Afternoon, everybody. Thank you so much for joining us. I'm Elizabeth Anderson. I am the healthcare services analyst here at Evercore. Welcome to the people online as well. I am very excited to be joined by Aaron Alt, CFO of Cardinal Health, and Matt Sims, VP of IR, and before we kick off our opening statement, I think Matt has a few words.
Great. Thanks for hosting us, Elizabeth. It's great to be here again. Before we begin, just a little housekeeping. 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. All right, let's get started.
Perfect. All right. Well, on that note, Aaron, do you want to kick us off with a few comments and then we'll jump into the...
That'd be great. And good morning. Thank you for having us, or good afternoon rather, on behalf of Jason Hollar and the entire team. We're excited to be here, excited to be talking about the Cardinal Health story. A little bit of context before we jump into questions, which is, I hope you've all noticed we delivered a strong quarter for our first quarter earnings results. We saw double-digit growth across all five of our operating segments, and so we were pleased by that. That was driven by strong demand, really, across the business. It was also driven by strong execution as our team continues to raise the game. And importantly, the specialty part of our pharma business as well, where we have been investing heavily, was also a strong performer as well.
The other "other" part of our portfolio, which is the combination of at-Home, Nuclear and OptiFreight, also had strong revenue growth and very strong profit growth. So we're delighted that the progress that those parts of our portfolio are making. And last but not least, the progress against the GMPD improvement plan continues, and our GMPD business delivered a strong quarter in the first quarter as well. All that is happening while we continue to invest for the future. And while we're pleased with the results in Q1, we are really looking at the business on a multi-quarter basis, and we continue to invest in new customers. We can talk about the fact that we have the benefit of new customers in the first half, about $7 billion of new customers in our pharma business. We continue to integrate and invest in the MSOs, the acquisitions that we've done.
Speaking of acquisitions, of course, we did a recent acquisition of ADSG into our at-Home business, where the integration is going quite well. So we're pleased with that as well, and then innovation. The innovation cycle is a core part of our business, and certainly the investments we're making in our Nuclear & Precision Health business as well is paying dividends to us as well. So all in all, a very positive Q1, and we're delighted to have also raised our guide relative to our full year to $9.65-$9.85. So that's where I would start.
Yeah, that's a great place to start. So maybe thinking about some of the positive long-term drivers of pharma, of which there are many, one thing we've gotten an increasing number of investor questions about recently is the generics LOE contribution to that growth. I know if we rewind 10 years, that was a different story, and you guys have totally evolved the business model since then. Can you talk about, as we think about this upcoming generic wave, how do we think about the contribution on that and what's sort of similar and different to what we saw in the 2010 to 2014 timeframe?
Yeah, we spent some time talking about this at our investor day in June, and it is the case that part of why we're bullish on the future for the business is there is a nice pipeline of new generic products coming, right? And the pipeline from 2025 through 2029 is stronger than the five years before. And so we're excited by that. You often hear me talk about the fact that we make more of our money on generics than we do on the branded side of the portfolio. So having that pipeline coming is a positive for us, particularly where we can continue to be confident in consistent market dynamics, which is we manage our generic portfolio to average margin per unit, right?
And so long as we can keep the buy and the sell in equilibrium, so long as volume is rising, right, we're going to do well. And we believe that has been the case for the last several quarters. And certainly, as we look forward, we continue to predict strong demand, perhaps not as strong as Q1 was, but strong demand, including in our generics in our generic portfolio. We have, of course, the benefit of our industry-leading Red Oak partnership with CVS, which has the dual...
Who's not there last time?
That's exactly right. As the dual goal of both access, we believe we have better access than anyone else in the industry, as well as keeping our costs under control. And so that will contribute to our success as we carry forward as well.
Got it. No, that's very helpful. And one thing, you guys have obviously done a nice job of aligning yourself with nicely growing customers. So can you talk about how you sort of weave that into your broader strategy and portfolio? And then I'm also thinking CVS acquired Rite Aid, so that brings you some new volume. So you're sort of there, you're seeing a nice structurally growing customer. How do we think about that as it contributes to your model, and how do you kind of plan for that strategically?
Yeah. So part of being able to talk about strong demand is also being able to talk about winning with the winners, right? And we are very pleased with our ongoing strategic partnership with CVS. It's been outstanding for many years, both on a service to their stores as well as the Red Oak partnership. We were pleased to onboard new great customers like Publix in the back half of last year as well. And when I was commenting earlier about us having strong demand or outsized demand in Q1, it was across every element of our business and with our key customers like the Publix, like the CVS, et cetera. Now, we don't typically comment on the individual drivers within a customer, but to your point on what else is going on in the industry, well, I can't identify exactly where the Rite Aid file buys went, right?
We do know that CVS acquired many of them, right? And certainly for that portion of our portfolio or their portfolio that we service, that would have been a contributing factor to our success.
Yep. No, that makes sense. And then just talking about seasonality, I know that there, although you have great visibility in terms of the longer-term model, we think about the sort of quarter-to-quarter visibility. So fiscal third quarter is typically the highest profit dollar quarter for pharma, at least in each of the past two years. We've also seen very good strong growth in the first quarter and then sort of maybe a little bit more moderation. How do you think about the main drivers of those seasonal dynamics and sort of how are you expecting that to play out this year?
Yeah, there are a couple of things going on this year in particular. The first is we have called out the fact that the first half will benefit from the fact that we have the $7 billion of new customer volume coming into our portfolio. Of course, we had $10 billion in the back half of last year, so we will lap that when we get to the end of H1. It's also the case that we have a couple of acquisitions that as we get past Q2, we'll be lapping those as well. We closed ION last November. We closed GI Alliance, now the Specialty Alliance in February as well. And so their contributions will be lapping that. We had a little bit weaker COVID demand in Q1, notwithstanding the fact that overall demand was very strong.
And so there's a variety of puts and takes across the portfolio this year that are a little different than prior years. But like I said, overall, we're expecting a very strong year given the rate of store guide.
Got it. And it sounds like those are all sort of not core run rate drivers of the business. They just happen to be based on when you made an M&A or acquired a company.
Yeah. I mean, look, from a core business perspective, if we have strong demand as we've seen and our team is executing and raising their game every quarter, which they are, and if we continue to make progress in the specialty portfolio as well because it's higher margin and higher growth, and if the other businesses continue to make good progress as well, I mean, 60% margin growth last quarter, that is the recipe that gets us to our full year success for the year, and so we're pretty bullish in that respect.
No, that makes sense. Recently, you've also spoken about the stability of the buy-sell spread as a driver for profit growth. How do you sort of, why has that spread been more stable of late?
You know, for us, it's been stable for several quarters, right? I know that we talk about it differently than some of our peers do in the industry, but because of Red Oak, because of the way we manage the business to the average margin per unit, right, we're able to price and be rewarded for what we're providing in a way which gives us more stability than perhaps others are commenting on there. And so in our business, so long as volume is rising, we are going to continue to do well. And when you have volume rising with outsized demand, right, it's pretty easy to see where the success comes from.
Yep. No, that makes sense. And another segment that's obviously done quite well recently is the other segment. I'm still waiting for your marketing department to get a hold of that. I know the lawyers are winning at the moment.
We run a 1% margin business. There is no marketing department.
There's no marketing department. Well, there you go. The cost center's right there. Okay. We'll take polling answers for a new segment name later. So if we think about the other segments, AOI growth, excluding M&A, this has been sort of running still well ahead of the long-term 10% target this year, last year. So how do we think about that core underlying outperformance, ex-M&A, and sort of how do you see those trends developing for the rest of the year?
So the portfolio we're talking about is at-Home, Nuclear & Precision Health, and OptiFreight, three very different businesses. All three businesses were very excited about it. We're investing in those businesses in different ways. The at-Home business, and sorry, all three are growing at double-digit rates on an organic basis. And then if you add acquisitions on top, that's when you get to the 60% from the last quarter. From an at-Home perspective, we are very focused on driving efficiency. And so our investments have been in creating a supply chain which is best in class, which is highly automated, which is shipping the right products at the lowest cost. And so their success is contributing to the profit growth in that business. From the Nuclear & Precision Health perspective, we're investing in capacity. We're also investing in the cyclotrons.
We're investing in the theranostics product, which is a high-growth part of the business for us as well. And so there, again, that is supporting the double-digit profit growth in that business as well. And then OptiFreight is a little bit different business for us. It's a logistics technology provider to acute environments. And they have been investing in better capabilities and driving penetration with existing customers and getting new customers. And so the profit growth in that part of the business is coming from both doing well with our existing customers and gaining new customers with the new technology.
That makes sense. If we think about the most recent quarter, you also talked about favorable mix within ADSG. Can you help us unpack what those favorable mix drivers are?
When we did the acquisition of ADSG, we were really putting two very complementary assets together. Let me take a step back for a second. When we resegmented our overall enterprise to create the five operating segments, our goal was to reinforce that which gets measured gets done and to drive accountability in the right place so that if we were investing, we would see a return on the investments in higher growth parts of our portfolio. The Edgepark part of our business, the at-Home part of our business as well, does a lot of things well. Where they had some opportunity was on the patient acquisition and patient care pieces that were able to match what ADSG brings to the portfolio with the operating excellence that the at-Home and Edgepark part of the business brings as well.
And those together is really what's driving the success within the at-Home portfolio.
Got it. No, that makes sense. And then turning to GMPD, I mean, two of your peers in the medical products distribution business are up for sale or exploring strategic alternatives. How do you think about some of these potential strategic changes ultimately impacting competition in the market? And sort of are there any other factors that you think that will drive? And then how do we think about the ongoing consolidation of physician offices into health systems and sort of the dynamics between inpatient and outpatient growth playing in that?
So for reference, our GMPD business has historically been very acute environment heavy. And we have been moving into more physician office experience, but we've been very focused on the acute part of the space. And you're right, the competitive set is going through a lot of change with Medline going public, with OMI selling to private equity, and with McKesson announcing a separation of their med-surg business. But the one thing which is constant in all this is that we have a plan. We're sticking to it. And we are executing against it very effectively, as the first quarter demonstrated for GMPD, which is we are constantly raising our game from a customer service perspective. If you look back at our investor day materials, Steve Mason spent a lot of time talking about his five-step plan, customer service, et cetera.
Every quarter, we raise our game in that respect, and that is contributing to our success. It's also the fact that we continue to find great ways to take cost out of the system, even in a world where tariffs is creating complexity in the overall environment. And so that team has been able to manage through the tariff environment quite well as well. We see progress against the plan, and we're not going to allow ourselves to get distracted by what the other folks may be doing in the meantime. We're going to grab the opportunities we can, and we're just going to deliver against what we said we're going to do.
Great. And speaking of that, and I know this is probably your least favorite question of all time, but any updates on the tariff front or sort of steady as she goes? I mean, there are updates on the tariff front, but just in terms of material impact on the business.
Nothing new from what we described at earnings, which is we did comment that we expected the net tariff impact to be the top end of the range that we had publicly disclosed, but we are doing what we said we were going to do as far as executing against pricing initiatives, but working with our customers as you would expect us to do to make sure that we're giving them the right service, but also that we're being compensated for the services that we're providing given the environment in which we're operating.
Yep. No, that makes sense. And maybe turning to some of the broader policy questions, of which there have obviously been many recently. If we think about CMS's BFSF rule currently, I didn't go into the final physician fee schedule. How do you think about the potential impact of that if it's reinstated? Obviously, that's very detrimental to the independent physicians. And so I think that that doesn't make a ton of sense given them being the lowest cost side of care. So I guess how do you see that? Is there sort of an evolution? What do you see happening to that over the next year or two?
If I zoom out for a second, we agree with the administration's objectives for access, affordability, and innovation. Those three things are good for all of us in that way. And there continues to be a robust policy debate in which we are participating around what should that look like. We don't believe that the administration is focused on hurting the economics of the community physician, whether it's a generalist or specialist in that way. And many of the rules and regulations that have come out have been subsequently modified over time. And as you called out, the bona fide service fees are not in the current. They were not put in place.
And so, hard to say exactly how that's going to play out other than I would observe that we've been consistent for many years that given our role in the industry, we expect to be compensated for that, which we do. And so far, we see no signs that that won't be the case.
Okay. Got it. And then just maybe on another drug policy hot topic, if we were to think about CMS implementing drug price negotiations under the IRA, any meaningful differences we should think about in terms of Part D versus Part B and any things you would call out in terms of the impacts there?
No, when we provided our updated guide in our Q1 earnings, that which we knew or that which we thought to be true was already baked into the guidance. And so I have no reason to change the guide based on anything which has evolved since that time. We're going to continue to be compensated for the services that we provide. And as I said earlier, we're working closely with industry groups and with the administration to make sure that the proposals or the changes that are rolled through the negotiations, et cetera, are thoughtful and have the impact that they're after around affordability and access and innovation. And so far, so good.
Okay. No, that makes sense. Maybe turning to your MSO business, we lapped sort of the one-year anniversary of some of the recent acquisitions. Where are you in sort of that integration journey? And sort of how do we think about the expanding set? You've been attracting more physicians to the group, which is great. And then how do you think about that going forward and then also the sort of expanding the level of services you offer to that group of client physicians?
Yeah. That's a great question. So we are in a little bit different position from an industry perspective than some of our peers in that our strategy is unique to Cardinal in that while we are relevant from an oncology perspective, both through the organic Navista build and the acquisition of the ION assets, our emphasis has been more on what you would call the other ologies, if you will, which we have defined as autoimmune and urology, at least to start with. Autoimmune includes the gastroenterology parts of GI Alliance. We're excited about those assets because Cardinal has historically been quite strong from a distribution perspective in those other assets. Indeed, we've been quite strong from a data and technology perspective. It's part of why our first acquisition was not of an MSO.
It was a GPO plus the Specialty Networks acquisition, because they had pieces that we knew we were going to be putting together with other assets to be able to drive a more diversified revenue stream and more diversified profit stream, not just focused on drug distribution. And so what excites us about the MSOs we're in is the fact that in contrast to oncology, if you were to look at the revenue streams within the MSOs, it's a third, a third, a third or so around drug distribution, around in-office procedures, and around other ancillaries and ambulatory procedures. And so there's goodness there that we are able to contribute to the success of the individual doctors because our incentives are aligned. But for us, it's not all about the drug spend.
Right. And do you have those other ancillary assets that you talked about acquiring, have those been rolled out across the broader customer bases for the different ologies, or where are we in that journey?
Still in the process. And so whether it's pathology or the in-office dispensing or the anesthesiology or the revenue cycle management, the data pieces of it, we have a very detailed integration plan across these efforts. And Dr. Weber and his team are being very careful and thoughtful about which practices, assuming which of the ancillaries on what timeline. And we're very pleased with the progress he's been making in that respect so far.
No, that makes sense. And as we stand now, you talked about obviously pulling a bunch of different assets together. Do you have the right set of assets now, or is there anything you're kind of looking for, whether you build that organically or still sort of looking to add on to that?
Yeah. Well, we will always keep an eye on the marketplace. We like to think that we are not reacting to what is available, but rather we are either building what we want or seeing what we want to acquire and going and getting that. That's certainly how the GI Alliance acquisition came to the fore. It was not for sale per se. We went and built that relationship and acquired it. I would say the acquisitions that we may do are more tuck-in in nature than large platform acquisitions. I mean, to be totally honest, Solaris, which is our recent acquisition, we've just closed on the largest urology MSO and GI Alliance, our acquisition of the largest GI Alliance gastroenterology MSOs. Those were the two largest platforms across the other ologies. And so for us, it's about how do we grow organically within those platforms.
We're putting them together, by the way, into the Specialty Alliance. How do we grow organically? But then as well, if there are tuck-in acquisitions that support the objectives of those businesses, we will certainly smartly look at that.
Got it. No, that makes sense. And maybe on the back of that, switching to sort of capital allocation more broadly, I think that was my favorite part of the investor day presentation. We were like, I don't even know about this part over here. We have so much cash that we're generating. So can you sort of talk about if we think about where we stand now? We're not too far out from the investor day, but sort of any changes or tweaks or how you're thinking about those capital allocation priorities that you laid out, or have you thought of what you're going to do with that extra money?
Yeah. Well, I know you noticed that we did raise our adjusted free cash flow guide at our Q1 earnings as well. And that's a sign that the team continues to make good progress on making sure that we are as focused on cash generation as we are on profit generation. That's been part of what Jason and I have been leading at the company is that relentless focus on the cash. That, when you have good cash flow, that enables a lot of things, starting with investing against the business. And our single highest best use of the cash we're generating, we believe, is investing back in the business and high ROI projects. And so we will invest between $600 million-$650 million or so in capital during this fiscal year to do just that, to support that which we're building.
And we've had a series of announcements recently around new buildings, technology, et cetera. And that's where those capital dollars are going. After that, we are very focused on managing our balance sheet smartly. We are a BBBA rated company. That's where I want to stay. We have a little bit of work to do by the end of this fiscal year to get back to our Moody's leverage target, but we're confident that we can get that done. That then leads us to our return of capital, our baseline share repurchase. We committed at the start of the year to buying back at least $750 million of share repurchase. We commented at our Q1 earnings that we had launched the first half of that. It wasn't out yet done on our earnings day. But so we're making good progress against that as well.
And that leads the remaining cash for M&A or additional return of capital to shareholders over the course of the year. And we'll talk more about that when we get to our Q2 and Q3 earnings as well because, look, we are very committed to telling you what we're going to do, doing it, and reporting back. That's how we operate internally. It's how we operate externally as well. And so nothing has changed about our disciplined capital allocation philosophy that way.
No, that's great. And maybe just talking on the investments, AI is the theme of the year or what have you. Where are the biggest opportunities in AI in Cardinal Health?
Yeah. We are focused on finding every opportunity we can without distracting the broader team to take advantage of AI there. And whether it's in customer service, we have initiatives underway in customer service. We have initiatives underway within finance to help us to better manage the data and interpret and make decisions based on the data across our broad business as well. And then our operations teams are also very focused on how can AI support the operations teams. And so we don't view AI as a silver bullet. We view it as a tool that can enable a lot of things. And we're making good progress with Jason leading the charge on where can we relentlessly improve our business either from an effectiveness or from an efficiency perspective leveraging AI tools.
Yep. No, that makes sense. Another topic that's come up recently are a bunch of the DTC models, which have come into a lot of prominence this year. If we think about your position as a wholesale distributor and logistics backbone for some of these products, how do you kind of see the evolving risks and opportunities for the DTC model shift? And how do you sort of envision your role shifting as we move forward in that part of the industry?
It's a great question. And I would observe that there's a difference between following the cash and following the product. Most of the DTC models that are out there actually have one of the distributors behind them in some way. And so I don't view the creation of DTC models or even the growth of DTC models as necessarily being a threat to our business model because we're supporting in one way or I say we, I mean, our industry is supporting one way or another most, if not all, of those very models. And if the DTC models increase, that may well present an opportunity.
Right. No, absolutely. And should we think of those as traditional economics so that it's not like you support those customers in a very different way than you do? You're delivering them to pharmacies and they dispense that. That's how we should think about them. Is that fair?
Many of them are cash pay models, which is a very small, very small part of the market, and so I think those models will continue to evolve in quarters ahead, but right now, it's a tiny part of the business.
Yep. No, that totally makes sense. Anything to think about on the GLP-1 front? I mean, they've been clearly a major revenue driver, but not necessarily as much as a profit driver. Sort of supply and demand normalize and we get the launch of the oral solids at the different price point. How do we think that market changes for you guys over the next couple of years?
I'm smiling just with the idea that supply and demand will normalize within GLP-1. It's been quite the ride. Look.
Always hope.
The oral solids, I said earlier the innovation depot, but oral solids coming shouldn't be a bad thing for us in that way. It should be a lower cost of service product in that way, which hypothetically would support the idea that GLP-1s might actually make the distributors some money at some point. They certainly have not been a profit generator for the industry so far. We're in favor of that innovation. Every innovation that comes every year that passes is a continuing conversation with the manufacturers on what is the right economic model for that. But we'll see. That story has yet to be written.
Got it. Okay. We'll stay tuned. And then one of the things is I think a bunch of people have been asking about the DME impact. We've had some changing regulatory situations there. But in terms of how you sort of see the potential impacts on your business model, could you maybe walk us through that?
Yeah. I have two primary thoughts in that respect. The first is that with the new regulations, who is going to thrive in that context? It's going to be the players that have scale. Now, great news for Cardinal, we have the scale in there. Certainly in the diabetes categories, there are other categories involved in the recent announcements as well that we also have scale at. We'll talk more about that in future events, I'm sure. So we feel good that we have the right to succeed in the new environment. But of course, the new environment isn't here today. It certainly isn't going to impact our fiscal 2026. It may not even be terribly material for our fiscal 2027. And I say that because there's a lot of time yet to work with the administration to figure out exactly how will all these pieces come together.
We feel good that as an industry leader, we will be leading that charge.
Got it. And maybe in the last couple of minutes, if we're sitting on this stage again next year, what do you see that you'll be most excited that you have sort of done over the past year and looking forward to? What would you say you're sort of looking forward to at that point?
Yeah. I would start with this. Jason and our management team, we are not running the business for the quarter we're in. We're running the business for the quarters going forward. We're making the investments now so that two, three, four, seven, ten quarters out, we have the continued opportunity for revenue and profit growth in those businesses, and we're deploying those dollars using the cash flow that we referenced earlier, so what I get excited about is how much opportunity I see coming down the line because I know what the investments are. I know what the return should be.
Then, if I look at the innovation cycle as well across our business as well, the new products that are coming as well, there's a lot of goodness in the industry that I believe will support the plans we've got in place and that will ensure that we continue to have very positive conversations about how Cardinal is doing at this conference next year.
Great. Well, I think that's a perfect place to end it. Thank you very much.