Cencora, Inc. Q4 FY2024 earnings call

Management Statement and Operational Highlights

• Bob Mauch highlighted strong results in fiscal 2024, driven by customer relationships, business capabilities, international footprint, and team expertise. He discussed investing in core distribution infrastructure, deepening strategic partnerships, leveraging data and analytics, and strength in specialty. Announced acquisition of Retina Consultants of America (RCA) to broaden community provider relationships in high-growth segment. Mentioned goodwill impairment on PharmaLex due to slower business growth but emphasized it remains a key long-term asset. Expressed confidence in team and future priorities including customer-centric approach, innovation, and evolving leadership team.
• Laz Krikorian reviewed fourth quarter and full-year fiscal 2024 financial results, noting adjusted diluted EPS of $3.34 in Q4 (17% increase y-o-y) and $13.76 for full year (15% increase y-o-y). Discussed consolidated revenue, gross profit, operating expenses, operating income, net interest expense, effective tax rate, and share count changes. Outlined full-year 2024 results including $3.1 billion adjusted free cash flow, $3.1 billion cash balance, and $1.9 billion returned to shareholders.

Segment Performance

• US Healthcare Solutions segment: Revenue was $71.7 billion, up 16% versus the prior year. This reflects strong prescription utilization trends, including sales of GLP-1 products, increased sales of specialty products to physician practices and health systems, and growth in sales to largest customers. Gross profit for this segment contributed to the consolidated gross profit growth. The segment's operating income increased by 10% to $697 million, driven by increased volumes across distribution businesses.
• International Healthcare Solutions segment: Revenue was $7.4 billion, an increase of almost 6% on an as-reported basis and 8% on a constant currency basis. However, operating income was $154 million, a 9% decrease on an as-reported basis and an 8% decline on a constant currency basis due to higher information and technology expenses at European distribution business and lower operating income in Canadian business, partially offset by positive results at global specialty logistics business. Consolidated gross profit was $2.5 billion, up 7%, with consolidated gross profit margin at 3.1%, a decrease of 24 basis points compared to prior year quarter due to lower margins in US Healthcare Solutions and impact of GLP-1s and absence of COVID-19 therapies.

Guidance

• Fiscal 2025 adjusted diluted EPS expected in range of $14.80 to $15.10, representing 8% to 10% growth.
• Revenue expected to have consolidated and segment growth rates in range of 7% to 9%.
• Operating income expected to have consolidated and segment growth rates in range of 5% to 6.5%. US Healthcare Solutions segment operating income to benefit from pharmaceutical utilization trends, growth in key markets, and internal efficiencies offsetting COVID-related headwinds and potential oncology customer loss. International Solutions segment operating income to benefit from growth in key businesses and lower information technology expense growth rate.
• Interest expense expected between $150 million and $170 million.
• Effective tax rate expected to be approximately 21% for fiscal 2025.
• Full year average share count expected to be approximately 196 million shares.
• Capital expenditures expected to be approximately $600 million.
• Full year adjusted free cash flow expected in range of $2 billion to $3 billion.
• RCA acquisition impact not included in 2025 guidance yet, expected to be approximately $0.35 accretive net of estimated financing costs for first 12 months upon closing.

Risks

• Goodwill impairment on PharmaLex due to business growth not keeping up with original expectations as outsourced pharma services market faces broader demand challenges.
• Potential impacts from healthcare policy changes such as the Inflation Reduction Act (IRA), including uncertainties around Part B and Part D reimbursement changes which could affect provider practices and Cencora's operations.
• Uncertainties related to the impact of legislative changes on pharmaceutical supply chain and reimbursement, which may pose challenges to the business.

Q: Lisa Gill from JPMorgan asked about strategy changes with new CEO and IRA impact.

A: Bob Mauch mentioned continuing to execute the strong strategy, with no need for major change, and emphasized working through healthcare policy changes with customers. Bennett Murphy noted US Healthcare Solutions segment operating income guidance top-end without COVID vaccine headwind is 8%.

Q: Michael Cherny from Leerink Partners asked about headwinds and specialty contribution.

A: Bennett Murphy said US Healthcare Solutions segment operating income benefits from pharmaceutical utilization trends, growth in key markets including specialty, and COVID-related headwinds and potential oncology customer loss are factored in.

Q: Elizabeth Anderson from Evercore ISI asked about RCA and MSO capabilities.

A: Bob Mauch explained RCA fits in specialty focus and supports community providers, aligning with Cencora's strategy of supporting community providers with MSO solutions.

Q: George Hill from Deutsche Bank asked about IRA impact on practices dispensing drugs.

A: Bob Mauch said Cencora has teams thinking about IRA impacts, which are manageable for providers and Cencora through innovation.

Q: Eric Percher from Nephron Research asked about specialty trend uptick.

A: Bennett Murphy stated the fourth quarter specialty trends were a continuation of good trends seen for a while, with strength in specialty distribution to physicians and health systems.

Q: Stephanie Davis from Barclays asked about RCA and specialty roadmap.

A: Bob Mauch said RCA is a market leader in Retina, aligns with pharmaceutical pipeline growth including biosimilars, and has strong clinical research capabilities.

Q: Kevin Caliendo from UBS asked about RCA as a stepping stone and market opportunity.

A: Bob Mauch said RCA is a market leader in Retina, with growth expected from adding physicians and strong pharmaceutical pipeline including biosimilars, and clinical research capabilities supporting new products to market.

Q: Eric Coldwell from Baird asked about ophthalmology market share.

A: Bennett Murphy said Cencora is a leader in the retina and ophthalmology space, with RCA being a well-known leader in that segment.

Q: Erin Wright from Morgan Stanley asked about World Courier demand and MSO vs biopharma partnerships.

A: Bob Mauch said World Courier has softness from clinical trial development but is a good growing business, and Cencora aligns resources with customers' strategies, including Walgreens, and RCA supports specialty and pharma value proposition.

Q: Allen Lutz from Bank of America asked about Q4 revenue acceleration outside GLP-1s.

A: Laz Krikorian said strong growth in GLP-1s and specialty products and distribution continued to drive top-line growth.

Q: Charles Rhyee from TD Cowen asked about RCA and MSO strategy risks.

A: Bob Mauch said Cencora views MSO model as supporting community providers, enhancing patient access and cost-effectiveness, and will participate in governmental reviews of MSO ownership.