Cencora, Inc. (COR) Earnings Call Transcript & Summary

All right. Good morning, everyone. Welcome back to the final day of the conference. Thank you so much for making it here and for surviving this long. I am absolutely pleased to be kicking off the day with Cencora. They're one of my top picks for the year, and we have some very special guests on stage. As you know, we have the CFO, Jim Cleary. He's been here for a while, but we have some incoming and outgoing. I love maybe to kick this off, a little recap from you as you've been -- you've kind of been a bookend for my career looking at [indiscernible] kind of a little sad. And then I'd love to hear from you, Bob, a little bit more about how your arc has been. You've been at the company for a while and what your vision is.

Well, thank you. Thanks for having us. And again, thank you for your wonderful research report. We appreciate your support of Cencora. I think most of you know us, and I also appreciate you being here on the last day of the conference. We had our shareholders meeting on Tuesday, and we wanted to make the important announcement and the wonderful announcement about the transition that we'll be making on October 1 to Bob becoming a CEO and becoming the third CEO in AmerisourceBergen, now Cencora's history. So very exciting day. The good news I can just tell you is that it was really received well internally. I don't think you want something like this to be too much of a surprise. One of my colleagues was relaying a story how she was called into an executive meeting and the CEO and founder of the company said, this is the gentleman who's taking over CEO on Monday, and she said it was just awful and very flat. We had a really positive celebration. We had very -- sort of no drama. It was an orderly change of power. So -- but it's been wonderful being a part of Cencora and growing our specialty business in the 90s. Then being part of AmerisourceBergen merger in 2001. And that's when the specialty group business really, really took off. And also at the same time, we had the golden age of generics. And then being elected CEO in 2011 and serving until 2016, just the CEO and then as Chairman and CEO. So I've had the most incredible career, and it's been a privilege working at Cencora and with the team members there and doing all the wonderful things we do. We've expanded the business tremendously. During COVID, we had probably some of our best years with the programs we were able to do to help with the antiviral therapies, get them out into the really impacted areas, the work we did on vaccines globally, so many different countries, and we acquired Alliance Healthcare and subsequent to that PharmaLex. When I think about the Barclays conference, I was elected CEO, as I said, in 2011. In 2012, we acquired World Courier, first big acquisition since I was CEO, and I nearly had a -- one of these rooms over here, we were having a lunch in. And nearly -- I had some people walk out, some people accusing me of Empire Building and why didn't I just carry on with the self-perpetuating LBO of the company and we thought that you were carrying on in the same legacy. It was quite extraordinary. So I have some PTSD from being in this hotel, but since then, it's been really good. And so -- but I wanted to give you all a chance to get to meet Bob as well, and I think most of you know him quite well. So Bob, why don't you talk a bit.

Thanks, Steve. Thanks, Stephanie. Hi, everyone. First and foremost, I'm incredibly honored to be able to succeed Steven in this position. He's a legend not only at Cencora but in our industry and clearly very large shoes to fill. For those of you who don't know me, I -- as Stephane said, I've been around AmerisourceBergen and Cencora for a long time. I came in through an acquisition in 2007 and have worked really in every part of our business. I'm currently the Executive Vice President and Chief Operating Officer; and I oversee all of our U.S. and international businesses. I've had a real pleasure to interact with the investment community over the last several years, and I'm looking forward to getting to all of you better. And I'll hand it over to Jim.

Well, thanks. I'm Jim Cleary, CFO. I've been CFO for about 5 years. And I'll just kick it off with one financial comment when we issued the press release announcing the leadership succession plan, we also reaffirmed our guidance for fiscal year '24, which I think is a best practice in that type of press release. And our guidance, of course, contemplates 8% to 10% operating income growth and an incremental 3% from capital deployment. And so 11% to 13% adjusted EPS growth or EPS of $13.25 to $13.50.

Well, maybe let's kick that off on that point, right? You reaffirmed your guidance, and I was prepping for all of these different sessions. I was looking at the model. And I looked at the U.S. health care growth for last quarter. It's faster than most of my momentum growth companies. It was 16% on top line. It was 22% on EBIT. So can you maybe break down which parts of that are the nonrecurring, which part of it is recurring? How much conservatism you may be baking into that outlook?

Sure. That's an excellent question, and I'll start out. So we really did have a terrific first quarter of our fiscal year, and we plan to have a great year. And during the first quarter, we did have revenue growth in the U.S. of 16% and operating income growth of 22%. We really had very strong performance on COVID-related products, particularly the commercial vaccines. And if we back out COVID products from the first quarter in the U.S., we had 12% growth in the U.S. segment, which is, of course, still -- yes, it's very, very strong and it's really driven by a number of things. What we're seeing strong pharmaceutical utilization trends. We really have under Steve and Bob's leadership, just terrific execution across just so many of our businesses. We've seen very good operating leverage and very good results when it comes to operating expenses as a result of some initiatives we took in the middle of last fiscal year. And then as we commented for several months, we've been seeing a moderation of generic deflation, which means less of a headwind for us. And so we've seen just a number of things that are driving that type of growth. And -- of course, we plan for the execution to continue. And -- but some of the things like for instance, operating expenses and that we took initiatives in the middle of last year, kind of we have easier comps in the first half of the year compared to the second half of the year. But of course, we feel very good about our guidance and our performance.

One of your peers made some comments on the stage about pricing and kind of more stability. Are you seeing anything similar in this?

Yes, I'll make just a quick comment on that. As I said, with generic deflation, we're seeing, for several months, we've talked about, including when we announced last quarter's earnings, a moderation of generic deflation. And with regard to branded pricing, I'll just say it's generally in line with our expectations.

Is there any risk around the election or the IRA that we should be thinking and considering for this? That come up a lot.

I think Cencora, in fact, we were talking about this. We had this question at an internal town hall yesterday we often think that a lot of the political noise around pharmaceuticals is the way that benefit design is done particularly here in the U.S. and how we think manufacturers are more mindful of an international pricing environment and comparative effectiveness, which is really a lot of Bob's background in health outcomes and another reason is ideally suited for this position. But it's hard to tell. D.C. is a little bit fractured at the moment. So I think both parties, to some extent, looking at global pricing is a priority for both parties. And we'll see. There's a lot of work left to do. I think you can expect that a lot of the pharmaceutical companies will be very active on lobbying. We are very mindful of reimbursement for our customers. When we think about independent pharmacies, we think about community oncologists and Part B practitioners and even retail pharmacy. So that's a lot where we spend our efforts in D.C. And I think we get a lot of recognition for that as we go around. People say, you're not yet to lobby for yourself. You get talk about your customers. And we get a lot of credibility for that, and we've been doing that for a long, long time. We also participate vigorously in trade groups like international wholesale Federation, but also HDA and NACDS and others that are also advocating. But I think the political process is going to play out and we'll see. And hopefully, there's some thoughtful implementation of the IRA, which is what we would be advocating for. The last thing I'd say is part of this industry is we are really blessed that 75% of Life Sciences investment is here in the U.S. and I think we should be very appreciative and carrying on recognizing that, that's an important part of our economy. Bob, anything you'd add?

Yes. I'd only add one thing, Steve. So definitely, you had the lobbying and the work that we do there. But we also stay very close to the manufacturers, to Steve's point about the innovation that's happening in the United States. When -- as they look at different pricing actions based on policy, we're at the table with them. And we are doing a lot of work for upstream manufacturers and for the downstream providers. And we are in a good position to create that efficiency and continue to have a fair fee for the work that we do. So we're right there with them. And as we've seen pricing changes over the past year, and insulin is an example of that, which had some significant price decreases. We were able to work with the manufacturers through that, and it worked out just fine.

If Steve was scarred by his Empire Building meeting over here at the conference. Tell me about your first 2 days as CEO. How do you envision this? And what will your legacy be when we're sitting on the stage 10 years from now?

Yes. That's a great question, Stephanie. It's important to start with -- we've worked together, Steve and I and others on our executive team on our pharmaceutical strategy over many, many years. We're focused on expanding specialty. We're focused on growing our higher margin, higher growth businesses, things that would be pharma-facing services. So I don't have any idea what exactly will happen on the first 2 days, but I'm confident that we'll be reinforcing those messages internally and externally. We have a very, very solid strategy that is working. You talked about the performance, right? So the performance is a result of the strategy that we have and how well we're positioned the customer portfolio we have, the trust and value creation that we have with manufacturers. And so I would hope to be reinforcing all of those things not only day 1 and 2, but all the days forward.

Well, let's maybe pull on a specialty thread a little bit because it's been -- of course, given the growth, a big topic on the stage so far this week, you guys have a more entrenched position than some of your peers. So how would you frame maybe opportunities that they wouldn't have?

Okay. So I mentioned the customer portfolio that we have. And I think it's really important to start first with the one that we all think of, which is the community oncology space, the one oncology investment that we have is a great example of how we're continuing to position ourselves there. But specialty products, as you know, are in every channel. And we'll see what happens with the GLP-1s over time. But even in retail, right? It's a real opportunity. So what we're working hard on is making sure that we are well represented across the continuum of care. And as innovation happens as specialty products continue to grow, Cencora will be well positioned there. Health systems is an area that we talk a little less about, but where we do a lot of work in supporting their needs in terms of specialty care and specialty products, and it's obviously growing there as well, and we're well positioned. So I could go through the channels, but you know we're -- we have significant space in really all of those channels and specialty is growing. So when we think about our customer portfolio, we think a lot about how will the product mix and how will we benefit from the specialty growth within those channels.

One big step, Bob or so that with -- jointly decided to invest in on oncology and that was through a unique vehicle. And so that's interesting. We're getting to get -- participate more in a practice management way we have positions on the Board. And I think we're looking forward to seeing how that plays. They're doing very well in the market. And it's a market that is going to require large, sophisticated players as you look at accountable care, affordable care and so precision medicine, a lot of these areas. And also hopefully do more clinical trials in a community setting, we believe that having a closer seat at the table that we can participate more extensively in those areas. And again just a comment on Bob's first 2 days, if you don't mind. So one thing we thought a lot about the Chair and the CEO role and when I became CEO, my predecessor left immediately. And what's so different now is how diversified and large the company is. I think we had maybe 6,000 or 7,000 team members something like that, [indiscernible]. But we have 45,000, 47,000 -- and although we do a lot of town halls and we probably have 5,000 to 7,000, 8,000 people that participate in those. There's nothing like going and meeting the people. And I can really -- with Bob's partnership, I can go and do some of that on behalf of the company. So it's exciting, and I think he can really get to focus on so many things that global CEO needs to do as well. So we just -- it's a great opportunity to really extend the reach and accessibility of the management team.

Yes. And Stephanie, I should say, I'm just -- I'm absolutely thrilled that Steve is going to continue as Executive Chair for all the reasons that he described. This is a large, complex, not only in services, but in geographies. And to have somebody like Steve available to support that is absolutely fantastic. And in our case, it's absolutely the right thing to do.

So how are you going to spend your time for the first 100 days? He's freeing it up. You have some free time, where to go. Visit regions?

Yes. I'm making that up. I don't know about free time. It's a pretty busy job.

Yes. Yes. So I will be very focused on our team members and our customers and other stakeholders. So that first 100 days and frankly, throughout the transition period, I'll be making sure that people are -- people who don't know me, know me. We'll be reinforcing that in many cases. But as I said, the strategy is solid. So we'll be continuing with that, but I'll expect to be spending a lot of time outside the office with key stakeholders and team members and making sure that they're understanding the transition and getting to know me better.

How much of the time during this initial period will you be focused on change health care and some of the noise that's creating right now. I see a little eyebrow raise. Jim.

Yes, I'll start with that. Stephanie, it's a great question. The changed health care situation is obviously very challenging for customers, for providers -- medical providers and in particular. And I would say it's also a real opportunity for us to support them through a very challenging time, which we are doing. We're actively supporting our customers and trying to help them through a difficult period, which is core to our mission, right? So we do that in so many ways. And when customers are in need or customer segment is a need, we are going to figure out a way to help in is exactly what we're doing. And I'll let Jim explain more.

Sure. And I think you can just hear from Bob's answer just how customer-focused he is, really following in Steve's footsteps there. yes. And so with regard to change health care, kind of the impact that I think we'll see from a financial standpoint, is it will have a negative impact on free cash flow in the March quarter. But then, of course, that should reverse out in the June quarter. And so we would expect, if we look at the January to June period, it would have a neutral impact on free cash flow. And of course, our -- some of our customers, particularly in the specialty physician practice area, are -- it will take them longer to get reimbursement. And so we'll have some extended receivables there that will impact free cash flow in March, but then we very much expect to receive the cash, of course, during the June quarter. So we see it as a temporary timing impact. But I think the most important thing, which Bob was saying, is this is just one more opportunity for us to demonstrate our value in the supply chain and the importance we put on our customers and be able to be a close partner with our customers.

And his first day as CEO is October 1. So we're hoping that the situation has stabilized. I'm sure.

So it's actually your problem?

Yes. Well, it's -- we don't work that way. We're a strong team. So the 3 of us are all very involved in the people that are leading, in particular, our specialty businesses, but it's impacted lots of different areas, including retail pharmacy. And so it's something we all have to be mindful of.

What's the opportunity there to help your customers? Are they going through maybe their own cash flow issues or their collections issues.

Yes. I mean, for example, with some of our provider customers, we're providing them with extended dating on a limited basis to give them some time until they get their payments in from the payers. It's a very carefully managed program, as you would expect. But that's the way that we're helping.

And of course, it's something we're able to do due to our strong investment grade credit rating. And of course, we have credit facilities where we always maintain excess liquidity.

So I have to bring this back. We have about 2 minutes left to the growth you're seeing versus the long-term guidance and I know your philosophy historically has been very conservative, but your growth rates are nearly double what you're targeting for your long-term growth. Is something different? Or are you really assuming that this normalizes in that direction.

Yes. And so I will start out and then I'm sure Steve and Bob want to talk about the sorts of things that are driving our growth. But our long-term guidance is, of course, organic operating income growth of 5% to 8% and incremental 3% to 4% from capital deployment. And so EPS growth of 8% to 12%. And it's double-digit EPS growth at the midpoint of that range, and we feel very good about that as long-term guidance and something that we plan on achieving. And the most recent quarter in quarters, we've had particularly strong growth, just given some pharmaceutical utilization trends and really just excellent execution broadly across our businesses and some of the COVID related and other things that we've talked about. And I'm sure Steve and Bob would want to kind of talk about some of the things we're doing in the businesses that are really driving that growth.

Well, let me frame it this way as you guys get that answer. How much of this is the environment changing? And how much of this is just a much stronger execution track record?

I think our team has gotten better. We made a lot of good decisions early on in the merger. If you look at how we built up our infrastructure, the SAP implementations, bringing a key decision that Bob and I made earlier on was bringing our specialty businesses onto the SAP platform. And so I think from a systems perspective and an infrastructure perspective, we're particularly well positioned. We have a lot of capital to still deploy in investing into our European businesses and getting them into different classes of trade. We have some opportunities for capital deployment, the commercialization services area, some extended third-party logistics, specialized distribution. In Europe, those are areas of interest to us. Of course, you've seen our one oncology investment, and we anticipate that we will own 100% of that at some stage. So the team is, I think, getting better. We have a really strong board. And I feel like under Bob's leadership, we're in a really good position to carry on the execution, both operationally and strategically, which is the trick, right? And he's a great candidate to do that.. Sorry, I took our last chance. Why don't you say something to wrap up.

No. Yes, we are -- we said a few times, we're really well positioned geographically across businesses. One thing we didn't talk about that I can put in there, that is helping. We changed our business model over the last several years to make sure that we were not overly dependent upon its generic growth, and it would be earning a fair return for our work that we do in the specialty products. And so as that market continues to grow across our customer classes, that certainly is part of the reason the pricing actions that we've taken and the strategy that we have, which helps our customers and help Cencora is certainly part of it.

All right. Well, that's all the time we have. Thank you guys so much. Congratulations on the new titles and looking forward to seeing what the future holds for you guys.

Thank you so much.

Thank you, Stephanie.

Thank you, Stephanie.

Thanks everybody.