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

And then just in terms of thinking about broad-based pricing across the market, the other potential moving piece is on IRA. We're in the process of finalizing negotiations in the first 10 prices. Is there any way to think about how your business is affected, impacted by IRA? And maybe is there anything, in terms of microcosm, we can look at on the recent changes in insulin pricing as a way to think about how the economic flow-through would occur for Cencora?

Why don't you take the first part, and I'll take the second?

Sure. So there are still some to be determined on IRA. If you look at 2026 and the Part D side, that is really -- actually, in both cases, it is really reimbursement. So it's not actually a price change so much as it is, what is the government paying change. So we'll continue to work and analyze as you would expect. But as you know, we're not -- similar to the prior conversation, reimbursement prices can be different, and they aren't really pegged to the reference price. And I would just say that there are some things that I think still needs to be figured out, particularly at least one of those products in that scope was about to have or is in the process of having biosimilar competition and that could have negative impacts, just for the healthcare system. So certainly still some things to be crystallized. But I think Jim can talk a little bit about the WACC insulin price dynamic as a comparison?

Yes. I think what happened in insulin this year is a kind of really good case study and kind of gives us confidence with regard to kind of the fact that we can maintain good profitability in cases where there is a deep decrease in WACC pricing. And as you all know, in the insulin product category, there were significant decreases in WACC prices this year. And our contracts have terms in them that if something like that happens, then we can renegotiate and we were able to successfully do that this year. We were able to maintain economics and continue to be compensated well and so that was a very favorable outcome for us, where we saw a decrease in WACC price, but we were able to maintain our dollar economics. And so we view that as a very good case study. And I think the overall kind of point is that distributors are very efficient, and we very efficiently provide our services in the market and benefit the healthcare supply chain. And so this was just a great example that due to our efficiency, we were able to maintain our dollar profit.

And just one last one on the distribution side. There have been, relative to the market, some elevated customer contract moves versus previous levels of headline [indiscernible], which is elevated more than normal. When you go back to market now, especially with your broader service levels with everything you're building around Specialty, as you go to reengage customers on contract renewals, go to pitch for new business, has the contracting process changed at all in terms of how you go to market? What you're offering? What types of services, a new customer or upselling existing customers are starting to take?

Yes. So let me kind of comment on a few things there. First of all, we kind of have leading customers in each of our businesses. And we have very strong customer partnerships in each of our businesses and customer relationships that are multiyear or decades long. And in terms of kind of changing kind of processes, there's nothing that I would call out right now, but this is something that we've done over a multiyear period, which I think has benefited us. For instance, if you kind of look across product categories, there was a period of time where we earned a lot on generics and less on brand, but we went through a rebalancing process where now we make kind of a fair profit on generic brand and Specialty. And we not only went through a rebalancing process from a product front, but also from kind of a contract timing front. So rather than kind of earning, kind of low profitability in the first year and high profitability in the last year, which makes it harder during the renewal process, we kind of have contracts now so we make a fair return over the life of the contract. And so this is something that we've worked on for many years, which makes it less likely for us to have to call out a renewal issue, which is why you haven't seen us call out anything like that in the recent past, Michael.

Stability always works for me. Maybe turning to parts of the Alliance business. I think one of the things that got overlooked with the acquisition was you bought a primarily European wholesale distribution business that came with a whole suite of manufacturing services assets. I know you talked about PharmaLex before. But as you said now, 2.5 years, 3 years post deal, like how has the integration gone, especially the manufacturer services assets wrapping into what you already had with World Courier and layer on PharmaLex as well?

Sure. This is why we bought the business, right? It allowed us to expand our geographic distribution footprint into key markets in Europe. But importantly, it's a business that does a lot of manufacturer services that are complementary to distribution, that we already do in the U.S. and allows us to kind of leverage both of those strengths in the Western Europe, in the U.S. and then we also have a number of those manufacturing services in Canada. So we can provide a differentiated service on the manufacturer service side, particularly for the things like 3PL across North America and Western Europe, which allows us to be a really key partner for pharma, particularly small and midsized biotechs that are looking to launch products and aren't sure which market they're going to be going into first. By working with us, we can pivot with them. You just saw an announcement by one of those small and midsized biotechs 2 days ago to that effect. And I think that it's a validation of the differentiation that we have and that we can provide for these small and midsized biotechs that are bringing products to market and need a partner that can solve a lot of problems for them as they look to commercialize their products.

And Ben, let me just build on kind of a couple of things you were saying. I think our team is doing a good job of kind of integrating businesses like PharmaLex and our 3PL business in Europe and our 3PL business in the U.S. and World Courier and the kind of the business development effort we have now to cross-sell. It's in the early innings, but I'm really impressed with the team and I'm really impressed with the results and so it gives me optimism for the long term. And then one other thing I'll say that has been good with regard to Alliance is, we have retained the management team which is a strong management team. And so we have that kind of legacy of knowledge, which is helping with that integration process. And it's something that is -- I think Cencora has done for quite some time, Bob Mauch, our incoming CEO, who will start October 1. He kind of came from the acquisition of Xcenda and I myself came from an acquisition. And so Alliance is just another kind of example of us, from a talent standpoint, retaining the team which I think helps.

Well, good timing to turn to the acquisition you came from, which is MWI, the animal health side. It's an area you talked about on the calls and you go and look at the Ks and Qs to figure out where the growth rate is. And we've seen some recent acceleration in growth, if my math has been correct. Like where do you see those pockets of growth coming from? And especially as we sit here now, how do you see the balance of demand between companion production relative to the growth for MWI?

Yes. So in our Animal Health business, our growth rate for the first half of the fiscal year for revenues 8%. So about $2.6 billion in revenues during the first half of the fiscal year. The growth rate has been faster in the companion animal market than in the production animal market this fiscal year. But I think that the thing to kind of call out about our Animal Health business is it's had kind of 5 quarters in a row of good growth. And so this is not just kind of a recent thing. We've seen the kind of the good growth for over a year now, getting into the sixth quarter, and it is a business that is executing well. And one of the things that enables our growth is, we have a very strong demand generation sales force in our Animal Health business.

Got it. Great check in there. We're going to run one minute another -- you mentioned earlier the increase in guidance from the Walgreens related share sale and buyback. This is obviously the largest purchase you made of shares that they've sold in the last few iterations. So maybe give us a little bit of rationale on the why the elevated level. I know the balance sheet obviously has gotten meaningfully delevered post-Alliance paydown. But how do you think about the signal that this is sending relative to your cash availability and other capital deployment opportunities?

Yes. Thank you for asking the question. And Cencora has a balanced capital deployment, and one of the great things about our business is our free cash flow. This year, our adjusted free cash flow guidance is approximately $2.5 billion. That's after capital expenditures. It's approximately $3 billion before capital expenditures, and we put about $500 million into capital expenditures. A lot of that's IT sorts of things, and those kind of CapEx typically have very good return on investment. And then we're doing strategic acquisitions such as the OneOncology investment or the PharmaLex investment centered around specialty and higher-margin, higher-growth manufacturer services. And then really, the third thing is opportunistic share repurchases. And this most recent purchase from WBA is a great example of opportunistic share repurchases. We have bought a little bit more than we have in the past iterations and just we felt it was opportunistic. And as a result of that, and we brought our share count down. We increased our EPS guidance, as I said, at the same point in time that we bought back the shares. And I think one of the great things that we've been able to accomplish over the last couple of years is WBA's ownership has come down from 28% to 12%. And then if you net out all of the shares that have been pledged and variable prepaid forwards where the banks have sold most of those shares. And if you net those out, it's actually approximately 2% ownership. So I think we've done a really good job managing through that process, consistently buying back stock, which is very consistent with our capital allocation kind of statement of opportunistic share repurchases. And then just very briefly, the fourth component of our capital allocation is a reasonable growing dividend that we've been increasing our dividend every year.

I appreciate that. And like coming down to 0 is always a fun exercise if and when we get there. But you did mention the $500 million of investments. And maybe I think sometimes people miss some of the targeted IT that you and your peers are rolling out, not just internally focused, I remember the ERP implementation a couple of years back, but other ways to do it on a growth basis. Can you maybe just talk about some of those targeted investments and where you see the opportunities to use IT as an outbound advantage versus simply an inbound efficiency tool?

Yes. And that's a great question. So we spent about $500 million a year in CapEx and had kind of put it into 2 categories. One would be kind of run the business and the other is growth and innovation. And run the business would be kind of infrastructure sorts of things and IT sorts of things. And then we're always looking at new initiatives around growth and innovation. And if we kind of look in both those categories, IT sorts of investments would be kind of a big example. And kind of one example that I'll call out where we've kind of completed the investment is kind of the initials are -- Drug Supply Chain Security Act or we call it secure supply chain internally and this is something where once we implement this to be able to electronically track product at the package level, which is just kind of one more investment we're making has a big IT component that's kind of regulatory compliance investment, but it also kind of differentiates the main companies in our industry that were able to do these sorts of things. One thing that kind of continues to differentiate our industry to be able to provide this sort of service, not only kind of upstream to manufacturers, but also kind of to benefit the healthcare supply chain, which is what we're all about.

Last really quick question. I'm not old enough to remember the last time you went through an internal CEO transition, which feels like a long time ago with Steve being the last man standing in the space. Now you're in the process of another one. How is Bob preparing for the job and moving up in the seat to take up the CEO role?

Yes. Bob is incredibly prepared to do this. He has a background in pharmacy. He's a pharmacist. He has a PhD in the area. He sold his company that he founded to Cencora in 2007. He has run all the businesses within the Cencora. He's been COO for a period of time now, but even before he was COO, he was running the businesses. And so Bob is incredibly prepared to do this. He has been on the executive management committee, been actively involved in setting the strategy for the company for some period of time now. And then, of course, also, Steve Collis will be staying on October 1 and becoming Executive Chair.

Awesome. Well, Jim and Ben, thank you so much for joining us and drilling us in on the story.

Thank you, Michael.