Hello, everyone, and welcome to the Cencora Q4 Full Year 2023 Earnings Call. My name is Emily, and I'll be coordinating your call today. [Operator Instructions] I will now turn the call over to our host, Bennett Murphy with Cencora. Please go ahead.

Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2023 Fourth Quarter and Full Year Results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website, investor.cencora.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make 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-K. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the permission of the company. You'll have an opportunity to ask questions after today's remarks by management. We ask you to limit your questions to one per participant in order for us to get through as many participants as possible in the hour. With that, I'll turn the call over to Steve.

Thank you, Bennett. Good morning and good afternoon to everyone on the call. Welcome to our fourth and final earnings call for fiscal 2023 and our first earnings call as Cencora. Today, my remarks will focus on the continued execution and success of our business in fiscal 2023 and how our strategy and capabilities as a global health care services company position us to further drive value for stakeholders in 2024 and beyond. Fiscal 2023 was a seminal year for Cencora as we united together under our new globally inclusive identity and took key steps to advance our position at the center of health care. I am proud of how we continue to deliver strong results through execution by our team members as we capitalize on the strength of our business, while strategically deploying our capital by both returning capital to our shareholders and making meaningful internal and external investments. PharmaLex and OneOncology were important investments made this year that extended the services and opportunities we have to continue to differentiate the solutions we provide our core customers. Our evolution to Cencora unites our team members under a name that better reflects our impact on health care as we continue to build on our commercial strength. We entered 2023 from a position of strength and have continued to build on the momentum throughout the year, delivering full year adjusted EPS growth of 9%. Guided by our purpose, powered by our foundation in pharmaceutical distribution and differentiated by the breadth of solutions we provide our partners, we continue to execute on our strategic imperatives to advance our core business and enhance our capabilities to drive value in the years to come. This year, we expanded our leadership in specialty by enhancing our suite of services for pharmaceutical partners and adding to…

Thanks, Steve. Good morning and good afternoon, everyone. Fiscal 2023 was a milestone year as we became Cencora, uniting under a name and stock ticker that are more meaningful and reflective of the important role that we play at the center of health care. Solid underlying business fundamentals, broad-based utilization trends and execution by our team members allowed us to deliver strong results in the quarter and the year. In fiscal 2023, we continue to do what we do best, now as Cencora, driving strong execution, deepening relationships with our partners and continuing to invest in our strengths to advance our pharmaceutical-centric strategy and help drive long-term growth. Now turning to our results. And as a reminder, my remarks today will focus on our adjusted non-GAAP financial results, unless otherwise stated. Growth rates and comparisons are made against the prior year September quarter and fiscal year. For a detailed discussion of our GAAP results, please refer to our earnings press release. Beginning with our fourth quarter results, we finished the quarter with adjusted diluted EPS of $2.86, an increase of 10%, which was driven by operating income growth in both segments and a lower share count as a result of opportunistic share repurchases. Our consolidated revenue was $68.9 billion, up nearly 13% with strong revenue growth in the U.S. Healthcare Solutions segment and also in the International Healthcare Solutions segment. In the quarter, our U.S. Healthcare Solutions segment continued to see significant growth in sales of low-margin GLP-1 products, and excluding GLP-1s, our consolidated revenue growth would have been 10%. Consolidated gross profit was $2.3 billion, up 9% due to gross profit growth in both segments, particularly in the International Healthcare Solutions segment, which also benefited from the addition of PharmaLex. Consolidated gross profit margin was 3.34%, a decrease of…

[Operator Instructions] Our first question today comes from the line of Lisa Gill with JPMorgan.

Thanks for all the detail, Jim and Steve. Steve, I wanted to ask a bigger picture question. I think there's been a little bit of an overhang on the stock as you think about your relationship with Walgreens Boots Alliance and the lack of leadership. And even with the former leaders, I would say they had less of a healthcare focus. We now have Tim Wentworth, who's been named CEO. I know you've had a long-standing relationship with Tim. I really just would be curious around 2 things. One, when you think about the relationship, do you think that there's an opportunity to even deepen the relationship? Or are there new verticals you can work together on? And what are your thoughts on the leadership, number one. And then number two, when we think about the sale of your stock -- and they clearly are in a position where they probably need to do something, whether it's cut their dividend or sell more stock. I know that they have some future contracts, and the percentage of ownership of ABC as way down. But how do I think about that and your ability -- maybe this is a question for Jim -- to continue to buy back shares as that continues to happen?

Yes, Lisa. So of course, our relationship with Walgreens is -- and Boots in the U.K. is very significant. We also have the WBAD purchasing alliance. So it's by far the most scaled and material relationship we have. So having said that, we're very pleased that someone who we've known literally for decades like Tim has assumed the mantle. And he has a proven track record. I first met Tim when I was running the specialty business at the former Bergen Brunswig, and he was running the Accredo division at Medco. So go back a long, long time. But our partnership is very strategic. We believe that there's always room to do more because of the scale that we have, and also the challenges that we're going to have. So in the past, we've worked together on purchasing and sourcing initiatives. I think we worked effectively very well together through this COVID season, where we both had our respective roles. There has been, of course, much more patient director in front of the patient. But we think that this relationship will continue to prosper. And we look forward to Tim being very successful in the new role. Jim, do you want to take the second part?

Sure. Thanks for the question, Lisa. And I'll talk about the capital deployment portion. We've successfully collaborated with Walgreens on their latest transactions, repurchasing about $250 million in shares from Walgreens in the most recent quarter and over $1 billion in shares from Walgreens over the past year. And if they were to continue to sell our shares, which wouldn't surprise us, we view it as an opportunity to continue to collaborate with them and repurchase some of the shares and the amount that we've repurchased would be dependent on managing our capital needs and opportunities. And I'm pleased to say that this fiscal year that recently ended, we generated $3.1 billion of free cash flow. So we feel very good about our cash flow generation and our balance sheet and our ability to deploy capital. Thanks a lot for the question.

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

I appreciate the details on '24. I was wondering if you could talk through some -- in a little bit more detail, some of the underlying profit drivers for 2024? And as I'm thinking about them, sort of core customer growth, GLP-1 benefit. Obviously, some of the new -- the benefit for the new acquisitions you've been doing, just to help us sort of get a better sense on where you're seeing perhaps outsized growth, et cetera for the upcoming fiscal year?

Great. Well, I'll start off by saying that we feel very good about our guidance for fiscal year '24. On a consolidated level, our adjusted operating income, we're expecting it to grow in the 8% to 10% range. So that's constant currency, ex-COVID. And so some of the things that move us within that range, from a big picture standpoint, it's of course, the growth rate of our higher-margin, higher-growth businesses. In particular, specialty distribution, but also our commercialization services businesses, including World Courier. The continued strength and utilization trends, which we've certainly seen in fiscal year '23. The extent of the strength of those utilization trends in fiscal year '24; certainly, are 1 of the things that will drive our business. Of course, drug pricing always plays a role, including branded inflation and generic deflation rates, sales of COVID products. And I talked quite a bit about that during the prepared remarks. And then, of course, also FX, but typically, we look at this on a constant currency basis. And I could get into a little bit more detailed commentary on some of these things on some of the kind of the moving pieces. As I said during the prepared remarks, we're expecting $0.02 to $0.10 of EPS contribution related to exclusive COVID-19 product distribution with a vast majority of that in the first quarter. We divested, of course, the Egyptian business during the fourth quarter of the year, which we were pretty -- very pleased with. And that business didn't have a meaningful operating income contribution in fiscal '23. So the divestiture will not create a meaningful headwind to fiscal '24. You asked about GLP-1 products, they're a key driver of our revenue growth, but they're minimally profitable for us, so not a major driver of our operating income growth. But -- and so those are some of the things that are -- from a big picture standpoint and a detailed standpoint, that our driving our business in fiscal year '24. And I'll just finish up by saying we have very good confidence in our guidance, given our strong momentum and the strength we've seen broadly across our businesses as we've finished fiscal year '23.

Our next question comes from Eric Percher with Nephron Research.

Guidance-related question here. Steve or Jim, I'd be interested for your view on the list prices related to [A&P cap] changes in January. And obviously, we have the insulins. I'm curious if that was an impact at all in guidance for next year? And if you expect to see others? And then, Jim, I'd be interested in your assumptions on brand increases. Are you assuming in the guidance that it's not as strong as what we saw in '23, and that might leave upside? And then GLP-1s, do those begin to annualize at the revenue line in Q1, in Q2? When do we start to cycle that?

Yes. Okay. So let me address those things, Eric. First of all, with regard to insulin pricing. There's nothing that I'll call out. The anticipated impact is reflected within our guidance range. And I'll say that, as always, when there are changes that could impact our economics, we engage in discussions with manufacturers and other stakeholders to ensure that we continue to be adequately compensated for the value we provide. You'd asked about drug pricing and how that impacts guidance. And what I'll say is we don't put out specific guidance metrics on drug pricing, but our guidance contemplates brand and generic pricing changes being in line with what we've seen over the past couple of years. With regard to brand inflation, it's really less important for Cencora because well over 95% of our brand buy-side dollars are fee-for-service. With regard to generic deflation, generic deflation has moderated in recent months in certain pockets of the market. So it was less of a headwind for Cencora in fiscal year '23 versus prior years. And so that was, of course, positive for us. If deflation were to continue to moderate more broadly across generics, it would continue to be less of a headwind for our business. I'll say that from a supply and demand dynamic standpoint, it remains generally in balance, and we work closely with manufacturers to understand their supply and availability of product given shortages in certain areas. But as you know, our business model is not as reliant on generic pricing as it once was in the past. Several years ago, our leadership recognized the need to have more balanced profitability across the portfolio of pharmaceuticals, so we've rebalanced some contracts to make sure that Cencora receives fair compensation for the value we provide across brand generics and specialty, which has been key, especially as the market continues to shift to include more specialty products. And Steve, do you have a follow-up there?

Yes. Just a couple of things. I just want to say, in terms of anticipated any reforms, as we know, the best of our knowledge, most of the pricing concessions would take place below the WAC line. So that's what we anticipate at the moment. Just then, Jim, on GLP-1s, I'd say they are clearly most impactful on the top line and an incredible example of the innovation in our industry and the patient impacts. We expect continued growth in this category. But again, they are a much more meaningful revenue growth driver than operating income driver, but important part of our portfolio. The last thing I'd say is that we continue to advocate and help our community pharmacies to obtain adequate reimbursement on those products. So thanks for the question.

Our next question comes from Daniel Grosslight with Citibank.

I want to stick with guidance here. And really relative to your longer-term outlook, which I know hasn't been updated in a few quarters. But you're operating now on an adjusted constant currency basis at around 8% to 10% AOI growth versus your longer-term guidance of 5% to 8%, and that's coming off after a pretty strong fiscal '23 as well. So I'm curious, is there anything, I guess, looking out longer term that would cause that growth to step down perhaps in fiscal '25 and beyond? Or are you in kind of a secularly stronger market than you were when you initially gave that longer-term growth outlook?

Yes. So let me start off, and I'll talk about our long-term guidance. And as you know, our long-term guidance, it contemplates operating income growth of 5% to 8% and EPS growth of 8% to 12%, normalizing for exclusive government-owned COVID products and foreign exchange. This -- we are assuming we'll be able to grow 5% to 8%. And each of our segments and capital deployment contribution will be 3% to 4%. Our guidance is higher than that. As you know, in fiscal year '24, as we called out, as you mentioned, on a consolidated adjusted operating income growth basis, it's 8% to 10% constant currency ex-COVID. And there are a number of things that are driving our guidance and fiscal year '24 and a number of things that drive our long-term guidance. And one thing I think to keep in mind is that the kind of the second half of our fiscal year '24, it compares to 2 quarters of particularly strong ex-COVID growth, including 15% growth that we had in the third quarter of fiscal year '23 and then the 14% growth we had in the most recent quarter. But we have really good confidence in our long-term growth capability, and it will be driven by the things that's been driving our recent growth. It's the growth of our higher margin, higher growth businesses, including specialty distribution and our commercialization services business. It's continued strong utilization trends. It's drug pricing and those sorts of things. And so we have good confidence in our fiscal year '24 guidance and very good confidence in our long-term guidance.

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

Steve, you spoke about the recent conference that you attended with the Good Neighbor Pharmacy customers. And our work suggested you've been growing the number of pharmacies under that brand pretty nicely over the past few years. I'm curious with some of the headwinds we're seeing for companies like Walgreens, can you talk about the current state of the independent pharmacy market and what you're seeing there?

Yes, thanks for the question. Our community pharmacies always differentiate themselves with their resilience. And broadly speaking, they hold up well. Around 20%, 21% of market share. And they've been in that place for several years now. I think with product innovations like GLP-1s and more people doing their vaccine and COVID shots at the pharmacy, it does give an opportunity. Labor and access to pharmacists is probably easier on a more macro level on a smaller basis. And often, some of those pharmacies are in smaller communities, they're very active in those communities. And also, some play a key role in access to underserved communities as a leading health care provider in those communities. So we're proud of our partnership with them. You mentioned growing. And I would say that we do that through our relationships with our buying groups, that we are, I believe, are leaders in the space. And it's a fascinating space for us and one that we'll continue to invest in. Thanks for the question.

Our next question comes from George Hill with Deutsche Bank.

Yes. And Jim, kind of a question at a high level as you look out to earnings -- operating earnings growth in 2024. Would just love to hear you talk about growth in the specialty business versus what we think of as the regular way, retail store drug wholesaling business. And maybe I would love to hear you talk about margin growth in manufacturer-facing services versus retailer-facing services. And just kind of like where are the pockets -- like when we look at the kind of composite growth targets, kind of where are the pockets of strength and kind of where are the pockets of kind of performance that's closer to the core?

Yes. And so as we look at growth opportunities, as you called out, specialty is a key driver of growth for us. And after I talk, I'll ask Steve to talk about it also because, of course, he was the founder of all those businesses. And we're seeing very good growth in and with -- in the specialty market with regard to specialty physician services and physician practices. We're seeing good growth with health systems also, and there's so much innovation that's going on in the market. It's really a long -- it has been, and we think it will continue to be a long-term tailwind for our business. The innovation in that market and the capabilities we have, including all of our wraparound services that we offer. And then just -- and one example of our belief there is the investment that we've made in OneOncology. And then with regard to our commercialization services business, our manufacturer services businesses that are higher margin, we are continuing to make investments there and continue to see very good opportunities. And in addition to specialty, it will really continue to be a focus area for us, driving our growth over fiscal year '24 and the longer term. Steve, are there any things you'd like to add?

No, no. Thanks, Jim. Well said, certainly, I think if you look at where manufacturers are investing their dollars, of course, there's been a very robust sector in the GLP-1 category in the diabetes and weight loss category. But oncology is one where so many manufacturers are focused. We still feel that we have significant opportunities with biosimilars with some of the other new categories of drugs in this area. Cell and gene therapy are going to be important business drivers for us. Cencora plays an important role in those products. And then on the practice management side, the data, value-based care side, so robust, the sector, and our role in it is so integral to those practices that it's just still a very exciting place to be and one way where Cencora will continue to be the leader. And hopefully, we also look to do more oncology in Europe over time as well. Thank you.

Our next question comes from Kevin Caliendo with UBS.

It's Andrea Alfonso, in for Kevin. I wanted to switch gears a little bit and ask about the international front and given your expectations for 7% to 10% ex-FX and ex-COVID, which is above the LRP targets you've outlined. Could you maybe discuss some of your expectations there a little bit? I assume maybe PharmaLex accretion is improving. But we also are comping against pretty strong growth in World Courier and sort of the volumes per shipment and mix basis. And then maybe what your expectations are for commodities as well?

Sure. So yes, we feel very good about our growth opportunity this year in International. One of the things that's driving the growth rate though, I want to make sure you know, is we do have an extra quarter of PharmaLex in fiscal year '24. We had 3 quarters in fiscal year '23, and we'll have 4 quarters in '24. Also we'll really benefit for the fact that we've recently divested the Egyptian business. And that was a headwind in our fiscal year '23, and it will no longer be a headwind in our fiscal year '24. But overall, we also continue to benefit just from the very strong Global Specialty Logistics business, the World Courier business, which has been an excellent performer. And then also solid execution from the Alliance Healthcare team and the Alliance business. And so those are some of the things that drive our growth rate in International in fiscal year '24.

Our next question comes from Charles Rhyee with TD Cowen.

Great. Just wanted to follow up a little bit on that, as we think about the acquisition of PharmaLex and you've been moving more into sort of pharma services, are there other areas when you think about serving your biopharma manufacturer partners, areas that you're -- maybe you're not in that you think are sort of strategically, kind of -- tangential to things that you're doing now that could be interesting for you as you think about capital deployment going forward?

Yes. PharmaLex is a strategic asset that's very complementary to our existing services. They, as you know, provide a platform with services in the U.S. as well as a high level of service for a differentiated level of service than we've historically been providing in Europe. We already had a commercialization service category-type businesses with companies like other well-known like Lash and Xcenda. World Courier, in a way, has many aspects of it that are more like a commercial or a commercialization services, but also strong distribution and supply chain expertise in our ultra niche market. So these are areas that are very intriguing to us. We've always had a view that our customers are both up and down the supply chain. And we want to carry on providing those best-in-class services. We have opportunities also for geographic expansion. So where else does it make sense for us to be. And PharmaLex has been very adept at getting into new markets and is present in many, many countries. So some of these compendia works we're doing, we've been talking about them. And business reviews are really truly global in nature to the extent of very few projects that we've worked on in the past. So exciting opportunities for us, strong management team. We focus on the integration. And I think you'll see potential add-on investments and to -- and including geographic, potentially. But at the moment, we're just focused on rolling it in to the extent that we would want with key integration goals. So -- but thank you for the question.

Our next question comes from Erin Wright with Morgan Stanley.

Great. So a lot of my questions have been asked. But just a quick question on Animal Health. What are you currently seeing in the companion and production animal markets? And how do you see that playing out over the next year, just in light of some that still sluggish vet office visit environment that we're seeing? And then a separate question just on the 2024 guide. I think you mentioned the Walgreens relationship earlier, but any other contract changes or material renewals that we should be thinking about that may be embedded in your guidance here?

Okay. Yes, sure. I'll start off with the Animal Health business there, Erin, and thanks a lot for the question. And I'll really focus my answer on our business. And as I mentioned during my prepared remarks, our Animal Health business had a great quarter. Both our companion and production animal businesses grew very nicely during the quarter. And despite the companion market having some headline issues with vet visits, we've continued to see good sales growth. And in the production market, the herd count remains near record lows. But given the high price of cattle producers want to make sure they keep their cattle healthy. And so we have seen very good results there, and it's probably been driven by, I think, just really good execution by our Animal Health team the last few quarters. And then with regard to your other question on major contracts coming up for renewal, we don't have any large upcoming renewals in the near term.

Thank you. That concludes our questions. I'll just make a closing statement. Cencora is proud to finish our first quarter as Cencora, and we move into fiscal year '24 with strong momentum. We are executing, as we always have, to deliver results. We are investing in our business to differentiate our capabilities and deliver long-term growth. We are at the center of health care and the care of the supply chain, the core of the supply chain, including -- very closely tied to these innovative products that we're so proud to represent in the marketplace. Our fundamentals are strong, and our strategy is sound as we are well positioned to continue delivering value for our stakeholders in fiscal year '24 and beyond. Thanks for your time and attention today.

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.