Hello, and welcome to the Cencora's First Quarter 2024 Earnings Conference Call. My name is Lisa and I'll be the Chorus call operator for your call today. [Operator Instructions]. I would now like to turn the call over to Bennett Murphy, SVP, Head of Investor Relations and Treasury. The floor is yours. Please begin.

Good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 first quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.cencora.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed permission of the company. You'll have an opportunity to ask questions after today's remarks by management. We ask you to limit your questions to one per participant in order for us to get to as many as possible within the hour. With that, I will turn the call over to Steve.

Thank you, Bennett. Good morning, and good afternoon to everyone on the call. Cencora delivered an exceptional start to fiscal 2024 with revenue up 15% year-over-year to over $72 billion in the quarter and adjusted earnings per share up 21% year-over-year. Given our continued performance and execution, including our strong first quarter results, I am pleased that we are able to raise our fiscal 2024 full year guidance. The strength of our business is bolstered by the execution of our teams and powered by our commercial partnerships and strategic positioning. Teams across Cencora continue to prioritize customer centricity and enhance the services we provide. We are capitalizing on the positive trends across our business, creating value for our customers and stakeholders, and building on the pivotal role we play in the global healthcare system. Our core in pharmaceutical distribution and breadth of higher margin, high-growth businesses linked with our scale has provided us with a unique expertise which positions us to support both upstream and downstream partners to achieve the best outcomes for patients. Our leadership in specialty has spanned 20 plus years, and over that time we have built an unparalleled suite of services that connects manufacturers and providers. Strategically positioning ourselves in the center of the specialty market, we have created opportunities to partner with leading innovators early in the drug development process through scientific development and consulting, safety and quality compliance, and clinical trial support and logistics. Our downstream services enhance provider efficiency allowing physicians to spend more time with patients, and includes patient experience insights, as well as operational and financial solutions. Specialty medicines and services will continue to be a key area of focus for Cencora as ongoing innovation and increasingly complex therapies drive opportunities for growth and allow us to demonstrate the differentiated value…

Thanks, Steve. Good morning, and good afternoon, everyone. Before I turn to my prepared remarks, as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. For a detailed discussion of our GAAP results, please refer to our earnings press release and presentation. Cencora delivered remarkably strong results in our first quarter of fiscal 2024 as our team capitalized on the opportunities provided by our pharmaceutical centric strategy, commercial partnerships, robust infrastructure, and team member execution. In the quarter, this drove over 20% growth for Cencora's adjusted operating income and adjusted diluted EPS. Our strong performance in the quarter and expectation for continued execution and growth in the balance of year leads us to meaningfully raise our full year fiscal 2024 guidance. I'll now turn to a review of our consolidated first quarter results starting with revenue. Our consolidated revenue was $72.3 billion, up 15% with strong revenue growth in both segments. We continue to see good utilization trends broadly across our business in addition to continued growth in sales of GLP-1 products, particularly in the U.S. Excluding the increase in sales of GLP-1s, our consolidated revenue growth would have been 12%. Consolidated gross profit was $2.4 billion, up nearly 13% with double-digit gross profit growth in each segment. Consolidated gross profit margin was 3.31%, a decrease of 7 basis points. Similar to the past several quarters, our gross profit margin comparison continues to be impacted by sales growth for low margin GLP-1s and less volume of government-owned COVID treatments. The impact of these two items was partially offset by the full quarter contribution from the distribution of commercial COVID-19 vaccines, which have higher gross profit margins given the complexity associated with the products. Consolidated operating expenses were $1.5 billion, up 8% due to…

Thank you. [Operator Instructions]. First question comes from Stephanie Davis with Barclays. Your line is open. Please go ahead.

Hey guys, thank you for taking my questions and congrats on a very strong start to the year. I was hoping you could tell us more about the strengths in the core business. You saw outsized operating income growth, so it looks like there was a lot more than GLP-1s driving the beat. So anything else to call out there in the sustainability? And a quick follow-up on the other side of the business, just given some of the geopolitical turmoil, is there anything you could call out on potential international shipping headwinds? Thank you.

Sure, Stephanie, thanks a lot for those questions. And with regard to the beat in the core business and the sustainability kind of, let me start out with some of the kind of the drivers of the Q1 beat and I'll call out five things. First, commercial COVID-19 vaccines. We had very strong performance there during the first fiscal quarter. Second is just the continued strong pharmaceutical utilization trends resulting in favorable volume trends broadly across our businesses, including in specialty. Third thing I'll call out is just particularly strong execution by our Cencora team members broadly across our businesses, with our key businesses performing well. And then a fourth thing, and this is key, we had very good performance on operating expenses and good operating leverage as a result of both its OpEx focus and the volumes that we saw during the quarter. And then finally on pricing, including some continued signs of moderating generic deflation during the quarter. And so how do these benefits impact guidance and how sustainable are these benefits that I just called out? Well, I'd say that the first one commercial COVID-19 vaccines, we expect these sales of commercial COVID-19 vaccines to come down very significantly in Q2 to Q4 of fiscal year 2024 compared to Q1, perhaps with an increase at the end of the fiscal year in the month of September as seasonal vaccine activity begins picking up. And as I said in my prepared remarks, if we exclude the contributions from both commercial COVID-19 vaccines and the exclusive COVID treatments, our operating income growth would have been 12% in the U.S. Healthcare Solutions segment in Q1 versus the 22% that we reported in the U.S. And with regard to the other positive trends that I talked about, we expect these positive trends to continue across our business throughout the fiscal year, but perhaps not at the same level of outperformance as in Q1 and this is reflected in our guidance. And an example I'll give there is operating expenses. On the May call last year, we talked about some operating efficiency initiatives that we took in April of last year, and they were very effective, and as we can see in our results, this quarter with 8% operating expense growth compared to 13% gross profit growth. And kind of the comps get a little bit harder on OpEx in the back half of the year. And so that's one of the things where we would continue to expect to have outperformance, but perhaps not the same level of outperformance. But having said that, I just want to finish by saying we feel really good about the ongoing strong performance of our businesses and our guidance. So thanks for asking the question. And then there was a second part of the question was that on shipping?

Yes. I could answer. I think it was more to do with geopolitical risk in Europe if I understood. And I would just say, of course, we don't have a crystal end, but I would just say that our business has proved over many geopolitical events, many economic crises to be very resilient, in fact among the most resilient of businesses. As long as patients keep needing prescriptions, as long as pharma companies keep on innovating, as long as payers both government and commercial payers keep paying, we've proven to be very resilient, very inelastic in demand for our core services. It can get a little bit different in commercialization services depending on what's going on with investments in pharma life cycles. But overall, I'd say we tend to be the most durable of businesses. Jim, you want to add something?

Yes. I'll just say with regard to shipping specifically, we don't have anything specific to call out, I mean, our teams are experts in this and are very focused on it. And like some of the things that we actively focus on are monitoring any shipping disruptions and working closely with our manufacturer partners and our provider customers to analyze and ensure sustainability of supply. And like I said, we don't have anything specific to call out other than to say our teams are experts in it and very focused on it, Stephanie.

Next question, please.

Our next question comes from Lisa Gill with JPMorgan. Your line is open. Please go ahead.

Yes. Thanks very much and good morning. Steve, first, I wanted to start with the International Business, I mean, you called out Global Specialty Logistics as being part of the strong performance on the international side. Can you maybe help us to understand what are some of the keys to that outperformance? Was there anything that was kind of one-time in the quarter? And then just as a follow-up, Jim, I was surprised to hear you say generic price, lack of deflation or stabilization in generic price was number five. Can you maybe just talk about what you're seeing in the environment there, because I would have expected that that would have been maybe a little bit more of a key driver when we think about the operating profit?

Yes. So on our logo business, and of course, our World Courier business which does more specialized logistics, are both performing very well. And we expect to see continued growth in those businesses. We have a logo closely linked with our traditional RCS business in the U.S., and we're getting away from those names as we move to Cencora and global programs. But those businesses continue to be of significant interest to manufacturers. They help with the commercialization process. They provide efficiency both for large and small manufacturers and are a key element of our growth. In Europe, we have some stronger competitors there. And it's a more established industry, I'd say. And of course, every country is a little bit different. But as a generalization, I'd say we have stronger competitors there. And certainly Cencora intends to raise the bar. Our leadership is very focused on becoming the leader in that industry in all the major markets we're in. And you'll continue to see us making progress because we have a great understanding of the whole healthcare ecosystem that is hard for others to have. We have it from the provider, the manufacturer perspective, the health system perspective, and we have it across so many different countries and healthcare ecosystems that I think it just gives us some business intelligence that is hard to replicate, and you'll expect us to continue to do very well in those areas. Jim, the second part was for you.

Sure. With regard, Lisa, to the moderation of generic deflation, and as we've indicated over the last several months, there's been a moderation in generic deflation, particularly in certain pockets of the market and we've certainly benefited from that to the extent that it's been a smaller headwind. And if the moderation in generic deflation sustains and is more broad, it would really be a benefit to us -- continued benefit to us as the annual headwind would be smaller. In terms of ranking them, just one point I want to make, just the volumes were so strong this quarter with 15% revenue growth and, as you well know, when you can have 13% gross profit growth and 8% OpEx growth, that really is kind of a big driver. That operating leverage is a big driver of operating income growth. And so that volume is driven by a number of things, including commercial COVID-19 vaccines were a really good benefit for us during the quarter. And so I really wouldn't make too much of the ranking though. And the generic moderation trends were certainly positive for us during the quarter. Thank you, Lisa.

Our next question comes from Eric Percher with Nephron Research. Your line is open. Please go ahead.

Thank you. Jim, the gross profit was strong despite the downward pressure you mentioned from GLP-1s and government COVID treatments. Can you remind us when the -- how the GLP-1 volumes and also the gross profit have trended over the last year and specifically when the shift in sell side discount occurred, how that plays through for the remainder of the year and whether there's any impact on generic discounts built in there?

Yes. And so let me kind of address that with regard to your questions on kind of the GLP-1 growth and the GLP-1 profitability and the impacts it has on our business. And as we talked about, we've continued to see strong growth in drugs in the GLP-1 class. The revenue this quarter grew by $2.2 billion versus the first quarter of fiscal year 2023. As I talked about in the prepared remarks, our consolidated revenue was up 15%. And if we exclude the increase in GLP-1s, our consolidated revenue growth would have been 12% during the quarter. And then with regard to profitability, my comment there is consistent with what we've said in the past. GLP-1s continue to be more impactful from a revenue growth perspective and are minimally profitable for us given that they're a brand with cold chain requirements also, Eric.

Next question, please.

Our next question comes from Daniel Grosslight with Citi. Your line is open. Please go ahead.

Hi guys, thanks for taking the question and congrats on the strong start here. On the international side, you called out strength in your Canadian business. I know you have a strong vaccine distribution business up there, but I'm curious if it's vaccines -- COVID vaccines there that's driving that strength, or if there's some other piece of the business on the Canadian side that is performing well. Thanks.

Yes. No, thank you. Nice to get a question about Canada, which has been a strong business for us a long time. We did several acquisitions there many years ago, and we have an integrated business model there. The business goes by the name of Innomar, and it's both distribution on the specialty side, we run some infusion centers which are really part of a manufacturer commercialization. We have a lot of patient programs. We do 3PL, and it's a health system that is very relevant to our expansion into other countries. And certainly, if you look at the value and the way the Canadian government thinks about new products, and that it's very illustrative of the types of pharmacy and healthcare models we see in Europe. So it's been a good formative business for us and one that we continue to do well in. I would also say that we have an entrepreneurial team that understands the market there that's pretty stable, that’s -- have been with us for a long time. Many of them are actually helping us now in international development, so good business for us and really punches outside of their weight and especially marketing Canada and having a global impact for Cencora now. So thanks for the call out. Jim, you want to add something?

Yes. I'll add one minor point in response to your question. There was growth in vaccines in Canada during the quarter, but it was a small part of the growth, really the growth was driven by the core part of the business, which performed very well during the quarter.

Our next question comes from Elizabeth Anderson with Evercore ISI. Your line is open. Please go ahead.

Hi guys, thanks so much for the question. One thing that I wanted to explore a little bit more. You obviously said that you're seeing nice performance from the PharmaLex business as it continues to integrate into the core business. One thing we've been hearing from the more the manufacturer side of the equation is just sort of maybe a little bit of reduced spending on the commercialization side. Can you talk about how you're seeing the impact of that in the business? Is it something that you sort of maybe a headwind later in the year? Does it present additional opportunities as they seek to outsource additional services? Can you help us sort of think through that as we think about the rest of the year? Thank you.

Yes. It's a very good question. Certainly, I understand that. I mean, investment cycle, in life cycles, in the -- in life sciences and the approval cycles, we've had experience with this through businesses like Lash and even in my early days, RCS, as we look at products getting approved or not getting approved, and as you look at the VC funding cycle and as you look at M&A from big pharma and just smaller pharma. And I'd say that the market has been a little bit softer than in the last year to year-and-a-half with some of the geopolitical and inflation and market pressures. But you are seeing a -- I think there's a real thesis of a tremendous investment in innovation, precision medicine, cell and gene therapies, which Cencora is uniquely positioned to capitalize on, and you'll see us continue to benefit we spending just getting ready now for our March strategic plan presentations to the board, we spending a lot of time looking at our commercialization services capabilities, how do we become the best-in-class in all the various areas that we're in, including the four main segments that PharmaLex is in, development, consulting, regulatory affairs, pharmacovigilance, quality management and compliance. And we think that there's a real role for Cencora globally in those launches, in those commercialization services. And you'll see us continue to invest. We're happy with the team we have in place. We're happy with the U.S. presences we have there. And you'll see us continue to benefit and we'll be a little bit affected by the economic cycles. But there's a global trend here, which is a long-term trend, which we intend to capitalize on.

We now turn to Allen Lutz with Bank of America. Your line is open. Please go ahead.

Good morning, and thanks for taking the questions. One for Jim. We're about a month into the year, just wondering how are brand price increases coming in versus expectations? Is there anything to call out there? And then what's embedded in the model for mid-year price increases? Thanks.

Yes. And so let me talk about brand price increases and what we've been seeing. The January price increase activity was broadly in line with our expectations. And I'll also say that, as we've said in the past, that brand inflation is less important for Cencora than it once was since well over 95% of our brand buy side dollars are fee-for-service. And then what I'll just say with regard to our kind of expectations and what's in the model for the balance of the year with regard to brand pricing, we don't have specific guidance metrics on drug pricing, but our expectations that we have in the model or that will be generally in line with the changes we've seen over the past couple of years. Thank you for the question.

We now turn to Erin Wright with Morgan Stanley. Your line is open. Please go ahead.

Great. Thanks. I have two questions here, if that's okay, but on GLP-1s, is there any way you can achieve better economics associated with GLP-1s, or is it just simply a function of the more complex logistics and there's nothing more you can do there? And then on Animal Health, you called that out as strong. What are you seeing in terms of volume and pricing trends across both companion and production in animal, how's the landscape evolving, for instance, in terms of alternative channels? Thanks.

Yes. Thank you for the question, Erin. On GLP-1s, I would just say that in the long-term, some of the formulations are going to switch. It's such a big category that as we look at renewals of contracts and we have on the sell side, we have somewhere usually around three to five years on those contracts. This is a different category that we would work with the customers to understand what our mutual requirements are. Certainly it's a category that is having a weight on those contracts. It's of such a serious top-line significance and has impacts on the different contractual requirements that we have including mix of products, et cetera. So it obviously will come up in any discussion. We also intend to do more work with manufacturers. We do think that from a clinical perspective, these are products that are interesting at the pharmacy counter, and we're encouraging our independent pharmacists, for example, to stay involved in the dispensing of these products. So it's certainly something that we are very mindful of. And we would expect that over time, you -- as these sell side contracts come up, that you'll see them become more typical brand economics than the headwind, which we've experienced in the early days. Hopefully, that's the aspiration. That's what we would hope to get to. Jim?

Sure. Erin, with regard to your question on Animal Health, our Animal Health business had a particularly strong growth in the quarter and it had very good performance. And it also benefited from an easier comparison, given the industry-wide pressures in the prior year December that we called out last year. And so particularly strong operating income growth and also very good performance from a revenue growth standpoint. It had low-double digit revenue growth in the quarter, with growth in both the companion animal business and the production animal business with growth being stronger in the companion animal business. And then one just final thing I'll say is that we've seen just very strong execution by our Animal Health team, just as we have by all of our teams across Cencora. So thank you for that Animal Health question.

We now turn to Charles Rhyee with TD Cowen. Your line is open. Please go ahead.

Yes. Thanks for taking the questions. Steve, obviously a lot of discussion recently around potential changes on how pharmacies are reimbursed by payers and moving to a cost plus model. And I think the argument here is that that industry is at a tipping point where maybe there's less potential for generic substitutions to offset sort of the reimbursement pressures pharmacies face by payers. From where you sit as a key partner to both chains and particularly independent pharmacies, could you comment maybe on what you see in the market in terms of the health of your retail customers? Do you think we are reaching sort of a limit to what pharmacies particularly independents can bear? And if the industry does move to a cost plus model, how might that impact the way you interact, or how might that impact your business and how you interact with the retail customers? Thanks.

Yes. So I think we always one of the things that I learned early on in my career is that we always have to be very mindful of reimbursement for our provider customers. Of course, we do a lot of work with independents, in particular with Elevate, PSAO, and we've been saying for a while that some of the rates are not manageable. So to see an industry leader step up and really talk about changing the model, I think is very important. We would like to see a fair and transparent reimbursement system for all categories in pharmacy, include -- especially community pharmacy, and especially including independent pharmacists who we feel a special need to advocate on behalf of. So it's early days. It's encouraging that there is some talk about adoption of the cost plus model across the industry, and we'll see how the industry responds and payers respond, et cetera. But we believe that this is a sign that there does need to be an improvement in the base profitability of community pharmacists, which is encouraging.

Our next question comes from Eric Coldwell with Baird. Your line is open. Please go ahead.

Thanks very much. A number of mine have been hit, but I might have two small separate ones. First on international, very strong underlying performance. AOI up over 20%. FX foreign currency, I'm curious if you could parse out the impact of Egypt from both a revenue and AOI standpoint, because I believe your AOI would have been up even more X the year-over-year headwind in Egypt. And then secondarily, just a quick one on GLP-1s. I know you don't guide to specific revenue or revenue contribution growth rate, but when we look at your raised revenue target for the year, could you give us a sense on how much of that was or was not related to GLP-1 outlook, i.e., has your GLP-1 growth expectation changed since the last update? Thanks so much.

Okay. So let me start out with Egypt, Eric, and we haven't specifically disclosed the size of that business, but let me say, yes, you're absolutely right. Our operating income growth would have been higher in the quarter if we had backed out Egypt, for instance, from the first quarter of last year. But let me kind of give you some data that I think would be helpful, as you do your models over the course of the year. The Egyptian business was profitable in the first fiscal quarter of last year, as we just referenced, and then was essentially flat in Q2 and Q3. And then it had a loss in Q4. And so for the full year, it was a slight -- a slightly profitable business in fiscal year 2023. And so it really doesn't have, if you look at on a full year basis, it doesn't have much of an impact on kind of full year growth rates in the International segment. But as I said, during the first quarter, the growth would have been a little bit higher if we included or if we backed out Egypt from last year. And then with regard to kind of U.S. Healthcare segment and GLP-1. So the U.S. Healthcare Solutions segment in revenue growth, we now expect 11% to 13% growth, up from our previous expectations of 7% to 10% growth. And the new guidance range reflects the strong revenue growth we saw in the first quarter, including the year-over-year growth of GLP-1s and continued good growth for the remainder of the year, driven by expected broad based prescription utilization trends. And so GLP-1 essentially contributed 3 percentage points of growth in the first quarter. And we expect just kind of continued good growth throughout our business during the balance of the year and feel really good about the business overall and really good about our guidance. Thanks.

Our next question comes from George Hill with Deutsche Bank. Your line is open. Please go ahead.

Hey guys, thanks for squeezing me in and I'm going to kind of get into a niche topic here with CenterX, Jim. I know that you guys have that EPA business and we've seen kind of a surge in demand for EPAs, both as it relates to GLP-1s and the increasing use of biosimilars. So we'd just love to hear you talk a little bit about how that business is performing relative to kind of the GLP-1s in the biosimilar space.

Yes. So I'll say, overall, we feel really good about our prospects in global pharma services and patient services and the sorts of things that CenterX does. And we feel just very good overall about the growth prospects there and really don't have any comments beyond that other than to say kind of global pharma services. And those businesses like CenterX are just a key part of our growth this year and over our long-term guidance also.

This concludes our Q&A. I’ll hand back to Steve Collis.

Thanks, everyone. I appreciate your patience. We ran a little bit long today. So this wraps up our call for today. I just have to make a little note that at the end of our fiscal year 2023 call, I received a little pouch and it was 50 quarters from my predecessor to commemorate 50 earnings calls. So once we're counting, 51 is clearly one of the most memorable and exciting quarters that we have presented, and even more so to do it under the new call ticker symbol. While we have a lot of work ahead to continue to deliver on our purpose and the potential of Cencora, we are really proud of the work our team members are doing to position us successfully and strategically at the center of pharmaceutical based healthcare. Thank you for your time today.

Ladies and gentlemen, this call has now concluded.