Cencora, Inc. Q3 FY2023 Earnings Call

Hello, and welcome to today's AmerisourceBergen Q3 Fiscal '23 Earnings Call. My name is Jordan, and I'll be coordinating your call today. I'm now going to hand over to Bennett Murphy, the Senior VP and Head of Investor Relations and Treasury, to begin. Bennett, please go ahead.

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen fiscal 2023 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; and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.amerisourcebergen.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. AmerisourceBergen assumes no obligation to update any forward-looking statements. And this call cannot be broadcast without express permission from the company. You 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 in 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. Today, I am pleased to discuss AmerisourceBergen's pharmaceutical-centric businesses. The strength of our balance sheet and execution by our team members have continued driving our strong performance in fiscal 2023. In the quarter, we saw continued momentum across our businesses, delivering revenue growth of 11% and adjusted EPS growth of 11%. We are once again raising our fiscal 2023 guidance as we continue to benefit from good underlying business fundamentals and our focus on operating more efficiently. As I said last quarter, we are leveraging our commercial and organizational strength to find ways to better collaborate with a focus on enhancing the way we go to market with our customers. Operating efficiently is critical to our role in the supply chain and to our ability to invest as we seek to drive further differentiation in our business. Guided by our pharmaceutical-centric strategy, we advanced our business by focusing on four key areas: community providers, specialty medicine and services, global access and opportunity, and customer partnerships. We leverage our robust commercial strengths to provide solutions and forge deep relationships with customers and partners globally. Community providers, from specialty physicians and local health centers to pharmacies and veterinarians, are the cornerstone of access and care in their communities. We work closely with our customers to provide solutions to support their operational needs and strategic initiatives, as they enhance their patient impact. By leveraging our scale and expertise, we offer a broad range of solutions to our community provider customers from those designed to help them solve everyday challenges like marketing and contracting to those designed to help evolve and broaden their reach. One example of this is our network of community pharmacies across Europe, where we recently introduced an oncology support program. This program provided community pharmacists with improved training to support patients undergoing cancer treatment. Our oncology support equips pharmacists to interact frequently with cancer patients, with resources to help address topics such as mental health, managing side effects related to treatment, and adjusting to lifestyle habits and changes. By providing these types of valuable services, we are able to help elevate the role community pharmacists play as critical health care providers within their communities. In the United States, the completion of our minority investment in OneOncology marked an important step in evolving AmerisourceBergen's support of community oncology providers. Over the past several decades, we have built our leadership in oncology and been a strong supporter of community oncologists. Leveraging our expertise, we partner with our customers to drive innovation and share best practices to support the health and vitality of those crucial community providers. Our investment in OneOncology further expands our footprint within the oncology space allowing us to deepen our already strong ties to community oncologists. We look forward to enhancing the value we provide to all our partners as the oncology landscape continues to grow and evolve. As we continue to expand our downstream solutions in specialty, our focus on specialty medicine and services differentiates us to our pharmaceutical manufacturer partners across the commercialization process, from clinical development to patient access. As pharmaceutical innovation continues to advance medical care and health in our communities, we have positioned ourselves as a differentiated leader. AmerisourceBergen's ability to provide global access and opportunity by offering U.S. and pan-European logistics reach and commercialization support makes us a partner of choice for pharmaceutical manufacturers, particularly as specialty medicines with higher commercial and distribution complexity are making up a bigger portion of the pharmaceutical development pipeline. Our offering is particularly unique in the cell and gene space, where we can integrate logistics with essential patient support services and orchestration technology. While still in the early days with cell and gene, we have had positive receptivity to our integrated solutions for these highly specialized products from their biopharmaceutical innovators. Cell and gene therapy is a key area for innovation, as it represents an evolving and expanding market with considerable long-term growth opportunities. Following the launch of our Cell Gene and Therapy integration hub in April, we announced our support for the commercialization of a recently approved gene therapy. We will serve as the exclusive distributor of the product and provide commercialization support, including 3PL, kitting, and storage. Our goal is to simplify the commercialization process for our partners and help them achieve their desired outcomes. AmerisourceBergen is well-positioned to support the next evolution of innovative products, and we will continue to invest in developing technologies and solutions to increase our value to our partners. Our ability to drive innovation and establish new solutions to serve our customers and partners is key to advancing our strategy and long-term growth. Transparency into the supply chain has never been so broadly appreciated, and we are focused on providing actionable and timely insights to ensure the supply chain can operate in an efficient manner. Serving at the core of the pharmaceutical supply chain, we take our role seriously, handling nearly $1 billion worth of orders daily across tens of thousands of products. Our ability to manage thoughtfully, professionally, and effectively through disruptions and shortages amplifies the importance of the expertise and diligence we provide in the pharmaceutical supply chain. To further our ability to provide confidence and transparency, we recently announced a partnership with ParcelShield, which will enhance our customers' view of the delivery of critical medications by providing them with real-time packaging, tracking, and delivery updates. This example builds on other initiatives we have taken to enhance supply chain visibility, including the addition of real-time tracking on shipments in our global logistics business, and demonstrates how we are leveraging our infrastructure, enhancing our distribution efficiency and creating innovative partnerships to deliver valuable services for our customers and partners upstream and downstream. We also drive value by leveraging our extensive customer partnerships to develop solutions that will expand access to high-quality care. In 2022, the innovative test to treat initiative began permitting pharmacists to administer COVID-19 tests and prescribe certain COVID treatments. This, in turn, increased accessibility to these treatments, particularly in underserved communities. Taking learnings from the success of this program, AmerisourceBergen has partnered with SteadyMD to pilot a telehealth solution for community pharmacies to expand the number of Test to Treat services they can offer. By working jointly with physicians through the SteadyMD platform, pharmacists can accelerate patient access to Accenture Pharmaceuticals before conditions become critical. These types of initiatives fortify our customer partnerships and support our customers' growth. Guided by our purpose of creating healthier futures, we are focused on contemplating and building out other solutions to innovate how we support and grow with our partners as they improve patient care and outcomes. Over the last two decades, AmerisourceBergen has recognized the importance of being a purpose-driven company. Unifying under a new name that better represents who we are today and where we are going in the future will allow us to deliver on our purpose and advance our impact across the health care industry. Today, I am tremendously excited to announce that effective August 30, 2023, AmerisourceBergen will officially become Cencora and begin trading as COR, which will unite our team members under a globally inclusive name and ticker symbol that reflects our core role in health care. This new identity will allow us to go to market as a unified enterprise to our customers and partners, showcasing the breadth and depth of our solutions across our footprint. The name Cencora also better represents our commitment to our people, who are at the center of everything we do. Our team members are the key to our success, and we are focused on creating an inclusive and engaging environment where our people feel comfortable sharing their unique backgrounds and experiences. We pride ourselves on cultivating an inclusive culture and continually improving upon our efforts to ensure all our team members feel empowered and welcome. We've taken steps to further our inclusion efforts by signing the CEO disability inclusion letter published by Disability IN to ensure an accessible and equitable environment within the AmerisourceBergen team. We were also honored to be recognized as the best place to work for disability inclusion after receiving a perfect score on the Disability Equality Index. We proactively set goals and action items to advance disability inclusion and equity, demonstrating our commitment to enacting change within the environment in which people with disabilities work. At AmerisourceBergen, we are powered by our people, and we are proud to promote a working environment that supports and empowers all backgrounds, abilities, and genders. As we continue to grow and evolve under our new corporate identity, we will remain driven by our purpose. Our future success hinges on our people, environment, and communities in which we live and work, and I remain inspired by our team that delivers our purpose every day. In the remaining months of our fiscal 2023 year, we look forward to executing on our strategy and investing in further innovation and growth. Building on AmerisourceBergen's strong legacy, Cencora will continue to be a differentiated force within the global health care system and provide value for all our stakeholders. The emphasis we place on innovation and efficiency sets us up for long-term growth and success as a leader in pharmaceutical-centric healthcare. I will now hand the call over to Jim for a more in-depth look at our third quarter results and updated guidance going into the final quarter of our fiscal 2023. Jim?

Thanks, Steve. Good morning and good afternoon, everyone. AmerisourceBergen delivered another quarter of strong results as our team members' execution continues to create significant value for all our stakeholders. Our results speak to the strength of our business and our continued work to drive efficiencies. In the quarter, we also strategically deployed capital, closing our minority investment in OneOncology, an example of investing to further our strengths, and we continue to opportunistically repurchase shares to also return capital to our shareholders. Before I turn to our third quarter results, as a reminder, my remarks today 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. Turning now to our third quarter results. AmerisourceBergen had adjusted diluted EPS of $2.92, an increase of 11% over the prior year quarter, driven by growth in both segments and a lower share count due to opportunistic share repurchases over the past year. Our consolidated revenue was $66.9 billion, up 11.5%, driven by growth in both segments, particularly in the U.S. Healthcare Solutions segment, which had broad-based growth across our customer base, including growth in sales of products labeled for diabetes and weight loss in the GLP-1 class. Without this increase in GLP-1 products, our consolidated revenue growth would have been more in line with our consolidated gross profit growth. Consolidated gross profit was $2.2 billion, up 8% due to growth in both segments. Consolidated gross profit margin was 3.33% and a decline of 11 basis points due primarily to lower contribution from COVID treatments, which have higher gross profit margins, and continued volume growth in GLP-1s, which have lower gross profit margins. Both these margin impacts are to be expected given the unique characteristics of each of these product groups. Consolidated operating expenses were $1.4 billion, up 7.6%, primarily due to higher expenses in our International Healthcare Solutions segment. We continue to focus on creating efficiencies and working collaboratively to drive value for our stakeholders, which contributed to the sequential year-over-year moderation of growth in operating expenses in the quarter, particularly in our U.S. Healthcare Solutions segment as a result of actions we have taken. Consolidated operating income was $822 million, an increase of nearly 9% compared to the prior year quarter. Our operating income growth was driven by solid performance in both segments, and I will provide more detailed business drivers when discussing segment-level results. Moving now to our net interest expense. For the third quarter, net interest expense was $58 million, an increase of 9.5% versus the prior year quarter. As we look to the fourth quarter, we expect net interest expense to be at its highest level this fiscal year given cash use in the past few months. Now turning to income taxes. Our effective income tax rate was 21.5% compared to 20.2% in the prior year quarter. As we called out last quarter, we continue to expect our full year fiscal 2023 effective tax rate to be towards the bottom end of our guidance range of 20% to 21%. Turning to diluted share count. Our diluted share count was 204.4 million shares, a 3.5% decrease compared to the third quarter of fiscal 2022, driven by share repurchases we completed over the last 12 months. This included $100 million of repurchases in the third quarter in conjunction with transactions that Walgreens Boots Alliance executed. Going forward, we expect transactions to continue to occur, and we anticipate continuing to collaborate and coordinate with Walgreens Boots Alliance as we have done over the past year. Regarding our cash balance and free cash flow, we ended the quarter with approximately $1.4 billion of cash. Our adjusted free cash flow for the nine months ended June 30 was $1.5 billion, and we are now slightly improving our adjusted free cash flow guidance to be at least $2 billion for the fiscal year, up from approximately $2 billion. 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 $59.9 billion, up 12% for the quarter with broad-based growth across our customer base, including sales of products in the GLP-1 class and sales of specialty products to physician practices and health systems. U.S. Healthcare Solutions segment operating income increased by 9.5% to $635 million as we saw good pharmaceutical utilization trends across our business, and our Animal Health business had another good quarter with growth in both the companion and production animal markets. Our operating income growth also benefited from an easier expense comparison as we lapped inflationary pressures that began in the March quarter of fiscal 2022 and from efficiency initiatives that we have taken, both of which we called out last quarter. This combination of operating expense items helped improve our operating expense margin in the quarter, offsetting most of the gross profit margin pressure from lower COVID-19 treatment contributions and increased volumes of GLP-1s. In the quarter, U.S. Healthcare Solutions segment operating income margin did still have a year-over-year decline of 3 basis points to 1.06% as a result of our mix of those two product groups. As a reminder, COVID product volume has continued to decline as expected, and we are earning a fee for distributing government-owned products, and GLP-1s are a big driver of revenue growth but not a meaningful driver of operating income growth. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $7.0 billion, up 5.6% on a reported basis or up 12.4% on a constant currency basis. In this segment, we saw growth in all our businesses. International Healthcare Solutions operating income was $187 million, up 6% on a reported basis or 7% on a constant currency basis, driven by solid performance in our Global Logistics business, and the inclusion of PharmaLex in the quarter, which offset the impact of the divestiture of our Brazilian specialty business in June of 2022. As a reminder, this divested business contributed nearly 2% of segment-level operating income in the third quarter of fiscal 2022. That completes the review of our segment-level results. I will now discuss our updated fiscal 2023 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. Full details of our fiscal 2023 guidance can be found on Pages 8 and 9 of our earnings presentation on our Investor Relations website. Starting with revenue, we are raising our consolidated revenue guidance and now expect our revenue growth to be at least 8% to reflect stronger revenue growth in the U.S. Healthcare Solutions segment and favorable currency movements in the International Healthcare Solutions segment relative to our prior guidance. In the U.S. Healthcare Solutions segment, we now expect revenue growth to be at least 9%, which reflects strong pharmaceutical utilization trends and also the increase in volume of GLP-1 products. In the International Healthcare Solutions segment, we are raising our as-reported revenue growth guidance to be in a range of 1% to 4%, up from our previous expectation of a 3% decline to flat due to favorable currency movements relative to our May guidance. Moving to operating income, we are narrowing our consolidated operating income guidance to a range of 3% to 4% growth from the previous range of 2% to 4% growth, primarily to reflect the strong performance we have seen in the U.S. Healthcare Solutions segment and to reflect favorable currency movements in the International Healthcare Solutions segment. In the U.S. Healthcare Solutions segment, we now expect segment operating income growth to be in the range of 4% to 5% from our previous range of 3% to 5%, excluding contributions related to COVID-19 treatment distribution. We now expect operating income growth to be in the range of 7% to 8% from our previous range of 6% to 8%, and we are more likely to be near the top end of that 7% to 8% range. In the third quarter, COVID-19 treatments contributed $0.06 to our consolidated EPS, with about $0.05 in the U.S. and $0.01 in the International segment. This brings our total COVID treatment contribution year-to-date to $0.29. Our full year expectations for COVID treatment contributions remain generally unchanged, and we expect only $0.01 or $0.02 of COVID-related contributions in the fourth quarter, with the contribution occurring in the U.S. Healthcare Solutions segment. In the International Healthcare Solutions segment, we now expect as-reported segment operating income growth to be in the range of flat to 4% growth, which reflects favorable FX rates relative to our previous guidance. As a result of these updates, we are raising our full year diluted EPS guidance from our prior range of $11.70 to $11.90, to a new range of $11.85 to $11.95, representing growth of 7% to 8% on an as-reported basis or 12% to 13%, excluding COVID-19 treatment contributions. As you turn to your models, there are a few items we wanted to remind you of as you think about the fourth quarter and the year ahead. In the fourth quarter of fiscal 2022, we had $0.17 of contribution from distributing COVID treatments, $0.16 of which was in the U.S. Healthcare Solutions segment. As I mentioned, this year, we expect to only have $0.01 or $0.02 of COVID treatment contributions in this year's fourth quarter, which will impact year-over-year growth rates. It's also important to keep in mind that into the fourth quarter of fiscal 2022, the dollar was at historically strong levels versus most major currencies. This should create a tailwind in the International Healthcare Solutions segment on an as-reported basis, as we lap that easier comparison and as-reported growth is expected to be higher than constant currency growth in the fourth quarter of fiscal 2023. This dynamic is reflected in our increased as-reported operating income guidance at the International Healthcare Solutions segment level and in our constant currency operating income guidance, which remains unchanged at the International Healthcare Solutions segment level. We are in the middle of our planning process and feel confident that the strength and resilience of our core business and our value-creating approach to capital deployment will allow us to deliver on our long-term growth guidance. While it remains early in our planning process, at this point, we would expect contributions related to COVID treatment distribution to be minimal in fiscal 2024. As usual, we will provide full fiscal 2024 guidance in November when we can be fully informed by our detailed planning process. Before I turn to my closing remarks, I would like to provide a brief update on one of our key ESG initiatives. As we have discussed, in fiscal 2023, we introduced an ESG metric within our executive compensation program that includes three quantifiable components focused on business resiliency, female representation in leadership roles, and employee inclusion and engagement. During the quarter, we successfully completed the business resiliency target by completing business impact assessments across our locations. This exercise informs our resilience planning and ensures we are able to continue operating in the face of natural disasters and a changing climate. To this end, we were also proud to be recognized by Forbes on their first-ever Net Zero Leaders list. This list recognizes businesses that are leading the way not only in transitioning to a low-carbon economy by 2050, but also in embedding sustainability practices into their business and working to achieve sustainability targets. Companies were evaluated across industries for the robustness of the company's climate governance strategy and risk management principles. We continue to focus on maintaining strong business resilience practices to allow us to deliver on our role at the center of the pharmaceutical supply chain. Reflecting on this being our last earnings call with the corporate name AmerisourceBergen, I am impressed by our company's track record of adapting and evolving over the years. We have executed on our pharmaceutical-centric strategy, building on our foundation in pharmaceutical distribution and expanding our suite of solutions for both our customers and manufacturer partners. Looking ahead, I'm excited that on August 30, we will begin trading under the ticker symbol COR, C-O-R, on the New York Stock Exchange. This ticker is more meaningful and reflective of our business and role in the supply chain. As we begin our next chapter at Cencora, I am confident that our team members will build upon the legacy we have created and continue to drive long-term growth for our stakeholders.

Thank you. This concludes today's event. You may now disconnect your lines.

Congrats on the quarter. One that was particularly impressive as we think about the performance in the quarter was obviously the improvement in the OpEx. Can you help us sort of think about the sustainability of that improvement as we think about maybe the fourth quarter and then maybe conceptually beyond that?

Thank you for the question, Elizabeth. We were very pleased with many aspects of this quarter, particularly that our operating expense growth was slower than our gross profit growth. Our gross profit increased by 8.0% while our operating expenses grew by 7.6%. The notable improvement came from the U.S. Healthcare Solutions segment, where our operating expense margin decreased by 11 basis points. We achieved this by better aligning our internal capabilities with our customers' needs and creating a more efficient organizational structure. We discussed this focus on the May call, and it remains a priority for us. Additionally, we benefited from a decrease in inflationary pressure that began in the March quarter of fiscal year '22. As we look ahead to the fourth quarter and fiscal year '24, our company is committed to enhancing efficiency to better align our capabilities with our customers' needs and to maintain an efficient organization. Thank you for your question.

Just want to understand a couple of things better on the margin side. So first, in your prepared comments, you talked about exclusive distribution relationships on cell and gene therapies. And then you talked a little bit about the growth in GLP-1s, which I understand, has high dollar value when we think about it branded, but probably a lower margin as we think about your book of business. How do I think about the progression of margin, especially in the U.S. distribution component of the business as we think about; one, exclusive distribution relationships; two, the continued growth in GLP-1; three, biosimilars, how that plays a role. And then just lastly, like anything else that I should keep in mind, whether it's generic price deflation, which seems to have moderated as we start to think about not just the fourth quarter, but thinking about '24 as well.

Yes, there’s a lot to discuss. Let me begin with GLP-1s, as they significantly contributed to our revenue growth this quarter. I mentioned earlier that we achieved about 11.5% revenue growth, and without GLP-1s, our growth would have been closer to our gross profit growth of 8.0%. While GLP-1s are a key driver of top-line revenue, they are not highly profitable from an operating income perspective due to their low gross profit margins and somewhat higher operating expenses related to the cold chain distribution. As for our exclusive cell and gene relationships, these are positive and strategically important for the company but are currently generating only modest revenue. Regarding biosimilars, they continue to present a significant growth and margin opportunity for AmerisourceBergen. You asked about generic deflation. Recently, we have noticed some moderation in generic deflation in specific areas, but it’s too early to identify a definitive trend. However, if this trend broadens across a wider range of generics, it could position us favorably. Specifically for the U.S., the gross profit margin decline this quarter was 13 basis points, mainly due to decreased sales of high-margin COVID therapies and increased sales of lower-margin GLP-1s. I believe that covers your questions. I want to conclude by expressing our satisfaction with the quarterly results, especially the growth in operating income fueled by strong performance across various business segments, improved utilization trends in the U.S., and effective management of operating expenses.

Thank you for the commentary on GLP-1. I want to stay on that subject and it's good to hear they're minimally profitable for Amerisource, but what we're hearing from pharmacies, particularly independents, is that they're not profitable. And it sounds like maybe even the same for chains. So given the importance of independents, have you had to help them offset that? Or is that the role of the manufacturer and others in the supply chain?

Yes. So Eric, thanks. As you know, we price more on product category, so this would fit into a branded and indeed, oral category that's dispensed mainly in the retail sector. A fairly significant amount of this is going through mail order. So we don't discount on a particular product category, even as significant as this product category is. But we do regard ourselves as a liaison. Of course, we'll be talking on behalf of Good Neighbor Pharmacies in particular. You look at the Elevate network; we discussed this as a key product category that is affecting profitability, reimbursement stability in the community pharmacy. But it's not anything that we are discounting on a particular product category basis. So it just fits into that broader category. Of course, these products are extremely important, a good example of innovation, and there are a lot of positives about the product as well. I think we shouldn't only look at this in terms of the negatives. I mean, I think there will be a whole lot of benefits to the pharmacy industry as this category evolves, including the monitoring of side effects, potentially, anything else that pharmacists can do to help manage the health of their patients, and AmerisourceBergen will, of course, be there to assist.

Congratulations on another strong quarter. I have a quick question regarding the adjusted operating income guidance for the rest of this year and how we should view that as we move into 2024. If we exclude the COVID impact and expect to reach the high end of the range for the fiscal year, it suggests about a 2% sequential decline from the third quarter. I'm wondering if there was any carryover from the fourth quarter into the third quarter that could be contributing to this decline, or if this is just typical seasonality now. Looking ahead, would a low teens or high single-digit growth rate in that segment be considered reasonable?

Thank you for your question. We are very pleased with our results this quarter, which has led us to raise our guidance for fiscal year '23. We are confident in our updated guidance for this fiscal year and also in our long-term outlook, which aims for 5% to 8% organic operating income growth. Including capital deployment, we expect a double-digit compound annual growth rate for adjusted EPS at the midpoint of the range. Both of these projections exclude COVID and capital expenditures, but there are factors that can affect results from quarter to quarter. As we enter the fiscal fourth quarter, we have strong momentum in our business, with robust utilization trends in the U.S. and positive performance across various areas. This gives us great confidence in both our full-year guidance for fiscal year '23 and our long-term projections. Furthermore, we are currently in the midst of our fiscal year planning process and look forward to sharing our fiscal year '24 guidance during the November call.

Congratulations on the quarter. I wanted to revisit the services you are offering to pharmaceutical manufacturers. You mentioned enhanced commercial support, the cell and gene therapy hub, and so on. Can you elaborate on how OneOncology fits into this? When we look at some of your peers and their initiatives related to services for manufacturers, it's clear you have a lot of offerings, particularly through World Courier. What is the overall strategy, and what types of services are manufacturers increasingly requesting from companies like yours? Additionally, what unique advantages do you have in this space, and how significant do you anticipate this business will be for Cencora moving forward?

Yes, Charles, thank you for your question. I'll address all the points you raised. One way that AmerisourceBergen sets itself apart is through our robust distribution capabilities and strategic relationships, which we leverage in our upstream interactions to offer more services to manufacturers. It's important to note our presence in specialty distribution, particularly as a leader in community oncology, which will be strengthened by the OneOncology acquisition that we anticipate will provide valuable insights. Recently, we've seen considerable activity in areas like urology, which might become a focus for us. Additionally, as we explore physician dispensing capabilities, we'll be looking at markets where we're already active, such as urology, rheumatology, ophthalmology, and potentially neurology as well. Complementing our distribution capabilities linked to dispensing physicians and the Part B market are our Group Purchasing Organization (GPO) capabilities. AmerisourceBergen has heavily invested in expanding our commercialization services. Our primary customer is the biopharmaceutical manufacturer who will utilize many of these services. Reflecting on our past investments, such as in Lash, we started our ICS business focused on pre-wholesale third-party logistics, where we've always excelled. Our aim is to provide a comprehensive suite of solutions and support our partners throughout the commercialization process. As we introduce more complex therapies, especially cell and gene therapies, we face challenges regarding costs, access, distribution, storage, and transportation. AmerisourceBergen is developing a variety of services to address these needs, including unique handling processes for cell and gene products. We will continue to adapt our business accordingly. We have the capability to track outcomes on a therapy-specific basis and have done so in the past, ensuring we remain responsive to market demands while adding value for patients in terms of access and helping manufacturers navigate the distribution landscape to get their products into the market efficiently and effectively.

It's Kevin Caliendo for Andrea. Regarding the International segment, you've mentioned pricing visibility. With World Courier, there's been an advantage from the increased weight per shipment. Is this what contributes to organic pricing increases moving forward? What I'm trying to understand is what factors will drive margin improvement both domestically and internationally beyond the easing of operating cost challenges for the entire international segment. Is this a major factor, or should we consider other elements in relation to the international margin or the potential for margin improvement in that area?

Thank you for your question. Regarding the international business and World Courier, there has been some benefit from pricing. However, moving forward, a significant portion of the benefit we expect from World Courier will come from volume growth. When we consider margins in the international sector, the most significant factor impacting them will likely be the mix of business. As we invest capital as we did with PharmaLex, those investments will be directed towards higher margin and higher growth areas. Over time, this should lead to an increase in margin percentage growth for the international business, and I believe this will be the primary driver.

I'm going to shift topics here a little bit. We're seeing aging of receivables and weaker cash collections in certain of our healthcare services coverage. Biopharma clients are simply trying to hold on to cash as long as possible to take advantage of interest rates. I know payments really are never seen as a risk here, but at least on the pharma side. But I'm just curious, what are you seeing in contract renewals and client negotiations when it comes to payment terms? And are you seeing any of your upstream or downstream accounts trying to hold on to cash longer than they have in the past?

Yes, I can start. It's an interesting question considering the current interest rate environment and the near recession we've experienced. Although I'm not an economist, I can say that terms in our business remain very stable. The physician segment typically has longer terms, but we haven't observed any noticeable changes in terms. There is a tighter funding environment for biopharma manufacturers, particularly for start-up innovative products, but we may be seeing some signs of optimism in that cycle. We closely monitor some of our peers at World Courier and larger life sciences service companies and take note of their comments. However, I don’t want to put Jim on the spot. When we negotiate fee-for-service and clauses, the terms are pretty well established. Additionally, after nearly 30 years in the business, the resiliency of our balance sheet and inventory is strong. Most of the manufacturers we work with are stable, although a few smaller ones have faced financial difficulties in recent quarters. Overall, when looking at AmerisourceBergen’s gross business, any issues are quite negligible and stable.

Yes. This is something we monitor and manage very closely and constantly, and there's no meaningful change to highlight. Working capital management, ROIC, and free cash flow are key value drivers for us in the long term. We stay on top of this, and I can confirm there's no major change to mention.

It's Jonathan Yong on for A.J. Just going back to the generic pricing commentary, and I appreciate that the improvement is in the pockets of products. I guess how are you thinking about this from a competitive landscape? Is the increased pricing perhaps providing an opportunity to gain share in the market if your purchasing might be better than others? Just curious to get your thoughts there.

So yes, as I mentioned earlier, what we have observed in the last few months is a moderation of deflation. It's still early to declare a trend, as it's present in specific areas. However, if a trend does develop, it would certainly benefit us. Regarding the sell side, I'd like to note that it is a competitive and stable market.

This is Dan Clark on for Mike. Are you seeing any impacts to sterile injectable pricing margins or supply after the Pfizer plant was disrupted a little earlier this month or last month? And if so, how does that impact factor into the guidance?

It's very quick and soon. That was a plant that manufactured a couple of injectable products. We've worked closely with Pfizer to see if we could assist, as we had a distribution center near the affected plant. However, there's nothing to report yet. We're monitoring this situation. Our supply chain group has done an excellent job managing through COVID and various setbacks. We had concerns about farmer nationalism discussed on one of the calls, but I don’t believe that one manufacturing plant will affect us. Additionally, this is one of the most established and resilient manufacturers, and I would imagine they have their contingency and business continuity plans in place. Jim, Bob Mauch, our COO, and I held a call with our supply chain team to gather insights, and there are no alarming developments at this time. We will keep a close watch on the situation and are confident we can manage this, as we have successfully navigated multiple setbacks that are not materially impactful to what AmerisourceBergen does.

And James, I want to come back to Eric's question talking about GLP-1s and generics. And I guess has the growth of the GLP-1 kind of changed the generic mix and kind of compliance hurdles in the independent channels? And I guess has this led to the independents kind of like artificially hitting generic compliance numbers with you guys to kind of offset the brand into generic mix. I would just kind of love to hear you delve into that dynamic a little bit more.

That's a good question, George. The growth of these products has certainly made headlines, and it has changed over time. However, we are not a rigid organization. We engage in discussions with our customers and maintain a close relationship with them. I'm particularly proud of how our teams have handled this over the past few years; we focus not only on large clients but also on smaller ones during the RFP process. We strive to stay connected with all our customers, utilizing new resources including telehealth options that we are supporting through our venture funding, as well as enhancing our communication tools and market coverage. As Jim mentioned, the market is competitive but stable. We have a solid understanding of our customers and their needs, and we’re proactive in addressing any issues that arise. The growth of this product category will be a topic of discussion and may lead to adjustments, though we don't see any clear trends yet. This weekend, we have our major retail trade show, and I expect this topic will arise because Bennett describes these products as headline-grabbing, which they certainly are. Since the introduction of hepatitis drugs, we've encountered nothing like this in the market, but we believe this growth is more sustainable and larger in scale. Additionally, the payer mix is different, which we must consider. Our priority is ensuring that our partners, especially community pharmacies, have long-term stability, which includes proper management of these products that are vital for their patients. So, is there a final question? Okay. Well, thank you for today. Thank you. We are kind of a little bit emotional here as we report our last quarter as AmerisourceBergen. And I know Dave is going to be turning over. He doesn't like that we haven't changed us. But we are very, very excited to be talking in the future about Cencora. Cencora is a name that I think really resonates with myself and the team as we look towards a future where we're even more of a United Global Health Solutions leader. This name has been studied very well by AmerisourceBergen, and we really believe that it resonates with our team and who we are. What's also extremely important, and I cannot understate this enough, is who we are, what we do and how we do it will not change. We will continue to be a purpose-driven pharmaceutical-centric leader powered by our team members and driven to provide differentiated solutions to our pharma partners and provider customers. We will continue to build on our foundation in pharmaceutical distribution, further our leadership in specialty distribution and services and carry forward our long track record of execution and creating value for all our stakeholders as Cencora. Thank you for your time and attention today.

Thank you. This concludes today's event. You may now disconnect your lines.