CAH - Cardinal Health Inc. (CAH) J.P. Morgan 42nd Annual Healthcare Conference (Transcript)
2024-01-09 19:06:07 ET
Cardinal Health, Inc. (CAH)
J.P. Morgan 42nd Annual Healthcare Conference
January 09, 2024, 05:15 PM ET
Company Participants
Lisa Gill - Managing Director at JPMorgan
Conference Call Participants
Jason Hollar - CEO
Aaron Alt - CFO
Presentation
Lisa Gill
Good afternoon and thank you for joining us. My name is Lisa Gill and I head the Healthcare Services Group here at J.P. Morgan. With me this afternoon is Cardinal Health. Presenting for Cardinal will be CEO, Jason Hollar. After Jason's presentation, he will join me and our CFO, Aaron Alt over at the desk and we'll go through some Q&A.
With that, let me turn it over to Jason.
Jason Hollar
Great. Thanks, Lisa, and thank you everyone for joining us this afternoon. We'll look forward to interacting with as many of you as possible in the next few days. Before we go into anything too far, I do need to make you read this whole entire slide. A reminder, I will be making forward-looking statements today. These forward-looking statements are subject to certain risks and uncertainties that may cause actual results to differ materially from those projected or implied. For a description of these risks and uncertainties, please refer to our Investor Relations website or to our SEC filings.
Okay, so a couple of points here today. I know some of you are a little bit newer to Cardinal Health. So I'll spend a few moments on who we are, but I will really prioritize our time on going a little bit deeper as to today's announcements that we provided and how they tie to where we're taking our business going forward.
So, just again, real quick, a couple of data points as to who we are. We are healthcare's crucial link. Our breadth and depth, scope of our business really is immense. We connect the clinical to the operational aspects of healthcare. We work with the innovators. We work with the manufacturers. In some cases, that is us. In some cases, that's our partners and we work with them to deliver those goods and services all the way through to our final customers and ultimately to the end patient.
That can be in the form of the 90% of the U.S. hospitals that we serve. It can be the 20,000 specialty physicians, or it can be the five million patients that are in their home. The scope truly is what is unique about our organization, which creates a very large business. We anticipate fiscal '24 being over $225 billion of revenue and operating globally across 30 different countries with nearly 50,000 employees.
Now, there's a bit of a financial snapshot there down below, which represents our old segment structure, that's part of what we're announcing today that I'll get into more detail, but no matter how you look at it, whether it's the old segment structure or the new segment structure, the largest, most significant part of our business clearly is our pharmaceutical segment and that is remaining nearly $190 billion in the new segment structure.
This business has had a fantastic couple of years, operating performance, top line, bottom line growth, delivering the $2 billion approximate profit here for this last year and it's done so through benefits of both benefiting from underlying demographic shifts, secular trends, as well as our own specific performance to drive this business forward.
The medical business has been a bit more of a turnaround story. This is the business that had the adverse impacts associated with inflation, essentially beginning in fiscal '21, '22 and we've been dealing with that ever since. Now, the business has made fantastic progress and that's all about the execution of the medical improvement plan. Now, this business does include two growth businesses, at-Home Solutions and OptiFreight logistics and that is part of what we're announcing today and what I'll get into further.
So, we have been very busy the last 18 months, since I've been named CEO and we've been very productive. We have accomplished a lot. Here are just a few of the value creation initiatives that have been completed. You can see the green check mark next to those that have either been completed this quarter or we had further progress this quarter and it really all starts with what you see in the left, the strategy and operations.
That's what generates all the value for all those other actions to be worthwhile and it started when I stepped into the role and I put the right leaders in the right places and we made a lot of very significant simplification and prioritization actions to really focus on our core, focus on that the core pharmaceutical and distribution business and focus on our medical improvement plan. And then today we're going to further announce some other additional streamlining of our leadership structure to get after the next phase of this growth.
We've also been very focused on capital deployment, very responsive return to capital to shareholders. We've now exceeded over $3.3 billion of capital back to shareholders either through dividends or share repurchases and this is in part driven by an additional $250 million that we just completed this last quarter, which brings us to $750 million for fiscal '24 in the first six months. We're doing that while continuing to invest heavily into our organic growth of our business.
Financial performance has been strong over the last couple of years. Our expectations for fiscal '24, we just increased again further today to the top end, which would bring us to over 20% growth EPS this year, driven by strong underlying growth, like I mentioned with pharma, as well as the progression we're making in the medical improvement plan and certainly a lot of favorability in the below line items driven by very strong cash flow generation by our operations.
We're doing this with a backdrop of very strong governance. We appointed four new independent directors when I stepped in as CEO. We formed the business review committee and recently in June just extended it further and we have completed the review now of the entire pharma segment and of the growth businesses within our medical segment and that's really what the key point is of today's announcement, which let me go into those details a little bit further and jump straight to it.
So the primary point of what we've announced today is that we have completed the business and portfolio review of those two growth businesses, at-Home Solutions and OptiFreight logistics. These are two fantastic businesses that have terrific secular growth trends, have a strong leadership position in the industry and a strong leadership team in place.
So we've completed that work, but we do recognize there's still some work to be completed within the remainder of the medical segment, which we're calling the Global Medical Products and Distribution Business, which is our products and distribution business within the medical segment.
Now the second point is, as a result of those conclusions and the determination that we're going to retain and invest and grow in those growth businesses, we have restructured the organization to be more aligned with that and I'll go into a lot more details with what those look like here shortly and then the third point is we raised our guidance to the high end of that EPS range, driven by that cash favorability that is driving lower interest expense and lower share count with below line improvements.
So I just told you the kind of results of the business portfolio review. As a reminder, this is the framework that I shared at our Investor Day that highlights that, yeah, the strategy is, of course, one of the most important aspects of determining the outcome of a business and portfolio review, but so is the operational performance of the business and what I've consistently highlighted is why we have not completed the review of our Global Medical Products and Distribution business, GMPD. So I can make that a lot quicker in the future.
The reason we've not completed the GMPD review is because we are still primarily focused, our highest priority is to drive the medical improvement plan, and that's where there is still work that remains and we'll certainly keep our investors and stakeholders apprised as we continue down that progress.
Okay, when I step back and think about why we are making these changes, I think the words that you should keep in mind are simplification and focus. That's been what I've stressed from the first moment that I stepped into this role for all the other aspects of how we're managing the business and when you think about, let's start with the bottom left of this slide, the pharmaceutical and specialty solutions business.
Even with this change in taking the nuclear business out of this segment, it is still an incredibly large, incredibly important business for us. Less than 1% of the revenue is reflective of that business that has been taken out. This is such an important business, it makes sense that the continued leadership of Debbie Weitzman and her team just continue each and every day to live and breathe everything related to pharmaceutical distribution and specialty solutions. So that is their continued priorities. They will continue to focus on the core PD, a little bit slower growth part of the business, while investing heavily in the specialty business, so that we have a blended mixture to achieve our long-term goals.
The same point can be said for the right-hand side, bottom right of the slide, where the GMPD business, that is a massive undertaking by Steve Mason and his team to transform that business back to profitability and to have these two growth businesses with very different investment profiles out of that business allows Steve and his team to put all their efforts to driving the improvements that are necessary within that medical improvement plan.
So that leaves those three growth businesses, each with, again, strong secular trends, strong performance and we are bringing them together into one financial reporting segment. However, how we're structuring it is that each of those three leaders, also strong in their own regard, Rob Schlissberg, the Head of at-Home Solutions, Mike Pintak, the Head of Nuclear and Precision Health Solutions, and Emily Gallo, the Head of our OptiFreight logistics business. Each of those three will report directly to me. So we're not creating a third segment leadership structure. We're creating a very streamlined set of growth businesses that have very quick access to not only senior leadership, but access to the investments and the decisions that need to be made to ensure that they have the support and the investments necessary to continue growing at the strong rates that they already have.
So I've told you a lot about what's changing. Let me be really clear about what's not changing. We're not changing our strategy. We're not changing our long-term targets. We do need to communicate some changes here as it relates to remapping these long-term targets, but go to the far right of this, our long-term growth targets, the 12% to 14% EPS, are absolutely unchanged, and we're going to show you some of the changes as to how we get there from our prior targets, but the actions underneath this are exactly the same. We're just moving around the pieces a little bit to ensure, again, that focus and that access to capital going forward.
So this is a double-click into each of those three segments. Again, our largest, most significant by far, pharmaceutical and specialty solutions, the old pharma segment, ex-nuclear, still $189 billion of revenue and $1.9 billion of segment profit. Now, nuclear was a little bit faster growing business than the core of pharma, but given it was relatively small, it doesn't change the math here that the 4% to 6% targets is still the appropriate growth rate for that segment. So that is unchanged.
The primary differences are in medical, where at-Home and OptiFreight are a larger portion of the earnings than what nuclear is for the pharma business. So you may recall that our long-term target before for the full segment of medical was $650 million by fiscal '26. Well, that breaks up $300 million for GMPD and the balance goes into others. So it's the same aggregate total, but then within that other, we also include the nuclear business and so it's just a rearranging of the pieces and we expect each of those long-term targets to be then managed separately as those three different pieces.
The other thing that's not changing is our strategic priorities. Now, when I presented this last, which would have been back in June, point one, two and four were exactly the same. Building upon the growth and resiliency of our pharmaceutical segment, again, large important part of our business, that remains unchanged. That is the vast majority of what that segment was already focused on. Debbie and her team will continue to drive that each day, every day.
Number two, execution of the medical improvement plan. Same plan. I'll show you where the pieces map a little bit differently, but it's the same plan that we need to continue to drive. The only nuance here is point three would have been embedded in the other point one and two before. So now we're calling this out that this is a more significant business. These are $4 billion worth of revenue, $400 million worth of profit. They deserve their own spotlight here to ensure that we continue to grow that significantly going forward and then point four is exactly the same. It's a lot of hard work and a lot of accomplishments to get one, two, and three done. When we do that, we will be very responsible with that cash flow and that capital to ensure that it continues to create value for our shareholders.
Now, how we are going to accomplish all that is similar to a lot of the strategies that we walked through in June at our Investor Day. We're going to invest organically across our enterprise. When you look at a lot of these components, the distribution components is a lot about automation and capacity, that this is a very quick growing space. There's a lot of capabilities and needs. We're going to continue to lean in and ensure that our customers and our manufacturer partners have access to the capacity and the capabilities that are needed for us to get there, but we're doing so in a way that's more highly automated in the past to ensure that we have productivity as well as the capacity that goes along with it.
Within pharma, beyond core distribution, we're also investing heavily in our specialty business organically as well as inorganically. Organically, a lot of that time, attention, and dollars is in oncology and with the expansion of our Navista network, which we continue to prioritize, but it's also in other areas and one good example is our recent acquisition of Bendcare in rheumatology last year.
Global medical products and distribution; this is, again, been all about the medical improvement plan and here we continue to work to improve the customer experience, which has improved now back to the point of near to where we were pre-pandemic. So our service levels are fantastic. Our CLI scores are way up and we now have access to the sufficient volume and inventory so that we can go out and be more aggressive in winning more new business.
On the right-hand side, we have those three growth businesses, a part of that third other segment. On the right-hand side, we have those three growth businesses that are part of that third other segment and it's a combination of different investments in different areas, but I'll go into each one of those more deeply here in a few moments. So let me just jump on for now.
Within the medical business, I'm not going to go through all this again. This is just showing for you in the past, we had the medical segment with four key steps to the medical improvement plan. You can see now its three key steps. The only difference here is that that fourth step was growth and at-Home and OptiFreight. So that's now in a separate segment.
So this is just the same plan, but with only GMPD elements, but these GMPD elements are exactly the same and as you can see, the most significant is the mitigation of inflation. That $300 million problem was the impetus of this plan in the first place and we continue to make significant improvements here. As of last quarter, last time we updated this, we were at 70% mitigation of that gross spend and we still intend to be mitigated by the time we exit fiscal '24.
We continue to also make progress with growing our Cardinal Health brand products. You may recall over the last several years, we actually had volume headwinds as we got through the pandemic and made these investments. Pleased to say that in the first half of fiscal '24, we are now seeing volume growth within Cardinal Health brand and really a demonstration that those leading metrics, leading indicators are indicative of our ability to continue to grow this business more consistent with the market going forward and then even today, today's announcements give us further enablers to further simplify and drive additional costs out of the business.
Now just real quickly to go into each of these growth businesses a little bit more deeply. As I look at each of these three, I just think about the breadth and the capability and the leadership that each of these businesses are exhibiting. For at-Home Solutions, this is a business that was about a $1 billion when we acquired it 10 years ago. It's now $2.6 billion and has seen very consistent growth and that growth is because we have an incredible breadth. You can see that we serve five million patients, 20 million packages per year and importantly, we are able to do that because we have a 99% coverage where we can reach most of the population in one to two days.
Within our nuclear and precision health business, we talked a lot about this at Investor Day. We focused our commentary then on the Center for Theranostics Investments and the progress we're making there, but I'd like to step back. When I think about this business, what is so exciting to me is this demonstrates how far you can really please your customers when it comes to core distribution and this is a much more sophisticated type of distribution than a lot of our other distribution activities.
When you think about, we can reach 95% of hospitals within three hours and we can deliver within a 15-minute window at 99.7% on-time delivery rate. That is the definition of high-touch, white-glove service. That means that we can do that. We can do anything with this specialized distribution service and I think we're just really scratching the surface of what this team and what this business can do far into the future. Right, Mike?
But now, what is so fantastic about this business is that's the foundation. That's what this business was built on many, many years ago and what this team has done is they've taken that foundation and worked with our customers, our partners, and said, okay, now how can we add more value? And that's where this end-to-end innovation has come from with the Center for Theranosics Advancement, where we work with those innovation partners, those manufacturers, those other innovators, to be with them and support them through the pre-commercialization phase of their business so that when they get to commercialization, we are the obvious partner and that distribution is really just one aspect of the value stream that goes with it and that's where so much of Precision Healthcare is going and why there's so much more opportunity in front of us.
Now, OptiFreight Logistics, a little bit one of our smaller businesses, but I like to say small but mighty and this is a business that, and when you look at the profile of this business, I would focus on what we do for our customers. I think it's the $700 million per year of savings that we achieve for our customers through their freight management is what really drives the value for our customers and what makes this an indispensable part of our portfolio.
The other part that I think is fantastic, hey, we love all of our customers, don't get me wrong, but this business has 17 of Gardner's top 25 supply chain health systems. We really do have fantastic customers in this business that only make us better each and every day.
Okay, so discipline capital allocation framework. I think our actions speak louder than any words I can provide you here today. There's not a lot new here other than we keep doing what we say we're going to do. We indicated earlier that we finished this last quarter with over $4 billion of cash in the second quarter and that was in spite of spending another $250 million for an incremental ASR in the quarter.
So our cash flow has been impressive, driven by strong operational execution and strong working capital and balance sheet management. So we're in a very strong, flexible position here, which means we're six months into the year and I've already dipped into some of those opportunistic levers.
We've been very clear. We're interested in M&A. Our highest priority remains our specialty business. That is where the biggest growth is, and it's the biggest part of the business that is capable of that type of growth, and so we're going to continue to prioritize that, but with today's announcement, we are indicating that we're open to M&A in those growth areas, nuclear, at-Home Solutions, and OptiFreight logistics.
Now, that space is naturally a smaller space, and so I would anticipate there's fewer targets, and we're earlier in that process to evaluate what's possible. So you should think of specialty continuing to be our highest priority, continuing to be what we're most focused on, but this is the first indication that we are willing to consider something outside of the specialty space, but just keep in mind that we will continue to use the same framework. We'll continue to be very responsible and disciplined with the choices that we make as it relates to any and all deployment inclusive of M&A.
Okay, to wrap up, why we believe we are a compelling investment thesis. I think, again, our actions speak louder than words. We've done everything that's on this slide, and we're continuing to focus on this. It all starts with that largest, most significant business, our Pharmaceutical and Specialty Solutions business. That team has done some outstanding work. Again, it's a combination of we've been fortunate to have a nice underlying utilization environment, but we've executed very well on top of that, driving our own performance.
Medical products and distribution is all about the medical improvement plan and to continue to make the impressive success and growth that we've seen over the last several quarters, but we're excited about these other growth areas. We've always been excited about them, but we're really doubling down and putting even more time and attention and potential investment next to those to see if we can further increase the growth of the overall enterprise and as we are successful in each of those three areas, we anticipate continued strong cash flow, and, again, our commitment that we'll continue to be very responsible with that so that we can continue to enjoy the value creation that we've seen over the last couple of years.
So, again, thanks for the interest, and I'm moving on over here now for questions.
Question-and-Answer Session
Q - Lisa Gill
Thanks, Jason, and thank you for all the detail. You walked through the three segments, and you're kind of bucketing them into this other category right now, but you were very clear that they're going to operate separately. They're all going to report directly into you. Can I just understand, like, why that was important to pull it out of the current segments that they're in? Were they being encumbered by other responsibilities within those segments?
Jason Hollar
Yeah. So, first of all, I really believe we're doing this from a position of strength and not because we're trying to address a problem. When you see the performance that both of our segments have had over the last 18 months, it's been terrific. This was not a problem we were trying to address. This really came out of our business and portfolio review. We did that work and said, you know what, these two businesses, OptiFreight and at-Home have the same conclusions that we saw with nuclear and that there's just so much more that we can get after. That was step one.
Then it's like, okay, now that we've decided that, how do we optimize that? What's the right way to do it? And when we looked at the, I'll say, what was already on the plate of Debbie and Steve's team, they still have massive businesses, right? They still have a ton to do and a lot of opportunity. There's endless opportunities for them in those places and so, they were already, these three leaders that we have with Emily, Mike, and Rob, they are already in place. Their team's already in place. They've already been working underneath the umbrella of those segments. So, they haven't been hindered in any way, and they know that even though their businesses are in different phases, they have access to capital in different ways, but this just brings it out and provides even more transparency, even more accountability.
One thing we haven't talked about too much at this stage, but we'll be evaluating different incentive structures to make sure that the broad team is fully aligned with that and just make sure that we're holding ourselves accountable to continued growth in an area that is just a very different opportunity set for these businesses than the rest of the company.
Lisa Gill
So, from an operating perspective, you broke it out as other today. Should we anticipate that it will be named something and remain a third category?
Jason Hollar
So, given that these are three relatively small businesses that are aggregated, we are unable to call it anything than other. It's a specific academy.
Lisa Gill
We can come up with an acronym right now.
Jason Hollar
No, no. Trust me. We spend a lot of time on developing different names, but by the nature of an aggregation of different segments, it is required through the disclosure to name it as other.
Lisa Gill
Great. So, as we think about your fiscal 2024 guidance, pharma growth has been above your long-term targets and when we think about part of that growth is GLP-1s, specialty growth in the United States, when we think about the growth normalizing, do you think that there is an anomaly right now? Or do you think that what you call out as your long-term revenue growth rate, that perhaps it is higher just given where we are?
Jason Hollar
So, your question is revenue or is it earnings?
Lisa Gill
Revenue. Let's start with revenue.
Jason Hollar
Yeah. So, yeah, I think with the GLP-1s growing at that rate, that has added an incremental percentage growth there that is most likely and trees don't grow to the sky. So, I would expect that to normalize at some point. I am not in a position to try to estimate what that will be and when that will be, but I think that when you back off from that and look at the other utilization, after we got through the COVID period, the last couple of years especially, at least the last couple of years, you've seen fairly consistent utilization.
And so, outside of the GLP-1s, what we really like about this environment is that it's very consistent. It's much more predictable than it had been over that prior period and that's a great environment to have confidence you can invest in into the business, into the industry, more for the longer term and so, we feel good about the short-term as well as the long-term utilization, but then, I also need to look at the particular periods because, about 12 months ago, we had just finished up the on-ramping of a significant new customer and so, there's some pieces there, but over long periods of time, our earnings for pharma is projected to be that 4% to 6%. That's unchanged from what we said before and I do expect that over long periods of time, revenue will be higher than that.
I've mentioned before that the operating income rate, the percent, is not the significant measure of success for us because there's brand inflation and there's items like the GLP-1s that carry with it a much higher price point and it just won't carry with it the same level of profitability in the short term until maybe it becomes generic and then, you get into all that, but that's fine. I think we have a very successful business with the revenue being at a higher rate than our underlying profitability.
Lisa Gill
You brought up branded inflation and generally, we hear here in the first week of January around what manufacturers did around price increases. Was it in line with what your expectations were?
Aaron Alt
We've been delighted. We've seen good overall utilization in the pharma business in the second quarter so far and to your question on brand inflation, we had called, as part of our guidance, that we expected a normal brand inflation environment and that's what we've seen so far now. Knock on wood, early days. It's still early in January, but that's what we're seeing so far.
Lisa Gill
And utilization, I think if we look back last year, we had a conversation around cough, cold, flu was trending higher than expected and then really dropped off right after our conference. I think our expectation this year is that it started a little later, just following the flu data in December. So, maybe we'll see it carry through to January, February, but, again, I think that those categories for you, right, are not really big needle movers.
Jason Hollar
They're not the biggest categories. That's certainly true. At the same time, the extreme of what we saw with the pull ahead last year was unique and it was broader than cough, cold, and flu. You had a number of other respiratory. So, it's harder to measure, but, yeah, we've highlighted before that the comparison is a little bit stronger as it relates to Q2, given that point. But, obviously, at this point, we certainly don't expect any impact for the full year that's meaningful.
Lisa Gill
And you made a comment around GLP-1s. I think we all appreciate that, they're part of the reason that the margin is lower, when you say a really high dollar amount, but, also, the fact that there is cold chain special handling that's needed around that product. Do you feel like you're at the efficiency that you need to be today, whether we think about cold chain or how the product gets delivered?
Jason Hollar
Yeah. It's high volumes and it's increasing dramatically. It's taking up more of our capacity, certainly. So, it is something to continue to keep an eye on. At the same time, even though the volumes are in a high growth mode, it's a lot of volume to start with. So, we are able to operate fairly efficiently. We thought we had some built-in buffer for excess capacity. So, we tried to get in front of this because it's so important for the specialty business to have access to all that. So, we have pretty good cold chain capacity throughout the enterprise and, of course, we're also looking forward to the vaccine rollout.
So, we're in a good position for that. The underlying profitability of all these products, we don't like to stress too much product by product because ultimately we step back and we look at the book of business for every customer, because each customer has a little bit different desire with how they like those contracts structured. So, for us, we go back to continuously to, I just love innovation.
Whether we make incremental profit today or not is one question, but, ultimately, innovation is great for the industry, it's great for our customers, it's great for patients, and ultimately it's going to be great for us. So, we don't have a business if we don't have a lot of volume being pushed through our channel. We can find ways to continue to optimize that, reduce our cost per item shipped, be more efficient, and at some point get the right pricing for it too if there's an imbalance. But we look at a portfolio for each and every customer and recognize that we need to look across the spectrum of products and not just fixate on one.
Lisa Gill
And when we think about a portfolio of products, when we think about generic, so for a couple of years there was definitely a headwind as we saw more generic price deflation. I think many in the industry have characterized it, and I think you may have as well, that around stabilization on generic pricing, would that be the correct assumption as we're moving throughout 2024?
Jason Hollar
Yeah, the phrase we use almost entirely without any exception is consistent market dynamics and we like that for a couple of reasons. First of all, it implies that there's a utilization element to that too. So, utilization has been very consistent. Now, it's been positive, it's been very consistent, and that's what's important to that generic business.
But it's also meant to imply that the buy side, sell side are working in tandem with one another because you can have shocks on any one side or the other, and that's okay as long as they're both moving at the same time in the same direction and that's the problem we have with our medical business, but that's not a dynamic that we've seen come out of balance within generics, and to any great degree. So, when we say consistent market dynamics, and we can say again here today, we still see consistent market dynamics, is that that margin per unit is stable, it's predictable, it’s something we can manage to and we have good utilization that then is helping improve the underlying profitability.
Lisa Gill
One of your large distribution relationships has recently announced that they're going to hopefully in the next couple of years move more towards what they call cost vantage, a cost plus model. As their distributor, will it change your relationship in any way with CVS?
Jason Hollar
So, never want to have too many specific conversations about a terrific customer with the whole world. I think the key is we're going to support our customers wherever they want to take their business, right? So, we're going to work very closely with CVS and understand what they're working to accomplish.
I think the one thing that they, I'm just looking, just even the public information here, it's clear what they're working towards is increased transparency. We've said very consistently, we believe increased transparency is very good for the industry. Ultimately, we believe that's good for utilization, that's good for healthcare, it's good for access to healthcare.
So, we're certainly not going to be any problem with that. We're going to work with our customer and I think ultimately, you have to step back and think about our role. Our role in distribution is to safely, securely, and efficiently get these products from the manufacturer to the end customer slash patient and that's what we'll continue to do and we can do that in any model that our customers want us to do and there's a lot of unique models that are happening out there.
There's a lot of unique potential changes. I don't even call this a change in the model. It's just tweaks to how they're approaching it, but in all those cases, they need a partner to be right there with them to ensure that safely, securely and efficiently, those products are getting to where they need to be and nothing that we're hearing or seeing is going to change that.
Lisa Gill
When we think about contracting in general, generally speaking, drug distributors have contracts that are up every three years. I think it's pretty well known that you have another large partner that's up for renewal. Maybe can you just talk about what customers are looking for today in a renewal and I think specific to the specialty side of Optum Rx, are things changing there at all from a relationship standpoint?
Jason Hollar
You keep trying to get me to talk about my customers with the world. Another great customer, if they're listening, we love you.
Lisa Gill
I have to try, Jason.
Jason Hollar
Optum is a large, diverse customer. They really do drive health care forward. So, of course, we're going to want to support our customers in any way in which they want to pivot their business. I'm not saying that they are. Again, the key point is all of our customers really do want the same thing, safely, securely and efficiently getting the products to where they need to go.
This is -- all customers are always looking for ways to be more efficient, more productive. That will always change how they approach it, but I'm absolutely certain that the distributors, certainly Cardinal Health, are going to be the best, the most efficient, the safest, the securest, the most efficient. So I have very high confidence all customers are going to want to utilize the distributors and we are a good company and I think the value that we provide as an industry and certainly we provide as a company, I think will be very difficult to be replaced by any of these customers and I'll go back to all these business models that we see are changing or trying to change.
There's still a distributor behind the scenes in all of them and that, I think, really tells you something. So, again, back to all of our customers, we're going to be there to see what we can do to be more -- to make them even more successful.
Lisa Gill
I'm not going to name a customer here, but we just talk about the independents collectively. So I think if you look at the independents, there's always been this talk of independents are going to decrease and as you know, I've done this for a really long time. We really have not seen a massive shift and as a matter of fact, they became increasingly important because of COVID, right?
As a trusted advisor, the trusted place to get your prescription and your vaccine, etcetera, etcetera, but it feels like they're under an enormous amount of pressure again and we were with another large health plan earlier today who said we're going to start to pay some of these independent pharmacies at a better rate because we feel, especially in rural areas, that it's really important that they stay in business. From your perspective, what do you see right now as far as the health of the independents and what are you doing to support them?
Jason Hollar
Yeah, they're an incredibly entrepreneurial bunch that are scrappy and find ways to be successful. Whether they're in a rural area where there's less options or sometimes it's the exact opposite, an urban area where they are very specialized products and services beyond the pharmacy. They always find a way. So I've been doing this, I think, maybe my career as long as you have, but within this space and less time, but I can tell you that the legend and lore of the retail independent pharmacy going under has been around for, I think, certainly since Cardinal Health has been around.
So we are not certainly ready to think that that's the case. In fact, we do exactly the opposite. Through our business and through our team, we actively work with the retail independents so that they can have access to our scale, so we can help them with their productivity, help them with back office, payment mechanisms. Consumer health has been a big area that we've been highlighting that we're continuing to invest even more into to have even better product availability, more inventory, more breadth. So these are all areas that can be of value to the retail independents to ensure that they are competitive in the future.
Lisa Gill
When I think about the comments that you made this morning as it pertains to the medical segment and the areas that you're breaking out, you did highlight, while you've moved the second quarter for medical expectations slightly, that it was driven by non-reoccurring items generally in the at-Home area of your business. How do we think about the sequential improvement in just the traditional medical business?
And what are some of the things that, again, I think when you break out those other businesses, you've made progress in medical, but it doesn't look as big as when it's including some of those other higher margin businesses, right? So maybe just talk about specifically what's going on at-Home that's non-reoccurring, and then secondly, really the line of sight that you have to this turnaround.
Aaron Alt
Sure. Let me offer a couple of thoughts. First, I want to zoom out and just remind everyone what we said. We provided some new information today. As part of the resegmentation, we provided visibility for the first time on the GMPD business that that business was unprofitable in fiscal year '23, but we also commented that that specific business was going to be profitable in fiscal '24. The exact number is to come in our earnings call in three weeks once our books are closed for Q2, but I think that's an important baseline, a piece of context there.
If you then zoom back into the segment structure that we were in before our announcement this morning, the guidance we had provided for the medical segment for second quarter was that we expected Q2 to be slightly above Q1, right? This morning we updated that. It went from slightly above to generally consistent. And so if you do the math between slightly above and generally consistent, the delta is some non-recurring items that are largely tied to our at-Home business and our wave mark business.
We're not going to get into what those are today, but I want to make an observation about that, which is if we went from slightly up to flat and the difference is a couple of non-recurring adjustments on the at-Home business, what that tells you is actually what we said this morning, which is we're pleased with the utilization trends within the business, both with respect to the results on inflation mitigation.
We're pleased with the continued progress on Cardinal Health brand as well as on the simplification actions that the team is taking. So the operating business books are still open, not commenting with any degree of finality, but we're pleased with that, but we're being transparent as well, both on from a what is the portfolio, the constituent pieces of the portfolio, at a deeper level of granularity and setting up the other businesses for success.
Lisa Gill
So when I think about utilization, what we've seen across, whether it's managed care or facilities, we've actually seen very strong utilization. I know you have surgical kitting. I know you have a number of different products that would benefit from some of that utilization. You have strong hospital relationships. Should we think about -- and I know there's this overhang of what happened with all the inflation issues, etcetera, but over time, should we see more of a direct correlation to what we see for surgical procedures across the U.S. and what we actually see in your business?
Jason Hollar
Yeah, I do think that when you look at our product portfolio within the medical business, it is overweighted on surgical and operating room items that are often disposable in that type of setting. So we do have other product categories, but that has always been a little bit of an overweighting of ours. But to your point, the utilization right now is broader than that. We're seeing it kind of everywhere, but that has been a component of our growth that we saw in the first half of the year and is absolutely a key part of our growth expectations for the long-term plan.
Lisa Gill
I know we're coming up against time here, and I have still multiple questions to ask. So let me leave it with this. Jason, in your seat, you've done a phenomenal job over the last two years nearly of laying out the strategy of what you're going to do and delivering on that, but as we think about now growing the business and we think about the next set of opportunities, what do you hope that investors will appreciate about Cardinal 12 months from now that maybe they don't today?
Jason Hollar
Yeah, you're predictable because I know you ask that question all the time and I was thinking about that earlier and first of all, what I'm probably most proud of is when I answered that question 12 months ago, which was only six months into my time in this role, I talked about three things that have absolutely been the case, right? That I think our pharma business was being underappreciated and that we were going to really hit that strong and then that, given how big it is, it was going to benefit our company even more.
I think there's still something left in that, right? I think there's still a component of that, but I think we've gone maybe 75% of the way there and it's really about the same point on the medical business where I really don't think a lot of people thought we could do what we've done so far. We still have some work to do, but I think there's still a little bit there.
The new thing for this year will be those growth businesses. That's partly why we did that, to keep ourselves accountable and transparent with that, but also to make sure that our investors understand what really exciting businesses these are and what they can be in the future and that's our obligation, to get you that insight so that you can understand that journey better going forward.
Lisa Gill
Well, I appreciate our conversation. Thanks, everybody.
Jason Hollar
Thank you.
Aaron Alt
Thank you.
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Cardinal Health, Inc. (CAH) J.P. Morgan 42nd Annual Healthcare Conference (Transcript)