Cencora, Inc. — 2024 Q2
Transcript
Each turn shows the speaker, their inferred role, the section, and that turn's net sentiment (×1000).
Hello, and welcome to the Cencora Q2 2024 Earnings Call. My name is Alex, and I will be coordinating the call today. [Operator Instructions]
Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 second quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steven Collis, Chairman, President and CEO; Jim Cleary, Executive Vice President and CFO; and Bob Mauch, Executive Vice President and COO.
Thank you, Bennett. Good morning, and good afternoon to everyone on the call. Before turning to discuss our second quarter results, I want to take a moment to introduce Bob Mauch, our current COO, who we announced in March will be succeeding me as CEO on October 1. For nearly 2 decades, Bob has been an integral partner in shaping and implementing our strategy. In Bob's time leading operations across our businesses, he has developed deep relationship with our partners and team members and his knowledge of our business and considerable expertise will significantly benefit the company as he leads Cencora into our next chapter.
Thank you, Steve. I'm excited to be joining today's call and look forward to deepening my relationships with our investor and analyst stakeholders in the quarters to come. It's an honor to succeed you to become Cencora's third CEO on October 1. Cencora is positioned as a leading health care solutions organization is rooted in our purpose, pharmaceutical-centric strategy and growth mindset. Our purpose, capabilities, and the critical role that pharmaceuticals have in health care and patient outcomes motivate me personally and professionally.
Thank you, Bob. I also wanted to take a moment to acknowledge Gina Clark, our EVP and Chief Communications and Administration Officer, who announced this morning will be retiring at the end of our fiscal year. Gina has had a distinguished career and made an enduring impact, leading large-scale initiatives across the organization, including uniting our company and our new globally inclusive identity, Cencora. Congratulations, and thank you, Gina, for your significant contributions.
Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to my prepared remarks, I want to extend my congratulations to both Steve and Bob on our recently announced leadership succession plan. Since joining Cencora in 2015, I've had the pleasure of working closely with both Steve and Bob as we have executed on our pharmaceutical-centric strategy and focused on creating long-term value.
[Operator Instructions] Our first question for today comes from Elizabeth Anderson of Evercore.
I think maybe one sort of on a high-level basis. Can you talk about the succession plan and sort of like how that came about? And then as we think about sort of the next few months sort of the key priorities of that succession plan, and then Bob, is -- you sort of take the reins fully later this year, can we talk about sort of like what your initial set of priorities is there?
Yes. Elizabeth, thanks for the question. I'll take it. And so our Board has been obviously a company of our size and the enterprise that we manage, of course, is very focused on the practice of succession planning, and 2 weeks ago, I actually had my 30th anniversary at the company, and of course, 13 years as CEO, and Bob has been in the COO position for 2 years. So we've been focused a lot on making sure that key executives have the right development opportunities.
Our next question comes from Lisa Gill of JPMorgan.
I wanted to focus on the margin improvement. And as we think about -- I think Jim, you talked about a couple of the key drivers, specialty, nonspecialty, expense growth, but it's very impressive of what you've been able to do. So can you give us a little more color? Are you seeing anything, for example, on the biosimilars side.
I'll just go quickly. No, it's not. I'll be on -- I'll certainly be on next quarter. So thank you, Lisa, and I'll hand over to Jim.
Yes, Lisa, thanks a lot. Thank you Lisa, for that question. We did have a very good quarter from the standpoint of from both gross profit percentage and operating income percentage during the quarter. So thank you for calling that out. We did have very nice margins during the quarter.
Our next question comes from Daniel Grosslight of Citi.
Congrats on a great run as CEO, Steve, and congrats Bob on your new role here. I wanted to stick with kind of guidance and really around margins for the remainder of the year. Guidance does imply a step down in the second half AOI year-over-year growth, even when you back out the impact of COVID.
Yes. Great. I'd be happy to address all those things. So our updated operating income guidance reflects our strong first half performance and continued operating income growth in the back half of the year. And the difference in growth rate in the first half versus the back half of FY '24 is largely due to COVID vaccine seasonality. And related to that, the COVID vaccine contribution we saw in the first half of FY '24 as well as the contribution we saw in the fourth quarter of FY '23.
Our next question comes from Eric Percher of Nephron Research.
I might switch gears to a question on the competitive environment at large. And so for Steve and Bob, I'd be interested to hear your views given some volatility at the pharmacy, new leadership and some consideration at mail and specialty of in-sourcing that they seem to be sticking with the channel. Do you see any significant change? And what do you need to do to compete at the low margin, high volume end of the market?
Yes. Thanks, Eric. So it's -- look, this industry, I've been in it for 30 years with the company now, and it's -- I think that our value proposition remains as intact as ever. In fact, probably even more so with the complexity of regulatory environments, with the sort of data and insights that we're able to do, and also the way that we've built out our businesses.
Yes. And I think, Steve, you fully addressed it in your answer, that we are always working with Walgreens and our other large customers on mutually beneficial opportunities and synergies and our management teams are needing to pursue those sorts of things.
Our next question comes from Allen Lutz of Bank of America.
I guess more of a high-level question here. How should we start to think about the Inflation Reduction Act, and how that could impact Cencora. Is there any way to think about any direct impact to revenue and margins?
Yes. So the Inflation Reduction Act is certainly something that we're paying close attention to. And we always talk -- I mean even going back to [indiscernible] days, he would say what keeps you up at night and [indiscernible] say [ Washington ] [indiscernible] And I think that's certainly the case more so than ever.
Our next question comes from Stephanie Davis of Barclays.
Congrats on the quarter. Given some of the GLP-1 accessibility issues that haven't called out, continues to assess through the year, should we assume that GLP-1 revenue tailwinds are going more on this 1 to 2-point contribution range versus the historical closer to mid-single digit. And just given the lower calorie nature of this revenue stream, how should we think about the benefits to your margins versus what we looked at prior.
Sure. I'll take that, Stephanie, and thanks a lot for the questions. And as we've talked about in the past, the GLP-1 products are a real driver of revenue growth, but they are minimally profitable. They are profitable for us but minimally profitable. And of course, we've said that for quite some time. But we -- I do feel that they'll continue to be a driver of our top line growth. And as I said earlier, what we saw in the second quarter is revenue growth of $1.3 billion from GLP-1s versus revenue growth of $2.1 billion from GLP-1s in the first quarter. And so -- but we do think that they will be a driver of top line growth. And of course, we're just so pleased to be part of an industry where there's this sort of innovation that benefits patients and just look forward to being a beneficiary ourselves of this sort of innovation for years to come.
Our next question comes from Charles Rhyee of TD Cowen.
Congrats, Bob and Steve, great working with you and look forward to hopefully catching up with you in person before you head off.
I'm not exactly sure what regulations are, but I can tell you, I feel incredibly good about Cencora's ability to manage a complex regulatory environment really whatever jurisdiction we are. And if we feel that we can't be comfortable with the regulations and the jurisdiction. We just don't participate in the business. The enterprises have sufficient size and scale that nothing ever makes us want to compromise any of the standards we have. In fact, we keep on increasing those standards. We want to be the leader in them.
Our next question comes from Michael Cherny of Leerink.
Great. Congratulations on a nice quarter. Maybe just a follow-up, I guess, to Lisa's question earlier about the guidance. I hate doing math on the slide, but I'm giving rough math of call it, $0.14 operating uptick in terms of your EBIT increase. Is that the case in terms of the breakdown into guidance?
Okay. All right. Great. Thank you for the question. And there was a lot in that question, so I'll try and address it all. I think Lisa had commented that she thought that the OI increase in guidance was about $0.12, and I think you said $0.14. And I'll just say that's kind of the increase in guidance implies, yes, that does imply that sort of increase, and it's really offset by the higher tax and the higher shares. And so as a result of that, we basically increased EPS guidance by $0.025 at the midpoint of the range.
Our next question comes from George Hill of Deutsche Bank.
I guess first thing I want to say is congrats to Bob on taking over the CEO role. And Steve, you guys are now the little engine that did, not the little engine that could. But I guess I want to hop in with two quick questions. Just number one, I want to follow up on Eric's question about the competitive environment more generally just because we've seen two sizable pieces of business which has in the last 6 months. So I guess, maybe just talk about if there's anything that we should be alluded to in the competitive dynamic?
Yes. So thank you, George. I do remember that article. And so thank you, and I do -- we are tremendously proud of the way that Cencora has developed in the last few years and how strong our positioning is.
Yes.
Yes. Okay. And thanks for the engine that did. That's a big complement. We've time for one more question, operator.
Our next question comes from Eric Coldwell of Baird.
I'll reiterate all the congratulations across the board. On U S. pharma revenue growth, you maintained the outlook 11% to 13%. I think you guys know that I'm less worried about revenue growth or sensitivity to revenue perhaps than maybe in other industries. But I am curious second quarter was below Street you have lower GLP-1 growth. There are the handful of negative WAC price changes. I think there is potential to lower-priced [ Humira ] and maybe some other biosimilars to gain traction now that the PBMs are is aggressively pushing along those lines. And we also have the known customer loss, which I think the market is guesstimating is around $1.5 billion a quarter.
Yes. So there's a lot there. And let me say with regard to our revenue guidance, what gave us the confidence, of course, to maintain that revenue guidance is just we're continuing to see solid utilization trends across the market. We're continuing due to our strength in specialty, and specialty growing better than the broader market. That's another thing that's helping us, Eric.
No, that's good Okay. We go to Steve for the close.
Okay. Thank you, everyone, for joining us on a busy Wednesday. We are really proud of the performance we reported in this quarter, which reflects the dedication, expertise and teamwork of all of our team members. As you can see, Cencora is very well positioned for the future. Our role in the supply chain is well established, and we will continue to innovate and invest in support of our customers. Thank you very much for your time. Have a good summer. We'll see you in early August.
Thank you for joining today's call. You may now disconnect your lines.