COR - NYSE

Good morning and good afternoon, ladies and gentlemen. Welcome to the Cencora Q3 Earnings Call. My name is Jaquita. I will be your moderator for today's call. All lines will be muted on the presentation portion of the call with the opportunity for questions and answers at the end. [Operator Instructions] I would now like to pass the conference over to your host, Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Bennett, please go ahead.

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 third quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; Jim Cleary, Executive Vice President and CFO; and Bob Mauch, Executive Vice President and COO. On today's call, we will 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 at investor.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 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-Q. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed permission of the company. You will have an 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 participants as possible within the hour. With that, I will turn the call over to Steve.

Thank you, Bennett. Good morning and good afternoon to everyone on the call. As I prepared for this, my 53rd and last earnings call as Cencora's CEO, I look back at my prepared remarks from my first ever earnings call as CEO. On that call 13 years ago, I highlighted that it was the first time the company had eclipsed the $20 billion revenue mark for a quarter and the company reported $0.66 in diluted earnings per share. Fast forward to today and Cencora is proudly reporting quarterly revenue of over $74 billion and adjusted diluted EPS of $3.34, representing year-over-year growth of 11% and 14%, respectively. Further, we are pleased to be raising our full year outlook as Cencora continues to execute well against our pharmaceutical-centric strategy. The healthcare landscape continues to rapidly evolve and our strategic position as a global leader in healthcare, coupled with agility and expertise of our teams, places us at the forefront of innovation. We continue to leverage our commercial strength to capitalize on the opportunities presented by positive pharmaceutical trends and innovation to drive increased value for our customers, partners and shareholders. Cencora's differentiated footprint and robust suite of services makes us a partner of choice, providing integrated solutions to support pharmaceutical commercialization and access. Our teams collaborate cross functionally, creating a seamless process to efficiently bring new products to market. We remain differentiated in the market by our comprehensive approach, which leverages expertise developed from our position at the center of healthcare and our deep collaboration. As an example, Cencora is serving as an integrated launch partner to a biopharma company launching their products outside the US. Cencora is supporting both market access and efficient distribution to ensure providers and ultimately the patients have reliable access to the novel therapy. Partnerships like this exemplify how our holistic pharmaceutical solutions are providing value to our pharma partners and serve as a testament to how our diverse capabilities allow us to capture opportunity to drive innovation and access throughout the industry. Many of these innovations are increasingly complex, which creates challenges to access and opportunities for Cencora to differentiate ourselves as a partner. This quarter, we continued our ThinkLive trade show series by hosting a two-day Cell and Gene Therapy Conference where leaders across the biopharmaceutical and healthcare industry came together to share a range of perspective on the developments and challenges throughout the developing market. By hosting events like this, we foster collaborative relationships and effective strategies that enable the launch of groundbreaking therapies and reduce barriers to patient access. On the provider side, just last week, we also hosted our Annual ThoughtSpot pharmacy trade show and conference in collaboration with our Good Neighbor Pharmacy network of independent customers. Our ThoughtSpot Conference provides thousands of community pharmacists with the opportunity to connect with peers, attend educational sessions on the latest development and technologies and celebrate the positive impact community pharmacies have as trusted healthcare providers. We truly believe that by bringing our customers together, we help advance the healthcare landscape and promote a deeper collaboration across our teams. Independent pharmacies play a vital role in promoting access to healthcare in their local communities and we are proud that Good Neighbor Pharmacy ranked number one in customer satisfaction among chain drugstore pharmacies in J.D. Power's U.S. Pharmacy Study for the eighth consecutive year in a row. The Good Neighbor Pharmacy network is clearly made up of leaders providing differentiated services for patients across the country. Forging deep strategic partnerships with market-leading customers is a strategic imperative and key differentiator for Cencora. Through these relationships, we better understand the challenges our customers are facing, which allows us to strengthen our services and solutions, driving mutual value and growing better together. As we work to enhance our customer experience, one area of particular focus has been evolving how we leverage innovative technology and analytics to enhance our efficiency and effectiveness. This is important for continuing to improve our day-to-day operations and also finding new and creative ways to analyze and grow their business with actionable data Cencora can harness. These strategic relationships with customers also allow us to capture areas of opportunity in rapidly advancing sectors of the market. I am particularly proud of our specialty distribution and services offering. For close to three decades, we have been a leader and innovator in this space. Importantly, we continue to make forward-thinking investments that position us to capitalize on addressing the complexities these products pose in handling and distribution, and connect us with downstream providers where we are positioned to equip practices with offerings that advance the strength of their business. As specialty continues to grow across all therapeutic areas, we are able to expand and develop the partnerships we have with customers, furthering our leading market position. Our leadership in specialty remains a key tenant of our long-term growth and strategy. We make forward-thinking investments in our infrastructure and emerging technologies to position Cencora as the best partner to address our customers' current and future needs. The value we create throughout the supply chain and for our shareholders is driven by our global team members and their commitment to our purpose. Our team members execute at the impressive level they do because of our purpose-driven culture, which promotes differing perspectives and points of view. In June, we celebrated our team members that identify as a part of the LGBTQ+ community by hosting a global pride celebration and events throughout the month. In recognition of our commitment to fostering an inclusive and supportive workplace for all our team members, we are also proud to have been recognized as a Best Place to Work for Disability Inclusion by Disability:IN for a second consecutive year. Our leaders are dedicated to fostering a working community and culture that celebrates and embraces our team members as the authentic self, which includes providing a safe and inclusive working environment for all as our talents' engagement and commitment to our purpose drives our business resiliency and long-term strategic growth. Cencora continues to efficiently adapt to industry changes, operate and draw on our business synergies and execute across the geographies we serve, which results in our continued growth and resiliency. Our team members' diligence and passion for our purpose is inspiring and is fundamental to our success. With that, I will now hand the call over to Bob, our incoming CEO effective October 1. Bob?

Thank you, Steve. As I continue to prepare to transition to CEO in October, I'm focused on speaking to and learning from our team members and our customers. In my conversations with customers, I reinforce the value of Cencora's strategy, leadership and expertise, and how we are investing and innovating to be the partner that they need now and into the future. In working closely with leaders in healthcare across every channel, prioritizing customer-centric solutions, maintaining a learning mindset and embracing our enterprise-powered capabilities, we differentiate ourselves as partners, grow together and anticipate advancements throughout healthcare. Our team members are motivated by the important work we do, the collective strength of our business and the collaboration we enjoy across our company. The culture and pride our team members have in their work drive our purpose as we create healthier futures, and our success is a direct reflection of our team's pursuit of operational excellence. We champion the diverse perspectives and backgrounds that our team members bring to the table, which enables us to take a thoughtful and creative approach to addressing industry challenges, enhancing the value we provide to customers, partners, shareholders, and the broader healthcare industry. Looking forward, we will continue to execute against our pharmaceutical-centric strategy, driving efficiency through the supply chain, and supporting the growth of innovative products through our higher-growth, higher-margin services. In closing, I'm incredibly honored to have the opportunity to succeed Steve as Cencora's next CEO. Cencora's position in healthcare is a direct result of Steve's vision and next-minded approach in growing and advancing the depth and breadth of our services. And I want to take a moment to congratulate Steve on his incredible tenure and the mark he made on this company as well as our industry. Under Steve's leadership, Cencora has delivered tremendous growth and demonstrated our crucial role to stakeholders. Steve has led the company through major strategic decisions that position Cencora for long-term value creation, including customer partnerships with leading healthcare organizations, expanding our geographic footprint, and the various services and solutions we provide, as well as successfully navigating significant national and global challenges, all while remaining committed to our purpose and supporting our team members. Thank you, Steve, for your service to Cencora and your unwavering commitment. I'm working closely with Steve to ensure a seamless transition, and I look forward to his continued leadership, partnership and guidance as he transitions to the role of Executive Chair. It's a privilege to work alongside Cencora's inspiring and passionate team members. And I look forward to building on our momentum as we are optimistic and excited about the future of Cencora and intend to keep up the track record of execution and performance. I will now turn the call over to Jim for a review of our fiscal 2024 third quarter financial performance. Jim?

Thanks, Bob. Good morning and good afternoon, everyone. Before I turn to a review of our consolidated third quarter results, as a reminder, my remarks will focus on our adjusted non-GAAP financial results, unless otherwise stated. For a detailed discussion of our GAAP results, please refer to our earnings press release and presentation. Cencora delivered another strong performance in the third quarter as we continued to benefit from positive utilization trends, our leadership in specialty and the strong free cash flow generation of our business. As Steve mentioned, adjusted diluted EPS increased 14% to $3.34 as we benefited from strong results in the U.S. Healthcare Solutions segment, lower net interest expense and a lower share count due in part to approximately $550 million in opportunistic share repurchases in the quarter, as we continue to thoughtfully deploy capital and return value to shareholders. Beginning with our consolidated revenue, in the quarter, we had $74.2 billion in revenue, up 11%, with continued growth in our distribution businesses, including increased sales of GLP-1 products, increased sales of specialty products to physician practices and health systems, and growth in sales to some of our largest customers. Our strong revenue growth was offset in part by the January 1 manufacturer price reductions in certain product classes. Sales of GLP-1 products in the quarter increased by $2.1 billion, or 38%, compared to prior year and increased 30% sequentially from the March quarter, when there was a notable slowdown in growth due to supply constraints, which have clearly now subsided. Excluding GLP-1s, consolidated revenue growth would have been approximately 8%. Turning now to gross profit. Consolidated gross profit was $2.4 billion, up 6% compared to the prior-year quarter. Consolidated gross profit margin was 3.19%, a decrease of 14 basis points compared to the prior-year quarter, as a reacceleration of low-margin GLP-1 product sales negatively impacts our gross profit margin. Moving now to operating expenses. In the quarter, consolidated operating expenses were $1.5 billion, up 6% due to higher distribution, selling and administrative expenses to support revenue growth and lapping the efficiency actions we called out last year on our May earnings call. Consolidated operating income was $878 million, an increase of 7% compared to the prior-year quarter, with strong growth in the U.S. Healthcare Solutions segment, which I will discuss in more detail when reviewing the segment-level results. Moving now to our net interest expense and effective tax rate for the third quarter. Net interest expense was $31 million, a decrease of 46% year-over-year, as interest income increased as a result of particularly strong cash flow in the quarter, in part due to our successful unwinding of the extended payments program we launched in the March quarter to support our customers during the Change Healthcare outage. The combination of strong cash flow early in the quarter and higher investment rates compared to the prior year drove the significant decline in net interest expense year-over-year. Turning to income taxes, our effective income tax rate was 21.0% compared to 21.5% in the prior-year quarter. Finally, our diluted share count was 200 million shares, a 2% decrease compared to the prior-year third quarter, primarily driven by opportunistic share repurchases. In fiscal 2024, we have repurchased almost $1 billion of our shares, including $700 million directly from Walgreens Boots Alliance. Regarding our cash balance and adjusted free cash flow, we ended the quarter with a cash balance of $3.3 billion and $2.3 billion of adjusted free cash flow, as the $600 million impact from the Change Healthcare outage that I just spoke about reversed early in the third quarter. This completes the review of our consolidated results. Now, I'll turn to our segment results for the third quarter. U.S. Healthcare Solutions segment revenue was $67.2 billion, up 12%, reflecting strong script utilization trends, including increased sales of GLP-1 products and specialty products to physicians and health systems. Excluding sales of GLP-1 products, segment revenue growth would have been approximately 10%. U.S. Healthcare Solutions segment operating income increased 10% to $698 million, as our specialty distribution business saw strong growth in both oncology and ophthalmology in addition to strong overall prescription volumes and biosimilar conversions. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $7.1 billion, flat compared to prior year on an as reported basis or up 6% on a constant currency basis. International Healthcare Solutions operating income was $179 million, a decrease of 4% on an as reported basis, due to continuation of higher information technology expenses for our European distribution business and lower operating income at our global specialty logistics business as there were less international shipments and lower weights per shipment, all of which was partially offset by positive results at our Canadian business. On a constant currency basis, International Healthcare Solutions segment operating income increased 1%. Our global specialty logistics business is starting to see some good early signs on the demand side and the business continues to invest to further differentiate its global strength in its complex high-touch market. That completes the review of our segment-level results. I will now discuss our updated fiscal 2024 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. I will start with updated adjusted diluted EPS guidance and then provide greater detail on the income statement items driving our improved earnings expectations. Today, we are pleased to raise our fiscal 2024 EPS guidance for the fourth time this fiscal year. We now expect EPS to be in the range of $13.55 to $13.65, representing growth of 13% to 14%, up from our intra-period provided EPS guidance range of $13.35 to $13.55. Our updated guidance range reflects our expectation for continued growth in the U.S. Healthcare Solutions segment, tapered expectations in the International Healthcare Solutions segment, and lower net interest expense expectations for the fiscal year. Beginning with revenue, we now expect both our as reported and constant currency consolidated revenue growth to be approximately 12% from our previous guidance range of 10% to 12%, given our increased guidance in the U.S. segment. In the U.S. Healthcare Solutions segment, we now expect segment level revenue growth of 12% to 13% from the previous range of 11% to 13%. In the International Healthcare Solutions segment, we now expect as reported segment-level revenue growth of 4% to 6% from the previous range of 4% to 7% and constant currency revenue growth of 7% to 9% from the previous range of 7% to 10%. Moving to adjusted operating income, we now expect our as reported consolidated adjusted operating income growth to be in the range of 10% to 11%, as we narrow our guidance from the previous range of 9% to 11%, and constant currency growth to be in the range of 11% to 12%, narrowed from the previous guidance range of 10% to 12%. Updated guidance reflects expected continued growth toward the upper end of our previous guidance range in the U.S. Healthcare Solutions segment and growth toward the lower end of our previous guidance ranges in the International Healthcare Solutions segment. In the U.S. Healthcare Solutions segment, we now expect our segment-level adjusted operating income growth to be in the range of 11% to 12% from our previous range of 10% to 12%, due to our continued strong growth expectations for the remainder of the fiscal year. As a reminder, in the fourth quarter, we will lap the prior-year contribution of $0.08 from exclusive COVID therapy distribution and will also begin comparing to prior-year quarters that had contributions from commercial COVID vaccines, which we expect to be comparable year-over-year. In the International Healthcare Solutions segment, we now expect our segment-level adjusted operating income growth to be in the range of 5% to 7% from our previous range of 5% to 8%. On a constant currency basis, we now expect adjusted operating income growth to be in the range of 10% to 12% from our previous range of 10% to 13%. We are modestly narrowing our International operating income guidance range, bringing down the top end of the range due to our third quarter results in the segment and some softness in demand at PharmaLex. Moving now to net interest expense and share count. We now expect our net interest expense to be in the range of $170 million to $190 million, down from our previous range of $185 million to $215 million, driven by our better-than-expected free cash flow. For weighted average shares outstanding, we now expect our full year count to be under 201 million shares as a result of our opportunistic share repurchases in the quarter. As you will recall, on May 22, we announced that we had completed $550 million in share repurchases in the month, including $400 million repurchase from Walgreens Boots Alliance, decreasing our weighted average diluted share count. Finally, turning to adjusted free cash flow, we now expect to generate $2.5 billion to $3 billion, up from our previous expectation of approximately $2.5 billion in adjusted free cash flow in the fiscal year, given our strong free cash flow generation in the third quarter. That completes the review of our updated guidance for fiscal 2024. As we near the end of the fiscal year, I'm proud of the strong results our purpose-driven team members have produced. The dedication and execution by our team members continue to drive our growth and enable us to deliver on our pharmaceutical-centric strategy. Cencora continues to demonstrate our ability to deliver long-term sustainable growth and create value for our customers, partners and all our stakeholders. Before handing the call back over to Steve, I want to extend my congratulations, once again, to both him and Bob as our company is well-positioned to continue creating value in the short and long term with the company's thoughtful leadership transition plan. Cencora has benefited from having such a purpose-driven leader in Steve for well over a decade and his vision for the company has created a strong foundation for value creation for our customers, partners and shareholders. Under Bob's leadership, we will continue to build on Cencora's momentum and commercial strengths and drive further value for our stakeholders on our path toward our purpose of creating healthier futures. Congratulations to you both once again. Before turning the call back to Steve, I'm going to go through a little bit of historical data, which will take Steve by surprise. And during the 13 years that Steve has been CEO of Cencora, the revenue compound annual growth rate has been 11%, and the adjusted EPS compound annual growth rate has been 14%. And it's a little bit of a coincidence that those were actually the same growth rates we had this most recent quarter, 11% revenue growth and 14% adjusted EPS growth. And then also, during the 13 years that Steve has been CEO, the company has had a TSR, total shareholder return, CAGR of between 15% and 16%. So, Steve, I thought I'd just go through that historical data, and now I'll turn it back over to you.

Thank you, Jim. You did take me by surprise. But with this being my final earnings call, I want to take a moment to thank our team members, our Board and our stakeholders for the opportunity to serve as Cencora's CEO these last 13 years. In my first call as CEO, I highlighted that we would pursue opportunities to increase our value offering to existing customers, add to our strengths in core competencies and increase shareholder value. Throughout my tenure, we have delivered on that framework and grown significantly, operationally, geographically and financially, as we built upon our scale and expertise as a pharmaceutical distributor and leader in specialty by deepening and broadening our relationships upstream with pharma and advancing our solutions downstream with our provider customers. We have advanced our core distribution capabilities through organic and inorganic growth opportunities, in turn, expanding our reach and providing more patients with the life-saving medications they need. Our leadership and capabilities in specialty makes Cencora a driving force in supporting access and intelligence for cutting-edge therapies. Cencora's demonstrated growth over the past decade-plus speaks to the strength of our execution against our pharmaceutical-centric strategy. Our team's relentless focus has allowed us to continually capitalize on growth across healthcare and to be the partner of choice for both upstream biopharma and downstream providers. Cencora is strategically positioned at the center of healthcare, and as Bob steps into the role as CEO on October 1, the company will continue to build on our momentum, relationships and capabilities, guided by his leadership to drive results and create value for all of our stakeholders. I've had the pleasure of working alongside Bob for almost 20 years and I'm excited to see the future as we watch him lead Cencora. Bob's deep understanding of all facets of pharmaceutical distribution, logistics and commercialization, experience leading all of our businesses during his tenure, and his integral role in helping to shape our strategy over the years makes him incredibly well-equipped to be the company's third-ever CEO. It has been an honor and a pleasure to be a part of the company's evolution and I look forward to seeing how Cencora advances into the future. The numbers that I talked about at the opening of the call would not have been possible without the enormous contribution of so many of my colleagues throughout my 30-year career with the company, and I'm sincerely grateful and humbled by their achievements and dedication to being united in our responsibility to create healthier futures. With that, we will now move to Q&A. Operator?

Absolutely. We will now begin the question-and-answer session. [Operator Instructions] The first question comes from the line of Lisa Gill with JPMorgan. Your line is now open.

Thanks very much, and congratulations, Steve. It's been great working with you for a number of years. And Bob, congrats to you as well. My question really is around how we think about things from here. Obviously, a great quarter, great last several years and also under your tenure, Steve, but as I think about '25, really two questions. One, Bob, any change in the philosophy of how you think about whether it's giving guidance to the Street or any of the growth metrics? And then secondly, for you, Jim, I know usually here in the third quarter, you'll give us some headwinds and tailwinds and things to think about as we think about fiscal '25.

Lisa, thank you for the kind words. When you think about going forward, it's -- I'll hit the strategy point first and that kind of links to your question. I think Steve said this, but it's important to remember that Steve and I and the executive team have worked for over a long period of time on our strategy, and that's working as evidenced by our performance. And so, you shouldn't expect any changes there. And that would include how we think about our going-forward guidance and projections, but I'll let Jim answer that.

Sure. Great. Lisa, I'll answer the second part of your question. I'll start by saying that we'll provide comprehensive guidance at the end of our fiscal year after we've completed our year-end planning process. I'll also say that we do feel good about our long-term guidance that contemplates operating income growth of 5% to 8% and EPS growth of 8% to 12%. And you asked about puts and takes. Items that would move us within a range include things like growth in specialty products to physicians and health systems and the growth rate in that important part of our business, continued positive utilization trends, of course, timing of capital deployment, including any timing of share repurchases. And then also one other thing for fiscal year '25 is comparison to the first season with commercial COVID vaccines. As you'll recall in the first quarter of fiscal year '24, we sold a lot of commercial COVID vaccines and we're preparing for that and -- for the first quarter of '25, but of course, it's hard to predict the absolute level. I'll finish by just saying that we've consistently delivered strong financial performance, driven by our leading market positions and the continued execution by our team members, our pharmaceutical-centric foundation and our competitive position enables us to capitalize on market trends and continue to deliver solid results. So, thanks a lot for the question, Lisa.

Thank you. The next question comes from the line of Michael Cherny with Leerink Partners. Your line is now open.

Good morning. Thanks for taking the question, and I'll echo Lisa's comments, Steve. It's been a pleasure. I know you're not going too far, but we'll certainly miss you on these calls. And welcome hearing from Bob more. Maybe just to kind of follow-up a little bit on the second part of Lisa's question, as you think about the market today, you talked last quarter about some of the changes in list prices and how it impacted the quarterly results you saw, at least from a revenue basis in the U.S., a nice sequential uptick. Where do you see relative to where you'd expect? I mean, Jim, you mentioned the long-term trajectory, but where do you see the health of the markets today as you prepare to give us that full guidance? And in terms of what could be a positive/negative dynamic, obviously, you have a lot of customers, some big, some small going through strategic changes. How does that factor into how you think about the trajectory going forward for your business?

Yeah. I'll start out in talking about the overall health of the market. We continue to see very good utilization trends. We saw solid utilization trends in the quarter, which is something we've talked about for quite some time. Those include continued growth of GLP-1s, which of course, drive top-line, but are minimally profitable on the bottom-line. But we are also seeing particularly strong sales of specialty products to physician practices and health systems that continue to outpace the broader market growth. And within specialty, we're seeing positive trends in both oncology and ophthalmology. Other kind of macro things as you're asking about, drug pricing, really no new commentary there. Brand inflation, that we would have talked more about last quarter because of the timing, brand inflation continues to be in line with our expectations, but then of course, over 95% of our brand buy-side dollars are fee for service. And generic deflation, really the same commentary that we've had for quite some time now that we've seen a moderation of generic deflation. And of course, our business model is not as reliant on generic pricing because of our contract rebalancing. But overall, in terms of market trends, it's very consistent with our recent commentary.

Thank you. The next question comes from the line of Elizabeth Anderson with Evercore ISI. Your line is now open.

Hey, guys. Thanks so much for the question. Congrats, Steve. And looking forward to working more with you, Bob, going forward. Maybe just a question about the PharmaLex business. I know -- can you talk about sort of how pharma -- how that cycle is going? We've heard across the spectrum that we've seen some weaker spending in that. Where do you think we are in that cycle? And how -- what have been your sort of tentative comments from your customers in terms of 2025 budgets there? Thank you.

Yeah. So, I will start. We've seen some softness in our consulting business as we commented on -- in our prepared remarks, and that's been noted by some other companies in the space. There are some early positive indicators in the market. It's too early to call it a rebound, but we are seeing some early positive indicators. And our team is really focused on identifying and prioritizing revenue-generating action items. And I'll also say that we do remain confident in our strategic decision to acquire the business.

Yeah, Jim, I'll just add. And Elizabeth, first, thanks for the question, and thank you for the warm welcome, but I'll just reinforce what Jim said at the end there. We have a strong belief in the strategic thesis that the innovation in pharma will continue over a long period of time and that our pharma services businesses, which are higher-growth, higher-margin businesses will benefit that. And from time to time, there will be partial slowdowns in that area, but as Jim said, we are seeing improvement.

Thank you. The next question comes from the line of Allen Lutz with Bank of America. Your line is now open.

Good morning, and thanks for taking the questions. First, congrats, Steve, on a really nice run here over the past 13 years. One question for Jim. The gross margin was relatively flat quarter -- year-over-year last quarter, but now it seems to be continuing the normal trend down. Is that all due to the reacceleration of GLP-1s? I know there's a lot going on underneath the hood, insulin pricing, vaccine, currency headwinds in GLP-1s, but I'm curious if there's anything else to call out there. Thanks.

Yeah, thanks a lot for asking that question. And the decline in gross profit margin this quarter is very explainable. First, let me say, year-over-year in the U.S., it's due to increase in sales of lower-margin GLP-1s. And then, if you look at it on a consolidated basis, really the balance is simply due to mix. The U.S. business grew faster in the quarter, of course, than the International business did and the U.S. business has lower gross profit margins. The International business has more of the kind of higher-margin businesses in it, and so that mix also had an impact during the quarter. Thank you for asking.

Thank you. The next question comes from the line of Eric Percher with Nephron Research. Your line is now open.

Thanks. I can't resist a kind of historic question for Steve, and Bob, I'll welcome you to comment as well. Of late, we've seen quite a few large oncology groups up for sale, and obviously, one of those benefited you last year with OneOncology, and another now in Florida in the news on a possible sale. Steve, do you think that there's a change going on? Is there pressure on these businesses that's leading to this change? Or do you think that they're looking to monetize from a position of strength? And then, the follow-through there is, does that ultimately create opportunity or risk for Cencora?

Hi, Eric. And thanks to everyone for the kind congratulations. On that question, look, the specialty market is very dynamic. There's no doubt that the aggregators in oncology are becoming more pronounced in their market share, even within our own business, as many community oncologists look to aggregate with shared services and offerings, more comprehensive offerings, but it's not for all of the customers that we have. And I think geography and certain payer mixes within regions, mixes within the practice between Medicare and Medicaid, philosophy around value-based care, all of that can make a difference. We intend to be the leader in the market in oncology and we've demonstrated that for well over two decades. I think Bob is committed to that as I've been, and we'll look to participate vigorously in the market. And sometimes, if that needs investing, we've shown with OneOncology that we will do that. Bob, anything to add?

Yeah, Steve. Eric, thanks for the question. I would add, I think what we're seeing is a real demonstration of the value of community oncology within the healthcare system. And they are a high-quality, lower-cost, side of care. And as they come together, they're building scale, which will actually make them more efficient and more effective. And as Steve said, they'll be even better prepared to participate in value-based care programs when those are more widely available. So, I think as a macro trend, it's positive. And as Steve said, we will do our best to make sure that we continue to lead in that area.

Thank you. The next question comes from the line of Charles Rhyee with TD Cowen. Your line is now open.

Yeah, thanks for taking the question. And Steve, I'd like to congrats on a successful tenure here, and Bob look forward to working more with you. I just want to kind of maybe follow-up on some of the earlier questions here. Obviously, when your large customers are undergoing sort of a restructuring here and a lot of details probably have yet to be kind of worked out, but I guess when you guys are doing your planning, is it fair to think that you are in discussions with your clients to kind of work through? Do they share with you sort of their plans on how they're working -- thinking through things like closures et cetera, or is that something that you find out along the way? And just maybe sort of how you factor that in when you're thinking about setting up sort of your projections for the coming year? Thanks.

Yeah, I'll start with that. So, the answer to your question in terms of how we work together and making sure that their strategic execution goes well, as you'd expect, we work very, very closely together. So, these are not plans that we would find out about after the fact. In fact, we would expect to and be involved in supporting that and helping, right, so that the most successful outcome possible is achieved. And in the example of store closures, that's something that we'll work very closely with Walgreens on, and we expect that they'll have a good level of success in maintaining the volume, but we do work very closely together, not only on but overall in our position with Walgreens and really all of our customers is to make sure that we're doing everything that we can to support their strategy and build long-term strategic relationships. And that's exactly what we're doing as we sit here today with Walgreens.

Yeah, and I'll just very briefly answer the last part of the question. And I think it goes without saying, but of course, we stay close to our key customers and we always are estimating growth and take that into account as we're developing our annual plans.

Thank you. The next question comes from the line of Erin Wright with Morgan Stanley. Your line is now open.

Great. Thanks. So, excluding some of the FX dynamics in the International business, can you detail some of those moving pieces that you're seeing there, like the technology investments that you're making, but also underlying utilization trends kind of internationally? Is there anything else to kind of call out there? And then, just a second question on animal health. Any sort of update on underlying demand trends there across livestock and companion animal? Thanks.

Okay. There's a lot there, Erin, and let me quickly go through it. So first of all, on International, as we said during the prepared remarks in the International segment, operating income was down 4.1% this quarter on a reported basis and up 1% on a constant currency basis. And the results -- there are couple of things that we called out. And as we previously called out, there were higher IT expenses in our European distribution businesses and we've continued to do the right thing, which is kind of investing in IT there. So, we have very good systems there. And then, the one other thing that we called out is lower operating income in our global specialty logistics business, which is long term, a great performing business, but what we saw this quarter was less international shipments and some lower rates per shipment. So, those are two things that impacted International this quarter. And we did have this quarter a very good performance by our Canadian business. And so, from a guidance perspective, we brought down the top end of the operating income growth range by 1 percentage point in our International segment. And just to put it into perspective, 1 percentage point is about $7 million. And we indicated we were modestly lowering that range due to the third quarter results and some softness in the PharmaLex business. But overall, what I will say is that results will tend to be a little bit more lumpy in our International business than in our U.S. business, because our U.S. business is really driven by pharmaceutical distribution and the utilization trends there, where the International business has more of the high-margin, high-growth businesses in it that can tend to be a bit more lumpy from time to time. And so, the second part of the question, really nothing new to call out in animal health. Year-to-date, revenue growth has been 7%. We're basically continuing to see the same sorts of trends in companion animal and production animal that we talked about, and I would say, we are seeing just kind of very good execution by our team there. And I think that fully covers it, Erin. Thank you for those questions.

Thank you. The next question comes from the line of Daniel Grosslight with Citi. Your line is now open.

Hi. Thanks for taking the question. And I'll add my congrats to Steve for a tremendous run here and Bob for officially taking the reins. Jim, maybe one for you on guidance. It does imply on the U.S. side a bit of an outsized sequential decline in operating income for your fiscal 4Q. Curious if you could provide a little more detail on what specifically is driving that sequential decline, particularly given, I would assume that you'd see a bit more operating income from commercial COVID vaccines in 4Q versus 3Q. Thanks.

Yeah. So, let me address that, and I believe your question was focused on the U.S. segment. And of course, we are increasing our operating income guidance in the U.S. towards the upper end of the previous range. So, we were guiding at 10% to 12% adjusted operating income growth and now we're guiding at 11% to 12% adjusted operating income growth. And really nothing specific to call out there beyond what we have been talking about is solid utilization trends and broad-based, good performance across many business units and particularly strong sales of specialty products to physician practices and health systems. So, the thing that could move us within that guidance range as we kind of get to the end of our fiscal year is just kind of how well businesses perform as the year ends. And then, the COVID part of it is key, and so thank you for asking that. We expect the contribution from total COVID to be down year-over-year in our fourth quarter. And the contribution from commercial vaccines, we expect to be comparable year-over-year, but we expect very little contribution from therapies in the fourth quarter, and we are lapping the fourth quarter of last year when we had contribution of $0.08 from exclusive therapies. And so that is kind of the one thing that creates a bit of a headwind in the comp year-over-year is we did have the $0.08 from exclusive therapies last year and we're expecting very little contribution from those -- from commercial therapies this year. Thank you for asking the question.

Thank you. The next question comes from the line of George Hill with Deutsche Bank. Your line is now open.

Yeah. Good morning, guys. And I'll extend my well wishes to Bob. And Steve, it's been great working with you. And, Jim, I look forward to continuing work with you. But I guess I'll ask a little bit of a pointed question about the Walgreens relationship, just because the management team at Walgreens has been pretty pointed about the idea of trying to extract more value from its relationship with you guys. I know there's a tremendous amount of investor concern, I think, regarding both the relationship and the earning stream that Cencora generates as it relates to Walgreens. So, Steve or Bob, would love to hear you guys kind of open mic on the status of the relationship kind of earnings exposure. If there's a way that you can kind of talk about that on the call? I can see why that would be a challenge. But just kind of like -- or maybe you can just talk about how you guys are collaborating to drive value for Walgreens. I think any color there would be appreciated.

Yeah. Hi, George, thanks for the question and the warm wishes. Yeah, look, Walgreens is an incredibly strategic relationship for us and a strategic partnership between the two of us. As I mentioned earlier in one of the operational questions, we work every day to make sure that we're supporting the strategy of WBA, as they go forward. And I think it's important to note that we have a very broad and strategic relationship. So, there certainly is the Walgreens distribution relationship, there's also the Boots distribution relationship, and of course, we buy generics together. So, as you would expect, we're working very closely with them. We want to do everything that we can to support their strategy as they go forward. But as long-term strategic partners, we're at the table doing everything that we can.

Yeah. And it's -- of course, George, as you well recall it since 2013, and I think Bob's got it, we also support Boots. That's a key relationship. So, it's something that we're proud of and you can expect that Cencora, in our usual diligent way, will approach this thoughtfully and with a mind to creating long-term value.

Thank you. The next question comes from the line of Stephanie Davis with Barclays. Your line is now open.

Hey, guys. Congrats on the quarter. And echoing everyone else, Steve, congrats on a really strong track record over the years. We've seen a lot of movement in your end market, as George has called out, and as contracts kind of have changed hands this year at what feels like an accelerated rate. So, I wanted to ask you a two-parter. First, how are you differentiating yourself versus your peers during your renewals? Like, what are the big ways you're highlighting you are able to add value? And secondly, I know you've had some kind of changeover in how your contracts are structured as it goes through the years of the contract. Could you remind us on how that changes renewal dynamics? Thanks very much.

Yeah, I'll take that. Thank you, Stephanie, very much. Look, the environment is, as it has been for a long period of time, competitive, but also very stable. We work diligently to make sure that we're supporting all of our customers across our entire portfolio, which is really from end to end, from a provider standpoint, here in the United States and outside of the United States. Specifically, we're working to help drive efficiency. We'll work to help improve service levels where that's important to those customers. And it's a customized approach, and that's really important for the large customers in particular. Then, we also have our programmatic services that Steve mentioned, our ThoughtSpot conference and our Good Neighbor Pharmacy independent pharmacy customers. And of course, we've talked about community oncologists as we go through. So, each of those customer segments requires a different approach, but in every case, we work diligently and we invest in having long-term strategic partnerships, so that we bring the resources of Cencora to support that customer strategy. Specifically, on the pricing front that you asked about, Stephanie, we have over many years worked to balance our contracts, so that when we work with a provider customer, pharmacy customer that we are not subsidizing one product category over another so that as mix changes happen, there's not a detriment to the customer or to Cencora. So, it's a bit more predictable as we go forward and as the market dynamics continue. So, we believe it's healthy and a positive in terms of our customer relationships.

Thank you. The next question comes from the line of Eric Coldwell with Baird. Your line is now open.

Thanks very much. I think most of mine have been covered. I wanted to come back to just quickly on, it sounded like a combination of both specialty logistics and PharmaLex, if I understood correctly, it sounded like you referenced early positive signs of a rebound. Just correct me if I'm wrong, if it was just in specialty logistics? But what are those early positive signs or leading indicators that you referenced? Do you have any details you could share? Thanks.

Yes. In the discussion of specialty logistics, the specific things that we were referring to when we said early positive signs were some volume trends. And so Eric, it was specifically on that. And I'll also just comment on that, as you know, that's a business that has just outperformed and grown really nicely for many years, and it's just -- it is a fantastic business for the long term.

Thank you...

Thank you. I realized that...

Thank you.

Thank you, Eric.

The next question comes from the line of Kevin Caliendo with UBS. Your line is now open.

Thanks. Appreciate the time. And, Steve, just want to say always appreciated your calming voice in this crazy world in which we operate sometimes. Super helpful.

Thank you.

Guys, I just wanted to ask, have you been approached yet or have you seen any disruption at all from any of your independence from what's been going on with [NADAC] (ph)? Have they come to you for relief or help, or is there anything that you can do try to offset what's been upwards now a 20% hit to their reimbursement? I'm just wondering how -- what the feedback has been from your independent and small regional chains who are being hit hardest by this.

Yeah. Thanks, Kevin. I'll start with just macro. The independents have been incredibly resilient over a long period of time. And as we've said a few times during this call, our intent is to be really close to them at all times. So, we're always talking to our customers, including the independent customers, about how we can best support them. NADAC specifically, it's a voluntary survey. We've seen the volatility in that survey and we're not seeing specific requests from our independent customers around this, at this time. But it's -- obviously, this and all things in the market around reimbursement, we stay very, very close to and close to our customers.

Thank you.

Thank you.

With that, we'll conclude our call, and I'll just make some concluding remarks. I just wanted to thank the analyst community for their interest and support and bearing through 53 quarters of the South African accent, which, of course, has been well shared. And also thank all the people that I don't necessarily call out on the call, including, the people in Jim's team who helped prepare these numbers, and Bennett's team that are so outstanding and so committed to the purpose of Cencora. So, in concluding, I just would also like to wish Bob as much success and performance and pride during his tenure as CEO as I've enjoyed. Thank you for your time today.

Thank you, Steve.