Cardinal Health : 2Q FY2021 Transcript

Q2 FY21 Cardinal Health, Inc. Earnings Conference Call

February 5th, 2021 8:30AM Eastern

Operator: Good day, and welcome to the Cardinal Health, Inc. Second Quarter Fiscal Year 2021 Earnings Conference Call. Today's conference is being recorded. At this time, I'd like to turn the conference over to Kevin Moran, Vice President of Investor Relations. Please go ahead.

Kevin Moran: Good morning, and welcome. Today, we will discuss Cardinal Health's second quarter fiscal 2021 results along with an update to our FY21 outlook. You can find today's press release and presentation on the IR section of our website at ir.cardinalhealth.com.

Joining me today are Mike Kaufmann, Chief Executive Officer; and Jason Hollar, Chief Financial Officer. During the call, we will be making forward-looking statements. The matters addressed in the statements are subject to the 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.

During the Q&A portion of today's call, we please ask that you try and limit yourself to one question so that we can try and give everyone an opportunity. With that, I'll now turn the call over to Mike.

Mike Kaufmann: Thanks, Kevin, and good morning, everyone. I'll start our discussion with a few high-level thoughts on our progress so far this year, and then Jason will review our second quarter results and our updated FY21 outlook. I'll close by sharing updates regarding our growth areas.

We continue to make progress on our strategic plan as we navigate the rapidly changing global environment. Overall, second quarter operating results came in better than our expectations, led by the Medical segment. In addition, we saw some favorability, including timing below the operating line, enabling us to deliver EPS growth of 14% in the quarter.

Due to our solid first half performance and our improved visibility into the remainder of the fiscal year, we are increasing and narrowing our EPS guidance to a range of $5.85 to $6.10 per share.

In the second quarter, we saw varying effects of the pandemic on our business. Our Medical segment saw a net positive impact related to COVID-19 as our lab business and PPE products continued to experience strong demand. And in Pharma, although the pandemic continued to

adversely impact volumes, mainly in generics and nuclear imaging, areas like Specialty and consumer health are recovering and performing very well.

Across the company, we remain focused on doing our part to support ongoing pandemic relief efforts. In Pharma, we partnered with the CDC to act as a network administrator, enabling retail independent, small chain and long-term care pharmacy customers to participate in the vaccination effort. And in Medical, we partnered with the state of Ohio to support vaccine distribution through our OptiFreight Logistics business.

Regarding PPE, we are utilizing our supply assurance program to manage costs for our customers and provide consistent, long-range supply in key product categories. We are seeing improving supply in some of these product categories such as gowns and masks, but continue to see a challenging market with exam gloves.

Looking ahead, we remain committed to supporting our customers, patients, government and communities through the ongoing challenges of the pandemic, and we are ready and willing to help in any way possible.

Before I provide some updates on our strategic growth areas, I'll turn it over to Jason to share more details on our second quarter and outlook for the year.

Jason Hollar: Thanks, Mike, and good morning, everyone. Beginning with total company results, second quarter EPS was $1.74, reflecting a 14% increase driven by discrete tax items and strong Medical results. Total second quarter revenue increased 5% to $41.5 billion, driven primarily by sales growth from existing customers. Total gross margin was flat at $1.8 billion. SG&A increased 2% to $1.1 billion due to IT investments. The net result for the quarter was consolidated operating earnings of $628 million, a decrease of 3%, which reflects a modest net negative impact for the enterprise from COVID-19.

The Pharma segment was adversely affected by COVID-19 during the quarter, and this was partially offset by a net positive impact in Medical. I will discuss these segment impacts shortly.

Interest and other expense decreased 33% versus the prior year to $34 million, driven primarily by lower interest expense as a result of prior year debt reduction, as well as an increase in the value of our company's deferred compensation plan investments. Our non-GAAP effective tax rate for the quarter was 13%, which reflects the impact of certain discrete items.

Now, a quick note on the GAAP tax impact during the quarter. Primarily due to a self-insurance loss on our FY20 federal tax return, we will carry back and recover previously paid federal taxes at rates that were in effect at that time. As such, in the quarter, we recorded a net GAAP tax benefit of $420 million associated with the recovery of prior taxes. Additionally, we have recorded a corresponding receivable of approximately $1 billion, which we expect to receive within the next 12 months.

Turning to cash flow and the balance sheet. We generated robust operating cash flow of $1.2 billion during the quarter. As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We ended the second quarter with a cash balance of $3.7 billion and no outstanding borrowings under our credit facilities.

We remain focused on taking appropriate action to maintain our investment-grade balance sheet. Our next debt maturity is in June 2022 with approximately $1.4 billion coming due. By the end of FY22, we intend to reduce long-term debt by that amount, though the exact timing and method may vary as we continue to evaluate the economics associated with early retirement of debt.

Now turning to the segments, beginning with Medical on slide 5. Medical revenue increased 7% in the second quarter to $4.3 billion, driven by a net positive revenue impact from COVID-19 and solid execution by our team. As we have previously discussed, we saw higher selling prices and volumes regarding PPE and higher volumes in our lab business, partially offset by reduced surgical products demand resulting from deferred and cancelled elective procedures.

Segment profit increased 21% to $236 million, driven by a net positive impact from COVID-19 and cost savings, which includes global manufacturing efficiencies. The net positive segment profit impact from COVID-19 was primarily due to higher lab volumes as well as increased contributions from PPE that were offset by the previously-mentioned elective procedure impacts.

As it relates to lab, we continue to experience a tailwind from increased demand for COVID-19 testing products. While difficult to predict, we expect this demand to remain elevated for at least the balance of fiscal 21.

Regarding PPE, we saw both higher volumes and timing favorability related to our cost mitigation efforts. As previously mentioned, we have incurred significantly higher procurement costs for select PPE products during the pandemic, and we expect the timing of selling the higher cost products to vary as we continue to manage our supply assurance program for our customers.

On electives, although procedure volumes continue to be choppy and still below prior year levels, second quarter volumes were generally consistent with our first quarter exit rate, down mid-single digits versus our pre-COVID-19 baseline.

Finally, as in the first quarter, we continue to see savings resulting from cost containment measures during the pandemic. And outside of COVID-19 impacts, we continue to realize benefits from our efficiency initiatives like our global manufacturing and supply chain transformation, which we expect will continue to deliver strong savings.

Transitioning to the Pharma segment on slide 6. Revenue increased 4% to $37.2 billion, driven by sales growth from Pharmaceutical Distribution and Specialty Solutions customers. Pharma segment profit decreased 11% to $413 million. This was driven by COVID-19-related volume declines in our generics program and Nuclear business and was partially offset by a higher contribution from brand sales mix in the quarter.

Our Specialty Solutions business continues to demonstrate resilience, both downstream with providers and upstream with biopharma manufacturers and again achieved strong overall growth in the quarter. Also, our generics program, when excluding the previously mentioned volume impact of COVID-19, continued to see generally consistent market dynamics.

Next, on slide 8, I will review the updates to our fiscal 21 outlook. Due to our solid first half performance and better visibility into the back half of fiscal 21, we are raising and narrowing our EPS guidance range to $5.85 to $6.10 per share, which at the midpoint, represents 10% year-over-year EPS growth. This improvement is driven by strong performance in our Medical segment as well as updates below the operating line.

Regarding updates to other corporate assumptions. We now expect interest and other in the range of $165 million to $185 million, with the improvement primarily driven by the impact of our deferred compensation plan adjustments. As a reminder, deferred compensation adjustments are fully offset in corporate SG&A and net neutral to our bottom line.

We are lowering our non-GAAP ETR range for the year to 23% to 25%, which reflects our year-to-date effective tax rate of 18% and higher expected effective tax rates in the back half of the fiscal year due to the timing of discrete items.

We also now expect dilutive weighted average shares outstanding to finish the year in the range of 294 million to 295 million.

Regarding the segment outlooks on slide 9. For Medical, due to the previously discussed drivers, we now expect segment profit percentage growth in the low to mid-20s and revenue growth for the year in the range of high-single to low-double digits.

Regarding the Pharma segment, we are maintaining our current guidance ranges of mid-single digit revenue growth and low-single digit profit growth.

To conclude, some comments on our enterprise COVID-19 assumptions for the back half of the fiscal year as we begin to lap the initial impact of the pandemic in the prior year. We continue to expect utilization to be choppy and to exit the fiscal year at or near pre-pandemic levels. And for the enterprise in fiscal 21, we continue to expect a year-over-year net negative impact from COVID-19, though less than originally anticipated due to improved medical expectations.

I'll now turn it back over to Mike.

Mike Kaufmann: Thanks, Jason. I'd now like to take a moment to elaborate on how this unprecedented time has reinforced our critical role in health care and how we see this role evolving as we look toward and beyond the second half of the fiscal year.

I said last quarter that we aspire to be health care's most trusted partner and create the greatest value for our customers, shareholders, communities and employees. We create this value