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

All right. Good morning, everyone. I'm Steve Baxter, the health care services analyst here at Wells Fargo. We're very pleased to have Cencora with us today. As I'm sure, all of you know Cencora is one of the largest drug distributors in the U.S., and also operates a lot of interesting pharma services businesses in addition to an international portfolio of businesses. From the company, we're happy to have CFO, Jim Cleary; and Head of IR and Treasury, Bennett Murphy. Thanks again for being here. Did you want to make any opening remarks or should we just kind of jump right into the questions?

Sure. I'll just take a couple of minutes to make opening remarks. First of all, Stephen thank you for inviting us and having us here. It's great for Bennett to have this opportunity. And I appreciate everyone coming to the session this morning. I'll talk just a couple of minutes about Cencora. First of all, you know our purpose. We're united in our responsibility to create healthier futures. That guides everything we do as a company. We're united in our responsibility to create healthier futures. But then I want to talk about our 3 growth priorities and our 4 strategic drivers. And I'll be very brief in talking about these 3 growth priorities and 4 strategic drivers. The first of our growth priorities is to lead with market leaders. We aim to have a market-leading customer in every one of our businesses, for instance, Walgreens and our large corporate pharmacy part of our business, leading health systems throughout the company. And I'll just throw out MD Anderson as one of the many examples. And then leaders really across the business, including the MSOs that we do business with in the specialty physician services market. Our second growth priority is strengthening our position in specialty markets. Specialty pharmaceuticals has really been the driver of our growth, and we want to continue to strengthen our position in specialty pharmaceuticals and you'll see that through our operating actions and also through our capital deployment. And then our third growth priority is we want to enhance patient access to pharmaceuticals. And you'll see this in a lot of things that we do with upstream customers and we do it downstream customers. And just I'll give you one example of that is all the work we've done on the Drug Supply Chain Security Act, where we're really playing a key role in enhancing patient access to pharmaceuticals. And so those are the 3 strategic priorities. Then we have 4 drivers, 4 strategic drivers for our business that really enable those 3 growth priorities. The first is digital transformation. And this is something that's very important to our company, and we're very focused on, and it's really all across the company. And I'll give you just one example, and that's in the finance department because it's something I have responsibility for. Over the next 3 years, our goal in finance is, right now, we spend 80% of our time generating reports and 20% of our time partnering with the business, and we're going to flip that so that we spend 20% of our time generating reports and 80% of our time partnering with the business, which can enable us to grow the business. And that's something that we're definitely going to achieve. A second strategic driver for the business, and this one is very important and very important to our CEO. We're really going to prioritize growth-oriented investments. And so as we look across our portfolio, we're going to be really focusing on and prioritizing the highest growth opportunity investments, and that means spending less on the lower growth opportunities. And so that's one thing that you'll see at Cencora as portfolio prioritization. A third strategic driver is productivity, and this is something that we've given Bennett Murphy, who many of you know, here responsibility for. And we're really going to be further building productivity capabilities and initiatives across the business to become even more effective and efficient. And we do a good job on that now, but it's really something that we're going to get even better at so that we can be more efficient and effective for our customer base. And then, of course, our fourth strategic driver is talent and culture, which is just going to be such an important part of what we do. And so as we have Bob Mauch at our helm now, these are the 3 growth priorities and 4 strategic drivers that our executive leadership team is really focused on. We've been very fortunate, fiscal year '25 has been a super strong year for us. It's been driven by our U.S. Healthcare Solutions segment. It's been driven by utilization trends. It's been driven by terrific growth in specialty. And so it's been a very nice year for us where we've had really broad-based strong growth across our U.S. business. And of course, we've been increasing guidance several times throughout the year and the most recent time we increased our EPS guidance to a range of $15.85 to $16. And that will conclude my opening remarks, and we're happy to answer any questions.

Thank you. That's great. And I think you're probably being quite modest about the strength in the business that you've seen this year, particularly on the U.S. side of things. I guess when we look at it and we see, obviously, there's some moving parts with acquisition and things like COVID, for example, in the numbers. But when you look at what we would consider more of a core earnings growth rate and compare that to your long-term plan, you're running essentially more than 2x the high end of your long-term target this year. I guess as we step back and try to think about what's driving that and try to assess the sustainability of higher growth over the next couple of years, what are the most important 2 or 3 things that have enabled the company to grow so strongly this year?

It's a great question. And I'm actually pleased to say that it's a little bit of a boring answer for a good reason because it's really the same things that we've been calling out for quite some time. It's strong utilization trends. It is growth in sales of specialty products to physician practices and health systems, where we are quite strong. It is kind of the broad-based results across our U.S. business. I mean all of our U.S. businesses are performing and executing well. As we look at changes, really, they're incremental and around the edges, like as we look to fiscal year '26, we'll have RCA for an extra quarter versus what we had before in fiscal year '25. As we look at fiscal year '26 on the downside, there's an oncology customer that was bought by one of our competitors that will have out of our numbers for 3 quarters in '26 versus we had a -- we'll have it out of our numbers for 4 quarters in '26, and we only had it out of our numbers for one quarter in '25, so that will be that incremental impact there. But as we really look across the business, kind of the -- looking at the fundamentals really remain quite strong with customer -- kind of leading customers in all the segments. And I just think value-added services and strong execution across the U.S. business.

Got it. And I appreciate that context. And then just to kind of follow up on some of the conversations you had on the most recent earnings call as people start to think more about fiscal 2026. Appreciating what your long-term guidance is and that you're not obviously changing your guidance as you sit here today. Are there things that are more discrete that you might think present some kind of lapping issues or more discrete elements that could push you towards the long-range plan as we think about 2026? Like just wondering about how you think about the sustainability versus just the prudence of having the guidance where you have it.

Yes. I mean, that's an excellent question, and it is spot on, and we will evaluate our long-term guidance every year. And this is the time of the year that we do it, and we'll put long-term guidance out in November. And I'm not -- I'm certainly not going to announce any changes to it here, but it's -- we'll just evaluate all the moving pieces and we've really been -- we benefited from really strong recent performance that has outperformed our long-term guidance. But then on the other hand, we take a prudent look to the market and what the market might present over a number of years. But one thing I will say that we think that this is an excellent market, and it's been demonstrated by our results. And there are just so -- regardless of what the guidance is, there's just so many fundamentally good things about the market now.

I think we appreciate that. And then at the same time, profit growth in the U.S. business has been outstanding. There's been maybe a little bit slower growth on the revenue line, so kind of an interesting contrast. As we look at the revenue performance in the year, how do we sort of square the performance of revenue versus the really strong profit trends?

Yes. That's a really interesting question and for a finance person, it's kind of fun. The -- and it's really a matter of mix, and that one is pretty easy to explain. It's -- I'll use a few examples. GLP-1s last year when availability became more available, the growth rates were really high, they've slowed -- they're still growing, but they've slowed -- the growth rate slowed down this year. That is a -- as we've always said, that's a minimally profitable product for us. So we aren't having the same growth rate, but profit is about the same. And so that's one of the things. Probably another big thing is in specialty brands that kind of the Part D specialty brands that go through mail order, some of those have been replaced with biosimilars. And so -- and specialty brands through mail order are a lot different than through physician practices because in mail order, we're sending a small number of pallets to a small number of locations. So the margins are very low. So when the brand goes down to a biosimilar in Part D, the revenue comes down. But in that such low margin business, the profit stays about the same. And then a third example would be we had a grocery customer that was more of a transactional customer than a partner customer. So it was a very, very low profitability customer. And we offloaded that grocery customer and picked up a more strategic grocery customer. So when we offloaded that grocery customer, revenues came down, but profits stayed about the same. So those would be 3 things that are mixed things. And then this might be a little bit longer answer than you wanted. The fourth thing is with RCA, RCA is a much higher margin business. And so that -- it's a much higher margin rather than a revenue business. And it's -- and then also, we sell that -- our distributor sells pharmaceuticals to RCA who sells the pharmaceuticals, and we don't double count that sale. And so as a result of that, that makes it an even higher margin from a consolidated standpoint. And so those are reasons why you'll be seeing our operating income growing faster than our revenue.

No, that's very helpful. And then over the past couple of weeks, in particular, there's been a lot of focus on vaccines in the headlines, both COVID and I guess also more broadly. Obviously, we're at the end of your fiscal year and you don't have guidance for your next fiscal year yet. But maybe could you spend a minute talking about how the company is thinking about planning for COVID vaccine demand over the next couple of years? And maybe just the importance of vaccine sensitivity to your model more broadly?

Yes. I think vaccines for us have become more important just because a lot of the COVID vaccine has gone through the retail channel. Historically, the normal cadence annual vaccines are actually not a really big piece of our business, and they still really aren't because many of them are still being administered in a pediatric office or in a physician office that primary care physician office that we don't really play in that space. If you think about the COVID vaccine, that's certainly that -- a good amount of that is going through the retail channel. . And how that typically works is, we -- every season, we go to our customers and we accumulate orders from them to have an understanding of what is their initial booking expectations so that when the vaccine gets approved, then we know who -- how we're going to ship those out. So your variability is on the approval, but you have less variability on the initial bookings. And then where you have the variability beyond that is, okay, what's the demand by the end customer? And how does it come through? And that will determine what comes in our Q1 or Q2? But our Q4 is the typical seasonal like vaccine -- COVID vaccine time period. The one thing I would point out is last year was somewhat of a clean year. In that, it wasn't -- there wasn't a subsidization of COVID vaccines in prior years. In prior years, it had been subsidized by the government. And in the most recent year, it was a true commercial product. So the demand was presumably real. So there's a lot of noise and discussion around vaccines. But at the end of the day, we have to see -- we know what our customers initially expect in that August-September time frame. And then it's -- the variability beyond that is what -- how much of that goes and then how much it results in more orders. The thing I would say is, we had a large -- we've been pretty -- very consistent on like disclosing what that -- what the contribution is from COVID vaccines, particularly when it was a large contribution in the 2024 time frame. It's still a meaningful contribution of 25%, but certainly much lower base than what it was in 2024.

Okay. That is helpful. And then as we just think about the overall utilization environment, it's been quite strong. But as we look out to 2026, there are some potential changes to the insured population that may be coming in the exchange market potentially depending on outcome. With enhanced subsidies there and also things maybe like work requirements and eligibility verification in Medicaid, it's just big picture, how is the company thinking about those dynamics for the next couple of years?

Yes. I think historically, it's always been a little bit of a challenge to predict what the fringe impacts are of coverage change, particularly for those parts of the market. I mean if you go back historically, when Affordable Care Act launched and it added covered lives, it was hard to really digest or pinpoint what the exact incremental change is. As I think about the typical common user -- heavy utilizers of pharmaceuticals, it tends to be more in that older population as opposed in that Medicare type space where you have comorbidities. In the other parts of the ecosystem, it's typically maybe like a one-off consistent chronic medication, but usually not heavy users of pharmaceuticals. So setting that aside, I think certainly, as Jim said, Cencora's purpose is united and responsibly create healthier futures, and we're very much in favor of physicians -- or patients getting access to the pharmaceuticals that they are prescribed. And certainly, that access is generally key. Particularly, when you think about for the overall U.S. health care system, pharmaceuticals are the most effective form of care, so the people getting access to their pharmaceuticals ends up saving the system a lot of money.

Okay. And then we touched a little bit on biosimilars and the impact they're having on your P&L, you guys have a great biosimilar report out there and it's just pretty clear to us, the pipeline is getting larger and more near term as we look out over the next few years. I guess can you contrast maybe how the contribution from biosimilars is today relative to what it might be 2, 3, 4 years from now, how do we think about the evolution of the pipeline during that time frame?

Yes. So biosimilars, particularly Part B, have been in our numbers and have been a very good contributor. They're somewhat accretive in that they have the -- we can get better margins on those, but they're great in that they take a lot of cost out of the system to make room for new innovations. The -- we -- most recently with the retina biosimilar that we launched, that was certain -- that's certainly a good guide. But we've had a number of oncology biosimilars that are -- that have been in the mix, and they're good for profitability too, as we look out. That Part B space is where is really the sweet spot. The Part D ones are good for the health care system. And for the customers where we retain the biosimilar volume when they switch on the Part D side, whether it's a mail order and some other customer channels where some of those Part D drugs go, those are good for us as well, but not as much of a sweet spot as a Part B side where we generally retain the volume.

Ben, there's only one thing I'll add that might be an interesting story. One of the real differentiating things about our retina consultants of America business is that we're the leader in clinical trial sites and that we have so many sites, and we have that -- we have the leading doctors and we have the capability. We do a lot of the retina trials there. And so we have exposure to biosimilars through those retina trials also, which is a very good part of the business on many fronts. It's a very good business. It creates a lot of data, and it really also attracts the young fellows out of school, the young doctors out of school and makes it a more interesting place to work because not only are they operating on people, but they're doing the clinical trials also. And it's something, which I think is kind of a key part of our talent strategy there.

Okay. Interesting. And you mentioned GLP-1s, obviously, and there's been variability on the top line contribution, but again, not very profitable. It doesn't seem to you given the incremental cold chain cost. I guess as we think about the next few years and maybe oral drugs coming into this market with a lower cost structure, maybe improved profitability to you, how do you think about the GLP-1 business may be evolving over the next few years?

Sure. Yes, I'd say a couple of things there. First, if we are doing our business planning over the next couple of years, we are not envisioning a change. We are envisioning that the revenues continue to grow. They'll continue to be profitable for us, but they will be minimally profitable for us. When cold chain is no longer required, they will be a little bit more profitable for us. It's not a huge amount, but they will be more profitable for us without cold chain. What it's probably -- and this is my own personal opinion, what it's really going to take for them to become significantly more profitable for us is a point in time when there's competition on the market and then perhaps it would move to a more normalized fee-for-service.

Okay. That's helpful. And then if we were to think about RCA, maybe you could spend a minute just updating us on the integration process and how we should think about the growth profile of this business, maybe 1, 2 years out from finishing that -- the integration process?

Yes. I will start and Bennett don't hesitate to jump in here. Yes, the integration process is going really well. The teams are working together very well. We recently had all their doctors and business leaders into our headquarters. We have a very large headquarter space for conferences and had just excellent meetings and interactions. It's an area where we definitely -- and we talked about prioritizing where we want to invest capital and prioritize where in our portfolio we want to invest. This is definitely an area we want to continue to invest. We really see the synergy here. And so I would say that the acquisition is going along very well.

And then maybe in a similar vein to touch on OneOncology, and would love to just get an update on the performance of the business. I think when you announced the deal, you might have had, I think, 900 oncology providers. And when we're preparing for the conference, we're on the website. And it seems like you potentially have maybe almost doubled the number of oncology providers, which was a bit of a surprise to me. I guess, first, like what's driving the growth in providers? And I guess, how should we be thinking about eventually the conversion to full ownership or majority ownership and what that's going to mean for your P&L?

Sure. It's both organic growth and inorganic growth that's been increasing the number of providers. And we own 35% of the business today. We have a put-call structure to acquire the balance of the business from our partners, and that starts 3 years after that initial deal and ends 5 years after the initial deal. And so 3 years after the initial deal would be June of '26. Five years after the initial deal is June of '28. So if you were modeling it, you could pick the midpoint. Kind of the midpoint, June of '27 is when our partners put ends and our call starts, but it may happen sooner. We're just very pleased with the business. We're very pleased with the leadership and we are just really looking forward to one day owning all of the business because we really think, given our pharmaceutical-centric strategy and our strength in specialty and the strength of these businesses, it really is the right move.

Okay. And then obviously, the business has seemingly grown a lot, which is very exciting. I guess how do we think about maybe the capital commitment that would be required to move into the majority ownership position.

Yes. And it all depends on what the size is of the business. There are metrics in place. And so it will really depend upon the size of the business. But one thing I can assure you is, we have that capital and it's a range because we don't know exactly what the size is going to be at that date. But we have that capital fully allocated and built into our plan, and it's something that we definitely intend to do.

Okay. That's great. And now I guess just kind of to expand more broadly to the MSO trend that we've seen over the past few years. We've now seen a number of platform transactions both for you and across the rest of the industry as well. What do you think the next few years look like? Like are there still large deals to do in the end markets that you find attractive? Or do you think it's more about consolidation at this point in time?

Yes. And I'll answer that from Cencora's perspective. As we've said many times, Cencora is pharmaceutical-centric. And so when we look at MSOs, just like we look at other businesses, we're interested in the MSOs that are pharmaceutical-centric that have the highest percentage of pharmaceuticals as revenues integrated into the business. And so when we did the strategic analysis, we put oncology and retina at the top of that list, which are very pharmaceutical-centric. And so what I would see from us is continued bolt-ons or acquisitions or organic growth and hiring in those 2 areas, which are pharmaceutical-centric. And I would expect it to be a growth area for us.

Okay. And then just another policy question. Obviously, it's very hard to predict the potential impact of things like most favored nation policies, but I guess is there a way to think about what you would need to know to frame the exposure there or think about what that could mean for your business if that were to come to pass?

Yes, I think it's important to kind of take a step back and like kind of look at what is trying to be addressed or discussed or approached -- the approach here. And I think, clearly, there is a perception and a focus of a relative price differential that's not appreciated, that is trying to be like look at where prices that are being paid in other developed world countries. I think that's the focus kind of period. I think what we're focused on is to the extent that there are any potential changes in the U.S. that have knock-on effects, it's just that there isn't an unintended consequence of that relative pricing issue. And we have very good relationships in terms of understanding what the focus is. And clearly, the focus is relative to pricing, and there isn't any -- doesn't seem to be any appetite for impacting local community practice providers. So I think that's the key is making sure that there isn't any unintended consequence. And that's part of the value that we have is making sure that we are playing that advocator role for community providers in the U.S. and it's something we've done for well over 15 years, and that's a discussion that is well received.

Okay. Maybe just to spend a minute on the international business, results have been a little bit more challenging there, maybe haven't improved as quickly as you might have hoped earlier in the year. I guess, what's taking longer to improve internationally? And as you look out at leading indicators, I guess, what gives you confidence in the trajectory of that business picking up a little bit over the next few quarters?

Yes, that's an excellent question, and thank you for asking that. And I'll just step back for a second and, say, of course, our U.S. segment, which is 85% of our operating income has been performing outstanding in the recent past. And our International segment, which is 15% of our operating income, we have not been pleased with the performance. The 2 biggest drivers this year have been our global specialty logistics business that many of you may remember is the World Courier business. And then our global consulting business. Both businesses have had down years. And World Courier has had a down year after many years of very good growth. And as you all know, there's been slowness in the clinical trial market and some slowness for an early-stage consulting work. And so that impacted both those business, our global specialty logistics business and our global consulting business, which is really the drivers of what's caused the weak results in the International segment. And Alliance Healthcare has been doing okay, but it hasn't been having an upbeat to offset the other two. And as we look forward to fiscal year '26, we have better expectations for the International business in fiscal year '26 because as you've seen in the market, some clinical trial activity is rebounding. Combine that with some cost measures that we've taken in the business and combine that with the -- but just the comps are easier. Now that we had a bad year, the comps are easier. We are internally planning on achieving growth in International this upcoming year.

Maybe since we have Bennett here, the productivity head, maybe spend a minute talking about what are your key areas of focus and how that translates into the results that you guys are putting out?

Yes. I think, certainly, Cencora is a very efficient company, right? If you look at our margin profile, we have to be. And as you think about our relationships, upstream and downstream, we are expected to be. And that's a key element of our value proposition as an organization. Having said that, there's -- within any organization, there's opportunities to identify like ongoing process and capability improvements, whether it's better leveraging technology, connecting teams that might be in different areas or different jurisdictions to align work and align tasks more effectively. And lastly, I would say that we've done a good job in the last couple of years of building up a global capability center footprint that allows us to access talent in various jurisdictions and make sure that we're really being thoughtful and strategic about how we do work, where we do work and what type of work we ask people to do to ensure that they can really deliver on the value that they need to drive for Cencora.

Okay. And maybe just the last question on capital deployment. I guess we know that you need to plan for the eventual buy-in of OneOncology. But kind of thinking about that, what are the key priorities beyond that? Do you think there'll be much incremental deployable capital beyond what you'll be able to need to commit? And then what would the priorities be?

Yes. Well, fortunately, we are a business that has terrific free cash flow. And there are really 4 components to our balanced capital deployment. One is invest in the business and, this year, we're investing about $600 million in CapEx, most of which is in technology and infrastructure, and then strategic M&A. And really, a lot of that is spoken for with regard to both OneOncology and then bolt-ons, both in OneOncology and RCA. It's not to say that there couldn't be some other things also, but that speaks for the majority of it. And then, we opportunistically repurchase shares. And of course, we've done that for many years, and we're very successful in buying down WBA shares, and they're essentially down to 0 shares now. And so we'll opportunistically repurchase shares and then we'll have a reasonable growing dividend, which is most recent year, we grew at 8% to make sure that it was at least at the bottom end of our long-term EPS growth range.

All right. Well, I think that's a perfect place to leave it. Thanks so much for the time this morning.

Thank you, Stephen.

Thank you.

Appreciate it.