Cardinal Health, Inc. (CAH) Baird’s Global Healthcare Conference 2023 (Transcript)

Cardinal Health, Inc. (NYSE:CAH) Baird’s Global Healthcare Conference 2023 September 13, 2023 8:30 AM ET

Company Participants

Matt Sims – Investor Relations

Jason Hollar – Chief Executive Officer

Aaron Alt – Chief Financial Officer

Conference Call Participants

Eric Coldwell – Baird

Eric Coldwell

Good. Okay, great. Good morning, everyone. My name is Eric Coldwell, Pharma Services and Distribution analyst at Baird. It’s real pleasure to have Cardinal with us today and some new face — newer faces over the last, few months, few years. Matt, Matt here, Matt Sims new lead in IR, so that’s fantastic. And…

Matt Sims

Always been with the team for a little while. So [Multiple Speakers]

Eric Coldwell

Been with you for a while, but…

Matt Sims

By both of you.

Eric Coldwell

Recent news. I’m not going to do a big introduction, I want to jump into Q&A, but, Matt, I know you wanted to make some opening comments just to get us rolling.

Matt Sims

Yes. Just some quick housekeeping. So thanks, Eric, and thanks for hosting us here today. So during the fireside chat, we will be making forward-looking statements. Our actual results could differ materially from those projected or implied. For a description of the factors, which could cause our actual results to differ please review our SEC filings, which can be found on our investor relations website at ir.cardinalhealth.com. Jason?

Jason Hollar

Okay. Great, thanks, Matt. And thank you, Eric, for having us, and thank you all for joining us here today. Eric, putting travel challenges aside for the event. It is a great time to have a healthcare conference. There’s a lot going on in our industry and it’s an exciting time for us specifically at Cardinal Health. And it’s exciting for us because when you think about all these headlines, and all these new products and services, therapies, drugs for patients, potential evolution of the business models. When you look at all that, at the center of it all is the need to have a trusted partner that safely, securely, and efficiently delivers those products to the end customer and ultimately to the patient.

And why we’re so excited is that we fit that description perfectly. When you think about, what we bring to the table, it’s beyond just size and scale, which is certainly significant. Beyond the scale of just our own business, but we partner with others, like what we do with CVS and Red Oak Sourcing, but beyond that is really about that expertise, the breadth of our capability. And when you think about what we touch, it’s all aspects of health care from the clinical to the operational end. And that’s what those new innovations need is that partner that can understand that.

And if you think about what we touch, within that whole system, it goes way beyond just core distribution, which I don’t want to minimize that. That’s a big part of our business, but we do that each and every day, both within our pharma and medical segments. But then it gets really complicated after that. You get into the real specialized capabilities that we have. Think beyond the specialty business, but also in areas like well controlled substances, we don’t limit what we distribute. We, of course, follow all the rules, regulations, compliance, but we have the capabilities of going deep into all these products and services, vaccines, you get into really complex areas like our radiopharmaceuticals and areas of that nature. That’s just in the pharma segment.

Again, the medical, and we go straight into the home. We have our OptiFreight logistics where we have that expertise, and then of course our inventory management with our WaveMark business. So we have that breadth, and that’s what keeps us excited about where we go from here. It’s a big part of the resiliency we’ve seen over the last several decades and why we continue to expect to be resilient going forward.

So where we at today? You know, we had a lot of opportunities to communicate more recently. We had our earnings, our year-end earnings less than a month ago, and a couple months before that we had our investor day. So we won’t be providing new business updates today, but of course we’ll go into our actions and strategies further with you today. But what we said last, less than a month ago, is we had a strong finish to a strong year in fiscal ’23 across the enterprise we performed very well as we exited the year. We were led, of course, by our strong performance in our pharma segment and in our medical business. While that remains a turnaround story, we entered the year losing money in that business. We exited making $80 million in the fourth quarter.

So a great inflection of that business and performance improvements. And then of course, over the course of the year, we also had strong cash flow performance, which helped to add additional fuel to that fire through share repurchases. That resulted in the combination of all that at 14% EPS growth over the course of the year. Now that strength we anticipated continuing into fiscal ‘24, which is why we increased our guidance a little bit further last month with the strength of that pharma segment from what we had laid out in investor day. And that beyond the pharma strength, we do expect the same guidance and targets for the medical business at the $400 million for fiscal ‘24. And we continue to expect strong cash flow this year to help do additional share repurchases, which then results in that 12% to 17% EPS growth for fiscal ‘24.

Now stepping back from all that, all those actions and the strategies behind it are entirely consistent with what I laid out a little over a year ago when I stepped into this role. I highlighted three key strategic priorities, which all remain intact. You know first and foremost it’s the ongoing growth and resiliency of our pharma segment. That business has performed very well, both because of the secular trends, the things that we don’t really control, but then even within that, we have performed very well and executed upon that and that’s been a key driver of that success.

The medical segment, like I mentioned, we’re on track for the $400 million in fiscal ‘24, which is on the path to the fiscal ‘26 target of the $650 million. And then beyond that, it’s the relentless focus on shareholder value creation. And that is through that continued earnings growth, the strong cash flow performance, but as important, that continued responsible return of capital to the shareholders. So really excited about all that, but probably most excited because even with our strong performance that we’ve had in fiscal ‘23, we still see significant opportunities in front of us, which is why we have confidence in that long-term target.

So hopefully I answered all your questions, Eric and [Multiple Speakers]

Question-and-Answer Session

Q – Eric Coldwell

That’s fantastic. I’m — Look, I just want to start on the strategic review. You’re pretty deep into yours. Our last guest, not so deep into theirs. So there were some interesting tie-ins there on multiple levels, but in pharma, you completed the strategic review. You reemphasized your focus on specialty. You said you were keeping nuclear. You merged outcomes into TDS. You created the Navista community, and call it — you did a lot of things. A lot of things. And am I too punch drunk on the positive trends in pharma that I think it feels like maybe the next year is just riding the wave of the market dynamics and there’s not going to be a lot of news in that segment? Is it where we just at a kind of a peaceful place in pharma at this point?

Jason Hollar

I think you need to give us a little bit more credit that it takes more to manage the business than just [Multiple Speakers]

Eric Coldwell

Oh, I’m sure there’s something happening behind the scenes.

Jason Hollar

But with that said, there’s one, you’re right, there’s a long list of things that we completed this last year. But let me just add one more to your list, which I think is as impactful as all the others. In fact, it could be the key driver of all those. The first thing I did was I actually restructured the organization and put the right leaders into the right roles. Debbie Weitzman specifically is the CEO of that segment, has done a fantastic job driving and leading the day-to-day activities of each and every one of those initiatives that you just highlighted. So, we have a tight team, we have a strong team, and we’re working together on that.

With that said, how I think about it, and it is a bit of a cliche, but I think the metaphor of thinking about that large ship, it took a lot of effort, like you just listed there, Eric, there’s a lot of things that we did to put this business in the right direction. Now that it’s in the right direction, and we’re benefiting from that strong, secular underlying growth that has been out there this past year, you know, I think it takes less change to continue to adjust path of that big vessel, that big business because it is large. It is complex.

We do like the direction is going, and there are we’re not where we think this business can be. We think there’s still continued opportunity, which was what we laid out at our investor day. That’s across the board, but I would say, as we think about that, it’s more of the same of what we have started to put in place this last year, but, you know, we’re going to keep a very tight focus on that to ensure we continue going forward.

Eric Coldwell

In pharma, any other strategic priorities? I mean, nuclear is growing. Specialty is a big focus. Is there anything else you would highlight that maybe doesn’t get as much as it is?

Jason Hollar

Yes. Let’s answer that question around just general priorities for the pharma segment. And, there are a couple significant ones that come to mind and sometimes it’s overlooked, but I think the first one is probably the most important, which is the focus on the core. Doing core distribution, both PD and specialty, I’m talking about the operation aspects. Doing that really, really well, that should not be overlooked. That is a lot of hard work. That’s what our team does really well. That’s the expertise the team I put in place and what Debbie put in place. We are going to be the best distributor of those products and services, in terms of the operational basis, customer service, having those service levels in place and the confidence in our customers that we’re going to treat them really, really well.

We say we are health care’s most trusted partner, we are going to show every single day like we have this last year, especially that we are health care’s most trusted partner. So that remains the highest priority focusing on the core and doing everything that we do today really, really well. But that doesn’t mean we can also focus on some growth initiatives at the same time. So the second priority is continuing our focus on the growth of the specialty business.

We’d love nuclear, and I’ll say that’s going to be our third priority to continue to grow. The Theranostics business is fantastic, it’s a $1.2 billion of revenue, a little over $100 million of profit. You know, that’s relevant, but the growth of this business is core, core business growing 2% to 3%, specialty growing double-digits driven by, just the secular trends in the space, but also our specific investments in areas like oncology, where we launched in the Navista Network, we’re pleased with the reception we’re seeing from customers, current customers, prospective customers. We’re confident in the strategy. In the other 60% of specialty where we have many advantaged positions, we feel very good about those ongoing organic investments. We did a little bit of inorganic investments as well in the space. We’ll continue to look at that.

But we’re very confident that we are on the right path organically for our long-term growth objectives of 4% to 6% growth for pharma. We have the actions in place. If we can augment that over time with some M&A, that’s great, but we’re — our strategy is not predicated on it. So we’ve got a clear plan in place and we’re executing to it.

Eric Coldwell

Medical. Sticking with strategic review and more the, you know, the current topic, [Dejour] (ph). You have your medical improvement plan, you got to your goal at the end of the last fiscal year. You’ve reiterated your $400 million circa AOI for this year, $650 million down the down the road. What are some — do you have some real time updates on what’s happening in the medical improvement? There’s so many moving pieces. I mean, that’s I think that’s one thing the street struggles with is can I build a model with part one, part two, part three, part four? Each part has five subparts or 50 subparts. It’s really hard. What in the moment is happening? And I want to come back Aaron in a minute on the phasing of medical.

Jason Hollar

Sure.

Eric Coldwell

So…

Jason Hollar

Yes. So let me start and talk about the four pillars and then Aaron can go into some of the proof points along the way in more detail. So we’re not providing real time updates, but it’s been less than a month since we provided real time updates. So I’ll go deeper into what we co communicated then. The four pillars of the medical improvement plan, again, unchanged from, over a year ago when we laid this out. And three of those four are absolutely unchanged. And we had some timing difference is with the last one. So those three that have been unchanged over the last year plus, the largest most significant impact benefit for this period of time is the mitigation of the inflation impacts. So, this is you know, two parts, you should unpack that thinking about the price side and the cost side of inflation. So certainly with costs, we all know inflation remains quite elevated. It’s not increasing at the rates that it was, but it’s not decreasing of course.

So I’ll say that’s largely plateaued for a lot of our input costs with one key exception, and that’s the international freight. That was a significant pain point for us. And that started to come down about a year ago. Now we have a lot of product and inventory, so at least six to nine months more in the nine month type of side, because of the elongated supply chain. And that started to free up about a year ago. So we are seeing that benefit come through our P&L. And it just took us some time to kind of burn through that inventory. So that part is basic math, you can all track that through different indices that are out there. It’s come up a little bit, but it’s still significantly below where it was at the peak. So it’s pretty consistent to what we said before.

On the pricing side, this is more about taking those temporary price increases that we put in place about a year ago, enrolling them through as those contracts renew. So that just takes us some time to get that to go through our P&L as well. Main point is that’s the biggest most impactful item, and we’ve had no changes. And frankly, I think that’s probably the most, significant point is that’s really complex. You got a lot of inputs, a lot of pricing, a lot of market dynamics that we don’t control things that we do control, but it makes sense for us to get this pricing, because this is an industry wide cost increase. It’s not unique to us. And so, therefore, it’s normal that, that’s passed on through that industry.

We’re doing everything we can to absorb and offset, I’m sorry to offset those costs in other areas, but ultimately, we need a price for them. Outside of the mitigation inflation, you know, it’s kind of blocking tackling normal type stuff with our growth businesses, the right secular trends and areas like our at-home business, more care moving into the home. So it’s — we’re increasing our investments there, more distribution capacities, some partnerships like what we’re doing with medically home and, you know, Mayo and Kaiser partners there.

But, then there’s cost reductions, you know, we still have some simplification opportunities. This last year, we closed down a couple of manufacturing plants. We exited four more countries to simplify how we operate. So there’s some more opportunities for cost reductions. All those, assumptions have remained unchanged. The one item that we delayed by a year was the Cardinal Health brand volume. So this is an area where…

Eric Coldwell

And that was delayed?

Jason Hollar

From ‘25 to ’26.

Eric Coldwell

Right, but back at June — in June before Investor Day. This wasn’t a recent change [Multiple Speakers]

Jason Hollar

Right. Yes, this is not a new update. That’s right, so back at the Investor Day, we had went through a lot of those pieces. Yes, thanks for the clarification.

Eric Coldwell

I want to make sure nobody thinks this is a…

Jason Hollar

No. No, no, no new news here, for this. And so, but the basic premise behind this pillar of the plan is absolutely intact as well because we have really good visibility on the leading metrics. Go back a couple of years, we had significant service level challenges. We had a supply chain that was elongated, and we did not have enough resiliency in our own processes to be able to mitigate that. Since then, we’ve invested heavily in our own supply chain. We put a lot of capital into our manufacturing plants. We have, you know, leading products with great margins and great growth, and we couldn’t support that volume. So our customers had to go elsewhere for that volume. So we’ve mitigated that and our service levels.

Well, let’s step back, the ability for us to satisfy that starts with, what the product availability is. Our inventory health is fantastic. Our back orders are at a near all-time lows, so we have product. We have the availability, and you can’t do anything else if you don’t have that. Well, now that we have the product, our service levels are up significantly as well. And then that leads to a satisfied customer. So everything is moving consistent with our plan. The part that took longer was, when you lose some of those distribution contracts, because we didn’t have the products, sometimes you keep that Cardinal brand volumes, sometimes you don’t, we misread how much of that volume would come — would go out over that period of time, but given our strong retention rates in fiscal ’23 we anticipate to have a lot more visibility now as we go forward.

And that’s why we have confidence, especially in the second-half of fiscal ‘24 that you’re going to see us growing that business consistent with the market rates, because we do still think that you should anticipate, good utilization in this space that’s what our assumptions are, again, that low-single-digit type of growth. And we think that there’s that type of demand out there for patients.

Eric Coldwell

So you’ve probably touched on the vast majority of what I was going to follow-up with Aaron. But I…

Jason Hollar

There’s still some left. I left a little bit out there for him.

Eric Coldwell

I’ll inject some opinion and perspective and then try to elicit a response. I came off of your fiscal fourth quarter call thinking is what we heard before, sounded like a pretty normal update, good update. I got a lot of feedback from the Street that maybe you sounded a little more cautious incrementally on Medical. The Q4 to Q1 phasing of EBIT, the $82 million, $20 million-ish of that being seasonal or one-time wasn’t that different than what I thought the Street was modeling or expecting. It felt like the Street was expecting more. So I want to make sure I’m clear, were you at some level tempering expectations relative to how you felt you would set the Street up at the June Investor Day or was the Street just overreading those?

Aaron Alt

No, look, I can’t speak to what was in the Street’s mind, but I can tell you what was in our mind, which is let’s be pragmatic about the guidance we’re providing. You have to keep in mind that our Medical segment — this is a turnaround story that has been operating in an incredibly complex environment for a couple of years. And so how seasonality plays out is — has been masked by the business that we’ve been operating during the COVID environment, et cetera. And so our goal in providing a color, if you will, on the same guidance we gave at Investor Day was to try to provide some context on the timing and action, the cadence of the initiatives that Jason has just walked through from a financial perspective.

And so let me go back and just touch on a couple of those elements. At the highest level, the OI for the Medical business, we have guided it will be $400 million for the year, right? That is a dramatic improvement over fiscal year ’23 when, of course, we lost money in fiscal — in Q1 of fiscal ’23. We’re in Q1 of fiscal ’24 right now. And the drivers to get to the $400 million are what Jason just laid out. It’s all about execution against the medical improvement plan.

At our Investor Day, without referencing seasonality, what I said was we expected core performance for the Medical business of about $60 million, which we did. And then I did the simple math, which is if you take that core performance and multiplied times 4, that gets you to the $240 million, right? That’s just the business operating consistent with the new norms and execution against the initiatives. Then we layered on — while some of the inflation mitigation is already in the $60 million in Q4, we said there’s another $100 million over the course of the year as well over the course of ’24.

And so we laddered that on. That got us to $340 million. And then we said there’s another $60 million contribution without reference to seasonality from the other parts of the medical improvement plan, the simplification and cost optimization, the contribution of the growth businesses, as well as the Cardinal Health brand volume. And so that’s how we got to the $400 million without reference to seasonality.

Now the important part of the further color we gave at Q4, which we didn’t really view as an update is just the fact that we don’t — we want to make sure people understood that our largest part of the Medical business, the global medical products and distribution business is at a seasonal low point in our fiscal Q1. That’s driven by things like holiday schedules in our international business. It’s driven by the volume trends within our U.S. business. It’s driven by the fact that from a profit perspective, the costs that we’re incurring back in December, January, February, which are the highest cost environments, as you can imagine, we actually recognize that in our fiscal Q1 as well. And so that brings it down as well. We didn’t want the Street to not realize some of the key drivers that we’re carrying forward.

Then if you ladder on to that, what Jason talked about with respect to we’re building Cardinal Health brand, right? That benefit is significantly back half loaded and certainly following year loaded as well, along with the inflation mitigation, which is current and active, but builds over time, you get to a place where we have a plan which is significantly back-half loaded for reasons, which as we look at it, our eminently explainable and understandable, but we want to make sure there was awareness.

Eric Coldwell

Side note, 30 seconds or less, could you identify two, three new Cardinal Health brand items looking to grow? Or is it more just penetrating existing portfolio? I think you’ve highlighted some new Kangaroo lines and different things, I think, for the audience and some faces who may not be as familiar with your individual proprietary products.

Jason Hollar

Okay. So how I would think about it is we’re not looking to expand into new categories. We have a couple of dozen key categories for us. And within there, we have our leader categories, which are areas like you mentioned, some nutrition products. So that’s where our R&D is focused on areas like nutrition, compression and surgical gloves. Those type of leader categories that make up a smaller part of our revenue, but a larger proportion of our margin. We were very intentional about the segmentation of our business and focusing that innovation where the market is growing faster and we have a greater right to win.

Eric Coldwell

Nutritions like interval feed.

Jason Hollar

Yes. Yes, that’s right. New launch that you must have seen about there — recently for the thicker type of [Multiple Speakers]

Eric Coldwell

I’m not smart enough to model with your products individually. I just want to be able to say what they are. So PPE, I know, look, probably the most boring topic out there at this point. It just — it feels like this horse has been beaten 1,000 times over, but you did cite that once market fully stabilizes, which whenever that will be, that you’re already back to somewhat of a normal margin across these categories.

I’m just not sure what a normal margin is for Cardinal, right? It’s this massive business tucked inside of an even more massive organization with 1 million changes, a medical improvement plan, there’s a lot of moving pieces. And when I look at your limited competition set and where their margins have been over time, it’s ranged anywhere from quarters with losses to quarters with low to mid-20s operating margins in similar product categories. What is normal for PPE?

Jason Hollar

So for PPE, I love how you actually asked the question, PPE for us should be boring. That is my objective is to make it boring. We have exited…

Eric Coldwell

Pre-pandemic, it was 2% or 3% at most of the markets purchase.

Jason Hollar

That’s right. And it’s always been a lower margin product for us. It’s a commodity product. So it’s never been — it’s important for our customers, right? We need to have the full capabilities of providing all their needs in the medical products, but it’s not a product category that we anticipate to be a high-growth, high-margin type of product category. So when we talk about normalized, we’re saying those margins have gotten back, which in this case, is actually improving to low margin. So it’s a small part of our overall portfolio.

And within that, we had — the challenge has been our cost was too high. We procured way too much product at the height of the pandemic when the supply chain was elongated. So we’ve had to burn down that inventory over the last 18 months or so at a higher cost. So what we now have in our balance sheet is much lower cost of goods sold. And then the prices have come down over that same time period. Volumes have come down as well, but that volume impact is much less meaningful to us now. We care less about the volume because our margins are relatively low.

The key is to make sure we do not allow ourselves to get in the situation of having higher cost and product again when prices are unstable. We just can’t have higher-cost product and a lot of that product. So what we’ve done about that is we’ve changed our sourcing. We’ve diversified our supply base. We have more near shore, so a lot less out of Asia, more nearshore. I wouldn’t say there’s a lot onshore, but that gives us access to low cost options, much lower level of shorter supply chain. And we’re going to be very careful if there is further spikes as to the risk that we take as an organization when you can’t control all aspects of the logistics.

So — but the key is — and I’m sure we all remember the $300 million charge we took a few years ago. The biggest piece of that was our non-medical-grade PPE. We got rid of that business. We exited that. That was the first couple of weeks I was in the job. We got out of that business and that risk was even lower margin, and we now no longer have that exposure, so there’s a lot of things that we have done and will do to ensure that it stays boring.

Eric Coldwell

When you say nearshore, we’re talking Mexico, under…

Jason Hollar

I would say Central America.

Eric Coldwell

Puerto Rico — kind of markets.

Jason Hollar

I don’t think Puerto Rico is real big for PPE, because it sits little bit higher, lower cost, essential America, You see more in places like Costa Rica, Honduras.

Eric Coldwell

Are these controlled relationships? Do you have dedicated space? Or I’m just curious what in the past, not under the purview of various parties on the podium here today necessarily. But in the past, the company had situations where QA/QC got out of control and manufacturing partners would basically go off and do whatever they wanted. You had a medical gown issue a couple of times.

Jason Hollar

So we’ve absolutely changed our processes since then. And that was before I stepped in this role. We brought in significant senior leadership. We also created a risk committee with our Board. So they have a very tight purview on this as well. Our internal process are substantially different. There’s never going to be a zero risk type of environment, but we’ve taken specific actions to ensure that we have more visibility, insight relationships with that supply base to ensure that we can keep it at a lower risk.

Eric Coldwell

I want to come back to strategic review, but wrap with a firm level question here. So you’ve completed the preliminary enterprise level review, I think, was the last update. The preliminary review at the firm level was completed. Correct me if the wording is wrong hereon, not — maybe you look like you don’t know where I’m going with this.

In Pharma, but I think there was also a comment around Investor Day, maybe I’m wrong, but that just the overall preliminary review had been completed. You finalize Pharma, of course, that’s — we agree on that. You’ve taken a number of steps to reinvigorate the company since the initiative began, yet you extended the agreement with Elliott for another year.

I personally thought that was almost a natural outcome based on what I thought I knew about Elliott’s role here and what they were intending to do, the amount of work there was to do. And my sense is that this wasn’t any big surgical exercise coming that this wasn’t just lob off medical and be done with it. It was about fixing the company for the long haul. So that’s a lot going into this question.

Jason Hollar

There’s a lot there.

Eric Coldwell

What’s left? And then look, you have a medical improvement plan. You’re tracking toward it. We’re in fiscal ’24 now. Pharma is done in terms of the review. So what’s left?

Jason Hollar

Let me throw another cliche at you, Eric, and that is it really is the journey, not the destination, and because we did a lot of work before the Business Review Committee was established, we sold off several businesses for several billion dollars and had some clear parts of our company that we’re not a good strategic fit. So we have completed the review on the Pharma segment. And we made some changes as a result of that.

Within Medical, how I would think about it is there is still work to be done. Now when you — the way you asked the question, the way a lot of people think about it is very focused on the strategic side of it, which, of course, is incredibly important [Multiple Speakers] synergies, yes.

Eric Coldwell

Well, that was actually my — that was my follow-up. Is it tactical? Or is it strategic at this point?

Jason Hollar

But I think you have to go deeper. When you think about the type of criteria we evaluate for any business review and this is not specific to Medical business, this is how we looked at every part of our company and how we continue to look at every part of the company is. You got to look at the strategy, the synergies, dissynergies, how they all work together, do they create more value together or separate. But you also have to look at the underlying operational performance of that business because that does dictate if you do something, how you do something, when you do something, and then you also look at the capital markets. That is a clear distinction. And of course, we all know the capital market has been all over the place for the last few years.

So with the Pharma business, very strong performing, very predictable business. It was a lot easier to look at the performance aspects of the capital market aspects with that business. These three criteria all interplay and interconnect in different ways. And when you have a business that’s in a turnaround as we are with the Medical business, you just can’t complete all that review because as I’ve highlighted before, no matter what that right long-term answer is for the Medical segment, we know it’s very clear what needs to be done under all scenarios in the near term, and that’s the execution of the medical improvement plan.

We are the right organization to get that business turned around. We’re staying focused on that. And the Business Review Committee has been very helpful over the last 15 months now. And so there just doesn’t seem to be any reason to change that. It was my idea to bring that forward. It’s because it works well. And of course, the Board immediately said, yes, let’s — this is a great a combination of different great minds and great relationship. So let’s keep that activity going.

Eric Coldwell

All right. I’m on — in the last minute, I didn’t see any investor questions on the iPad. So I’m going to go back to Aaron to wrap this up. Probably the easiest low-hanging fruit, low ball question, you can possibly get capital deployment. The sector has fantastic cash flow, fantastic balance sheets. Your cash balances are collecting nicely in the bank. You’re all buying back shares. This is a good healthy place.

I’m curious very specifically where the nuance has changed between everybody’s colloquial balanced approach because everybody says the same thing, to be fair. What’s changed? What’s nuanced right now in the moment? And how is the strategic review altered what you otherwise would be doing? I threw it Jason at Investor Day. Why not go buy some direct-to-patient companies, your Cardinal Health at-Home business is cranking. He gave me a response that I really appreciated. But I’m curious, what would you do different if you didn’t have other things happening right now?

Aaron Alt

Look, I guess all I can say is this. We — as you pointed out, we ended the year with $4 billion on the balance sheet. We committed to adjusted free cash flow of additional $2 billion over the course of this year and indeed the next couple of years as we carry forward. And — but I hope you took away from Investor Day and indeed our Q4 earnings call, as well as we’re going to do exactly what we said we’re going to do, which is we’re going to invest in the business.

We are going to invest $500 million this year. It’s about what we did last year from a CapEx investment perspective. We’re going to return at a baseline — sorry, we’re going to protect the investment-grade rating. We’re already there, and so we don’t need to repay additional indebtedness to preserve our BBB, BAA rating, but we’re also going to return capital to shareholders.

And from a baseline perspective, that’s about $1 billion from a baseline perspective, call it, $500 million from a dividend, which we’ve raised more than 30-years in a row, as well as $500 million of committed share repurchase in fiscal ’24.

In the lens of doing what we said we’re going to do, we said we were going to do an incremental $500 million in Q4, and you would have noticed we did just that, right, we’re able to talk about that in our Q4 earnings. So we’ve committed to $500 million this year. And then after that, it’s really how do we further enable the growth strategy and the turnaround strategy that Jason has laid out. And so we’re going to start with are there incremental dollars necessary from an OpEx investment or from an operating plan perspective? Stay tuned, right? Is there M&A, right?

Specialty is a core focus area for us from that strategy and then we’re going to go there. And then we’ll productively talk about further return of capital to shareholders. And you’ll have to bear with us as we go quarter-by-quarter on the updates we’re able to provide.

Jason Hollar

Just real quick, I would only add. We laid it out our capital deployment in terms of different designations different buckets, we created that opportunistic bucket so that you can have visibility to how we’re thinking about that. So we do think there’s a table stakes. With the cash flow that you highlighted, we are very pleased with our ability to generate that type of cash and we wanted to be real clear with that minimum level of repo that we would expect each year so that you can at least understand how we’re thinking about that. That’s some significant new information to be able to try to get inside of our heads in terms of what that looks like the information at the time of the Investor Day.

Eric Coldwell

Strong cash is always a good problem to have, that’s figuring out where to deploy it.

Jason Hollar

We’ll be responsible.

Eric Coldwell

So we’ve got a couple of minutes over. It’s fine. I’m staying in this room with Charles River and in the Session 3 and Session 4, we have Vor Biopharma and Vistagen Therapeutics. So with that, everyone, please join me in thanking Cardinal. Jason, Aaron, Matt, thank you guys so much. Really appreciate it.