Cardinal Health Inc (CAH) — Q4 2022 Earnings Call Transcript

Good morning, and welcome. Today, we will discuss Cardinal Health's Quarter and year-end fiscal 2022 results along with our outlook for fiscal year 2023. 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 Mike Kauffmann, Chief Executive Officer; Jason Hollar, Chief Financial Officer; and Chief Accounting Officer. During the call, we will be making forward-looking statements. The matters addressed in the 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 our 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 schedules attached to our press release. During the Q&A portion of today's call, we kindly ask that you please 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.

Thanks, Kevin, and good morning, everyone. As I am sure many of you have seen, a short time ago, we issued a press release announcing that I am stepping down as CEO and as a Board member of Cardinal Health, but will continue to serve through August 31. Effective September 1, Jason will become Cardinal's new CEO. He has also been appointed as a board member effective today. They say timing is everything, and I believe as we start a new fiscal year, the time is right for me to step away as CEO and open the door for a new leader to take Cardinal Health forward over the coming years. I have been blessed to be part of the Cardinal Health family for 32 years. In that time, I've seen our company grow and evolve in many ways. We are truly essential to care, and I'm honored to have been part of it. Jason has been a tremendous partner over the past two-plus years, and has been instrumental in many of our strategic initiatives. He deeply understands our business, priorities, and industry landscape. And the board and I are confident that he is the right person for the job. With that, I would like to turn the call over to Jason.

Thanks, Mike. I really appreciate the kind words and the opportunity to work closely with you these past few years. Let me start by saying how excited I am to be taking on this new responsibility. I am grateful for the trust and the confidence the Board of Directors is placing in me. I would also like to thank you, Mike, for the leadership and the many contributions to the company over the years. I hope to preserve the culture that you've helped ingrain into the fabric of our organization, and I look forward to what I know will be a smooth transition. I also want to welcome Trish English, who will be serving as our Interim Chief Financial Officer. Trish most recently served as our Chief Accounting Officer and has been a valuable member of the Cardinal Health family for over 16 years. I look forward to continuing to work with her in this new capacity while we conduct an external search for a permanent CFO. Before stepping into the details of our financial performance for the quarter, let me step back and summarize the key points from this past year. Within our Pharma segment, while we experienced the effects of industry-wide inflation and incurred incremental technology investments, we grew the business 5%, consistent with both our original guidance for the year as well as our long-term growth targets. The Medical business was more significantly impacted by these inflationary dynamics, which drove a significant impact on our results. However, we have strong mitigation actions in place, including pricing and will present a plan to you today that mitigates all of the inflationary and global supply chain constraint impacts plus an additional 8% of compounded annual growth by fiscal '25. Underlying these operating results this past year was a significant focus on cash flow, which results in increased financial flexibility. We are absolutely focused on shareholder value and intend to deploy these incremental funds to additional share repurchases for fiscal '23. While we remain in a dynamic environment, I'm excited to share further details of our plans with you today and commit to continue to provide increased transparency on the key metrics underlying our performance. So let's now turn to some of the details driving our results in the fourth quarter, beginning with the Pharma segment on Slide 6. Fourth quarter revenue increased 13% to $43 billion, driven by branded pharmaceutical sales growth from existing and net new PD and specialty customers. Segment profit increased 26% to $451 million, driven by generics program performance and a higher contribution from brand sales mix, partially offset by inflationary supply chain costs. As we've previously noted, this also reflects a favorable comparison due to the prior year inventory adjustments. During the quarter, our generics program, including Red Oak, saw strong performance and continued to experience consistent market dynamics. Regarding the inflationary supply chain costs, we saw impacts in areas such as expectation and labor, which we expect to continue into next year. We also incurred higher costs supporting sales growth. And with ongoing progress in opioid litigation matters, we saw a decrease of approximately $15 million in opioid-related legal costs. Turning to Medical on Slide 7. Fourth quarter revenue decreased 11% to $3.8 billion due to the divestiture of the Cordis business and lower products and distribution volumes. Medical segment loss of $16 million in the fourth quarter was due to net inflationary impacts on global supply chain constraints and product distribution. On a year-over-year basis, the favorable comparison to the prior year of $197 million PPE inventory reserve was mostly offset by the net inflationary and global supply chain constraint impacts, a lower contribution from PPE and the Cordis divestiture. During the quarter, our products and distribution business saw an approximate $100 million impact from net incremental inflation and supply chain constraints. This reflects a gross impact of approximately $125 million and an approximate $25 million offset from our mitigation actions, which includes our initial wave of price increases on five Cardinal Health brand categories that went into effect back in March. I'll elaborate on our plans for further mitigation in fiscal '23 and beyond shortly. As mentioned, it continues to be a highly dynamic medical environment, and our Q4 results came in lower than we had previously expected. This primarily reflects overall volume softness in our products and distribution business, including a lower contribution from PPE. Stepping back, demand for PPE has fluctuated significantly over the past couple of years. We saw lower volumes as we exited Q3, and the fourth quarter experienced further declines. We believe this primarily reflects customers' higher inventory levels and to a lesser extent, some PPE category-specific customer losses driven by supply constraints during the pandemic. We continue to have strong conviction in our overall value proposition, which includes leading brands and clinically differentiated products. For context, PPE represents approximately 15% of sales in our overall Cardinal Health brand portfolio, as you'll see on Slide 20. Moving below the line, interest and other increased by $36 million to $64 million due to a decrease in the value of our deferred compensation plan investments compared to gains in the prior year. As mentioned, deferred compensation gains or losses reported in interest and other are fully offsetting corporate SG&A and net neutral to our bottom line. Additionally, in the fourth quarter, a one-time write-down of an equity investment impacted EPS by $0.06 per share. The increase in other expense was partially offset by lower interest due to debt reduction actions. As indicated, we repaid the $280 million of remaining June 2022 notes at maturity. Our fourth quarter effective tax rate finished at 25.4%, approximately 3 percentage points higher than the prior year. The net result was fourth quarter EPS of $1.05, an increase of 36%, primarily reflecting the growth in pharma segment profit. Now transitioning to our consolidated results for the year. Fiscal '22 revenues increased 12% to $181 million, driven by the Pharma segment. Gross margin decreased 3% due to the Cordis divestiture. Total company SG&A increased 1%, reflecting inflationary supply chain costs, our previously mentioned IT investments, and higher costs to support sales growth, mostly offset by the Cordis divestiture and benefits from cost savings initiatives. Operating earnings decreased 12%, which primarily reflects a year-over-year headwind of approximately $300 million related to net inflationary impacts and global supply chain constraints in medical, partially offset by Pharma segment profit growth. Interest and other increased 24% to $165 million, largely due to the items affecting the fourth quarter. Of note, this came in higher than our guidance primarily due to equity investment write-down in the quarter. Our annual effective tax rate finished at 22.1%. The net result was fiscal '22 EPS of $5.06. Now turning to the balance sheet. In fiscal '22, we generated robust operating cash flow of $3.1 billion. This includes the previously defined tax refund of nearly $1 billion and favorable timing of working capital. Additionally, in fiscal '22, we made approximately $500 million in litigation payments, primarily related to opioid settlements. In July, we made our second annual payment under the national opioid settlement agreement of approximately $375 million, which will be reflected in Q1 fiscal '23 operating cash flow. We are focused on deploying capital in a balanced, disciplined, and shareholder-friendly manner. This year, we invested approximately $385 million of CapEx back into the business to drive future growth, paid down approximately $850 million in debt to reduce leverage and returned $1.6 billion to shareholders through share repurchases and dividends. We ended the year with a cash position of $4.7 billion, which does reflect some timing favorability with no outstanding borrowings on our credit facilities. As for the segment's full-year results, beginning with Pharma on Slide 10. Pharma revenue increased 14% to $165 billion, reflecting consistent drivers with the fourth quarter. Pharma segment profit increased 5% to $1.8 billion, driven primarily by generics program performance and an improvement in volumes compared to the prior year. This was partially offset by investments in technology enhancements and inflationary supply chain costs. To be helpful, the tailwind from improved volumes and the headwind from incremental IT investments effectively offset in fiscal '22, each approximately $80 million on a year-over-year basis. Additionally, we saw an approximate $50 million headwind from inflationary supply chain costs, primarily in the second half of the year. Moving to Medical on Slide 11. Fiscal '22 medical revenue decreased 5% due to the divestiture of the Cordis business. To a lesser extent, lower products and distribution volumes were partially offset by growth in at-home solutions. Segment profit decreased 63% to $216 million, primarily due to the net inflationary impacts in global supply chain constraints in products and distribution. Additionally, the favorable comparison to the prior year PPE inventory reserve was offset by a lower contribution from PPE and the divestiture of the Cordis business. Now for our fiscal '23 guidance. On Slide 13, we expect earnings per share in the range of $5.05 to $5.40, which reflects the following assumptions: First, for the enterprise, we expect interest and other between $140 million to $170 million, which assumes approximately $550 million in debt paydown for the March 2023 notes at or before maturity. We are assuming a non-GAAP effective tax rate in the range of 23% to 25%. We anticipate diluted weighted average shares outstanding between $262 million and $266 million, reflecting our plan to complete between $1.5 billion to $2 billion in share repurchases over the course of the year. Supporting our capital allocation priorities, we expect to adjust free cash flow in the range of $1.5 billion to $2 billion, which excludes litigation payments and any other significant and unusual or nonrecurring items. As for the segments, beginning with Pharma on Slide 14, we expect revenue growth in the range of 10% to 14%, driven by growth in existing and net new PD and specialty customers. We expect segment profit growth in the range of 2% to 5% based on the following key assumptions. We expect continued stability in overall pharmaceutical volumes along with consistent market dynamics within our generics program. Continuation of the inflationary supply chain costs we've seen in the last two quarters should result in approximate $50 million headwind primarily in the first half of the year. The completion of ERP technology enhancements should be an approximate $30 million tailwind. We expect opioid-related legal costs, including initial costs for implementation of the settlements in adjunctive relief terms of approximately $80 million in fiscal '23, a $20 million tailwind. And we see increased contributions from our growth areas, primarily specialty, including biosimilars. Before moving to Medical, a couple of points from the Pharma fiscal '23. Similar to last year, we expect the year-over-year segment profit growth to be significantly back-half weighted, which primarily reflects the year-over-year impact of inflationary supply chain costs in the first half. Specifically, in the first quarter of next year, we expect segment profit between $400 million and $420 million. While we do not typically provide quarterly guidance, we thought additional color may be helpful given the puts and takes over the last several quarters. Now turning to Medical on Slide 15. We expect revenue to decline in the range of 3% to 6% due to lower PPE sales and lab testing volumes. We expect segment profit ranging from a decline of 10% to growth of 10%, reflecting the following assumptions. We expect a similar net impact of approximately $300 million from inflation, global supply chain constraints, and mitigation actions in fiscal '23 or a minimal impact on a year-over-year basis. This assumes an approximate $475 million gross impact from inflation and global supply chain constraints, partially offset by $175 million of mitigation actions, including pricing and evolving our commercial contracting. While still significantly elevated relative to historical levels, we're encouraged by the recent improvements in spot rates of certain cost drivers such as international freight and some commodities. As a reminder, these product costs are capitalized and have historically been reflected in our P&L results on a 1 to 2 quarter delay. However, in the current period of elongated supply chains, it is closer to 2 quarters. Our current assumption is that the impact of inflation in global supply chain constraints will peak in the first quarter of fiscal '23 and gradually decrease over the next couple of years. Additionally, along with the pricing actions that went into effect at the start of the year, we are implementing additional ways of increases over the course of fiscal '23. We continue to expect that, as we exit fiscal '23, the run rate of our mitigation actions will offset at least 50% of the gross impact from inflation and global supply chain constraints. In terms of other key assumptions for medical and fiscal '23. As the operating environment continues to normalize, we expect an approximate $50 million tailwind from an improvement in PPE margins. We plan to sell through the majority of higher-cost PPE in the first half of the year and for PPE margins to normalize as we exit the year. We expect the PPE tailwind to be offset by a similar headwind from lower lab testing volumes. We also anticipate a headwind of approximately $50 million from re-baseline incentive compensation following fiscal '22 underperformance. And finally, we expect increased contributions from our strategic growth areas, primarily at Home Solutions. On Medical's quarterly cadence, while we are assuming a similar segment profit total in fiscal '23 versus fiscal '22, we do expect the cadence to be the reverse of the prior year. Specifically, in the first quarter, we expect segment profit ranging from a loss of $20 million to a profit of $20 million. We expect the gross impact of inflation and global supply chain constraints in the first quarter to be approximately $150 million, approximately 25% of this offset through our mitigation actions. As for the rest of the year, we expect the substantial majority of segment profit to come in the second half of fiscal '23, particularly in the fourth quarter. This sequencing primarily reflects our assumptions around inflation, global supply chain constraints, inflation mitigation, and PPE. While there are many moving parts in fiscal '23, we are confident in our long-term outlook and are reiterating our previously announced long-term targets for our businesses and for double-digit combined EPS growth and dividend yield over longer normalized periods. Additionally, we are introducing a new target for at least $650 million in Medical segment profit by fiscal '25, driven by the medical improvement plan that we are introducing today. Slide 17 highlights our four areas of focus to improve medical performance. Number one, mitigate inflation and global supply chain constraints. We plan to fully address the impact of inflation and global supply chain constraints through mitigation initiatives by the time we exit fiscal '24 and are targeting to exit fiscal '23 offsetting at least half of the gross impact on our business. Our second wave of price increases went into effect on July 1 on four more categories. We plan on the next wave commencing on October 1. In addition, we've executed distribution fee increases for certain suppliers, and we are actively working with customers and GPOs to adjust language in our product and distribution contracts as they renew, allowing for greater price flexibility to respond to current and future macroeconomic dynamics. Two, optimize and grow the Cardinal Health brand portfolio. Our $4.6 billion Cardinal Health brand portfolio, which includes nearly $4 billion of non-PPE categories, offers leading brands and clinically differentiated products. Plan to grow Cardinal Health brand sales by a compounded annual growth rate of at least 3%, which will generate $75 million or more of incremental segment profit over the next three years. This growth will be achieved through two key areas of focus. First, R&D and new product innovation. We see opportunities in key categories such as new nutritional delivery, where we will be launching the next-generation Kangaroo feeding platform. Second is increased product availability as a result of investments within targeted categories such as surgical gloves and electrodes. For example, in our surgical glove portfolio, we are investing $125 million for the construction of a new manufacturing facility dedicated to increased supply for leading Texas brand gloves. Third area of focus is to accelerate our growth businesses, primarily at Home Solutions. These businesses have growth rates in excess of our core, along with a higher margin opportunity, and we've been making investments to drive at least $60 million of total segment profit by fiscal '25. Home Solutions, for example, is now a $2.4 billion business that has consistently grown top line at around 10% as patient care continues to shift into the home. And finally, our fourth area of focus is to continue our simplification and cost optimization efforts. We expect actions that increase productivity in our manufacturing plants, distribution centers, supply chain, and back office to yield at least $50 million of net cost savings by fiscal '25. Going forward, we are focused on driving simplification through value improvement projects, transportation management and further optimizing our sourcing and manufacturing footprint where possible. We expect these initiatives to contribute towards exceeding our existing enterprise $750 million cost savings goal by fiscal '23. While on the topic of our supply chain, let me take a moment to share some additional color where we have received a number of investor questions. We operate a highly diverse global supply chain with approximately two-thirds of our Cardinal Health brand revenue coming from self-manufactured products. We have invested in additional self-manufacturing capabilities, many in our own North American facilities. And today, approximately half of our Cardinal Health brand revenue comes from North America in total. To best serve our customers, we continue to believe in the importance of a diverse global supply chain, and we are focused on responding to any global supply chain disruptions with resilience and agility. In summary, we believe the introduction of measurable proof points in each of these four areas of focus provides visibility to measure progress against our plans going forward. Now let's turn to the Pharmaceutical segment where we continue to focus on strengthening our core PV business and investing in our growth businesses, primarily specialty. In Pharma Distribution, with our significant technology enhancements that we've been working on over the past several years, substantially completed, we now focus our attention on increasing productivity, maximizing working capital efficiency, and prioritizing the customer experience. With our generics program anchored by the scale and expertise of Red Oak, we continue to further enhance our capabilities as we focus on share of wallet and maximizing margins. We recently held our Retail Business Conference where over 4,000 customers attended live for the first time in three years and had an opportunity to see and experience our latest innovations. We also had the chance to register for services that would help them create an online shopping portal, advisory support to optimize reimbursement, and central fill compliance packaging services. In specialty, we are continuing to see downstream momentum in oncology and emerging therapeutic areas driven by our offerings, including the Vista TS. We announced a tuck-in acquisition of the Bank care GPO and investment in their main services organization. These will further strengthen Specialty Solutions cornerstone rheumatology GPO, which offers innovative office management solutions and robust specialty drug access to over 1,300 rheumatology providers nationwide. Upstream with biopharma manufacturers, we are investing for future growth in our 3PL business as evidenced through our cold chain storage expansion, which increases our current capacity by 200%. We also continue to see strong growth in SynXis our patient hub where our technology solutions help biopharma customers remove barriers to patient care. And with biosimilars, we are proactively addressing common barriers to adoption by investing in education campaigns to build awareness, clinical comfort, and ensure accessibility. We continue to be excited about the future growth in the space and remain well positioned as new biosimilars come to market. In closing, while there's a lot of work to be done, I'm excited to work with our 44,000 teammates and executing our plans to grow in fiscal '23 and beyond. With that, I will now take your questions.

I want to wish you the best of luck, Mike Kaufmann. It has been a pleasure working with you all these years, and I hope to stay in touch. Congratulations, Jason, on becoming CEO. You mentioned a significant ramp-up in getting the medical side of the business back to $650 million in profit. I’d like to focus on the first area you discussed, which is growing Cardinal brand products. As someone who has followed the company for a long time, I've seen the focus shift over time. Can you explain why you believe now is the right time to accelerate this growth? You mentioned nutrition, which has been challenging for others in the industry. Why do you see it as a promising area for Cardinal? Lastly, regarding physician preferences and market feedback, what insights do you have about private label products that highlight the opportunities for Cardinal brand products? I'll stop there.

Yes. Great question to start off the discussion. Thanks, Lisa. So first of all, let's start with your first one about why now. So ebbs and flows. I understand what you mean. And of course, I think what you're referring to is we especially talked about the sales force right before the pandemic. We've made a significant restructuring to have that team very much focused on driving our Cardinal brand mix and then COVID occurred and it went from a sales-focused challenge to now a supply chain challenge. And of course, our sales team as well as our customers were very much focused on PPE and in giving care to COVID patients and the change in the mix was not exactly the highest priority. So I think it's always been a focus of Cardinal, but we recognize that we needed to change our priorities to align with our customers' priority over the last couple of years. But behind the scenes, especially with the pandemic, our medical team realized that we needed to invest in our own supply chain capability, our own products, and a lot of the capacity that is necessary for the manufacturing, either whether it's our own products or sources products to ensure further resiliency. So now that we are getting a little bit more normalized, and we see that we have to invest in that supply chain, it not only helps provide resiliency to our customers, but also allows us to grow high-margin products where we have the right to win and expand our margins further. So now is the right time as we start to move on and allow our sales team to get reengaged and focus on driving that volume. But of course, we need the capacity and the products to allow them to be successful. You asked a specific question about nutritional. That's just one area, right? We have a very broad, diverse product mix, and we are successful in the category today. The King Group brand is a market leader. So this is not necessary we're getting into it. In fact, that's what gets me so excited about this item; it's opportunity. The two items I referenced, the surgical gloves and nutritional, are already areas where we are significant leaders with good margins and good growth. We have the opportunity to just get our leadership through additional products and additional capacity. So it's actually a lower-risk strategy than entering in separately. As it relates to your last question, again, we have a very broad, diverse product mix, and we can manufacture. We can source and we are to use all tools available to us and use that diverse capability, internal and external, with partners or ourselves, and continue to adapt and evolve as the market demands when we look at the supply chain state that go behind that.

And Mike, I want to echo Lisa's sentiments and wish you well. Jason, I hope this question does not come off as insensitive, but considering the company's recent performance, could you explain why the Board decided not to search for a replacement for Mike? Why did you opt for an internal promotion? Additionally, could you share any insights on the Board's view of the company's performance and how it plans to assess management moving forward?

I certainly will not attempt to speak for the Board, but what I will say is that my time both here as well as elsewhere in the industry, I'm very focused on driving operational performance within the business. I have made a mark within this organization. I've been very focused on capital deployment, driving cash in the company, and have made that impact. When I think about why I feel like I'm the right person going forward here, we have a lot of great assets within the organization. We have a wonderful culture. We have wonderful products, leading positions, great growth areas. But what the pandemic has shown us is that we need to go back to some level of basics in terms of the operational core and driving efficiency, driving simplification, so probably doing fewer things, but doing them better. And that focus and that attention to derisking the model and driving this profit improvement plan for the Medical business. The pharma business has been very resilient. We hit both our short- and long-term goals this year. We need to keep doing more of the same, while also continuing to grow those growth areas, of which, of course, specialty is the largest one. So we're in a very different phase there. And then with this plan today, we're really highlighting how aggressive we're going to be with our capital deployment that when we generate that cash, $3.1 billion in '22, we're going to deploy it effectively. I'm well positioned to take us through those challenges that we've been faced with and I am absolutely focused on taking the next steps here.

It's unclear on for A.J. I just want to echo my congrats on Jason and Mike as well. So you mentioned the various costs have been coming down within the Medical segment and understanding there is a lag between when the spot prices come down versus when it flows through your P&L. Should we take it that any further decline in the spot prices would be upside to the medical outlook for FY '23 and beyond? And then alongside that, you talked about the 3% revenue CAGR for the Cardinal Health brand products. I guess what are you assuming in terms of pricing growth moving forward and alongside that utilization?

To begin with the spot prices, we discuss the net impact because there is a gross impact driven by pricing and other contracting elements that contribute to that net. In the short term, as you've mentioned, it varies based on the specific costs, such as inventory expenses like international and product freight or commodities, which will see a lag of about two quarters. However, domestic transportation costs have not changed significantly, so that aspect is more immediate. Therefore, it really depends on which costs we are considering. In the long run, we expect costs to return to pre-pandemic parity. If costs decrease, some pricing actions might be adjusted, but in the immediate term, I do not anticipate any pricing changes. Regardless of the pricing scenarios, we expect to cover only slightly more than half of that impact. In the short term, costs are likely to focus on reducing what we can. This will probably be more evident in the second half of the year. Regarding the 3% CAGR, I may not fully grasp the pricing inquiry, but in relation to Cardinal Health, it is specifically tied to the $4 billion figure I mentioned, which is influenced by underlying volume. There is associated pricing, but it is primarily volume that drives that growth rate, not an increase in pricing strategies. This assumes a typical inflation level in pricing, making volume the key factor for that additional value.

And Mike, obviously, same here, but I wish you best wishes as you move on. It's been a pleasure working with you over the years. Maybe, Jason, to dive a little bit also into the medical transformation plan as you think about the totality of Cardinal as you step into the CEO seat. As you think about the moving pieces that you have and the drivers to push back towards growth, can you give us a sense as well on how much the linkage between the pharma and medical side will be able to help allow you to hit these targets that you've laid out? And how do you view the synergies, especially among this revamped medical outlook between these two segments going forward?

When considering the plan, there are a few areas that could be influenced by our connectivity. One of the primary aspects is the simplification and ongoing cost optimization. These initiatives are extensive, and as we execute specific projects aimed at reducing costs, we often cherry-pick the best ideas from different segments and corporate functions to implement across the board. In some instances, we're capitalizing on our scale by centralizing work to standardize and offshore back-office activities. We are utilizing digital tools whenever we are able to invest in those technologies and expanding them across the organization. This is certainly a crucial element. Additionally, while there isn’t a lot of crossover selling in growing our Cardinal Health brand portfolio, we do share the same customers. Therefore, our relationships and discussions may open up various opportunities. While this may not be the main driving force, it can be a contributing factor. Overall, these are the areas where we see the most overlap.

Best wishes, Mike, and I'm looking forward to seeing how you do in your new role. I have a question regarding what you mentioned in the last call about having passed through higher costs for about 50% of SKUs. Could you provide an update on that? I recall you noted in your slides that you intended to offset about 50% of the gross impact as we exit 2023, and I understand there are various factors at play. I'd appreciate any further clarification you can provide.

Yes. So that reference to 50% of SKUs was reflective of the expected July 1 price increases. So that is effective July 1. Now since then, we've now discussed and are informing everyone of the October 1 increases. I didn't provide that exact number. But remember, that's just the percentage of SKUs that we're touching. I think the more important way to think about it is the percentage of mitigation that we're targeting. So let me kind of walk through the flow and how I think you should think about it for this upcoming year. So as an anchor point, I just walked through in the prepared comments, in Q4 '22, what we just finished is about a 20% mitigation. So we indicated there was a $125 million gross impact with $25 million of pricing. So a 20% mitigation. We expect that 20% with the July increases and phasing in over the quarter, that's going to increase that to 25% average for the first quarter of '23. Now we would expect that to continue to increase each and every quarter over the course of the year as we roll through various other increases. I mean these are the big ways, but there's always going to be other increases along the way and our supplier fees that go along with this, too. And then that 25%, we expect to double by the time we exit fiscal '23. So we expect a run rate of about 50% by the time we exit fiscal '23. And then as I indicated in my comments, we would expect to exit fiscal '24 with 100% mitigation. By the time you get to the end of '24, we would expect that part of this inflation continues to come down. So our growth impact in '24 would trend lower and then our pricing would trend higher until effectively, those two numbers offset.

I also just want to congratulate Mike on rewarding 30-plus years at Cardinal. And Jason here, so you hoping you'll have 30-plus years at Cardinal as well I think it puts you in your late 70s, but I think you can do it.

I also just want to congratulate Mike on his 30-plus years at Cardinal. And Jason here, I hope you'll have 30-plus years at Cardinal as well. I think it puts you in your late 70s, but I believe you can do it.

Just the 10% to 14% revenue growth in pharma jumped out is pretty high. I guess I was curious for more color on the drivers of growth within that as for fiscal '23, obviously more color around the double-digit top line within the pharma.

Sure. Well, yes, no, yes, okay. Got it. I think there's a couple of key points. First of all, it's very consistent with what we've done this past year, and that was driven by a couple of key drivers. And I think you should think about the drivers as being similar because one of the drivers we've referenced a few times is some net new business that we referenced team in beginning in the third quarter of '22. So that would be a little bit more of a front-end loaded type of revenue benefit as we see fiscal '23. And then we've also been highlighting the strength in our large customers large book PD specialty. And we've seen some really good volume in the brand category. And so as you know, some of that larger customers and some of the brand volume doesn't always bring with it a tremendous amount of margin, but that's one of the reasons why you see very robust revenue growth and still profit growth well within the range of what we've indicated for both our short- and long-term goals. But those are the biggest drivers.

And Mike, I wish you all the best, and Jason, congratulations and good luck. I have a couple of follow-up questions. Jason, thank you for explaining the $150 million gross headwind in the first quarter compared to the $125 million. It seems like your guidance assumes that the headwinds will worsen in the first quarter compared to the current run rate. I want to ensure I'm thinking about this correctly, and that things will gradually improve throughout the year. Regarding the mitigation, your numbers suggest about $38 million in mitigation from better pricing in the first quarter. When you mention 50%, should we interpret that as basically doubling it to $75 million? I would like to clarify the reference to that 50%. Additionally, I have a question about the Cardinal brand since it appears to be a significant part of the longer-term plan, accounting for about 29% of revenue for the segment. How do you envision this revenue mix evolving by 2025? Also, how should we perceive the EBIT mix? If it represents 29% of revenue, what percentage does it contribute to profits today?

Starting with pricing, you are fairly close, but I want to clarify a few points. Yes, the math for Q1 is about right. The gross impact is increasing slightly from $125 million in Q4 to $150 million in Q1. To connect the dots, we are seeing spot prices start to soften in some areas, though not all, with prices going down as well. Overall, there is some benefit, but it isn't affecting our profit and loss statements yet due to a two-quarter lag. International trade began to reduce significantly around two to three months ago, and we have seen a consistent decline over the past few weeks. Therefore, you wouldn’t expect to see any benefit in Q1. The growth impact is still increasing because it reflects changes from five to six months ago. When considering pricing, it's unlikely that the pricing will double. What you might be missing in your calculations is that the $150 million should decrease over the year, partly due to international freight. That will start to decline while pricing continues to rise. By the time we exit, we anticipate the exit rate will be around 50%, but lower than $150 million and higher than the $37 million to $38 million from the first quarter.

Am I coming through this time?

Yes.

Perfect. So Jason, as you take on the new role, I think a couple of questions came down to what you will do different. And what I heard during the call was you've had a desire to be more aggressive on returning capital to shareholders and opioid settlement behind you, strong balance sheet. We're going to see that I heard the focus on cost management. I want to ask if there are other elements that you think are important for us to understand. And then I want to also ask pointedly, will you reassess the portfolio and consider what hedging needs to be together long term?

Yes. So let me start. Whenever I step into any project let alone a role, it is always about defining the best opportunity to create value. Where are the opportunities, what are the challenges? And what is clear to me is that until we can get better evidence of the progress on our medical business, we're going to be challenged. And so that is why I'm so focused on this medical improvement plan, why we provided such clarity on it is that it is absolutely one of, if not my greatest focus, especially in the near term. And when you think about kind of any type of process to fix anything, it has to be, first and foremost, defining what the challenge is. And I do want to step back for a moment. When you think about the challenges in the medical, I know there's been a lot of adjustments. I know there's been a lot of noise. But when you think about the vast majority of the issues, they do stem from one very common theme, it is related to the supply chain. Now I can start and highlight all the external influences with that and blame things that have happened to us, and then it's very, very true. But when you think about where we were pre-COVID, this type of business, this type of industry was extremely stable. Our volume is predictable, especially in areas like PPE to think about going up 5x, 10x in terms of demand overnight and then not having a supply chain that could adjust with that; it really impacted our ability to execute in that environment in our diverse, low-cost global footprint what went from a strength to a challenge pretty much overnight. So now we've learned from that. That's what this plan is talking about. It's building in resiliency and capacity into our system so we can be a lot more flexible. We can derisk the model while also growing profitable categories. So this is very much a cornerstone of what needs to be the focus, but it's not not just cost. It's simplification to reduce cost. It's also about driving the right time, driving organic binding high-margin volume in simplifying everything about how we operate so that we can be more nimble and we can derisk. And then, again, within both segments, there is an absolute need to continue to grow our growth businesses. What you heard me say today was more of an emphasis on specialty and on at-home. Of course, we love all of our growth businesses. But what I'm really indicating here is for us to achieve the $650 million, what we need are those two businesses to continue to grow the top line and to have a good flow-through on that incremental volume that comes with it. And with that, then we have high confidence that we'll be able to get the pieces of growth for both segments necessary to hit their longer-term objectives. So that is very much a growth-based story, but it's about, again, prioritization and being really, really focused on the core of both businesses so that these two growth businesses can build from there. In terms of the portfolio, it's something that I believe in continually evaluating our portfolio for all of our businesses. And the company has demonstrated this in the past. You know about China and not of health and more recently, ports. We've monetized several billion dollars over the last several years through those activities and was responsible with the capital deployment thereafter. I'm not going to attempt to define what the appropriate long-term course of action is for this business for the medical business. But under all scenarios, what's really, really clear to me that the near-term actions need to be very focused on this improvement plan and then that will set us up for the best actions thereafter.

Thank you. Before Jason ends the call, I would like to say that I appreciate all of your congratulations and comments and enjoyed working with all of you. I look forward to a smooth transition with Jason and have complete confidence in his leadership. Jason, to you.

Yes. Thanks, Mike. I want to also thank everybody for taking the time to be on the call today and for all your questions. In addition to the leadership succession, I acknowledge that we drew a lot out of you today, including new disclosures, various puts and takes, and examples of incremental actions that we are taking. We did all this in an effort to provide additional visibility as we are confident and excited about these opportunities to drive growth. But there are three key takeaways I want to make sure that you have. First, we are committed to improving our results as demonstrated by the introduction of our medical improvement plan. Second, we continue to be encouraged by the resiliency of our Pharma segment, which continues to meet both our short and long-term objectives. And third, that we continue to take actions that are in our shareholders' best interest. With that, thank you, and have a great day.