Hello, and welcome to the First Quarter Fiscal Year 2025 Cardinal Health, Incorporated Earnings Conference Call. My name is George, and I'll be your coordinator for today's event. Please note, this conference is being recorded, and for the duration of the call, your lines will be in listen-only mode. However, you will have the opportunity to ask questions at the end of the presentation. I'll now hand the call over to your host today, Mr. Matt Sims, Vice President, Investor Relations, to begin today's conference. Please go ahead, sir.

Welcome to this morning's Cardinal Health first quarter fiscal '25 earnings conference call, and thank you for joining us. With me today are Cardinal Health's CEO, Jason Hollar; and our CFO, Aaron Alt. You can find this morning's earnings press release and investor presentation on the Investor Relations section of our website at ir.cardinalhealth.com. Since we will be making forward-looking statements today, let me remind you that the matters addressed in the statements are subject to risks and uncertainties that could cause our 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 our discussion today, the comments will be on a non-GAAP basis, unless specifically called out as GAAP. GAAP to non-GAAP reconciliations for all relevant periods can be found in the supporting schedules attached to our press release. For the Q&A portion of today's call, we kindly ask that you limit questions to one per participant, so that we can try and give everyone an opportunity. With that, I will now turn the call over to Jason.

Thanks, Matt. Good morning, everyone. Overall, Cardinal Health delivered a terrific start to fiscal '25 with strong operational and financial performance, led by Pharma and Specialty Solutions. The ongoing strength and resiliency of our largest and most significant business was evident, delivering 16% segment profit growth, reflecting the team's advanced preparations and excellent execution in managing through the previously communicated large customer transition. We continue to operate in a stable industry environment with positive utilization trends underpinning our growth. We saw particularly strong and broad-based pharmaceutical demand this quarter across Brand, Specialty, Consumer Health and our Generics program. We are pleased to again support our customers with commercial distribution of the COVID-19 vaccines in preparation for the fall immunization season. The team executed our customer transition plans with urgency, realigning operational processes to address inefficiencies, facilitate the ongoing growth of the business, and support new customer implementations. In GMPD, while the Q1 financial results were below our expectations due to some unanticipated health and welfare costs that Aaron will cover in detail, our team continues to make progress against the GMPD Improvement Plan, which is unchanged, and take actions to enhance our supply chain resiliency. We're confident in our plans to accelerate the performance of the GMPD business over the next two years, while also continuing our near-term value-creation focus, as we outlined last quarter. Across our Other businesses, Nuclear, at-Home and OptiFreight, we continue to be encouraged by the strong demand and underlying performance we are seeing as these businesses continue to expand and benefit from positive industry trends. In summary, we're pleased to be in a position to raise our enterprise guidance for fiscal '25 after the first quarter. Our business is strong and we're confident as we look ahead. With that, let me turn it over to Aaron to review our results and updated guidance in more detail.

Thanks, Jason, and good morning. Q1 delivered an excellent start to Cardinal Health's fiscal 2025 with outstanding results from the Pharma segment, accompanied by solid operational performance from GMPD and the businesses included in Other. As an enterprise, we grew operating earnings by 12% and EPS by 9%, despite the recent customer transition. At the same time, the team adeptly managed through and anticipated negative working capital unwind, over-delivering on our Q1 cash flow expectations and enabling us to continue to both invest in the business and execute on an early accelerated share repurchase program. With the solid start to the year, I am delighted to share the headline that we are raising our EPS guidance to an EPS range of $7.75 to $7.90, and raising our adjusted free cash flow outlook for fiscal '25 to a range of $1 billion to $1.5 billion. More on that shortly. Let's review the results, starting with Slide 4. Total company revenue decreased 4% to $52 billion, better than we expected. Adjusting for the customer transition, total company revenue increased 15% versus the prior year, reflecting our strong organic revenue growth across the rest of our business. We also started to successfully onboard the first of the new customers that make up the over $10 billion of incremental revenue in Pharma. Total company gross margin increased 9%, driven by positive trends in both Brands and Generics in the Pharma segment. While we tightly controlled discretionary spending during the quarter, on the face of our financials, SG&A grew by $91 million or 8% versus prior year. Approximately half of this increase was driven by incremental health and welfare employee costs. This included substantially higher employee plan utilization costs, both numbers of claims and cost per claim, as well as a one-time catch up charge resulting from our third-party actuary on whom we rely notifying us of a mistake in the calculation of our health and welfare plan liabilities from prior years. Even with that impact, we delivered operating earnings of $625 million, 12% higher than last year. Moving below the line, interest and other increased $15 million to $27 million, primarily driven by lower interest income due to the anticipated lower cash balances. Our first quarter effective tax rate finished at 23%, up 2 percentage points due to the non-repetition of some positive discrete items in the prior year. As a result of our share repurchases, Q1 average diluted shares outstanding were 245 million, 2% lower than a year ago. The net result for Q1 was EPS of $1.88, growth of 9%. Now, turning to the segments, beginning with Pharma and Specialty Solutions on Slide 5. First quarter revenue decreased 5% to $48 billion due to the impact of the customer transition. Excluding that, revenue increased 16%, driven by brand and specialty pharmaceutical sales growth from existing customers. This included 5 percentage points of revenue growth from GLP-1 sales. During Q1, we saw strong pharmaceutical demand across product categories, Brand, Specialty, Consumer Health and Generics and from our largest customers. Segment profit increased 16% to $530 million in the first quarter, driven by a higher contribution from Brand and Specialty Products, including a favorable impact from the earlier seasonal launch of COVID-19 vaccine distribution and positive generics program performance. This more than offset the profit impact from the customer transition. In Specialty, we saw strong broad-based performance across Specialty distribution and Biopharma Solutions. Despite the anticipated challenges in Q2, we are encouraged by the overall momentum.

The strong first quarter results build upon the momentum we've established for the past couple of years by ruthlessly prioritizing simplification and core operational execution to serve our customers and their patients with essential products and industry-leading service. They are also a testament to the actions we've taken to solidify our core foundation and increase our exposure to higher growth and higher margin areas. In Pharma and Specialty Solutions, we've been consistently focused on execution in the core and expanding in Specialty. This quarter, we made further progress on both fronts. We delivered strong operational performance across our distribution network. During the quarter, we achieved multi-year highs in productivity and our service levels reached their highest level in over a year. A key part of our ability to maximize service delivery for customers is our Generics program. Red Oak continues to effectively execute its dual mandate, managing both cost and available supply, which supports the positive volume growth and performance that we've seen and continue to expect. On the business's commercial front, we've seen successful renewals and extensions of key customers in a couple of recent customer onboarding that have gone smoothly due to our team's continual customer focus. We are thrilled to have reached an agreement to acquire Integrated Oncology Networks, as we announced in September. Together, Cardinal Health and ION will continue to push forward in our joint mission to improve cancer care in underserved communities. We will drive innovation through the Navista and Specialty Networks platforms to offer community oncologists, who seek to remain independent, a suite of clinical and economic offerings to improve patient care and enhance practice performance.

We are still in the fight to hit the $175 million segment profit target for GMPD this year. While the health and wellness challenges we experienced in Q1 are unanticipated, the team is executing on additional initiatives to recover the gap arising from those results. The overall utilization trends remain stable and we're seeing consistent growth across our customer base. We anticipate a continued focus on managing our costs effectively through the GMPD Improvement Plan. Our expectations for Cardinal Health Brand revenue growth remains healthy, following the prior fiscal year growth, and we believe new distribution wins will further enhance our performance.

Thank you very much, Mr. Hollar. Today's first question will be coming from Lisa Gill calling from JPMorgan. Please go ahead.

Hi. Thanks very much, and good morning. I just really wanted to focus on the drug distribution side of your business, which had really great results. Just a few questions. First, when I think about the vaccine, thank you for calling out the revenue component, Jason or Aaron, can you talk about the margin? Is that materially better? Or is there something else that was driving the margin improvement when we think about the quarter? And then, secondly, when you called out the revenue improvement around Specialty, what we've heard from some of the managed care companies is that changes in IRA is potentially driving incremental volumes, especially around Specialty drugs and those changes will increase as we think about calendar 2025. So, I'm just curious as to how you're thinking about volumes there, margins there? So, just overall my two questions, and a single question would just really be around that segment, first being how to think about the vaccine and contribution to the margin? And then secondly, how do we think about what's happening on the Specialty side? Thanks so much.

Thank you, Lisa. I'm glad you raised that question first, as it's a key highlight of this quarter and what is driving the Pharma segment. We provided a lot of details in our script, but I want to elaborate further. This was a strong quarter for Pharma, and while you mentioned a few key aspects, let me discuss the main drivers. There isn't just one factor that contributed to our success this quarter. I can categorize it into three main areas. First, we experienced very strong and broad demand across various customers and product categories, indicating strength across all areas of the Pharma business. This includes Brands, Consumer Health, and Generics, with notable strength in Specialty, particularly in distribution and Biopharma Solutions. Overall, we saw robust performance throughout. Regarding COVID, the volume this quarter was stronger due to the FDA approval occurring about a month earlier than last year—previously on September 11 last year compared to mid to late August this year. The peak in COVID volumes was indeed in Q1 this year, as opposed to October and Q2 last year. However, I'd like to point out that the actual impact of COVID on year-over-year earnings for the Pharma segment was a small positive, slightly better than we expected for the first quarter, but it wasn't the main factor driving the year-over-year results. The broader strength in utilization was a more significant contributor. On COVID vaccines, while we noticed a timing difference for Q1 and Q2, we still expect to see a modest year-over-year headwind for the full year, mostly concentrated in the second quarter. In summary, the primary point is strong volume across the board. The second key point is that some favorable mix contributed to the volume we saw, with a more advantageous class of trade among customers, although this was largely due to that robust underlying utilization. The final point is that with the volume we achieved, our service levels were excellent, and we made significant productivity improvements. Despite a lot of changes this quarter, including transitions of customers, we performed remarkably well. So, there are multiple drivers at play here—it's not just about vaccines or Specialty. In response to your inquiry regarding IRA, we noticed that Specialty grew at a faster rate than our overall growth when excluding the major customer transition, which was at 16%. Specialty growth was slightly above that. So, we did see some strength there, but I wouldn't attribute it as the primary driving force; it’s part of the broader growth.

Next question, please.

The next question will be coming from Michael Cherny of Leerink Partners. Please go ahead.

Good morning. Thank you for the question. I'll follow a similar approach to Lisa. I have one question with a couple of parts. I want to understand the 300-basis-point increase in Pharma guidance for the year. Jason, you've talked about improvements in utilization, but could you share what the main factors were that contributed to the full year improvement? Specifically, you mentioned that the COVID headwind is modest year-over-year. Can you confirm that it's the same level of modesty? Also, could you provide any insights on GLP-1 economics and whether it influenced the guidance increase? Thank you.

Great. Good morning. Happy to talk and provide some perspective on the updates to guidance for Pharma. And of course, starting where Jason left off, we are really pleased with the Q1 performance leading to the raise for a guide to actually to our long-term target of 4% to 6% in profit growth for the year. It's really driven by the strength and the resiliency of the business in Q1 that we see continuing as we carry forward. Now part of this is just execution. You heard Jason referenced the strong broad-based demand. That certainly assists in the raise to our guidance. It's also the case that, as we walked into Q1, we were very focused on how are we going to execute as part of the customer transition. The team managed that very well, both from an income statement perspective and from a working capital perspective. The impact that we were anticipating in Q1 was offset by significant simplification. We got more done there than we had anticipated, especially networks contributed, and the new customers, you heard me say we've started to onboard those as well. And so, the pieces are really coming together, helping to give us more confidence then as we carry forward through the year. Our guidance assumes consistent market dynamics in our Generics portfolio. We saw strength in Q1 in Generics and we anticipate those consistent market dynamics continuing. Our guidance also continues to see increased contributions from Brand and Specialty Products. I won't repeat what Jason just had to say about that category. COVID-19, we did guide at the start of the year and indeed, our guidance continues that it will be a modest headwind for us through the year, notwithstanding that it was a modest tailwind for us during Q1.

Next question, please.

Our next question is from Erin Wright of Morgan Stanley. Please go ahead.

Great. Thanks. Yes, Pharma was strong, but I do want to ask on medical here. So, how do we think about the quarterly progression in medical at this point for the balance of the year? And then, how are you thinking about kind of just underlying demand trends, excluding some of those dynamics that you were talking about in your prepared remarks, but just underlying utilization across that medical segment? Thank you.

Appreciate the question. Let me offer some perspective on both the quarter and the year as we carry forward. I want to start with the headline that we are still in the fight to hit the $175 million. That was our original guide for the year. And it is absolutely the case that we continue to make progress against the GMPD Improvement Plan and our fiscal '26 target of $300 million, which is unchanged notwithstanding the results in Q1. We did update our guide for the year to be $140 million to $175 million, primarily reflecting some unanticipated health and wellness costs. And just a little bit more context on that at the enterprise level, that was around $45 million. I called out about half of the $91 million increase in overall SG&A. About a-third of that was an error by our actuaries tied to prior years. The rest was tied to a notable increase in the number of claims as well as a notable increase in the cost per claim at an unusual level for us. That's really what was driving the Q1 performance. We were otherwise quite pleased with the GMPD progress against the plan and the tenacity they showed, and continued to find additional opportunities to help drive the plan.

Next question, please.

The last question today will be coming from Stephen Baxter calling from Wells Fargo. Please go ahead, sir.

Hi. Thanks. Just one last kind of cleanup on the Pharma guidance. So, appreciate all the comments that the strength is broad based and there's some differences in cadence to keep in mind. I guess when we think about the $16 million raise on the EBIT line, you're very clear that it's not driven by COVID. Do we think about this as largely just being the Q1 underlying favorability in the business, or should we think about this as the annualization of the favorability that you saw in the first quarter, assuming that strength is largely going to continue into the balance of the year? Thanks.

Yeah. And so, it depends on which pieces we're talking about. For the three elements that I talked about in terms of what's driving the growth of the business, the first element I highlighted was the underlying broad volume growth. And I highlighted that would be for our Qs two to four would be more normalized levels of growth. I also highlighted part of this quarter's favorability was favorable mix that some quarters as positive, some as negative, some as neutral. This particular quarter was more favorable. The final leg of the stool is the fact that with that volume we had fantastic service levels and multi-year productivity enhancements. In a quarter in which we had a lot of change, a lot of transition of customers, we performed incredibly well. But again, our guidance here anticipates a more normalized level.

Thank you very much. As we have no further questions, Mr. Hollar, I'd like to turn the call back over to you for any additional or closing remarks. Thank you.

Thank you again for joining us this morning. Again, an excellent start to the year, showing our broad strength, resiliency, and momentum of our broad business, especially our largest, most significant Pharma business. We're pleased to be in a position to raise our guidance after only the first quarter and look forward to continuing to give you more updates throughout the year. With that, thank you, and have a great day.

Thank you. That will conclude today's conference. Thank you for your attendance. We wish you a very good day.