Cencora, Inc. ($COR)

All right. Good morning. Welcome to day 2 of the BofA Global Healthcare Conference. My name is Allen Lutz, I run health care tech and distribution here at Bank of America. We are excited to have the Cencora team here. We have President and CEO, Bob Mauch; EVP and CFO, Jim Cleary; and Head of Investor Relations and Enterprise Productivity, Bennett Murphy. Thank you to the team for joining us. Really appreciate it.

I'll start with Bob. You reported earnings last week. I guess before we dive in, is there anything you want to highlight about the quarter or just any thoughts there?

Yes. First, thanks, Allen. Thanks for having us. We're excited to be here to talk about Cencora. And I'll say we don't take the recent pullback in our shares lightly, and we wanted to be here to explicitly express our confidence in our full year guidance as well as our long-term guidance. We recognize that there are some noise around the quarter and so we want to do everything that we can to make sure everybody understands why we have that confidence. And I'll also note that in our press release, we announced that we were resuming share repurchases and that we expect to repurchase $1 billion in shares by the end of the calendar year. Maybe most importantly, longer term is why we're confident and we have a very focused pharmaceutical-centric strategy that is supported by our purpose. And we have very specific growth priorities and performance drivers that I've spoken to extensively over multiple quarters over the last couple of years. So I won't do that again here. But one of the things that we're really working on is being focused and executing on that strategy across a number of domains. And that's what gives us confidence. And to just say again, we are very confident in our full year guidance as well as our long-term guidance.

That's great to hear. And to start to dive in here around the U.S. Healthcare Solutions business, there's been a lot of investor focus really on rate of change around the AOI growth for you and your peers. But I think if we take a step back and look at the growth in the business, last quarter, you said that organic AOI growth was toward the high end of your LRP, which is 7% to 10%. So we'll call that 9%, 9.5% in that ballpark. This quarter, AOI growth was 7%. But as we dug in, there's a couple of one-timers in there that I think are reasonable to take out about 1 percentage point headwind from COVID and 1 percentage point headwind from weather. So as I think about the momentum in the business, maybe momentum or AOI growth organically slowed from 9.5% to 9%. I guess first question is, is that the right way to think about the growth that you're seeing in the business. And then to the extent that there is some level of moderation in growth, can you talk about where that's coming from?

Allen, thank you very much for that question, and I will address, as you said, both the first quarter of our fiscal year '26 and the second quarter of our fiscal year '26. And during the first quarter when we reported results, we indicated that if you exclude the benefit of the RCA acquisition, our growth would have been at the high end of our long-term guidance. And then we also said, if you exclude the headwind from the loss of the oncology customer, our growth rate would have been above our long-term guidance. And if you compare that to the second quarter of fiscal year we reported U.S. growth of 6%. But we also indicated if you exclude the benefit of the OneOncology acquisition, and you exclude the headwind from the loss of the oncology customer, our growth rate would have been 7%. And then if you take into account 2 headwinds that we faced, the $10 million headwind from some inclement weather at the end of January and early February that impacted visits to physician practices. And if you exclude the COVID headwind of $10 million, our normalized growth rate would have been 9% in the U.S. for the quarter. And that really sets us up very well to hit our guidance for the fiscal year of EPS of $17.65 to $17.90.

That's great. And then related to that, as we think about the organic growth rates in the business, for the next couple of quarters, what is embedded in the guidance? Do you expect U.S. health care AOI growth to reaccelerate, to moderate, to stay the same? And as you think about the next 2 quarters, I would love to get a sense of any insight you have into April or early May and how you think about that as it relates to the guidance.

Sure. Well, there's a couple of things there. And let me talk about the balance of the year and things that will cause our growth rate to accelerate over the balance of the fiscal year. And there are really 3 things that I'll call out. The first is that the headwind from the loss of the oncology customer that was acquired by a competitor, that anniversaries and we lap that for the fourth quarter. So that benefits our fourth quarter of the fiscal year. We've also indicated when we acquired OneOncology, which we're really pleased with that the growth in OneOncology would accelerate each quarter over the fiscal year. And so that benefits us. And then -- and so those are 2 things. And the third thing is that we have an easy comp on OpEx in the fourth quarter, and we've been working on a number of OpEx initiatives also. And so that will benefit us over the balance of the fiscal year. And so on the earnings call, we indicated that we're expecting EPS growth of high single digits in the third quarter, and then we expect further acceleration in the fourth quarter of the fiscal year. Thank you for that question.

Thanks, Jim, for that. And then the second part of the question was any insight into Rx trends utilization in April or May. Is there anything to glean or learn from that?

Yes. One of the things that we've talked about is that the headwind that we saw from inclement weather at the end of January and early February that impacted physician practice visits. We have seen that improve in March and April. And really kind of the key thing that will move us within our guidance range. And again, I said we have confidence in our guidance for the fiscal year, probably the most important thing that moves us within that range utilization trends, particularly in specialty.

Got it. You mentioned brand conversions happened faster than you expected on the call. I believe what you're seeing is around STELARA, and this is not something that's new. You and your peers saw the same thing happen with Humira a couple of years ago. Can you frame -- so you've gone through this type of transition. Can you talk about what helps Cencora deal with this a couple of years ago around the Humira transition and how do you think that applies to STELARA today?

Yes, that's a great question. And probably the most important thing to emphasize is that's the sort of thing that impacts our revenue and our revenue growth rate but this is a lower margin part of our business. And so it has a very, very small impact on our operating income and our operating income growth. It's really the same customer that we're talking about. And this is a customer where we're shipping very high volumes of products that are palletized to a handful of locations around the country. So it's understandably low-margin business for us. It impacts revenue a lot more than it has very little impact on our operating income and operating income growth. And you asked about the difference when we had the experience with Humira a couple of years ago compared to STELARA now, I think that's the conversion was faster now than it was a couple of years back. But I think, again, the thing to emphasize is the impact it has on the top line and very minimal impact on operating income.

Got it. And then just a quick follow-up. I think at the time Humira went biosimilar, we estimated that the combination of Humira and STELARA going biosimilar might impact EPS by the combined impact could be a percent. Is that -- is there any way you can give any type of granularity around that? I mean that's a pretty small impact on 2 big drugs. But curious if there's any more perspective you could provide there.

No, I would just go back to Jim's comment on -- given the rate of decline that we saw in -- for STELARA in the March quarter, and that's not highlighting a material headwind specific to that dynamic in our operating income results that I would -- I just wouldn't put a number to it.

Okay. Got that. As we think about the Part D biosimilars, there's obviously some economics that are flowing to the PBMs. But on the Part B side, I think it's fair to say that as drugs go biosimilar in the Part B environment, that generally seems to help oncologists, at least historically. Would love to get a sense of your perspective. Is -- as you look at maybe some of the historical biosimilar launches in oncology Avastin, Herceptin, Rituxan. Can you just talk about -- is that -- was that a positive for the OneOncology business at the time? Just curious about your perspective there because from our perspective, it seems like Part D, some of the economics might be moving to the PBMs but in the Part B space, that seems like a potential opportunity for Cencora and the distribution business.

Yes, Allen, I'll take that. Thanks for the question. And you outlined it well in the previous questions around Humira and STELARA. But I would also add a point to that is the dynamic within our business model where when a brand moves to a generic within the male PBM space that they take that inside. That's been here even when we were talking about oral generics. So the fact that, that's happening with biosimilars is actually not new, and it's something that we expected and as we talked about, has a minimal profit impact importantly, which is your question, is the Part B biosimilars is absolutely a tailwind for most importantly, for health care, right? So it's lowering cost for patients in health care overall. It is good for the physician practices and the MSOs and historically has been good for Cencora overall. And I'll add a couple of things. And so your question was focused on oncology, but I want to make the point, it's also true in retina, right, where we have biosimilars and we'll have more coming. And the reason that, that is relatively more advantageous and part of that is certainly that the PBM control of the Part D space, but also the amount of services that we provide in the Part B space. And that's obviously for brand products, but it's also for biosimilar products. So if you think about a biosimilar coming to market, Cencora is going to be involved in helping the manufacturers, educate the physicians about that, helping the physicians understand the value proposition of the product. And so we use the term wraparound services, in many cases for our physician practice businesses. But it's those wraparound services that really help that Part B biosimilar space continue to be advantages for Cencora and for our customers.

And then related to that, one of your peers is co-manufacturing an old cancer adjacent drug Neulasta. I believe the drug is used in conjunction with chemotherapy treatment. Bob, with all the talk around PBMs and what they're doing around Part D, would love to get a sense of your perspective around the future potential or opportunity to co-manufacture biosimilars, maybe similar to the way that you're doing that with the generics business today in select cases. Have you -- has Cencora evaluated the opportunity to structure similar relationships given its large and growing presence in both oncology and retina?

Certainly nothing to call out. But as you said, we have done this in the in the oral solid space and the generic injectable space. So it certainly is something that could be contemplated in the future, but we don't have anything to discuss specifically today.

Got it. That's helpful. And then as we think about the revenue for the U.S. health care solutions here, there's a lot of moving pieces heading into 2026, we have the IRA and manufactured price reductions. We have the GLP-1 volume. We have STELARA as we talked about. But you reiterated your full year free cash flow guidance. So you did a great job managing that. Was there any from the -- I know that these revenue headwinds don't have an impact or a material impact on the income statement. But as we think about working capital, as we think about free cash flow generation, can you talk about whether any of these specific dynamics or anything else is impacting your free cash flow for the current fiscal year?

Yes. So let me just say that, of course, free cash flow and return on invested capital are 2 metrics that we're really focused on in terms of long-term value creation. And so we are constantly analyzing free cash flow and the impacts of a number of factors on working capital. And of course, our negative working capital is one of the real benefits of our business model. And so I'll just say that we are always updating our free cash flow estimates, and we were very pleased to confirm our free cash flow guidance for the fiscal year $3 billion.

Yes. And I would just say, as you think about it, I mean, you're thinking about it directionally correct, but the key to keep in mind here is, as you think about brand products, you're talking about shorter payables, tighter inventories. And then it's just the customer mix, where is that going? And then what's the debt -- so what's the average days payable outstanding that kind of flows that through. So directionally, but certainly, that working capital dynamic is key to what we -- how we manage the business.

And then can we get an update on the integration of OneOncology and RCA. Obviously, you've been acquisitive even since then with the recent Retina acquisition, another retina acquisition. Can you talk about how those businesses are performing relative to your expectations? And how we should think about the level of contributions during the back half of the fiscal year from both of those businesses?

Allen, I'll take that to begin with. The integration of the -- those MSOs, RCA OneOncology individually is going very, very well. We are absolutely happy with everything that we've seen so far and importantly, that we've talked about that we're excited to get to once we completed the OneOncology acquisition is that now we have the RCA team and the OneOncology team able to work together. And that's where there will be additional synergies created. And we've talked a lot about our excitement about the clinical trial space and the area that RCA is really the leader in and there are capabilities there that we're excited to share more broadly with OneOncology, which is a bigger space, right? So that clinical trial excellence that we have at RCA as we kind of make that a platform capability and not just something in one of the MSO verticals, we're really excited about it. And there are other areas where they're sharing capabilities, they're meeting together. We have working teams, as you would expect. But without going on too long about it, we're very excited not only about the performance in terms of what we expected, but also the teamwork that's going on between the legacy Cencora team as well as the RCA team and the OneOncology team, it's going very well. And as Jim said earlier, we're excited about the contribution that OneOncology will make in the back half of this fiscal year and beyond. You asked about kind of acquisitions. So I was just going to add one more thing. So there's the performance of the business and the integration of the business. And then there's also both RCA and OneOncology, having the ability to continue to tuck in acquisitions. And that's part of the thesis, and that's also going very well in terms of what we've been able to identify. The pipelines are strong for both. So we again, kind of short term and longer term, we're very optimistic.

Yes, I want to unpack that last comment, Bob, on the pipelines are strong, we'd love to get an update on the pipeline for both oncology and retina. Are there still the same number of assets out there? Is there any way to quantify number of assets that are out there? And I would love to get a sense of how broadly some of those smaller players have performed because I guess as we look at it, it seems like there's a pretty significant variability in quality of assets as we think about some of these smaller MSOs. So would love to get a sense of some updated thoughts on the pipeline and how that compares to maybe a year ago.

So we're optimistic. We don't have a specific number that we provide, but there are many opportunities out there in both retina and oncology, and they're predominantly smaller and by definition. And kind of when you talk about relative quality, there's a lot of ways to look at that. But I would also say by definition, probably a smaller practice is not going to be as sophisticated as a larger practice. And that's a big part of the value proposition of why you would join in MSO because that just brings the scale, the buying power, the expertise, the access to clinical trials, all the things that we've talked about. So it's not so much lower quality. It's to the extent that they're less sophisticated, that's actually why they would want why they would want to join and then we bring those capabilities to them, which improves their practice and improves their ability to provide care for patients. I would probably end with and then Jim and Ben can jump in on anything that they want to add. But we're really happy with the 2 platforms that we have, right? So we're really talking about now our focus being on tuck-ins in both retina and oncology.

Yes. And I think the only thing I would add is, I mean, we've seen it. Well, it's not like there's no big press releases, there's no big activity around those things. You've seen like in our cash flow that you'll see a little small deals, as Bob talked about for RCA over the past year. I think the key thing is to what Bob said is that there's a lot of opportunities to tuck in to that platform. It was unique in that we're able to carve out the retina focused parts of that business or that's -- part of the deal has been announced not closed, but so that deal being structured way that allows us to carve out the asset, the retina focus assets. And with the multiple different regions that are touched by that, that could be a good -- that's a unique opportunity to essentially do a bunch of tuck-in all at once and create a lot of value while the general ophthalmology, non-pharmaceutical centric part of that business stays and does not come -- would not come Cencora as part of that deal. We think it very much aligns with our pharmaceutical-centric strategy and is a good example of multiple tuck-ins.

And the only thing I'll add is that as we've analyzed the businesses over the past couple of years and even during a period prior to our ownership of the businesses, due to the synergies that Bob was talking about, we see that when they do an acquisition and then we compare the earnings from that business to 2 or 3 years later, really the synergies and the benefit we see from operating income growth and the operating income growth CAGRs are quite good.

Yes. And actually, the last piece I want to it's very -- it's really important because it gives the physicians the opportunity to maintain their clinical independence, operate independently be part of an MSO that gives them a lot of breadth and scale to compete in the market. But most importantly, gives them that critical independence and it gives a thoughtful strategic partner for long term.

Yes. Thank you for all that detail. That's really helpful. And then pivoting to the international business. Bob, you talked about a lot of confidence in the U.S. business moving forward. The international business had a really strong quarter. Can you talk about the sources of strength there and how to think about what's embedded in the guide and what you're seeing that gives you confidence into the rest of the year there?

Yes. Well, what I'll say is we were really pleased to see both the revenue growth and the operating income growth in our international business during the quarter. And of course, our operating income mix is about 80% in the U.S. and 20% international. And what we saw during the quarter is really 2 key benefits in our International Healthcare Solutions segment. One is the timing of a price increase in a developing market economy, and that was a benefit for us. And we talked about that during the first fiscal quarter and the fact that we expected to see that fiscal quarter, and we did see that in the second fiscal quarter. And we'll continue to see that benefit in the third quarter also. And then importantly, the second benefit we saw during the quarter is the performance of our global specialty logistics business, our World Courier business. We saw the second consecutive quarter of operating income growth and so we're pleased with what we're seeing in that business, and that will be an additional benefit for our International Healthcare Solutions segment in the third and fourth quarter, particularly as we have easier comps for our global specialty logistics business.

Around the World Courier business and the improvement there. Can you talk a little bit about what you're seeing around that improvement? Is the market inflecting there is Cencora taking share? Would love to get a little bit more details on what you're seeing and the sustainability of that AOI growth in that part of the business.

Yes. Thanks, Allen. Yes, we're really pleased with the performance of the World Courier Global Logistics business. I would start with just the level of quality that World Courier provides in the marketplace. So market-leading quality across very, very specialized logistics. So think cell and gene therapies and other clinical trial support. Second, Allen, as you mentioned, kind of about the market and the market certainly has stabilized. We went through a period of a real slowdown kind of in the biopharma space in terms of clinical trial starts, and that has -- that certainly has stabilized, which we can see in a lot of different report outs, and we're benefiting from that. And very importantly, I think the -- I think I know the team has been very, very focused on the right operating model, the right efficiencies and making sure that the value proposition for the pharmaceutical companies and others that we serve is as sharp as it needs to be. So you can be the high-quality leader and you also have to make sure that the overall commercial value proposition is right. And I think we're at a point now where we have a stabilized market and we have the right combination of efficiency, high quality and pricing that should allow us to continue to grow.

Great. And then moving on to the Other segment. Can you provide an update on when you expect the MWI transaction to close? And can you speak to your confidence that the deal will close?

Sure. We've indicated that our fiscal year '26 guidance assumes that the deal will not close during fiscal year '26. And so that's what our guidance assumes that it will close after that in fiscal year '27. We aren't now accounting for MWI as an asset held for sale. And so that's something that caused our operating income to improve in our guidance to go up for the other segment when we announced guidance recently. And then I'll also say just the deal is subject to regulatory approval. But as we have said, we like the fact that the combined business will really be able to increase innovation, efficiency and affordability throughout the Animal Health ecosystem. So thank you for the question, Allen.

Thank you for that, Jim. And then moving on to capital deployment. You talked about opportunistic share repo later in the year. You also talked about a really strong pipeline for M&A. Your share price is lower than where it was 3 to 6 months ago. Can you talk about -- does this change the way that you think about capital deployment in the relative pecking order of share repo versus M&A? I would love to get your thoughts there.

Yes. Thank you very much for the question, Allen. And this question. I was really hoping you were going to ask and really most wanted to answer, and Bob commented on it during his opening remarks, of course. And we've always talked about capital deployment in 4 areas. The first is investing in the business through CapEx. The second is strategic acquisitions that would be pharmaceutical-centric like tuck-ins in the MSOs, opportunistic share repurchases and then also a reasonable growing dividend. We announced the -- that we'll buy $1 billion back before the end of the calendar year and now is clearly an opportune time for us to be buying back stock.

I think if you look at the history of the company over the past 6, 8, 10 years and look at when there's been pullbacks of this type of nature, that company has absolutely executed against opportunistic share repurchases in a material way.

Great. And then as we kind of going back to the top here and going back to the guidance, there's a lot of moving pieces in the business, a lot of onetime dynamics. But as we think about the guidance for the second half of the year, can you maybe risk weight -- what are the biggest drivers to get you to the top end of the guide versus the low end of the guide? And I guess I'll start on AOI for the U.S. Healthcare business.

Yes, sure. And we did increase our guidance when we announced our results. Really, the reason for the increase was the asset held for sale accounting in our MWI business. Otherwise, the guidance and would stay be the same. But I think we have a very good confidence in the guidance. And the thing that moves us within the range is, of course, utilization, particularly in specialty. But as I said before, 3 of the things that give us confidence in the guidance is we lap the loss of the oncology customer that was acquired in the fourth quarter. As we've said, OneOncology ramps over the course of the fiscal year. And then also, we have easy operating expense comps, and we've been doing some key operating expense initiatives. So thank you for the question. And of course, our guidance for the year is EPS of $17.65 to $17.90 a share.

And then Cencora has been investing in the infrastructure of the business for a while now. And a lot of the conversations more recently just broadly from investors is around AI and optimization and things like that. We'd love to get a sense -- as you think about the investments you're making in technology, how do you think about AI? Is there an opportunity to improve the efficiency within your business? And if so, where would that be?

We're starting -- you'll notice in Bennett's title that he's also a Head of Enterprise productivity. So we have an expert on the stage as well. But I'll just say it. I wasn't going to go through our performance drivers, but maybe I'll just take a step back and go there because we're very focused on the portfolio optimization, which we've talked a lot about here today. So that's both investing in the growth areas as well as deprioritizing certain areas, talent and culture as a significant focus for us. Enterprise productivity is a focus than I would say, AI-led digital transformation is a significant focus for us. So Allen, I think the way to think about it, and you framed it this way, we're -- and not being naive, but I'd say we're -- given the services that we provide and the infrastructure that we have, we're not a business or an industry that's likely to be disrupted by AI. However, we have significant opportunity for efficiency improvement with AI. And that is through a real kind of end-to-end business process reengineering that's enabled by AI that will increase quality, increase team member experience, increased customer experience and certainly take out costs. It's a big initiative, and it's not just about technology because you can't -- my take on it is kind of putting technology or AI into your current business process here. I'm doing this because those are generally going to be verticals has limited benefit. You'll find some short-term costs, but it's going to be limited. You really have to think about the business process end to end and then apply the technology and very likely AI on that to drive the efficiency. So we're looking at this end-to-end and not just as a technology play.

Yes. And since we only have 20 seconds, I'll quickly chime in with -- when you think about the sheer operation that we run around managing inventory replenishment operations, there's a lot of opportunities for us to be better and better, better in leveraging AI to make really thoughtful strategic decisions informed by the right data. That's where -- that's a good initial steps into the AI space ahead of the business process transformation that Bob laid out.

Yes, that's great. I appreciate all those comments. Bob, Jim, Bennett, really appreciate the time. Thank you for joining us, and thank you to everyone in the audience as well. Thank you.

Thank you.