CARDINAL HEALTH INC Q3 FY2025 earnings call

Management Statement and Operational Highlights

• Overall Performance: Strong third quarter results with profit growth from all five operating segments. Pharmaceutical and Specialty Solutions drove performance, and growth businesses are becoming an increasingly important part of the mix.
• Acquisitions: Completed acquisition of Advanced Diabetes Supply Group in April. Acquisitions of GI Alliance and Integrated Oncology Network are showing positive initial results, contributing to higher margin revenue streams.
• U.S. Footprint: Over 99% of enterprise revenue generated in the U.S., and ~95% of segment profit from four businesses largely unaffected by tariffs. Invested ~$7 billion in the U.S. in the last two years in areas like domestic manufacturing and distribution nodes.
• Tariffs and Mitigation: In GMPD, taking aggressive actions to mitigate tariff impact, including increasing U.S. manufacturing capacity in key categories, diversifying supplier network, using AI for tariff planning, and reducing internal costs to minimize burden on customers.

Segment Performance

• Pharmaceutical and Specialty Solutions: Third quarter revenue was relatively flat at $50.4 billion. Excluding the customer contract expiration, revenue increased 20% driven by brand and specialty pharmaceutical sales growth from existing and new customers, including approximately 7 percentage points of revenue growth from GLP-1 sales. Segment profit was $662 million, a 14% growth.
• GMPD (General Merchandise and Pharmacy Distribution): Revenue increased 2% to $3.2 billion, driven by volume growth from existing customers. Cardinal Health brand saw 3% volume growth (closer to 5% when normalized for FX and operating billing days). Segment profit increased to $39 million.
• Other Businesses: Third quarter revenue increased 13%, and segment profit growth was 22% to $134 million with profit growth across all 3 operating segments (Theranostics, at-Home Solutions, Nuclear, OptiFreight).

Guidance

• Fiscal Year 2025: Raised and narrowed EPS guidance to $8.05 to $8.15, an $0.18 increase at the midpoint. Adjusted free cash flow expected at the high end of prior guidance range (~$1.5 billion). Narrowed interest and other guidance to $200 million to $215 million.
• Fiscal Year 2026: Expect robust cash flow generation, double-digit non-GAAP EPS growth, and continued focus on internal investments (e.g., Consumer Health Logistics Center), incremental debt paydown, returning capital to shareholders, and tuck-in acquisitions in strategic areas.

Risks

• Tariffs: Uncertainty around reciprocal and targeted tariffs, potential impact on GMPD. Need more clarity on nature, geographic reach, duration, and financial impact.
• Regulatory Changes: Potential impact on pharmaceutical industry from Section 232 reviews and drug pricing executive orders, though current economics not expected to change materially for the enterprise due to unique value proposition.

Question and Answer

Q: Strong brand and specialty sales growth, volume perspective and sustainability?

A: Jason Hollar said it's broad-based, including organic and inorganic growth, GLP-1s contributing ~7%, and $10 billion new customers starting in Q2, driving ~20% volume revenue growth.

Q: Tariffs impact on Cardinal Health brand and USMCA?

A: Jason Hollar said Cardinal Health brand is ~$4B of GMPD revenue, higher margin, and team is focused on USMCA protocol exemptions and mitigating tariffs.

Q: Pharma tariffs and pass-through to pharmacies?

A: Jason Hollar said pharma business model is strong, value provided is unchanged, and they feel good about contracts and historical context of value being rewarded.

Q: Nairobi protocol on tariffs, products and process?

A: Aaron Alt said team is using existing protections, monitoring Nairobi protocol, and it's part of ongoing efforts to mitigate tariffs.