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

Hello, everyone. Thank you for joining us, and welcome to the Cencora Inc. Q3 Fiscal Year 2026 Earnings Call. [Operator Instructions] I will now hand the conference over to Bennett Murphy. Bennett, please go ahead.

Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2026 third quarter results. I am Bennett Murphy, Senior Vice President, Investor Relations and Enterprise Productivity. Joining me today are Bob Mauch, President and CEO; and Eva Boratto, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided within today's press release, which is available on our website at investors.cencora.com. We've also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will discuss forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-Q. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the permission of the company. You have the opportunity to ask questions after today's remarks by management. We ask that you limit your questions to one per participant in order for us to get to as many as possible. With that, I'll turn the call over to Bob.

Thank you, Bennett. Hi, everyone, and thank you for joining Cencora's fiscal 2026 Third Quarter Earnings Call. To start, I'd like to thank our Cencora team members for their continued commitment to providing valuable solutions for our customers. In our third quarter, we delivered strong results driven by execution across Cencora and investments to advance our specialty positioning and our pharmaceutical-centric strategy. Our business performance drove double-digit adjusted operating income growth and supported by $1 billion of opportunistic share repurchases, we achieved 12% EPS growth in the quarter. We're pleased to be raising our fiscal 2026 EPS guidance, reflecting our confidence in our continued execution and the strength of our portfolio as we close out the fiscal year. I'm very happy Eva Boratto has joined us as Chief Financial Officer. She will provide details on our performance and continued confidence in our short- and long-term expectations. During my remarks today, I'll highlight how our strategy enables us to deliver on our growth priorities. First, our differentiated specialty pharmaceutical platform uniquely positions us to support innovation and patient care across our footprint. Second, through our digital transformation, we are modernizing how we operate and serve our partners. And finally, our focus on talent and culture is equipping our teams with the skills, resources and leadership needed to continue advancing our pharmaceutical-centric strategy and delivering our purpose. I'll start with specialty, where our platform supports growth across the health care ecosystem. Our specialty platform builds on our strong foundation in pharmaceutical distribution and deep relationships with providers and manufacturers. Over time, we've expanded our capabilities into a broad set of services designed to address the needs of specialty care. Over nearly 3 decades, Cencora has worked alongside community providers to advance our distribution, GPO and practice solutions, helping physicians operate effectively and care for patients close to home. As specialty care has become more complex, these providers are seeking partners who can help them navigate access, reimbursement and administrative demands while preserving their ability to deliver care in community-based settings. Our management services organizations are well positioned to help oncology and retina practices manage the growing complexity of specialty care and broaden access to clinical trials and research while allowing physicians to remain focused on patient care. Importantly, our role across the specialty landscape gives us a clear view of what it takes for new therapies to reach patients. That unique perspective informs the work we do with manufacturers who increasingly need partners with the infrastructure, expertise and connectivity to enable successful launches and protect product integrity. Across Cencora, our specialty logistics, 3PL and commercialization services help bring innovation to market and drive reliable access to therapies. Before moving to the next topic, I want to reiterate our confidence in the value Cencora provides and our ability to help all stakeholders navigate the impact of market dynamics as we've demonstrated. As the market continues to digest and annualized list price changes, the value proposition of the services we provide remains clear. We're well positioned through our distribution footprint, sourcing scale and end-to-end channel relationships. Importantly, Part B biosimilars will continue to be an opportunity for Syncora to drive value for all stakeholders while taking cost out of the health care system and improving patient access. Moving to our digital transformation, where we're combining business process improvement and technology advances to improve how we operate and work with partners across the health care system. A tangible example of this is our work and demand forecasting. Our teams are using AI to better anticipate product needs across our network and identify key factors driving changes in demand. In a business like ours, these tools help improve planning, enhance product availability and maintain reliable service for providers, pharmacies and health systems. Across our organization, we're applying the same disciplined approach to simplify routine activities and give our team members better insights. That allows team members to spend less time on manual processes and more time using their expertise to work with partners and solve problems. Next, through our focus on talent culture, we're equipping our teams to continue advancing our pharmaceutical-centric strategy and delivering on our purpose. Across Cencora, our teams bring the expertise and commitment needed to serve providers, manufacturers and patients in an evolving health care environment. We're focused on ensuring our talent has clear career paths while strengthening our ability to execute for customers and partners. That focus extends to key roles across the organization. This quarter, -- in addition to Eva, we welcome Sam Hammock as Chief Human Resources Officer. Since joining the company, both Eva and Sam have brought valuable expertise and proven to be excellent enterprise leadership team members. I also want to recognize the significant contributions of Jim Cleary and Silvana Battaglia, who recently retired as CFO and CHRO. Both will continue as advisers through the end of the calendar year. With that, I'll turn the call over to Eva for a discussion of our financial results and updated fiscal 2026 guidance. We're glad to have her here with us today for her first earnings call as CFO. Eva?

Thanks, Bob, and good morning, everyone. It's a pleasure to join the call today, and I look forward to engaging with the investor community in the coming weeks and months. Since joining Syncora in June, I've spent time with leaders across the enterprise and deepened my understanding of the strength of our businesses, the durability of our pharmaceutical-centric strategy and the financial discipline that underpins our long-term growth algorithm. Today, I'll provide an overview of our consolidated fiscal 2026 3rd quarter results and segment level results before turning to our updated guidance. Unless otherwise stated, my remarks will focus on our adjusted non-GAAP financial results. For further discussions of our GAAP results, please refer to our earnings press release and presentation. Our third quarter performance reflects the strength of our pharmaceutical-centric strategy the breadth of our specialty platform and our disciplined capital deployment. Adjusted operating income grew 17%, driven by strong execution in our U.S. Healthcare Solutions segment including the performance of our One Oncology acquisition and continued growth in our International segment, while share repurchases also contributed to the 12% adjusted earnings per share growth. Based on our year-to-date performance and confidence in continued execution, we are raising our adjusted EPS guidance for fiscal 2026 to a range of $17.75 to $17.95. Turning now to consolidated revenue. Revenue was $84.8 billion, up 5% and driven by growth in both reportable segments and in other, which I will describe in more detail when discussing segment level results. Moving to gross profit. Consolidated adjusted gross profit was $3.5 billion, up 23%, primarily due to growth in the U.S. Healthcare Solutions segment. In the quarter, consolidated gross profit margin expanded by 61 basis points to 4.16%, largely due to our acquisition of One Oncology in February. Consolidated adjusted operating expenses were $2.3 billion, an increase of 27%, which again reflects the impact of the February 2026 acquisition of One Oncology. Excluding both MSOs, operating expenses grew 5% on a constant currency basis. Turning now to operating income. Consolidated adjusted operating income was $1.2 billion, an increase of 17% compared to the prior year. driven by double-digit growth across both reportable segments and other. Moving now to our net interest expense and effective tax rate for the third quarter. Net interest expense was $141 million, an increase of $59 million compared to the prior year quarter primarily due to the debt raised in February to finance the One Oncology acquisition. We have made significant progress on our debt repayment commitments and have fully paid off our RCA financing-related term loan balance of $800 million, $400 million repaid in the June quarter and an additional $400 million repaid in July. Our effective income tax rate was 19.9% compared to 20.7% in the prior year quarter. Finally, diluted share count was 193.9 million shares, a 0.7% decrease compared to the prior year quarter as a result of $1 billion of share repurchases in the quarter at an average price of $268 per share. Regarding our cash balances and adjusted free cash flow, we ended June with $2.8 billion of cash and had strong free cash flow generation which results in year-to-date adjusted free cash flow of $1.1 billion. Our full year adjusted free cash flow guidance of approximately $3 billion remains unchanged. Now I'll turn to our segment results for the third quarter and key drivers of our performance, starting with the U.S. Healthcare Solutions segment. Our U.S. Healthcare Solutions revenue was $74.9 billion, an increase of 5%. In the quarter, our revenue growth was supported by strength in specialty across both health systems and physician practices. We also saw continued growth in sales of GLP-1 which increased by $2.3 billion year-over-year. The growth was offset by 3 items. First, manufacturer list price reductions that represented a $2.4 billion headwind to revenue growth; second, the 2025 loss of an oncology customer; and lastly, lower sales to our large mail order customer as expected and consistent with second quarter. Moving now to operating income. U.S. Healthcare Solutions segment operating income increased 16% to $966 million. In the quarter, we saw strong growth in specialty across our MSOs, health systems, and community provider businesses. We were particularly pleased with the performance of our MSO platform with both One Oncology and RCA performing ahead of our expectations. Our core business continued to demonstrate its strength and value, delivering double-digit organic operating income growth when excluding the One Oncology contribution and the loss of the oncology customer last July. I'll now turn to our International Healthcare Solutions segment. International Healthcare Solutions revenue was $7.7 billion, up 6% on both an as-reported and constant currency basis, driven by growth in our European distribution and specialty logistics businesses, World Courier and European 3PL. In the quarter, International Healthcare Solutions operating income was $166 million, up 21% on an as-reported basis and up 23% on a constant currency basis. In the quarter, our European distribution business continued to benefit from the shift in timing of manufacturer price adjustments in a developing market country, again in the third quarter. And there was strength across our global specialty logistics and European 3PL businesses that delivered double-digit operating income growth. Moving to other, which reflects the businesses for which we are pursuing strategic alternatives. Revenue in Other was $2.3 billion, up 7% largely due to growth at Pro Pharma and MWI Animal Health. Operating income was $109 million, up 25% due to operating income growth at MWI Animal Health which also benefited from being accounted for as held for sale. That completes the review of our segment level results. I'll now discuss our updated fiscal 2026 guidance. Driven by our strong performance and opportunistic share repurchases, we are pleased to raise our full year adjusted EPS guidance range to $17.75 to $17.95, up from $17.70 to $17.90. There is no change to our full year guidance for consolidated or U.S. Healthcare Solutions revenue. As you continue to refine your models for our full year U.S. revenue, we would expect revenue to be in the lower half of our 4% to 6% growth range given current expectations. In the International Healthcare Solutions segment, we now expect revenue growth to be approximately 8% at the low end of our previous range as a result of the stronger dollar in the second half of the year. On a constant currency basis, we expect International Healthcare Solutions segment revenue growth to be approximately 7%. In other, we anticipate revenue growth of approximately 6%. Moving to operating income. We are raising the bottom end of our guidance for consolidated operating income growth and now expect growth to be in the range of 13% to 14%. At a segment level, we now expect U.S. Healthcare Solutions segment operating income growth to be in the range of 14.5% to 15.5%. This contemplates continued strong growth in the U.S. Healthcare Solutions segment as we have now fully lapped the loss of the oncology customer continue to benefit from the One Oncology acquisition and have an easier expense comparison in the fourth quarter. In the International Healthcare Solutions segment, we now expect both as reported and constant currency operating income growth to be approximately 9%. We -- in other, we now expect operating income growth to be approximately 10%, reflecting MWI's strong execution and performance. Moving now to our below-the-line items. We now expect net interest expense to be approximately $490 million up from our previous expectations of approximately $485 million, primarily reflecting lower interest income following the $1 billion in share repurchases and we completed in the quarter. As a result of these repurchases, we are also updating our expectations for full year diluted shares outstanding to be approximately 194 million shares. Looking ahead to fiscal 2027, we are currently in the midst of our fiscal 2027 planning process and will provide full fiscal year '27 guidance on our November earnings call. That said, I wanted to offer some perspective as you think about your models. First, as we announced in February, we have reached an agreement to merge MWI Animal Health with Covetrus. We are continuing to work through the regulatory process and have no update on timing. However, for modeling purposes, if the transaction were to close at the midpoint of our fiscal year, we would have a $150 million operating income headwind within other. Given the structure of the transaction, that includes upfront cash, preferred equity and common equity, it would partially offset the earnings headwind, netting to an EPS headwind of approximately $0.35. Second, we do not have an update on the expected timing of the i South retina carve-out acquisition. As a result, we would not suggest incorporating that into the models at this time. Sancor is well positioned across our core U.S. and International Healthcare Solutions segment giving us confidence in our long-term guidance. Although I've only been the CFO for a month, I've been impressed by the strength of our talent, the clarity of our strategy and the dedication to our purpose. As I look to fiscal 2027 and beyond, I'm excited to further Cencora's strong track record of execution and disciplined capital stewardship to drive durable shareholder value creation. Now I'll turn the call back to Bob for some closing remarks before we move to Q&A. Bob?

Thank you, Eva. To close, we were pleased with our strong third quarter performance, which supports our increased fiscal 2026 guidance as a testament to the power of our pharmaceutical-centric strategy. I look forward to closely working with Eva as we continue building upon our track record of execution, growth and disciplined capital deployment to deliver on our long-term guidance. Power by our purpose, we continue to execute against our growth priorities and performance drivers, positioning Cencora to deliver sustainable long-term value creation. As we look ahead, we remain confident in our ability to deliver continued growth in our U.S. and International Healthcare Solutions segments, consistent with our long-term guidance and we look forward to sharing our 2027 outlook on the November call. We'll now open the call for questions.

[Operator Instructions] Your first question comes from the line of Lisa Gill with JPMorgan. Please go ahead.

Good to hear your voice, Eva. Just really want to understand 2 things a little bit better. When will this be the reacceleration that we saw in the U.S. pharma business, last quarter growing roughly 6%, this quarter growing double digits. Can you maybe just give a little more color around what you're seeing? And then secondly, Bob, you did reiterate on fiscal '27, you're comfortable with the long-term view. Just curious if you're comfortable with where the Street currently is, which is about 14% growth for next year. Are you saying that that's within the range? Or is there anything else that we need to think about beyond the 2 things that Eva talked about? .

Thanks for the question, Lisa. And I appreciate your kind words, and I'm super excited to have joined Cencora. And I'll start with your Q3 question. we're really pleased with the performance and the execution in the quarter. On the outperformance, it was largely in the U.S. segment, with strength in our MSO and underlying business trends in the core with strength in specialty in both health systems as well as physician providers. One Oncology did outperform our expectations demonstrating the strength of their platform and its ability to attract physicians to the MSO which we benefited from overall distribution and GPOs for some time. Excluding the loss, as you said, of Florida Cancer and the contribution from One Oncology, our operating income growth was up double digits, a meaningful acceleration from the 7% last quarter. I'll let turn it over to Bob on 2027.

Yes. Thanks, Eva. Lisa, thank you for the question. And yes, we're really excited that Eva is here with us to help us continue to execute at a very high level. On your question about 2027. So Eva gave some modeling guidance that will help everyone kind of estimate where we should be for the year. I'm not going to take it any further than that. But I will reiterate kind of what I was meaning to say in the remarks is that we are confident in our long-term guidance and feel like our execution, the market strength and the strength of our portfolio will continue to have us within that range.

Your next question comes from the line of Glen Santangelo with Barclays. Please go ahead.

Bob, I also wanted to follow up on the strength that you saw in the U.S. health care operating profit this quarter. And to that end, I want to focus a bit more on the specialty business. Back in the March quarter, the company called out some weather-related disruptions, but this quarter, in the prepared remarks, you're specifically calling out RCA and One Oncology is doing better than expected, kind of implying that you've seen some reacceleration this quarter. And I want to separate specialty into Part B versus Part B, as I think there's a very important distinction here, and I suspect you're going to tell me the Part B the much more meaningful driver. And so maybe could you give us a little bit of additional color here in terms of what you saw in the quarter? I think that would be helpful.

Glenn, thanks for the question. And it is important on a lot of levels, and I appreciate the opportunity to explain. So we absolutely did call out the acceleration of the businesses in RCA and One Onc, and the market absolutely performed well, and we have these amazing platforms in RCA and One Oncology that certainly, we're meeting the needs of patients through that market acceleration, and we believe we'll continue to do so. And Eva can spend a little bit more time on kind of expectations and kind of where we were relative to those -- but I do want to spend a minute on the biosimilar part of your question and the kind of Part D versus Part D because I do think it's important for everyone to understand how we think about it. I'll start with Part D. And well, maybe I'll start with biosimilars are good. Biosimilars are good for patients. They're good for cost. They're good for patient access. And so anywhere in our business, it's an incremental positive from a profit standpoint. In Part D, it's less so because we provide less services, less wraparound services in the part D space when a product goes from an innovator brand to a biosimilar. And as we saw last quarter with our large mail order customer that may be in-sourced. And so then we have the revenue decrease, but not a meaningful profit increase. So when we think about the Part D space, biosimilars are good, incrementally positive for Part B, it's much more important, as you alluded to. And that is because the Part B buy-and-bill infusion space, which is where our MSOs where our distribution and GPOs have such a long history of supporting physicians. And within that history, and I talked about distribution, GPO and the MSO, and when we talk about wraparound services, those are all the things that we do to support those products coming to market from a physician perspective, I mean from a manufacturing perspective and then support the physicians and understanding how they may choose to use those products. So that's -- therefore, there's a larger profit opportunity because we play a bigger role in how they're assessed and utilized. So we should think, again, kind of all the way back, biosimilars are good for Cencora. Part D much less so, but still good even though we'll have revenue pressure from time to time with those switches. But Part B will always be good, and we feel very confident about the durability of that over the long term. Eva, why don't you go ahead?

Okay. Just to add on the utilization trends, right? We did see a sequential rebound in the utilization trends from the March quarter. Strong sales in specialty products, as I said previously, to health systems and physician providers. Oncology clearly is the larger but retina also contributed to that sequential improvement. .

Your next question comes from the line of Elizabeth Anderson with Evercore ISI.

Welcome, Eva. Nice to hear you on the call. Could you talk about the operational improvements you're seeing in the One Oncology business and sort of where do you think you are in the integration efforts? And sort of how do we think about this? Just help us understand the sustainability of that above average growth rate.

Elizabeth, it's Bob. I'll start that, and then I'll hand it over to Eva. So as we've explained there really are 3 phases to the value creation thesis that we have for the MSOs. One is the integration of those MSOs into Cencora. So we have significant progress on RCA, good progress on One Oncology, and that's working very well. So the value that Cencora can provide to those businesses we're providing. And as we've talked about, you're seeing the results of their performance. The second phase is where we will share capabilities across the platform. And the example that we've used throughout is the clinical trial space. And I would say we're still early days there and kind of that Phase 2 of sharing capabilities. On track, we feel good about where we are but still early days there. And then the third phase is where we will be developing new services. So the excellent capabilities that we have at Santora from a corporate standpoint and then also within the MSOs of RCA and on oncology, where we'll build new solutions for both physicians and for pharmaceutical manufacturers. So you can think about analytics-type solutions and insights that we'll be providing. But that's in the future. And then in Phase III. And all of that is underpinned by the continuous addition of physicians to both platforms and those additions come in the form of tuck-ins that will happen within either in both of the platforms. And it also happens with individual physicians joining the platform, whether they're recently out of fellowship or moving from another side of care to the community setting. So all of that is working well. I would say we're on track. You see the results of that, but still early days in terms of the value creation that we believe that we can create. And I'll hand it over to Eva.

Great. Thanks, Bob, and to you as well, Elizabeth. As Bob said and I said earlier, both One Oncology and RCA continue to perform to perform well, and we're very pleased with these platforms. I'll go a little deeper on One Oncology. As you think about it on a 12-month basis, we continue to expect One Oncology to be neutral from an adjusted earnings per share net of financing. I would also note, as we continue to evaluate One Oncology's accounting, for its UUT subsidiary as it relates to noncontrolling interest. In the third quarter, we determined that there should not be a noncontrolling loss add back to net income. There was no impact to operating income from this change. It's a complex area. So looking beyond this pretty modest accounting item. Overall, One Oncology operating income is modestly better than our initial expectations.

Your next question comes from the line of Allen Lutz with Bank of America. .

I want to follow up on the strength in the U.S. Healthcare Solutions business. I think if we look at the sequential improvement in growth. You talked about -- well, obviously, weather was an impact in 2Q. I think if you ex that out, the rebound was maybe a little bit stronger than we expected. Can you -- is there anything else to call out as you think about the pockets of strength from your fiscal 2Q or that calendar 1Q quarter going into calendar 2Q. Was there any onetime dynamic around the IRA that impacted 1Q that is now normalized? Trying to understand if there's anything there that was maybe onetime in that calendar 1Q that may be abating now. And then just a quick follow-up. Any of the changes going on in 340B have any impact on your business?

Yes. Thanks for the question. For fiscal quarter Q2 to Q3 really the driver of the acceleration was the underlying strength in the utilization as we called out, relative to the prior quarter. I would also note, as you look forward to Q4, our Q4 implied guidance also implies strong double-digit growth. across our reportable segments. And as you think about that in the U.S., we'll have fully lapped the One Oncology customer loss, and will have an easier expense comp. But when excluding One Oncology, we expect to see the strongest organic growth of the year at the midpoint of our guidance. So just underlying continued momentum of the business, strength in international as well. And I'll turn it over to Bob.

Yes. Allen, thanks. Thanks for the questions. And I just want to reiterate what Eva was saying with the ramp is happening just as we planned. So as we talked about the second quarter being our lowest growth quarter, which it was, and we talked about the ramp that we had in the second half of the year and got a lot of terrific questions about how we were going to do that. But as you heard, we had a lot of confidence. It was mechanical, not aspirational, and we continue to see the opportunities there. On 340B, Allen, as you know, there's recently been guidance on the 340B program test that will be out there. We're still assessing it. We -- as you know, we stay very close to all things policy spend a lot of time in Washington. So we will participate in continuing to monitor talking to regulators and legislators about potential unattended consequences. And our focus on all these discussions is always patient access and having the most efficient access to care.

Your next question comes from the line of Charles Rhyee with TD Cowen. Please go ahead.

Eva, great to hear you again. Bob, when you talked about One Oncology earlier, you talked a little bit about opportunities, particularly in research and clinical trials. I think that's -- maybe can you talk a little bit about how much of that is already being done by One Oncology, maybe how much of revenues or maybe some qualitative estimate of how important that is today? And how mature is that as an opportunity for One Oncology because is this maybe -- are we still like in early innings? And -- how big of an opportunity do you think that could really be?

Charles, thank you for the question. It's -- I'll connect One Oncology and RCA together and kind of the answer of what inning we're in, it varies depending on which part of the MSO platform that you are. So one, as we expand the clinical trial business within the MSOs, it's an absolute driver of profitability and growth. RCA is mature in this space. So they've built a significant well-respected platform that pharmaceutical manufacturers depend on when getting clinical trials done in the retina space. There is a meaningful clinical trial activity within One Oncology, but there's significant opportunity for growth. So I would say, to use your innings, analogy, I think we're kind of in the later innings of the build-out of RCA. Now remember, the growth continues because products are always coming for clinical trials. So it doesn't mean that the growth slows, but the build -- maturity of the build-out is in the latter innings. In One Oncology, it's in the earlier innings, which is why we have so much optimism about the opportunity. Obviously, the amount of innovation in the oncology space and the need for clinical trial support will only continue to grow and will be a great source of that. And just to add, and this is true for RCA and One Oncology, the community oncology community specialty physician side of care we talk about as being the most cost-effective side of care in almost all cases, but it's also the most accessible side of care. So having a meaningful clinical trial access within the community physician space means that more patients will have access to those trials, which is really important for their health care and also for the accrual of the trials, which is 1 of the biggest challenges that the manufacturers have. Thank you for the question.

Your next question comes from the line of George Hill with Deutsche Bank. Please go ahead.

And Eva, again, welcome back to the health care services space. I guess I have kind of 2 quick ones I'd like to bounce through is, number one, on the World Courier in the 3PL business. It seems like there's been a step up in competitiveness in that market over the last 12 months. Would just appreciate if you could comment on anything you've seen there? And then as it relates to kind of the Q4 guidance, like -- and as it relates to specialty in oncology with the pricing dynamics, there also seems to be a little bit of a dollar-based slowdown in the market, given drug pricing and a little bit of a utilization slowdown. Just would be interesting in any -- if kind of a slowdown in the oncology market is weighing on kind of the Q4 results and the Q4 guidance in the U.S. business? .