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

Good morning and welcome. Today, we will discuss Cardinal Health's fourth quarter fiscal 2021 results, along with guidance for fiscal year 2022. 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 these 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 schedule 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.

Thank you, Kevin, and good morning, everyone. I will start my comments today by acknowledging that our fourth quarter results were below our expectations and yours, primarily due to an inventory reserve adjustment of $197 million. This reserve adjustment was driven by changing market conditions related to COVID-19 on certain highly commoditized PPE products. To meet our customer commitments during the pandemic, we carried higher levels of inventory in certain PPE categories during a period of significantly increased demand, higher prices, and longer-than-normal supply chains. Our analysis at the quarter-end of both the anticipated customer demand and projected sale prices for these products resulted in a sizable inventory reserve that affected a subset of our medical products inventory. In addition, there were a few other unexpected items that affected our results, which Jason will cover in his remarks. Throughout the past year, we have been taking action to drive performance, and we will continue to move forward with urgency. For example, we divested the Cordis business, extended our Red Oak Sourcing agreement with CVS Health, identified $250 million of additional cost savings opportunities, restructured parts of our organization to increase accountability, and made important leadership changes. We are continually reviewing our business and seeking areas to improve. With the actions we've taken to date, and our plans for fiscal 2022, we feel confident in our strategy and are encouraged by the tailwinds behind our growth areas and our strong cash flow generation. In fiscal 2021, we grew revenue 6% versus the prior year, and despite an estimated $200 million year-over-year operating earnings headwind related to COVID-19, we grew EPS. We continue to aggressively streamline our cost structure, and surpassed our enterprise cost savings target for the third consecutive year. We generated strong operating cash flow; prioritized returning cash to shareholders through dividends and share repurchases; and took actions to further strengthen our balance sheet. As I reflect on the unprecedented events of the past year, our team has prioritized our customers, maintained continuous operations, partnered with governmental agencies to support vaccine administration and protect patients, and further improved the resiliency of our supply chain. Before turning it over to Jason, I want to highlight last week's announcement that we have negotiated a comprehensive proposed settlement agreement and settlement process designed to achieve broad resolution of governmental opioid claims. If all conditions are satisfied, this agreement would result in the settlement of a substantial majority of opioid lawsuits filed by state and local governmental entities, and, depending on the level of state and subdivision participation, we would pay up to $6.4 billion over 18 years. This is an important step forward for our company. As we've consistently said, we remain committed to being part of the solution for the U.S. opioid epidemic, and believe a settlement would be a prudent way to provide necessary relief for our communities and certainty for our shareholders. With that, I'll turn it over to Jason to further discuss our results and fiscal 2022 guidance.

Thanks, Mike, and good morning, everyone. In the fourth quarter, we delivered EPS of $0.77, which, as Mike mentioned, included a $197 million inventory reserve on certain PPE in the Medical segment. Turning to the Pharma segment, on slide six, fourth quarter revenue increased 15% to $38.0 billion, driven primarily by sales growth from large pharmaceutical distribution and specialty solutions customers. As a reminder, the fourth quarter fiscal 2020 included reduced pharmaceutical demand related to COVID-19, which to a lesser extent contributed to the growth in the quarter. Pharma segment profit was flat in the fourth quarter, at $358 million. This reflects COVID-19-related volume recovery in our nuclear business, offset by pharmaceutical distribution customer contract renewals. This impact in renewals was in line with our expectations, and generally consistent with prior quarters. However, there were some other items, including inventory adjustments and opioid-related legal costs that are higher than previously assumed. As we've mentioned, we continue to prioritize investing for growth and optimizing our core operations. In the fourth quarter, the deployment of some of these technology enhancements resulted in incremental costs for implementation and depreciation, which we also expect in the next several quarters as we continue to deploy new capabilities. I will further discuss our investments as we look to fiscal year 2022. As we highlighted last quarter, we continued to experience softer volumes in certain therapeutic classes within our generics program. Our generics program continues to see generally consistent market dynamics. With respect to other product types, including brand, specialty, and consumer health, we largely saw volumes at or above pre-pandemic levels during the fourth quarter. In Medical, depicted on slide seven, revenue increased 23% to $4.2 billion in the fourth quarter. This revenue increase was driven by a net positive impact from COVID-19 on products and distribution primarily due to a recovery in elective procedure volumes, and a positive PPE pricing impact. Medical segment loss of $63 million in the fourth quarter was due to an adverse impact from COVID-19 primarily due to the previously mentioned inventory reserve, partially offset by a recovery in elective procedure volumes. Additionally, benefits from cost savings initiatives were offset by elevated supply chain costs. During the quarter, we were encouraged to see elective procedure volumes effectively return to near pre-COVID-19 levels. While our team continued to execute on our cost savings and efficiency initiatives within our global manufacturing and supply chain, we did experience elevated supply chain costs, particularly in the areas of freight, labor, and commodities. We are taking actions to help mitigate these impacts, but as we look forward, we do expect some of these higher costs to continue into next year. Now, I'll turn your attention to full-year results, beginning with the enterprise. Total company revenue increased 6% to $162.0 billion, with strong top-line growth in both segments. Consolidated gross margin decreased 2%, to $6.8 billion. Despite sales growth, SG&A decreased 1%, reflecting the benefits of our enterprise-wide cost savings measures. Operating earnings decreased 5%, reflecting a headwind of approximately $200 million year-over-year related to COVID-19, which was split fairly evenly between the segments. Including COVID-19, operating earnings would have grown in the low-single digits in fiscal 2021. Moving below the line, interest and other decreased 44% to $133 million driven by multiple items, including lower interest expense from debt reduction actions, the increase in the value of our deferred compensation plan, and one-time investment gains. As a reminder, deferred compensation gains or losses reported in interest and other are fully offset in corporate SG&A and net neutral to our bottom line. Our annual effective tax rate finished at 22.8%, benefiting from discrete items. We finished the year with EPS of $5.57, reflecting growth of 2% despite the net COVID-19 headwind. Turning to the balance sheet, we continued to operate with high net working capital efficiency generating robust operating cash flow of $2.4 billion for the full year. We finished the year with a strong cash position of $3.4 billion with no outstanding borrowings on our credit facilities. As a reminder, the day of the week in which the quarter ends affects point-in-time cash flows. We continued to deploy capital according to our priorities, investing $400 million back into the business in CapEx to drive organic growth, strengthening our balance sheet through approximately $550 million in debt paydown, which occurred primarily in the fourth quarter, and returning nearly $800 million to shareholders through dividends and share repurchases. As for the segments' full-year results, beginning with Pharma on slide 10, Pharma revenue increased 6% to $146.0 billion driven by sales growth from pharmaceutical distribution and specialty solutions customers. Pharma segment profit decreased 4% to $1.7 billion due to volume declines in the company's generics program, including the impact of COVID-19. This was partially offset by favorable brand sales mix. Excluding COVID-19, we estimate the Pharma segment would have grown low-single digits in fiscal 2021. Turning to Medical on slide 11, full-year Medical revenue increased 8% to $16.7 billion driven by a net positive impact from COVID-19 on products and distribution. As we saw throughout the year, this increase was primarily due to the impact of PPE sales and higher volumes in our lab business. Medical segment profit decreased 13% to $577 million due to an adverse impact from COVID-19 on products and distribution. This was primarily due to the fourth quarter inventory reserve on certain PPE products, partially offset by higher volumes in our lab business. Additionally, the team delivered strong cost savings and improved global manufacturing efficiencies on the year. When adjusting for COVID-19-related impacts in Medical, we estimate the segment would have grown mid-single digits for the full year. While our fiscal 2021 results fell short of our expectations, the underlying growth we saw in both segments excluding COVID-19 gives us confidence as we move into next year and as the pandemic's effects on our businesses continue to dissipate. Turning to our guidance for fiscal 2022 on slide 13, we expect earnings per share in the range of $5.60 to $5.90. This reflects incremental technology investments of approximately $120 million to drive growth and efficiencies across the enterprise, the Cordis divestiture, and other assumptions we will detail momentarily. We expect interest and other in the range of $150 million to $180 million. We anticipate continued reduction in interest expense versus the prior year, primarily as a result of the fiscal 2021 deferred compensation gains not expected to repeat. We're assuming a non-GAAP effective tax rate in the range of 23.5% to 25.5%. We expect diluted weighted average shares outstanding in the range of 287 million to 292 million and CapEx of $400 million to $450 million. Transitioning to the segments, beginning with Pharma on slide 14, we expect high-single digit revenue growth driven by growth from large customers and continued COVID-19 recovery and mid-single digit segment profit growth. We anticipate COVID-19 will be an overall tailwind of approximately $100 million to Pharma segment profit compared to the prior year. While we will likely continue to see some choppiness, we expect volume recovery in certain generic therapeutic classes by the end of the calendar year. As mentioned, we are investing in technology enhancements to drive growth and efficiencies, which we expect will lead to an $80 million segment profit headwind in fiscal 2022, including the annualization of the investments made in the fourth quarter. Adjusting for the COVID-19-related impacts and the incremental technology investments, we see Pharma normalized growth in the low-to-mid single-digit range. We believe normalizing for these impacts provides a better approximation for the long-range growth trajectory of the business. As for other assumptions, we continue to expect consistent market dynamics in our generics program. We expect increased contributions from our growth areas, including specialty, biosimilars, nuclear, and outcomes. We anticipate a similar contingent brand inflation rate as in fiscal 2021 with continued net dollar contribution each year. And we expect opioid-related legal costs of approximately $125 million, an increase of $10 million versus fiscal 2021. For Medical on slide 15, we expect revenue to be approximately flat in fiscal 2022, primarily due to the prior year COVID-19 comparison, with low double-digit segment profit growth. With respect to COVID-19, we expect an approximate $100 million year-over-year tailwind to Medical segment profit. We are assuming elective procedures will remain at or near pre-COVID levels for the duration of the year. We expect moderate headwinds in fiscal 2022 related to timing of selling higher-cost PPE products and lower lab testing utilization versus the prior year. And we anticipate a year-over-year comparison benefit related to the PPE inventory reserve. Outside of COVID-19, we expect an approximate $80 million segment profit impact due to the Cordis divestiture. Note, the anticipated reported impact for fiscal 2022 is higher than previously communicated, primarily due to exchange rate effects and other operating improvements within the business in the prior year. Additionally, we expect an incremental $20 million in technology investments in our at-home business to drive growth and efficiencies. Adjusting for these items, we see normalized Medical segment profit growth of mid-to-high single digits in fiscal 2022. Finally, as seen in the fourth quarter, we expect elevated supply chain costs to persist, particularly in the first half of the year. We anticipate these elevated costs will be partially offset by the continued benefits from our global manufacturing and supply chain transformation, which will ramp up throughout the year. Now a few additional comments on the expected cadence next year: we expect profit growth to be weighted more to the back half in both segments. In Pharma, this is primarily driven by the timing of the previously mentioned incremental technology investments being more weighted towards the front half, as well as stronger expected second-half performance in our generics program including the impact of COVID-19. In Medical, in addition to the elevated supply chain costs, we also anticipate the total unfavorable fiscal 2022 COVID-19 impact of approximately $50 million to occur primarily in the first half of the year. As a reminder, we also experienced favorable COVID-19 impact in the first half of fiscal 2021, which was of a similar magnitude. Throughout the organization, we continue to place a high priority on cash flow generation, as well as allocating capital in a balanced, disciplined, and shareholder-friendly manner. Our strong cash flow and improving capital position will enable our capital allocation priorities, support our company's obligations, and provide increased flexibility and the ability to be more opportunistic in our capital deployment. Along those lines, we anticipate deploying the Cordis proceeds through a combination of share repurchases and debt paydown, which is expected to offset the earnings dilution on a pro forma basis. We expect share repurchases in the range of $500 million to $1 billion in fiscal 2022. In addition, we expect total debt paydown of approximately $850 million reflecting the completion of the remaining June 2022 debt tower at or before maturity. With that, I'll now turn it over to Mike.

Thanks, Jason. To be clear, we are disappointed with this finish to the year and are moving forward with a sense of urgency to improve our operations and execute our strategy. We're prioritizing investment in our strategic growth areas and expect these businesses to collectively realize double-digit growth in fiscal 2022. Across our business, we're enhancing our IT infrastructure in key areas to increase capabilities and digitization that improve the customer experience and drive productivity. While we expect some benefits from these investments this fiscal year, the majority of these benefits will materialize in fiscal 2023 and beyond. In Pharma, we're investing an additional $80 million in technology infrastructure to create additional operational efficiencies, improve data insights, and drive cost synergies to enhance our ability to grow and generate better outcomes for our customers. Our generics program remains a critical priority. This week, we extended our Red Oak agreement with CVS Health for an additional five years, which takes the term of our generic sourcing joint venture through June 30, 2029. This ensures that we can continue to deliver best-in-class sourcing capabilities for our customers well into the future. We are also investing in data and analytics including our pricing capabilities, as we continue to focus on managing all components of our generics program and expect market dynamics consistent with the last few years. We remain committed to supporting the retail pharmacy community. At our recent annual retail business conference, we connected virtually with over 4,000 independent pharmacy customers and launched two new digital offerings, NavixRx and E-Commerce Storefront, to help independent pharmacies expand their services and improve healthcare outcomes. In Specialty, we're investing in our Sonexus patient hub where our technology solutions help biopharma customers remove barriers to patient care. And in our third-party logistics business, we're extending our cold chain storage space to accommodate the growing number of temperature-sensitive products, including cell and gene therapies. In Nuclear, we received FDA approval to use our radioactive diagnostic agent LYMPHOSEEK in pediatric patients one month and older. We continue to build out our multi-million-dollar Center for Theranostics Advancement in Indianapolis, and are also investing to expand our PET capabilities. We expect double-digit profit growth in nuclear over the next several years, and in outcomes, we also expect double-digit profit growth as we expand our direct-to-patient digital footprint and implement new patient adherence programs. Turning to Medical, we've been taking quick, decisive action throughout the fiscal year to streamline and simplify our medical business, and this work remains a top priority heading into fiscal 2022. We've recently restructured our organization to establish clear lines of ownership and accountability and made some management changes including appointing a single leader to manage U.S. medical products and distribution as well as a single leader to manage international. With the divestiture of Cordis, we plan to significantly reduce our international commercial footprint and have initially identified 36 markets we intend to exit so we can focus on locations where we have a competitive advantage and can generate sustained long-term growth. We're laser-focused on enhancing supply chain resiliency, improving business continuity, and investing in advanced planning capabilities to drive forward-looking insights to better serve our customers and their patients. In addition, our medical services businesses OptiFreight Logistics and WaveMark continue to enable clinically integrated and digitally automated supply chains. Our at-home business continues to focus on enabling and supporting comfortable home-based care for patients with acute and chronic conditions. We continue to see volume growth as care is rapidly shifting to the home. For fiscal 2022, we're investing an additional $20 million in technology infrastructure to create operational efficiencies and better data visibility. With respect to the enterprise, we're aggressively reviewing our cost structure to continue streamlining our operations and processes and intend to reinvest a portion of these savings to fuel future growth. In fiscal 2022, we plan to launch initiatives that will deliver at least an additional $250 million of savings by fiscal 2023. As Jason discussed earlier, we take a balanced, disciplined, and shareholder-friendly approach to capital deployment with a focus on investing in the business, maintaining a strong balance sheet, and returning cash to shareholders. In closing, I want to thank our employees for their hard work and contributions that make it possible for Cardinal Health to fulfill its mission of improving the lives of people every day. And now, Jason and I will take your questions.

Thank you. And our first question will come from Michael Cherny with Bank of America. Please go ahead.

Good morning. Thanks so much for the question. I want to dive a little bit more into the capital deployment priorities you think about into 2022. Obviously, you have the Cordis proceeds that are coming in of about $1 billion, I believe the tax receivable agreement, if I recall, is about $1 billion or so, and I could double-check that in the last quarter's transcript. When you think about that, think about your cash position as you sit now and the free cash that you're going to generate this year, even with the investments that you're making, do you think there's an opportunity to be a bit more aggressive, either on the buyback given where your stock sits in the market, on M&A, given that you talked about a number of growth priorities, of which I assume there's some bolt-on transactions. Just curious about that philosophy, where you sit now, given that the company is in as strong a balance sheet position as I can recall seeing in a while?

Thanks, Mike. I appreciate the question. We are really excited about the work we've done around that. But I'm going to have Jason give you a little bit more color on it.

Yes, thanks, Mike. And first of all, yes, I think we had some really great cash flow this last year, so $2.4 billion of operating cash flow. And that resulted in a $3.4 billion ending cash balance, which does include the $500 million debt paydown that we completed in the fourth quarter. So, as you indicated perfectly, we're stepping into this year with a lot of flexibility even before the Cordis transaction closed, which was just a few days ago. We're still to add another $1 billion to that balance. As we highlighted in some of those comments this morning, we do expect to pay down the $815 million that's coming due by the end of the fiscal year or before the end of the fiscal year. So that will be some of those uses. And then, of course, we guided towards the $500 million to $1 billion for the share repurchases, which is a fairly wide range and reflective of some of the flexibility that we talked about. And as I think about the Cordis proceeds, of course cash is somewhat fungible, but essentially that $1 billion, how we're thinking about it is accelerating some of that debt paydown, and a portion of that toward the $500 million to $1 billion in buybacks. So, we feel real good about that as we entered into the first quarter here. You referenced the tax receivable, and I don't think we provided any updated comments on that so far. Last quarter, I referenced that we expect it by the end of the calendar year. It's still our expectation, although, like many organizations, COVID has impacted some of the processes and created a little less certainty as to the precise timing. But we still feel pretty good that that's a reasonable approximate timeframe. When you think about receiving those proceeds perhaps late in the calendar year, there will be less time to actually deploy those to the balance of this year. So, it's certainly still a potential opportunity to get us maybe to some of the higher end of that range. But, nonetheless, there's a lot of flexibility that goes along with that. As you indicated, when we talk about the opportunistic uses, essentially we have increased flexibility here. M&A is always on that list, and it depends on the opportunity, the valuation, and what we see delivering to us strategically. And so that will be another thing that we evaluate along the year. Thanks for the question.

Up next, we'll hear from Kevin Caliendo with UBS. Please go ahead.

Great, thanks. I just want to expand on that a little bit. I guess I don't understand why you're not being more aggressive with the buybacks. Given the settlement, looks like it's largely done, the cash on hand is greater, the stock is going to come under pretty meaningful pressure today, most likely. What's stopping you from going out and buying $2 billion of stock or more? I mean, are there any credit issues or anything else that you're concerned about? And also, on the buyback, if I'm doing the math right, it feels like the numbers don't entirely jive to get to that $0.21. Is there simply the timing that it would happen so late in the year is why the buyback wouldn't cover the sort of $0.21 of dilution from Cordis?

Let me start, Kevin. I'll turn it over to Jason. I'll just comment specifically on the opioid piece, and then Jason will give you a little bit more information. The opioid settlement is at a step where we're pleased to have a comprehensive settlement out there. But it does have a few more steps left. So, we do have to wait and see if we get the states, and cities, and counties to sign on to get enough critical mass in order to make a final decision. We do have some time left on that to make sure we understand exactly with clarity where that's going to be. But we're pleased with where we are as far as an initial step of finally getting something out there for people to consider. Jason?

Yes, and as it relates to the proceeds on the Cordis that was implied or referenced, it's just a matter of timing of when you assume we pay down the debt and when we would complete the share repurchases. And so, there's an opportunity for that to have a reasonable range. That guidance range, we think, reflects what we think that possibility may be. The key thing, on a pro forma basis, is that extra $1 billion will be deployed in some manner, and we will see, and certainly within fiscal 2023 run rate, there will not be dilution expected from that divestiture. As it relates to the other question, and somewhat as it relates to credit, there's nothing there from a credit perspective that is concerning. We're on a glide path to getting to our targeted leverage ratio. A key part that I referenced last quarter is that this remaining debt that's coming due at the end of this fiscal year is a key part of getting us towards those targets. I indicated last quarter that I would anticipate the level of debt paydown to begin to diminish after this fiscal year. That continues to be our expectation. There are a lot of factors, as Mike referenced, that would play into that. But overall, that remains our viewpoint, and there's nothing overly constrictive from that point. Just a little bit of prudence until we get some of these risks and uncertainties defined. We also need to see underlying performance in cash flow over the course of the year. And then, as I mentioned before, we do have some additional flexibility as it relates to the precise timing of the tax receivable.

And up next, we will take a question from Jailendra Singh with Credit Suisse. Please go ahead.

Thank you, and good morning, everyone. I want to go back to your inventory impact on PPE in the quarter. Can you elaborate a little bit more what products this relates to? And is there a potential that you might have another write-down in fiscal 2022, and what kind of initiatives you're putting in place to ensure that this does not happen again?

Sure. So, as Mike mentioned, the key thing here is there's been a lot of uncertainties with the pandemic. We were first and foremost focused on fulfilling our customer commitments, and that resulted in a higher level of inventory that we carried over that period of time. That happened while there was increasing demand, higher prices, and longer-than-normal supply chains. We step back each quarter, do our analysis, determine the net realizable value, and then make any adjustments that may be necessary. So, this affected some highly commoditized products, a subset of our PPE — think of those as products that would have more volatile pricing. We saw pricing move more dramatically for that subset. Given it was a subset of our inventory, it was relatively defined. It was a relatively large percentage reduction within that subset, but it was contained. We're not getting into product-by-product detail, but it was that type of product that had somewhat lower value-add and therefore it was easier for supply to come into the market and that drove prices down quicker than other products.

Only to reiterate that our focus has always been and will continue to be on our customer. It was important to us from the very beginning of this pandemic to acquire critical PPE for our customers, and as Jason said, we did ramp up during a period of higher demand and higher prices and longer supply chains.

Next question, please.

And next, we'll hear from Ricky Goldwasser with Morgan Stanley. Please go ahead.

Yes, hi, good morning. And thanks for all the details you provided in the prepared remarks. Just a couple of follow-up questions to understand sort of the moving parts into guidance. Specifically, you talked about the customer renewal — seems like it's CVS — can you maybe help us quantify what the impact is in 2022, and also is there any other renewals that we should be considering in the next 12 to 18 months? And then, the second question in terms of the moving parts are on the investment that you're making: should we think about them as sort of one-time investments in 2022, or should we factor them as ongoing resources of investments to support future growth?

I'll start and then I'll have Jason comment on the investments. The renewal that we're talking about at Red Oak is not included in what Jason was talking about on customer renewals. That's part of our overall generics program performance, which we expect to be a tailwind next year. We feel really good about where we're headed with all the various components of our generics program and are excited to continue to partner with CVS moving forward with Red Oak. What Jason was talking about in renewals was just the normal renewals. There is nothing unexpected in the fourth quarter customer renewals; they basically came in as planned, so that was not anything unexpected. We don't see customer renewals being any different or unusual for us in fiscal 2022.

As it relates to the other moving pieces for Pharma that are part of that underlying guidance: our growth businesses we expect to contribute. As Mike mentioned, we expect double-digit growth for our growth businesses top line as well as bottom line, and for the Pharma business that would be specialty, nuclear, and outcomes. And then we have the year-over-year COVID benefit that I mentioned would be a key part of that. But the customer renewals are not something that we would anticipate to be significantly different year-over-year. Regarding investments, those investments are planned for next year. We've spent quite heavily over the last several years on the capital side of getting IT systems in place. We are finalizing a multi-year journey now, and are starting to depreciate those assets. So there will be elevated depreciation that is more fixed in nature, but there's also a component of the final testing and rollout launch of the systems that tends to be more expensive versus capital. As we're in that rollout stage the expense will be elevated. We would expect it to reduce longer term beyond fiscal 2022, but for the balance of this year we would expect it to remain elevated and then thereafter come down over time.

Next question please.

And up next, we'll hear from Eric Percher with Nephron Research. Please go ahead.

Thank you. I wanted to ask about the generic volume commentary around certain classes. I know that we saw a clear increase in acute volumes from March into April in the quarter. So what are the classes where you're seeing this and any other specifics on how that's impacting the generic program?

Thanks for the question. We did see some sequential growth from Q3 to Q4 on generic volumes, which is a positive sign. We do expect the impact from COVID-19 on all generic volumes to be back at pre-COVID levels by the end of the calendar year or by the end of our fiscal second quarter. What we're referring to here is that we're still seeing some less-than-pre-COVID volumes in areas like anti-infectives, antibacterials, antibiotics, antivirals, and some pain medications. Our expectation is that, as life returns toward normal — kids back in school, more activity — we would start to see those drugs being needed more than they have been. So again, we expect them to be back to pre-COVID levels by the end of the year, and that's in line with what we discussed last quarter.

Next question please.

And next we'll hear from Steven Valiquette with Barclays. Please go ahead.

The categories that are trending above baseline. I'm curious if you're seeing those same trends as well. Thanks.

Mr. Valiquette?

I'm sorry. We didn't catch the beginning of your question. Could you repeat it please?

Yes. I knew at some point it would happen. I would get paying to ask two questions on two calls at the same time. That just happened. I guess I'm curious if you could provide more color on the elevated supply chain costs you mentioned for the Medical segment in fiscal Q4, which you cited in the press release. Is this cost pressure mainly in the U.S. or international as well? In addition to other color, what's happening mechanically there and would the sale of Cordis alleviate this in any way into fiscal 2022? Thanks.

Thanks. I'll start with the Cordis point first. I don't see Cordis alleviating the supply chain pressure in the near term. While Cordis had more international exposure, the elevated costs are more generalized. In the fourth quarter we started to see the same pressures many other companies have discussed: increased fuel costs, container costs that can be three to ten times prior levels due to capacity and port disruptions, higher wages, and other logistics-related cost increases. So it's a broad-based supply chain cost pressure. We saw that in Q4 and expect it to continue into the first couple of quarters of fiscal 2022. As things normalize, we'll look for reductions or opportunities to appropriately pass through some costs to customers if they represent a more permanent shift. We'll continue to monitor closely.

All right, and our next question will come from Eduardo Mestre on behalf of Elizabeth Anderson with Evercore ISI. Please go ahead.

Hi, good morning. This is Eduardo on for Elizabeth. Can you maybe provide some more color on the $250 million of additional cost savings opportunities? What areas of the enterprise do you expect to generate those savings from?

Sure. It's very much a continuation of what we've done to date. Our initial target was $500 million and we've come close to accomplishing that over the first three years. That work covered varied areas from manufacturing and footprint adjustments to distribution and functional areas. As we go forward, this next stage allows us to go from more transactional benefits, like rate negotiation in transportation, into redesigning networks and leveraging augmented intelligence. We can unlock additional value by simplifying our international operating structure following the Cordis divestiture, which will enable further opportunities. We'll also continue to leverage digital tools like RPA, automation, and AI to reduce costs and improve efficiency. So it's a broad set of initiatives across manufacturing, supply chain, and shared services, enabled by digital investments and simplification of our footprint.

I would only add to emphasize the use of digital tools — bots, AI, robotic process automation — to reduce our cost structure. Our IT team has built capabilities and our businesses are embracing these tools, and location strategy is an important factor. We see these giving us tailwinds for cost savings going forward.

Next question please.

And next we'll hear from Lisa Gill with JPMorgan. Please go ahead.

Thanks so much. Good morning. I just want to understand as we think about normalization in your Pharma segment, beyond the renewals, do you see low-single digit to mid-single digit normalized Pharma segment profit growth over the longer term? And where are specific opportunities you see to further accelerate that growth beyond 2022? Do things like specialty and nuclear that you talk about returning to double digits, which are on the smaller side, help to accelerate that normalized growth? Any drivers you can detail for the longer term would be helpful.

Yes, Lisa, you framed it well. We provided a normalized growth expectation to give a sense of longer-term achievable growth rates. We expect continued double-digit growth from our growth businesses — nuclear, specialty, and outcomes — and these businesses are growing to be a larger portion of the Pharma segment. As they grow faster and become a bigger portion, they will have more impact on overall segment performance. We feel good about the pipeline in nuclear and the work we're doing in the Center for Theranostics Advancement. We already have significant manufacturer commitments to collaborate in that center on new diagnostics and therapies. We also have strong relationships with our manufacturer partners in the core pharmaceutical distribution business. The Red Oak extension gives us stability in generics sourcing for eight more years and helps our overall generics program. Taken together, these elements support the normalized low-to-mid single-digit growth trajectory for Pharma.

Next question please.

And next we'll hear from George Hill with Deutsche Bank. Please go ahead.

Hey, good morning, guys, and thanks for taking the questions. Mike, first, with the renewal of the Red Oak agreement, are there any substantive changes to the economics of that agreement? And second, you called out contingent brand inflation in the presentation as business is starting to mix back towards brand growth. Are you seeing any changes in the underlying economics of the brand relationships and the amount of profits exposed to brand price inflation?

Two good questions. On brand, we expect overall inflation rates to be similar to the last couple of years. Some suppliers that had contingent inflation arrangements have moved to non-contingent structures, and we've renegotiated some DSAs over the last year, so the net dollar contribution is changing accordingly. The team has done an excellent job working with manufacturer partners and we feel we have a fair market arrangement moving forward. As for the Red Oak renewal, we won't disclose specific contractual details, but it's been an excellent seven-year relationship. The team there has deep generics sourcing experience and strong leadership that continues to bring value to the market. We continue to partner closely with CVS and feel very good about the extension and its positive impact on our generics program.

And the last question will come from Charles Rhyee with Cowen. Please go ahead.

Yes, thanks for squeezing me in here. Maybe Mike, a question on the opioid settlement: I think there's a window for plaintiffs to accept terms. What's the minimum participation required under this settlement for it to go into effect? In other words, is there a minimum number of participants, and the amount you would pay scales down depending on participation. What is the minimum requirement? And what happens if you don't hit that threshold?

Thanks for the question. You're right that the total number accrued assumes all 50 states, cities, and counties participate. If some states or subdivisions do not elect to be part of it, the amount would be prorated and would decline based on agreed proration for states that don't participate. The process is multi-step: we'll first get indications from states, then from cities, counties, and other subdivisions. After those steps we will evaluate whether we have what we call 'critical mass.' There is no single predetermined numeric minimum. Our goal is to reach as close to 100% participation as possible to achieve the most clarity. If fewer jurisdictions participate, the decision to proceed would depend on which ones and whether the level of participation provides sufficient certainty to move forward. We'll evaluate that once we have clarity.

One clarification: as Mike indicated, if not all 50 states choose to join, the cash payments under the settlement structure would be lower. It does not necessarily mean the accrual would change immediately. We would look at the facts and circumstances to determine the proper accounting treatment at the time, and there could be differences that we'd need to evaluate based on participation.

Good clarification. That concludes our Q&A session for today. I will now turn the conference back to me for closing remarks. Yes. I want to thank everybody for taking the time to be on the call and for the very helpful questions. I know there was a lot of noise in this quarter, but I just wanted to end with a few thoughts to keep in mind. First, we did see underlying growth in fiscal 2021 in both of our segments if you exclude COVID-19 impacts, which gives us confidence as we move forward with the impacts of the pandemic beginning to dissipate. Our guidance is for growth next year in each segment. If you take normalized growth in each segment, when you normalize for noise like COVID-19 and the Cordis divestiture, we will grow in both segments. We have tailwinds behind our growth businesses. We expect all of our growth businesses as a group to grow at least double-digits top and bottom line. We have taken significant actions such as pursuing an additional $250 million in cost savings, closing the Cordis transaction to simplify our operating model, and extending our agreement with CVS — just a few examples. We have very strong cash flow generation, which gives us flexibility to be opportunistic in our capital deployment. So with that, thanks again, and have a good day.

And this concludes today's call. We thank you for your participation. You may now disconnect.