freight spend, not just in terms of the dollars and cents, but in terms of the capability and ensuring that those products get to where they need to go in a very timely fashion, very abbreviated fashion, and to do so in a way that's cost effective for those patients and ultimately our customers. So they each fulfill a different role, but all very specialized in what they do. They are all higher margin because of that specialization and the value that they bring to the industry and to our customers.
Each one of them has a component of driving our business to that 8%-10%, high single- digit type of range for the foreseeable future.
And then one last question for Aaron on this. As we think about the, the fiscal 2024 guidance, segment profit growth is different than revenue growth here. How should we think about the drivers of the margin within the Other segment? Is there anything going on other than mix that's impacting the relative growth rates, and how do you think about that?
Sure. So, the guide for the Other segment for fiscal 2024 is 6%-8%. We guided 2025 at 10%, but the long-term guidance range is 8%-10%, and each of the three businesses has a role to play in contributing to that profit, that profit guidance for, for that business. I wanna emphasize that we're actually investing in all three businesses, so notwithstanding the fact that the business, the profile of the Other segment is growing profitability over time, we're investing for the future, you know, in that business.
One thing to point out, during our second fiscal quarter of this year, we did have about $20 million of non-recurring items, and I think I called out at the time that about $10 million of that was tied to our at-Home business, which is part of the Other segment. So that's why we see, largely why we're seeing a lower growth rate in fiscal 2024 from the 10% we're calling for 2025 and the long-term growth rate. That's behind us. We're eager to see how these businesses deliver, because, consistent with the resegmentation, they are getting incredible focus, incredible transparency, and incredible accountability internally, and we have high hopes for them carrying forward.
Then last question here, I guess for Aaron or Jason. As you think about the fiscal 2025 numbers that you put out there, what are probably the, the biggest drivers to get us to the top and the bottom end of the ranges, as you think about fiscal 2025?
Yeah, you know, I think the number one thing you always need to think about first and foremost is just that industry utilization, right? That there's nothing we can do about how many people get sick, and things like vaccines, as an example, where we highlighted that was a driver of our results this year, that you know still need to see exactly how that will play out next year, and that can be more binary in terms of its nature, a little bit more volatile than some of the older type of generic products that have been out there. So that I think that is one of the key ones.
When we talked about some of the investments that we're making, you know, how we get up on that growth curve is going to be an important point. And, you know, whether we're talking organic investments with Navista or we're talking about Specialty Networks, which, you know, we're seeing that as a profitable business on day one, but we do have high expectations for the growth over the course of the year. And so those are some of the key items as it relates to the Pharma segment. Within Medical, you know, Aaron laid out some of the key drivers a few moments ago, and that is going to be, you know, very much—t he inflation mitigation is done, right?
That is, the actions are done this quarter, and we'll ride the rest of that wave for the balance of next year, is really driving the same point on utilization on Cardinal Health Brand volume. Part of that is our ability to get a little bit more mix in our own channel, but a lot of it's also going to be in just the underlying marketplace, and so that will continue to be the biggest trade-offs there. Anything to add, Aaron?
Yeah, we've provided pretty overt guidance around things like interest and other costs that folks can look back at our guidance commentary on, but we're looking forward to a good year.
Great. Well, we are out of time here. Thank you, everyone, for joining us, and thank you, Jason and Aaron, as well.
Yeah, thank you for having us.