Good day, and welcome to the Fourth Quarter FY 2023 Cardinal Health Inc. Earnings Conference Call. Please note this conference is being recorded. I would now like to hand the call over to Kevin Moran, Vice President of Investor Relations. Please, go ahead.

Good morning and welcome. Today, we will discuss Cardinal Health’s fourth quarter and fiscal year end 2023 results, along with our outlook for fiscal year '24. You can find today’s press release and earnings presentation on the IR section of our website at ir.cardinalhealth.com. Joining me today are Jason Hollar, our Chief Executive Officer; and Aaron Alt, our 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 full description of these risks and uncertainties. Please note that during the discussion today, all our comments will be on a non-GAAP basis unless they are specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the schedules attached to our press release. For the Q&A portion of today’s call, we kindly ask to limit yourself to one question, so that we can try and give everyone in the queue an opportunity. With that, I’ll now turn the call over to Jason.

Thanks, Kevin, and good morning, everyone. Fiscal '23 was an inflection point for Cardinal Health with improved performance, strong execution and notable progress against both our short and long-term plans. We delivered record financial performance, including our highest non-GAAP EPS ever, reflecting 14% growth in the prior year. We grew Pharma segment profit an impressive 13% and generated $2.8 billion of adjusted free cash flow. And in Medical, we drove significant sequential improvement in operating performance from a segment loss in the first quarter to over $80 million of segment profit in Q4. This year, we took decisive action to advance our three strategic imperatives; building upon the resiliency of our Pharma segment, executing our Medical Improvement Plan and maximizing shareholder value creation. Consistent with what you heard at our June Investor Day, these results were achieved through our team's commitment to ruthlessly prioritize the core of our business and to better serve our customers so they, in turn, can focus on caring for patients. We simplified how we operate by streamlining our organizational structure, exiting non-core product lines and rationalizing our geographic and manufacturing footprint. We made key leadership changes and governance enhancements, adding talent and key positions across the enterprise and to our Board. We formed and extended the business review committee tasked with evaluating our strategy, portfolio, operations and capital deployment. On that note, we completed our review of the Pharma segment, including announcements at Investor Day to further invest in our Nuclear & Precision Health Solutions business and launched our new Navista Network supporting community oncologists, which I will discuss more later in my remarks. We recently closed our Outcomes merger with BlackRock's Transaction Data Systems, which we see as a big win for pharmacies and an important opportunity to accelerate the business' future growth. We also deployed capital responsibly with a continued eye on maximizing value, and we are positioned with the financial flexibility to continue driving value for shareholders. At Investor Day, we provided preliminary guidance for fiscal '24. With a strong finish to the year and increased confidence as we look ahead, I am pleased that we can raise our fiscal '24 outlook. Later in my remarks, I will share further details on our three strategic priorities. But first, let me hand it over to Aaron to walk you through our financial results and guidance.

Thanks, Jason, and good morning. I won't bury the lead. Q4 was a strong finish to a year in which with Jason's guidance, the Cardinal team made significant progress against our strategic initiatives. We delivered fourth quarter EPS of $1.55 and $5.79 for the full year at the high end of our guidance from Investor Day. For both Q4 and the year, our EPS results reached historical high points. We also delivered stronger than expected cash flow, something I will touch on more later. Let's start with the Pharma segment on Slide 6. Fourth quarter revenue increased 15% to $49.7 billion driven by brand and specialty pharmaceutical sales growth from existing customers. We continue to see broad-based strength in Pharmaceutical demand spanning across product categories, brand, specialty, consumer health and generics and from our largest customers. Similar to Q3, GLP-1 medications provided a revenue tailwind in the quarter. Segment profit increased 12% to $504 million in the fourth quarter primarily driven by positive generics program performance. Within our generics program, we saw volume growth and consistent market dynamics, including strong performance from Red Oak. Increased contributions from brand and specialty products along with nuclear were also a positive factor, partially offset by higher investment and operating expenses, including higher costs to support sales growth. Turning to Medical on Slide 7. Fourth quarter revenue was flat at $3.8 billion, an improvement in trend. We saw a decrease in products and distribution sales related to lower PP&E volumes and pricing, partially offset by inflationary impacts, including our mitigation initiatives. This decrease within products and distribution was offset by growth in at-Home Solutions. In the fourth quarter, we delivered Medical segment profit of $82 million, a nearly $100 million increase from the prior year loss. The results for the quarter were consistent with our Investor Day commentary, composed of approximately $60 million or more core performance driven in connection with the Medical Improvement Plan and approximately $20 million of both seasonality and net favorable one-time items. As expected, we saw an improvement in net inflationary impacts, including our mitigation initiatives and the normalization of PP&E margins, which were impacted by unfavorable price/cost timing in the prior year. Of note, we achieved our target of exiting fiscal 2023 with at least 50% inflation mitigation. Consistent with the expectations communicated at Investor Day, we were encouraged to see early indicators of an improvement in trend with respect to our Cardinal Health brand product sales. We also saw a positive overall contribution from our growth businesses, including at-Home Solutions and OptiFreight and from our ongoing cost optimization measures. Though with significant profit growth in both segments, we delivered total operating earnings of $560 million, growth of 24%. Moving below the line. Interest and other decreased by $48 million to $16 million due to increased interest income from cash and equivalents and increased income from our company's deferred compensation plan investments, which, as a reminder, is fully offset above the line in corporate. Our fourth quarter effective tax rate finished at 27% to approximately two percentage points higher than the prior year due to certain discrete items. Fourth quarter average diluted shares outstanding were 256 million, 7% lower than a year ago due to share repurchases, including a $500 million accelerated share repurchase program initiated in the quarter as we announced at Investor Day. The net result of all of this was fourth quarter EPS of $1.55, growth of 48%. Now, transitioning to our consolidated results for the year. We surpassed the $200 billion revenue mark for the first time. Fiscal '23 revenue increased 13% to $205 billion and gross margin increased 5% to $6.9 billion, both driven by the Pharma segment. Total company SG&A increased 6% to $4.8 billion, primarily reflecting inflationary supply chain costs and higher investments in operating expenses such as higher costs to support sales growth, which were partially offset by our comprehensive enterprise-wide cost savings measures. Operating earnings increased 3% to $2.1 billion. Interest and other decreased 46% to $89 million, primarily driven by increased interest income from cash and equivalents. As a reminder, our debt is largely fixed rate, resulting in a net benefit from rising interest rates in the near-term. Our annual effective tax rate finished at 23%. Net result was for fiscal 2023 EPS, $5.79, growth of 14%. As for the segment's full year results, beginning with Pharma on Slide 10. Pharma segment profit increased 13% to $2 billion, driven by positive generics program performance and a higher contribution from brand and specialty products, partially offset by inflationary supply chain costs. Fiscal '23 year-over-year growth also included a modest benefit from branded manufacturer price increases, which we are assuming will not repeat in fiscal '24 as well as a favorable prior year comparison related to higher opioid-related legal costs and costs for technology enhancements in fiscal '22. Moving to Medical on Slide 11. Segment profit decreased 49% to $111 million, primarily due to lower products and distribution volumes and unfavorable sales mix and net inflationary impacts, including mitigation initiatives. This decline was partially offset by normalization of PP&E margins. Now, before I turn to fiscal '24, let's cover the balance sheet. In fiscal '23, we generated robust adjusted free cash flow of $2.8 billion with particularly strong cash flow towards the end of the year. We ended the year with $4 billion of cash on hand. At our Investor Day, we highlighted that cash flow optimization was an area of go-forward focus for our teams, and the Cardinal team delivered across our businesses. This effort will continue in fiscal '24, notwithstanding that it is a tougher calendar from an inflow, outflow days-of-week perspective. We remain focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner. In fiscal '23, we invested approximately $480 million of CapEx back into the business to drive future growth, paid down $550 million in debt to reduce leverage and maintain our strong investment-grade ratings, returned over $2.5 billion to shareholders, including through the dividend that our Board increased in May for the 34th year in a row and $2 billion of share repurchases. Now, for our updated fiscal '24 guidance on Slide 13. Today, we are raising our fiscal '24 EPS guidance to a range of $6.50 to $6.75. This increase reflects the strong finish to fiscal '23, particularly within Pharma where we are now entering the year at a higher jump-off point. We also are tightening our shares range to 250 million to 253 million, which reflects the recent share repurchases as well as our continued expectation of $500 million in base share repurchases over the course of fiscal '24. As you will calculate, the midpoint of our newly raised fiscal '24 EPS guidance is 15% above our fiscal '23 EPS results. There are no changes to the other corporate guidance assumptions provided at Investor Day. Interest and other between $110 million to $130 million, and effective tax rate in the range of 23% to 25% and adjusted free cash flow of approximately $2 billion in fiscal '24. Our segment outlooks for fiscal '24 are also unchanged with one exception, a high revenue range for Pharma driven by the continued acceleration of GLP-1s, which, as a branded product category, do not meaningfully contribute to segment profit. Slide 14 shows our fiscal '24 outlook for Pharma, our build and grow business. We expect revenue growth in the range of 10% to 12% and segment profit growth in the range of 4% to 6%, which is now on a larger fiscal '23 reference point due to our strong finish to the year. We are reiterating our key assumptions provided at Investor Day. We expect growth from our generics program with volume growth and consistent market dynamics and positive operational execution against our organic specialty efforts. We are not assuming outsized benefits from branded inflation. In contrast, some of the benefits that we did see in fiscal '23. On the Pharma fiscal '24 cadence, we expect the year to follow typical seasonality patterns. As usual, we see our fiscal Q3 being the largest segment profit dollar quarter due to the usual timing of branded manufacturer price increases. Turning to Medical. I want to recognize the progress that the Medical team made during fiscal '23, particularly in Q4, and also acknowledge that we still have blocking and tackling to do against the turnaround to both drive demand and improve our cost. For the full year, we are reiterating our assumptions of revenue growth of approximately 3% and segment profit of approximately $400 million for the year, while providing some additional color. Like fiscal '23, we anticipate segment profit to be significantly back-half weighted. We expect Q1 to be generally consistent with the core performance from Q4 with quarterly sequential improvements thereafter driven by our Medical Improvement Plan initiatives. There are a couple of factors for why Q1 is the low point in the year. First, keep in mind that Q1 is the seasonal low point for our global Medical products and distribution business due to the timing of volume and cost recognition. Second, while we continue to expect to exit fiscal '24 offsetting the impact of gross inflation, those improvements are expected to grow over time, making the impact greater over the course of the year. And finally, we continue to plan for slight Cardinal Health brand volume growth that will largely hit in the second half of the fiscal year. So in summary for Medical for fiscal year '24, continued work in front of us with each quarter improving from our Q1 launching point to get us to the approximately $400 million guidance for the year. Stepping back, we are pleased to see growth across our businesses continuing in fiscal '24. Consistent with our messaging from Investor Day, we are targeting a 12% to 14% EPS growth CAGR for fiscal '24 to 2026, now from the higher fiscal '23 baseline of $5.79. Now regarding our intended deployment of cash, which is consistent with our disciplined capital allocation framework as seen on Slide 18. After investing approximately $500 million back into the business to drive organic growth, making approximately $500 million of litigation payments, including our third payment under the national opioid settlement back in July, and our $1 billion baseline return on capital, we expect to have strong flexibility as we assess further investments in the business, M&A and the possibility of incremental return of capital to shareholders. I want to reiterate that as we shared at Investor Day, neither our fiscal '24 guidance nor our long-term targets reflect potential opportunistic deployment of capital, including M&A, which is difficult to predict in timing or magnitude or additional share repurchases beyond our $500 million of baseline repurchases each year. We will continue to evaluate both of these levers opportunistically to drive long-term value. To close, the Cardinal team has a lot to be proud of with respect to their accomplishments in fiscal '23. Jason and I are pleased with the progress our teams have made. We are confident in the plans we have in place, and we are excited for our team to realize the significant value creation opportunities still in front of Cardinal Health. With that, I will turn it back over to Jason.

Thanks, Aaron. Let's now dive deeper into the actions we are taking to execute our three strategic priorities, beginning with priority number one and building upon the resiliency of the Pharma segment. In our largest most significant business, the Pharma segment has been performing well by prioritizing what matters most, focusing on the core and delivering for our customers and their patients. The business is positioned at the forefront of favorable secular industry trends and has also benefited from our specific actions and performance. We are pleased to recently raise our long-term segment profit target to 4% to 6% growth, solidly in the mid-single digits and consistent with the segment profit growth we expect in fiscal '24. Our growth is enabled by a scaled, stable and resilient core Pharmaceutical distribution business growing in the low single digits and double-digit growth from our higher-margin specialty and Nuclear businesses. Within the core, our generics program remains a critical component of our overall offering and performance, enabled by Red Oak Sourcing. In addition to its leading scale, Red Oak's proprietary analytical tools and deep industry expertise puts us in the best position possible whenever product shortages occur to continue servicing customers. We're committed to providing customer-focused solutions across our many classes of trade as we noted at Investor Day. More recently, we hosted our 31st Annual Retail Business Conference, where we brought together nearly 4,500 attendees from across the country to celebrate the critical role independent pharmacies play in caring for their communities and showcase our commitment to our customers through our newest innovations. For example, we are offering modern payment solutions through our collaboration with Square to help independent pharmacies seamlessly manage business operations, integrate flexible payment options, and reduce payment processing costs. We've conveyed that specialty is our priority area of focus and a key enabler to our long-term growth. We're continuing to invest to expand downstream across key therapeutic areas such as oncology, rheumatology and other emerging areas. We're excited to build upon our existing capabilities with the recent launch of our Navista Network, a specific suite of offerings for community oncologists, supporting their growth and desire to remain independent. To ensure the Navista Network's success in development, we've recently appointed new leadership with deep industry and clinical experience and continue to build out the organization with internal and external talent. We continue to seek input from customers and have created an advisory board. While still early innings, I'm pleased with the engagement from current and potential customers. Upstream in specialty, we're expecting continued double-digit growth from manufacturer services. In our leading 3PL, we're expanding our ambient and cold chain space to keep up with our business' strong growth. At an excess access and patient support, we delivered on a record number of new client implementations and continue to launch new innovative products to streamline the patient journey. We're also supporting the growth of Pharmaceutical manufacturers in the cell and gene therapy space through our advanced therapy solutions offerings. For example, we're partnering with TrakCel to bring visibility and tracking capabilities to biopharma companies by helping them navigate cell therapies through multiple stages of development and commercialization. Overall in specialty, we're confident that the connection between our downstream and upstream strategies, what we call our specialty growth cycle, will drive double-digit growth well into the future. Our Nuclear business, which is on track to double profits by fiscal '26 as of our fiscal '21 baseline, is strategically positioned for growth at the center of precision medicine. We're further investing in the space with a Phase 2 investment of $30 million over the next several years to expand our center for theranostics advancement and support our manufacturer partners' projects as they advance through the commercial development pipeline. We're encouraged to see Pharmaceutical innovation expanding the breadth of conditions that are being addressed with emerging therapies such as cell and gene and precision medicine. As the future of health care continues to evolve, our breadth of capabilities from Pharmaceutical and specialty distribution, radiopharmaceuticals and theranostics to biopharma and manufacturer services enables us to offer multiple touch points for manufacturers, providers and patients to realize value from these promising new treatment options. Now, turning to Medical and priority number two. When we introduced the Medical Improvement Plan last August, our immediate focus was turning around the performance in the core product and distribution, where we've achieved tremendous progress over the past 12 months. We are on track to address the impact of inflation and global supply chain constraints by the time we exit fiscal '24. This is the number one key to returning to a more normalized level of profitability, and we are now over halfway to our target. We continue to execute our mitigation initiatives to offset elevated inflation and make progress with our commercial contracting efforts. And we are exploring other offsets with urgency such as our manufacturing excellence and sourcing initiatives. While overall costs remain elevated, international freight has generally returned to pre-pandemic levels, and we expect this improvement to be reflected in our fiscal '24 results. We're driving significant progress through our 5-point plan to grow Cardinal Health brand volume and seeing improvements in our leading indicators. This includes better portfolio health for key product categories and higher service levels, customer loyalty index scores and retention rates for distribution. We're driving enhanced customer experience through investments in product availability and automation while optimizing costs. At Investor Day, we highlighted our two-pronged approach to portfolio life cycle management, which has enabled us to completely exit our non-health care portfolio. And we are in the process of reducing over 2,000 SKUs across our Cardinal Health Branded product categories to simplify the business. We're focusing our investments in new product development and capacity expansion in key growth areas such as compression, enteral feeding and incontinence. Within our products that are core to distribution, we've seen continued stabilization with PPE, a smaller part of our portfolio but a source of volatility during the pandemic and growth in our pre-sourced surgical fitting category. In our specialty products portfolio comprised of clinically differentiated products and leading brands like Kangaroo, Kendall and Protexis, we're investing in innovation to meet customers' needs and drive sustainable growth. For example, the launch of our new Kangaroo OMNI™ Enteral Feeding system this month. As a result of our combined efforts, commercial momentum is accelerating. During Q4, we renewed several key distribution customers and saw positive net new wins during the quarter. These leading indicators give us confidence that moving forward we'll participate in the growth from an overall improving medical utilization environment. Outside the core, we're on track to accelerate our growth businesses. In at-Home Solutions, we're investing in DC network expansion to keep pace with increased demand as care continues to shift into the home. For example, we've recently begun construction for a new 350,000 square foot Greenville, South Carolina, DC. This facility, the 11th in our national network will be fully operational in 18 to 24 months and equipped with advanced automation technology and robotics to drive operational efficiencies. In OptiFreight, we provide premier logistics management powered by our technology capabilities and expertise. We're continuing to invest in digital tools to support core volume growth and sustain our strong performance. Finally, we continue to execute our simplification and cost savings initiatives such as optimizing our global manufacturing and supply chain and our international footprint. For example, we exited four additional countries and two additional manufacturing sites this year. In short, we are making progress with our Medical Improvement Plan. While there is still execution in front of us, I'm excited for the business to return to more significant profitability in fiscal '24. Finally, priority number three, maximizing shareholder value creation. We're maximizing shareholder value creation through operational performance, robust cash flow generation and the responsible allocation of capital. At Investor Day, Aaron detailed our new long-term capital allocation framework, which builds upon our long-standing priorities with some notable enhancements. We're pleased that with our strong cash flow profile and the significant progress we've made on our balance sheet, we have the flexibility for share repurchases each and every year. And with the residual cash flow that we anticipate, we'll continue to opportunistically evaluate disciplined M&A in specialty and potential additional share repurchases. While our team has made significant progress over the past year, particularly in realigning our operations for focus and simplicity, there is still work and opportunity in front of us. We continue to evaluate additional value creation initiatives, including the progress we are making with our ongoing business and portfolio review. To wrap up, I want to acknowledge our dedicated Cardinal Health employees who are fulfilling our essential role in health care, serving customers and their patients. Thank you for your determination and advancing our key priorities and moving healthcare forward. I'm excited for the opportunities still to come. With that, we will take your questions.

Our first question today comes from Lisa Gill of JPMorgan.

Thanks very much. Good morning and congratulations on the quarter. I just really want to start with the GLP-1 comment. So I understand you're raising revenue by 200 basis points. One, is that all GLP-1? And two, my understanding is that they are a lower margin, but they are contributory to overall margin dollars. Is that not the case when you're keeping the profit the same and when I think about the Pharmaceutical segment for '24?

Yes, good morning, Lisa. Thank you for your question. The main reason for the increase in our revenue guidance is due to GLP-1. We didn’t identify any other factors. We experienced a strong end to the year in relation to that. Looking ahead, there’s nothing foreseeable that will change those trends in the near term. We first noted GLP-1 as contributing to our revenue growth compared to last year in the third quarter. There was growth prior to that, but it wasn't as substantial. The impact was more significant in Q3 and Q4. As you look ahead to fiscal '24, we expect stronger revenue growth in the first half of the year since that will be a larger factor. However, we cannot predict exactly how that will evolve in '24, but we anticipate that as we compare to the second half of 2023, the year-over-year benefit will be less pronounced. Regarding your second question, I want to emphasize that these are branded products and they do not significantly contribute to segment profit, so I'll leave it at that. Next question, please.

The next question comes from Eric Percher of Nephron Research.

Thanks for all the commentary on Medical performance. I want to make sure we're kind of precise on the core performance and the stepping off point there would be around $60 million, not $82 million. And then, can you define seasonality and one-time benefits this quarter, and any expectation that those will recur as we look at that cadence for fiscal year '24?

Good morning, Eric. It's great to hear from you, and I'm happy to provide more context. We were quite satisfied with the Medical results, achieving $82 million. This includes $60 million from what we consider core performance and $20 million from a combination of positive seasonality and one-time items in the fourth quarter. I highlight this distinction because it affects how we view the quarterly flow in fiscal '24. Before I share additional context on our quarterly guidance, I want to emphasize that we are reaffirming our $400 million profit target for the Medical segment for the year. The essential elements of our Medical Improvement Plan are unchanged from our description at Investor Day. However, we are offering more insight into how we envision the year ahead, considering the complexities we've discussed in my prepared remarks. From a full-year perspective, as I mentioned at Investor Day, if you multiply the $60 million of core performance by 4, you arrive at $240 million of profit. Adding $100 million of additional inflation, nets you $340 million in total. As discussed at Investor Day, this leaves around $60 million coming from various other aspects throughout theyear, including branding simplification. That’s a comprehensive view for the full year. Regarding the timing, we must clarify that we expect profits to be weighted toward the second half of the year, similar to what we saw in fiscal year '23. We anticipate that Q1 will have core performance on par with Q4, with sequential improvements following that. Q1 typically represents a seasonal low for the Medical Products and Distribution business due to the timing of volume and how we recognize costs. That’s a key point. We also expect continued progress in mitigating inflation throughout the year, which will shift profit qualification to the latter half. Moreover, while we were pleased to report a positive change in trend for the Cardinal Health brand, we noted at Investor Day that the brand's volume growth is mainly weighted toward the back half of the year. I hope this provides clarity. Next question, please.

The next question comes from Kevin Caliendo of UBS.

Thanks for the follow-up. If we're looking at $82 million, the baseline is actually $60 million, and the first quarter will probably reflect a decrease due to $20 million in seasonality and one-time factors. After that, we expect growth from that base to reach $400 million. I want to clarify that this is what you're committing to or discussing. Also, regarding the new Cardinal brand products, will the increase in the second half of the year be driven by new product launches, enhancements in manufacturing capabilities, or new contracts that contribute more heavily? Could you explain how the dynamics work for the Cardinal brand products?

Well, I'll start, and then toss it over to Jason. You are correct in that the way we're thinking about this is that core performance Q4 to Q1 will be roughly in line. And if you interpret what I was just saying in response to an earlier question, we do have some negative seasonality in Q1 versus Q4. So that's why the jumping off point is core performance versus the Q4 results. Jason?

Yes, I believe the growth in Cardinal brand volume will be influenced by several factors in the latter half of the year. Firstly, we expect the market's underlying utilization to remain fairly stable. We observe that same-store sales growth is present and likely to continue. Additionally, our year-over-year comparisons are becoming easier as we recover from some business losses experienced over the past 18 months, and our five-point plan is showing positive results. This plan focuses on enhancing customer experience and ensuring supply chain health. We are making significant strides in service levels and customer retention, with positive net new wins for the quarter. This provides us with a solid foundation and confidence in growing alongside the market, particularly as we continue to overcome past impacts, which we anticipate will be more significant in the latter half of the year. All leading indicators align with our expectations set during Investor Day, giving us the assurance that we will be able to capitalize on the market growth we foresee for the upcoming year. Next question, please.

The next question comes from George Hill of Deutsche Bank.

Yes. Good morning guys. And thanks for taking my questions. I'd love to hear the kind of the progress that you guys have made on the Navista offering, since it was first announced at the Analyst Day. And I guess, given the growth and the size of the specialty market, particularly in oncology, I guess how should we think about the ramp of that business maybe through fiscal '24 and beyond, so just kind of progress in ramping contribution? Thank you.

Sure. Yes. Great. Thanks for the question, George. Yes, so when we think about Navista, I think it's important to recognize that we had a foundation in place. We have a foundation in place, built off of our existing specialty business. We had plenty of programs and initiatives in platforms like our, Navista TS, where we are already providing capabilities to the community oncologists to help support their value-based care initiatives, of course, other data and insights, clinical research support. So we have a lot of the tools. What Navista Network is doing is, bringing that all together in the form of a business with new additional senior leadership brought in place. So that's one of the key things that's happened since the announcement a couple of months ago, is we have brought in additional leadership to bring on top of the strong team that we already had in place that were already serving these important customers and their patients. So we are building that out further with both internal as well as external talent. We also created an advisory board to ensure that we are working directly with both current and prospective customers, more than anything to make sure that they have a strong voice as to where we go next with the development of this platform in this business. We continue to listen and be out in the field doing a lot of research, but we're also building what we're already notably to be some of the key attributes of this platform and this network that they're demanding. What's key and what we highlighted before is that these are the 1,500 that we're focused on here are very strongly interested in maintaining their independence. We're also hearing a strong desire for ongoing transparency, which as health care's most trusted partner, we feel like we're really well positioned for. So it's only been a couple of months since we rolled this out. But in that time frame, we've got the team in place, better definition of what the platform needs to be built out with and continue to work with those prospective customers to make sure that their needs are met. Next question, please.

Next question comes from Elizabeth Anderson of Evercore.

Hi, thanks for the question. Can you provide insight into the corporate costs mentioned in Medical, specifically the $60 million? Do you expect these costs to increase steadily over the year? Have the cuts already taken effect, or are they still being implemented and just becoming annualized? Any further clarification would be appreciated. Additionally, can you explain what is different about obtaining the next 50% of the inflation offset this year compared to last year? We know you've been securing better pricing in your contracts, but I'm looking for any additional insights on what distinguishes this remaining 50%. Thank you.

I believe I understand part of the question. Let me start with the second question regarding the corporate cost ramp. In terms of inflation mitigation, the situation for the second half is quite similar to the first half. We've observed a decrease in international freight costs, which peaked significantly about two years ago and began to decline roughly a year ago, returning to pre-pandemic levels six to nine months back. This trend started benefitting us as we moved out of fiscal '23. Initially, we incorporated these costs into our inventory, which delayed their impact on our profit and loss statement. Throughout this time, we were primarily addressing price increases on a temporary basis during the first year due to rising commodity costs, transportation, and labor expenses. Now, these costs have plateaued and are not showing signs of decreasing, necessitating permanent pricing adjustments. We temporarily adjusted prices for international freight, but as those costs diminish, we will maintain higher prices. We are gradually integrating some of those temporary price increases into permanent pricing. As contracts renew, we expect to see more of this pricing recognized. To be clear, we are not rolling back prices, and we have not raised prices beyond our cost increases. Currently, we are only covering half of the overall gross impact we've experienced. However, we anticipate that international freight costs will decrease over time. By the end of fiscal '24, we expect prices to continue rising as more contracts are renewed permanently, aligning with lower costs, resulting in a favorable exit by year’s end. Aaron, do you want to address the first question?

Sure. I believe I heard a couple of different points, so I'll address the question as I understood it. Earlier, I mentioned that in addition to the annualization of core performance and the inflation mitigation that Jason discussed, there is $60 million in additional benefits expected throughout the year. This is primarily driven by three key areas within the Med Improvement Plan: the contributions from growth businesses, simplification efforts, and the Cardinal Health brand initiatives. As I mentioned, this work will progress over the year, with more benefits expected in the latter half. I want to highlight that the simplification efforts are a priority; Steve and the team are diligently working on this every day, and we anticipate seeing more gains later on. The growth businesses are also performing well, although they experience some seasonality, and they are indeed significant contributors to the additional $60 million expected this year. Jason covered the Cardinal Health brand already, so I won't elaborate on that.

Next question please.

The next question comes from Daniel Grosslight of Citi.

Hi. Thanks for taking the question. I just have one quick housekeeping question, and then I'll ask my real question. There was a slight change in the language around your inflation mitigation efforts from your ID presentation to your current presentation. You went from fully mitigating by the end of '24 to just mitigating. Curious if there's been some change in how you're thinking about things? Or if it was kind of a simplification of the language? And then my real question is around the generics business. It seems like you and your competitors have all benefited from a more favorable environment. And it seems like it might have accelerated towards the end of your fiscal year. So I'm just curious to get your thoughts on the generics market potential shortages and how you're thinking about the benefit or tailwind of generics in your fiscal '24 guidance vis-a-vis the strength you saw in fiscal '23. Thanks.

Certainly. Regarding the changes in language for inflation mitigation, I believe you captured it well. It’s a simplification. One important point is that, similar to our COVID disclosures, it has become increasingly difficult to measure these precisely over time. This inflation mitigation has always focused on the incremental inflation we experienced due to unusual spikes. However, normal inflation exists as well, leading us to adopt broader language to acknowledge the increasing difficulty in distinguishing between the two. We understand significant impacts like international freight, but when it comes to labor, differentiating between what’s normal and what’s incremental is more challenging. We are therefore using broader language to reflect that our measurements will be less precise than they were earlier. We continue to conduct thorough analytics to maintain a reasonable understanding of the situation. The main takeaway is that we are on track with our strategy, which should indeed be passed down to the final consumer of our products and services, in line with our business model. The fundamental principles remain unchanged; we're just adapting to the level of precision. On your second question regarding generics, reflecting on the Pharma segment's performance this year, including generics, there have been a few notable trends. Overall market utilization has been strong, and our performance has been good, achieving levels higher than normal and exceeding our long-term growth targets. Looking ahead to fiscal '24, we expect this to normalize, though we anticipate still favorable growth. As mentioned during Investor Day, we foresee a unit volume growth range of about 2% to 3%, and we expect to participate in that. Our ongoing efforts, such as those through Red Oak Sourcing, are focused on driving both costs and addressing product shortages. While product shortages occur sporadically in the pharmaceutical distribution supply chain, this is not a new issue, driven by various demand and supply spikes. Our objective is to minimize these challenges and provide the best possible service to our customers. In fiscal '23, we experienced some advantages by being able to supply products as a secondary distributor when primary distributors faced shortages. This contributed positively for us this year, and we feel well-prepared to engage in normalized growth in fiscal '24.

I would just add one thought, which is in Q4, we saw strong volume, as Jason highlighted, but overall consistent market dynamics. And indeed, as we look forward, Jason called out the unit growth, but we are also guiding to consistent market dynamics for the upcoming year as well.

Next question please.

Next question today comes from A.J. Rice of Credit Suisse.

Thanks. Hi, everybody. I know on your Medical side, there's a lot going on, and you're a little more skewed toward inpatient than some of the others that have reported. But we've heard this discussion about an uptick in utilization from some of the providers. And I wondered if I peel back everything that's going on in Medical, did you see any change in behavior on the part of your customers to suggest that there was an uptick in utilization? And then just on the PPE comment, you're calling it normalization of profits from here. Do you think sequentially from here, we're pretty steady? And as we return to a normal environment, is there any seasonality around that category to call out to remember when we get back to a normal environment?

The utilization has remained fairly consistent. I would not classify it as an acceleration. We're observing steady underlying same-store sales growth, which fits well within our business model as outlined during Investor Day. However, I wouldn’t highlight anything particularly unique about it. Regarding PPE normalization, this is beneficial for us. Although it's an important category for our customers, it has never been a significant revenue source for us. Our goal is to provide customers with the products they need while minimizing associated volatility. I don’t expect this to be a major influence in either direction. Historically, PPE faced challenges from fluctuating prices and volumes simultaneously. Currently, we’ve seen a normalization over the past couple of years, with both prices and costs decreasing steadily and maintaining a manageable spread. Volume has been a bit more challenging due to destocking that began over a year ago. Given the tight margins for these products, achieving the right margins means that the lack of volume growth is not a major concern, as it does not contribute significantly to our overall volume or margins. We are maintaining a stable level and aim to keep it that way. Next question, please.

Our final question today comes from Brian Tanquilut of Jefferies.

Good morning. This is in for Brian. I had a question about your capital allocation priorities for the fiscal year 2024. You generated quite a bit of free cash flow this fiscal year, and I'm curious if you can provide any specifics regarding your capital allocation for the next fiscal year. Thank you.

Hi, great question. Thank you for putting it on the table for us. Look, we were very focused on our Investor Day in laying out the disciplined capital allocation decision matrix that we apply. And we were also very pleased to see the overall cash generation for fiscal '23 and Q4 in particular. Here's the simple answer. We're going to do what we said we were going to do at Investor Day in that respect. And just as a quick reminder, there are a couple of things which are table stakes for us, which is first, we're going to invest back into the business to drive the organic growth. We spent 480 in fiscal '23. We've guided we're going to spend about $500 million in CapEx against our business plans across the business. Our second priority, of course, is maintaining our investment-grade balance sheet. And you'll recall from our Investor Day that we don't have short-term maturities. We have some bonds coming due at the end of the year that we will likely just refinance. But we're feeling good about our investment-grade balance sheet. And then we've committed to a baseline of return of capital to shareholders, continuing to grow the dividend. We've raised it 34 years in a row. Similarly, we committed to buy back at least $500 million of shares during fiscal year '23. Those are the table stakes parts of how we're going to use our cash. As we then move through the year, as we assess the opportunities in front of us, as we assess how the business is performing, we have two opportunistic levers that we will also be looking at. The first is active, disciplined and targeted M&A largely in specialty, and we have opportunities there that we're looking at as well. And then on top of that, we will also continue to look at incremental return of capital to shareholders. Nothing additional to announce today on either of those two levers. But we want to be clear that we are going to do what we said we were going to do with respect to our disciplined capital allocation strategy.

And that does conclude the question-and-answer session of today's call. I would now like to turn the call over to CEO, Jason Hollar for any additional or closing remarks.

Okay, great. Thanks again for joining us this morning. To summarize, fiscal '23 was a great year. It was a year of inflection, and we are excited to continue this momentum into fiscal '24 and beyond. With that, thank you and have a great day.

And that does conclude the fourth quarter full year '23 Cardinal Health, Inc. earnings conference call. We thank you all for your participation and you may now disconnect.