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The supply chain crisis has not eased for Cardinal Health.
The time of dreams
More than two years into the pandemic, the supply chain crisis hasn’t abated since
Cardinal Health
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drug distributor and manufacturer of medical supplies. Shares fell 5.1% on Thursday after the company reported fiscal third-quarter results that beat Wall Street expectations and cut its forecast for the rest of its 2022 fiscal year.
Earnings from Cardinal’s medical segment (ticker: CAH), which manufactures and distributes medical supplies, were down 66% from the prior year quarter; the segment’s profit margin was 1.5%, compared to 4.2% a year ago.
These results lowered the company’s earnings, which were $1.45 per share on a non-GAAP diluted basis, below analysts’ consensus estimate of $1.52 and down from EPS. from $1.53 last year.
The significant challenges facing Cardinal’s medical supplies business highlight the ongoing crisis in the supply chain and how this crisis will drive up costs for healthcare providers. On an earnings call, Chief Financial Officer Jason Hollar said inflationary and supply chain stresses on this segment of the business could be even higher in the company’s 2023 fiscal year, which starts in July, than in 2022.
In an interview with BarronsCardinal CEO Mike Kaufmann said supply chain costs remain high and the company will raise prices for the medical supplies it sells.
Shipping containers that used to cost “a few thousand dollars” each now cost “up to $20,000 per container,” Kaufmann said. “They are still very high, probably at least 8 times at this point.”
Kaufmann also said the costs of materials used in their medical supplies have increased, particularly the prices of petroleum-based materials like polypropylene. Increases in transportation and labor costs in the United States also had an impact, Kaufmann said. Cardinal typically has multi-year contracts with its medical supply customers, which means the company hasn’t had the ability to raise prices to meet rising costs. This is changing.
“We instituted price increases on March 1, we have another round of price increases in July, and then we expect to see more benefits steadily as these are annualized” over the next the company’s fiscal year, which begins in July, Kaufmann said. . More price increases could come next year, he said.
The company cut its guidance for this fiscal year, saying it now expects non-GAAP earnings per share of between $5.15 and $5.25, down from its previous outlook of between 5. $15 and $5.25. The company now expects a 45% to 55% drop in profits from its medical segment, down from a previous forecast of a 30% to 45% drop.
The company’s pharmaceutical segment, which distributes prescription drugs, was unaffected and the company continues to expect mid-single-digit percentage profit growth in this segment. This is because Cardinal, like other drug distributors, effectively takes a percentage of the list price of the drugs it distributes as a fee, thereby shielding the company from the cost pressures that drugmakers may feel.
Kaufmann attributed the change in the 2022 forecast to both the supply chain and inflationary impact, and a drop in demand for personal protective equipment, or PPE. “I’ve spoken to customers, a lot of customers are very knowledgeable about EEP,” he said. “And so what we’re seeing is that some of the declining orders are for purchased or manufactured PPE items.”
For fiscal year 2023, Kaufmann said he expects the impact of inflation to be higher in “absolute dollar” terms, although offset by higher prices.
“The challenge we face as a business is just one significant inflationary element affecting our medical products and distribution business,” Kaufmann said. “So when I look at the performance of other businesses, I look at what we’re doing to deploy capital efficiently, investing in our growing businesses. I still feel very good about where we are headed.
Write to Josh Nathan-Kazis at josh.nathan-kazis@barrons.com
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