Cencora, Inc. (COR) Q2 2024 Earnings Call Transcript

Hello, and welcome to the Cencora Q2 2024 Earnings Call. My name is Alex, and I will be coordinating the call today. Now I'll hand it over to your host, Bennett Murphy, to begin.

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 second quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steven Collis, Chairman, President and CEO; Jim Cleary, Executive Vice President and CFO; and Bob Mauch, Executive Vice President and COO. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website 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 may not be rebroadcast without the expressed permission of the company. You have the opportunity to ask questions after today's remarks by management. We ask you to limit your questions to one per participant in order for us to get 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. Before turning to discuss our second quarter results, I want to take a moment to introduce Bob Mauch, our current COO, who we announced in March will be succeeding me as CEO on October 1. For nearly two decades, Bob has been an integral partner in shaping and implementing our strategy. In Bob's time leading operations across our businesses, he has developed deep relationships with our partners and team members, and his knowledge of our business and considerable expertise will significantly benefit the company as he leads Cencora into our next chapter. I want to extend my sincere congratulations to Bob, and will now turn the call to him to make some brief comments. Bob?

Thank you, Steve. I'm excited to be joining today's call and look forward to deepening my relationships with our investor and analyst stakeholders in the quarters to come. It's an honor to succeed you to become Cencora's third CEO on October 1. Cencora is positioned as a leading health care solutions organization rooted in our purpose, pharmaceutical-centric strategy and growth mindset. My parents owned independent community and long-term care pharmacies, so I grew up appreciating firsthand the critical role that pharmaceuticals play in positive patient outcomes. That experience helped shape my 30-plus year career in pharmaceutical care, leading me to found Xcenda, the health outcomes consulting firm for pharmaceutical manufacturers and setting me on the path that eventually brought me to Cencora. Since then, I've had the pleasure of leading businesses across our company, building and fostering our strong relationships with market-leading customers and partners and developing strong teams that are differentiated by their unique backgrounds and expertise. Throughout my 17 years at Cencora, I have worked closely with Steve and our teams to help shape our strategy. During that time, I've had the opportunity to benefit from Steve's leadership and mentorship and his fierce devotion to our people and purpose. I'm grateful that I will be able to continue to work closely with Steve throughout this transition over the next several months, and I look forward to benefiting from his continued leadership, partnership and guidance in his new role of Executive Chair later this year. Thank you to our Board of Directors and our team members for the trust and opportunity as I move into this new role. Together, we will continue to drive value for all our stakeholders, both now and in the years to come. I'm pleased to have had the opportunity to join today's call and share how excited I am for my future role. With that said, I'll leave it to Steve and Jim to answer your questions as usual. I'll look forward to speaking with you all more in the weeks and months ahead. I'll now turn the call back to Steve to discuss our fiscal second quarter.

Thank you, Bob. I also wanted to take a moment to acknowledge Gina Clark, our EVP and Chief Communications and Administration Officer, who announced this morning she will be retiring at the end of our fiscal year. Gina has had a distinguished career and made an enduring impact, leading large-scale initiatives across the organization, including uniting our company and our new globally inclusive identity, Cencora. Congratulations, and thank you, Gina, for your significant contributions. Now turning to our second quarter. Our ongoing focus on operational excellence and our team members' execution on our pharmaceutical-centric strategy drove another quarter of strong financial performance with revenue growth of 8% and adjusted EPS growth of 9%. Our role at the center of health care is core to our strategy and our positioning allows us to serve as a trusted partner while capturing opportunities presented by innovation, leveraging and investing in our infrastructure and extensive capabilities, we support access and efficiency across health care. Our multinational distribution footprint and global platform of commercialization services make us a natural partner for manufacturers bringing their products to market. With our increasing presence in pharma services, we are able to cultivate relationships with pharma early in the development process and position ourselves as not only a provider of logistics and distribution services but also as an integrated partner able to support the successful commercialization of their products. Connecting with our manufacturer partners is key to better understanding and anticipating their ever-evolving needs and challenges. In early April, we hosted our first ThinkLive series of the fiscal year, in which representatives from over 30 manufacturer partners and the Cencora team came together to share their insights on new ways we can collaborate and work to support ongoing innovation in the pharmaceutical space. Over the course of the year, we will host a number of these events focused on the different needs of our manufacturer partners from biopharmas and cell and gene therapy developers to the largest established manufacturers. The discussions we are having with pharma innovators provide us with a deep understanding of their pipelines for life-altering innovations, giving us a direct line of sight to development opportunities for our commercialization services portfolio. Additionally, for products that have been launched, our role at the center of the supply chain, and our global footprint allow us to capitalize on valuable insights and shared commercial opportunities, including for launches in additional geographies. Cencora has always endeavored to be a trusted industry partner and our integrated approach to commercialization is increasingly sought out and appreciated by our pharma partners. To this end, we were pleased to win another integrated services and distribution contract with an emerging biotech this quarter. While small in the context of the Cencora Enterprise, wins like this are important proof points that demonstrate our integrated model and global capabilities are differentiated and resonating with manufacturers. As we continue to advance our commercialization capabilities, we further strengthen our ability to contribute to pharmaceutical outcomes and support innovation. As the entire health care ecosystem continues to advance, we are embracing the latest technology to support our customers' growth and providing actionable insights to our partners, leveraging data and analytics. We continue to develop solutions for our provider customers, allowing them to focus on patient care and efficiently run their practices. Recently, we introduced an enhanced application that combines clinical, pharmacy, and financial information in one place for specialty physicians. With this integrated platform, our customers can seamlessly aggregate data about their practices across our solution set to analyze their performance and drive success through customizable, easy-to-use dashboards. Similarly, given investments we have made in our infrastructure to enhance the security of the U.S. pharmaceutical supply chain, we are now able to provide actionable insights to manufacturers leveraging our scale and rich data sets. As we continue to invest in our technology and capabilities, we increasingly see opportunities to create value-added data-informed solutions that drive innovation and differentiation. Our minority investment in OneOncology is another example of our approach to adding solutions that will deepen and expand our relationship with our partners, allowing us to support better health care outcomes in critical areas. Since completing our investment in OneOncology last June, the platform has continued to grow as oncologists increasingly recognize the value of joining a physician-led network of like-minded community-based practitioners. To enhance its value proposition to physicians, OneOncology has advanced key IT and practice management technologies while investing in important clinical research and real-world evidence solutions to make community provider participation in clinical trials more seamless. We are taking our learnings from our investment in OneOncology to unlock new growth opportunities for all our community oncology customers while allowing them to maintain their independence and treat cancer patients with high quality and cost-effective care in their local communities. Our continued partnership with OneOncology’s leadership team and TPG brings together our collective strength as we work jointly to advance accessible quality cancer care. Our commitment to, and investment in community oncology, has been well received as we are clearly focused on supporting the long-term vitality of community providers across the U.S. Our extensive capabilities, scaled platform and deep expertise enable us to collaborate with customers to overcome evolving challenges across the health care landscape. During the quarter, the health care industry faced an impactful disruption that prevented providers across the U.S. from receiving the claims payments they rely on to run their practices and ultimately care for patients. Our customers, particularly community providers, found themselves in a difficult position, uncertain if they could make payroll for their employees or cover expenses for critical medications needed for patient care. Much like we did during the COVID-19 pandemic, our cross-functional teams were nimble in developing solutions, including offering flexible payment terms to allow our customers to keep their businesses running without jeopardizing care until claims processing was restored. By providing solutions and working to address our customers' needs, we deepened our relationships while supporting continuity and access to care. The work we do would not be possible without our purpose-driven team members who diligently work to support our customers and their patients. At Cencora, we are focused on fostering a globally united culture that promotes the well-being of our 46,000 team members across our footprint. A recent example of the strength of our culture was in Lithuania where we operate both the distribution business and a Cencora business services center. We were proud to be recognized by the Lithuanian Ministry of Social Security and Labor with the safest emotional environment award for our shared services center, adding to the accolades the office has received in the past several years. This award is just one example of the strong culture Cencora has built and recognizes key elements of our people and culture strategy, including our leading benefits offering. I'm proud our teams have embraced our multinational presence which better allows us to serve our customers' needs across geographies and time zones, while maintaining our purpose-driven culture. As we continue to grow as a globally united enterprise, we prioritize building a culture that celebrates the unique backgrounds and experiences of our team members and will provide diverse differentiated perspectives, enhancing our business. As a crucial link in the pharmaceutical supply chain, it is imperative that Cencora has robust business resiliency plans to ensure the delivery of crucial pharmaceuticals, including in the face of a changing climate. As we further our business resiliency efforts, we are mindful of the impact our operations have on the environment and work closely with our partners to drive sustainability initiatives, help them to understand their emissions footprint and ultimately report on our joint progress. In partnering with stakeholders across the supply chain on these important topics, we amplify our impact across our footprint. While we continue to advance our work in our own operations and in partnership with other stakeholders, we were pleased that our efforts were acknowledged by Newsweek on its inaugural list of America's Greenest Companies that recognizes the top 300 companies in the United States who are making progress to positively change their sustainability footprint. Running an environmentally responsible business will continue to be an important aspect of our business resiliency planning and aligns closely with our purpose of creating healthier futures. In closing, the ever-changing health care environment necessitates that we remain agile and adaptive alongside our partners, both up and downstream. I am incredibly proud of our purpose-driven team members who exemplified their customer-centric approach and intellectual confidence to help providers maintain access to care during a challenging time. As we move into the second half of our fiscal year, we remain focused on creating a best-in-class customer experience, embracing innovation, and investing in our infrastructure to drive our pharmaceutical-centric strategy forward, creating value for all our stakeholders. I will now turn the call over to Jim for an in-depth review of our second quarter results and updated guidance. Jim?

Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to my prepared remarks, I want to extend my congratulations to both Steve and Bob on our recently announced leadership succession plan. Since joining Cencora in 2015, I've had the pleasure of working closely with both Steve and Bob as we have executed on our pharmaceutical-centric strategy and focused on creating long-term value. Steve's purpose-driven leadership and strategic vision have shaped Cencora into the company it is today, characterized by our foundation in pharmaceutical distribution, complementary solutions up and downstream, and long-standing leadership in specialty. I look forward to continuing to benefit from Steve's expertise as he steps into the Executive Chair role in October. Like Steve, Bob has deep knowledge and passion for supporting positive patient outcomes through pharmaceutical-centric care. Bob's experience leading our commercial operations and building talented customer-focused teams will benefit our company and all its stakeholders in the years to come. Now turning to our results. Cencora delivered strong performance in our second quarter, and we are pleased to raise our adjusted operating income guidance for the full fiscal year. Our teams continue to execute and stay focused on providing customer-centric services and solutions as evidenced in the quarter when we leveraged the strength of our balance sheet to support our customers during a time of industry-wide need. The important role we play at the center of health care, powered by our people and the long-term partnerships we have forged positions us well to continue to innovate, solve problems for customers and create significant value across the pharmaceutical supply chain. I'll now turn to a review of our consolidated second quarter results. And 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. Starting with revenue. Our consolidated revenue was $68.4 billion, up 8%, with solid growth in both segments. In the quarter, we saw continued strong trends in sales of specialty products to physicians and health systems and growth in sales to some of our larger customers, offsetting the manufacturer price reductions in certain product classes which were known well in advance. While we've continued to see growth in sales of GLP-1 products, this quarter, the growth rate moderated as we lapped the rapid adoption of the products in the second quarter of our fiscal 2023 and due to GLP-1 supply constraints in the quarter. Consolidated gross profit was $2.5 billion, up 7%. Consolidated gross profit margin was 3.70%, a decrease of 1 basis point. Consolidated operating expenses were $1.5 billion, up 5% due to higher distribution, selling, and administrative expenses to support revenue growth offset in part by the efficiency actions we called out last year on our May earnings call. Consolidated operating income was $1.0 billion, an increase of 11% compared to the prior year quarter with good growth in both segments, 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 second quarter. Net interest expense was $64 million, flat year-over-year. As you will recall, we called out an expected sequential step-up in interest expense on our first quarter earnings call, given the typical seasonal intra-period short-term borrowings and cash use. Higher interest expense in the second quarter compared to the prior year was offset by higher interest income and the September 2023 divestiture of our less than wholly owned subsidiary in Egypt. During the quarter, we issued $500 million in senior notes due 2034 at a coupon of 5.125%. We intend to use the proceeds from the notes issuance to repay our 2024 notes due this month. Regarding income taxes, our effective income tax rate was 20.9% compared to 19.0% in the prior year quarter. Turning now to diluted share count. Our diluted share count was 201.2 million shares, a 2% decrease compared to the prior year second quarter. This was primarily driven by opportunistic share repurchases during the second half of fiscal 2023 and continued share repurchases in fiscal 2024, including $50 million in repurchases in the second quarter in conjunction with Walgreens Boots Alliance lock sale in February. Regarding our cash balance and adjusted free cash flow, we ended the quarter with approximately $2.1 billion of cash and year-to-date adjusted free cash flow of approximately $0.5 million. During the quarter, many of our customers were impacted by the Change Healthcare outage that severely limited customers' cash flows as claims payments were delayed. To help our partners, we provided customers in need with extended payment terms giving them the financial flexibility to maintain their operations and focus on caring for their patients. The support we provided to our customers created a cash flow headwind in the second quarter of approximately $600 million, which we fully expect will reverse in our third fiscal quarter. The strength of our balance sheet and execution by our team members has allowed us to play a pivotal role in supporting our customers during this challenging time. I am appreciative of our team members who work diligently and collaboratively to understand our customers' needs and be agile in the face of uncertainty while being prudent to ensure we also protect Cencora and its shareholders. This completes the review of our consolidated results. Now I'll turn to our segment results for the second quarter. U.S. Healthcare Solutions segment revenue was $61.3 billion, up 8%, with solid growth in our distribution businesses including continued growth in sales to specialty physician practices and health systems and volume growth in GLP-1. Excluding sales of GLP-1 products, which increased by $1.3 billion, segment revenue growth would have been nearly 6.5%. U.S. Healthcare Solutions segment operating income increased 11% to $841 million as we continue to benefit from our leadership in specialty, both oncology and non-oncology and solid utilization trends. In the quarter, we also saw a benefit from our focus on managing operating expense growth as we compare to a period with elevated expenses prior to the efficiency actions we took last spring. As it relates to COVID contributions, in the quarter, we saw a decline in demand for commercial COVID-19 vaccines and contributions related to exclusive COVID treatment distribution were not meaningful as expected. As we no longer expect contribution from exclusive COVID treatment distribution, we no longer plan to provide guidance for ex-COVID growth rates. As a reminder, in the first quarter, we recognized $0.06 of exclusive treatment contribution which is the only contribution expected in the segment this fiscal year compared to $0.31 in the U.S. of the total $0.38 consolidated contribution for exclusive treatments in fiscal 2023. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $7.1 billion, up 5% on a reported basis or up 10% on a constant currency basis. International Healthcare Solutions operating income was $193 million, up 10% on a reported basis due primarily to growth for our less than wholly owned distribution business in Brazil and our Canadian business. In the quarter, our European distribution business delivered growth and benefited from manufacturer price adjustments in a developing market country, which offsets the decline in value of local currency. On a constant currency basis, International Healthcare Solutions segment operating income growth was 22%. That completes the review of our segment level results. I'll 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 EPS and then provide detail on the income statement items driving our updated EPS guidance. We are raising the lower end of our fiscal 2024 EPS guidance and now expect EPS to be in the range of $13.30 to $13.50 from our previous range of $13.25 to $13.50, representing growth of 11% to 13%. The updated range reflects our expectation for continued growth and execution in the balance of our fiscal year and also updated expectations on a few items below the operating income line. Moving now to revenue. Our guidance for consolidated revenue growth is unchanged at 10% to 12%. In the International Healthcare Solutions segment, we are narrowing our guidance range for segment level revenue growth and now expect as-reported revenue growth of 4% to 7% from the previous range of 4% to 8%, and constant currency revenue growth of 7% to 10% from the previous range of 7% to 11%. Turning now to adjusted operating income. We expect consolidated adjusted operating income growth to be in the range of 9% to 11%, up from our previous guidance of 8% to 10% due to our updated expectations for the U.S. In the U.S. Healthcare Solutions segment, we now expect operating income growth to be in the range of 10% to 12%, up from our prior range of 9% to 11%. Our increased guidance reflects our strong performance to date and continued growth in the second half, though at a more moderate rate, primarily due to COVID-19 vaccine seasonality and comparing to the prior year fourth quarter, which was the initial quarter that had a meaningful commercial COVID vaccine contribution. As context, in the first half, we saw segment level operating income growth of 16%, well above our initial expectations when excluding commercial COVID-19 vaccine contributions. Our growth was 8% in the first half. Switching now to exclusive COVID therapies. As a reminder, in the third and fourth quarters, we will have headwinds of $0.05 and $0.08, respectively, as we lap prior year contributions from exclusive COVID therapy distribution. Turning now to our International Healthcare Solutions segment. Our as-reported operating income growth guidance remains unchanged and reflects the strengthening of the dollar in recent weeks. On a constant currency basis, we now expect segment-level operating income growth to be in the range of 10% to 13%, up from our previous range of 9% to 12%. Regarding our adjusted effective tax rate, we now expect our adjusted effective tax rate to be approximately 21% from our previous range of 20% to 21%. Moving now to share count. We now expect our weighted average shares outstanding to be in the range of 201 million to 202 million shares from our previous range of 200 million to 202 million shares. Finally, turning to adjusted free cash flow. Our guidance remains unchanged, and we expect to generate approximately $2.5 billion in adjusted free cash flow. In closing, our teams across Cencora have continued to execute, allowing us to deliver strong financial results. As I reflect on the second quarter, I am impressed by the way our talented team members came together to support our customers, exemplifying customer centricity and agility in responding to challenges. As we look to the second half of our fiscal year, our pharmaceutical-centric strategy investments to enhance our infrastructure and drive innovation and our commitment to our purpose will continue to drive differentiated value creation for all our stakeholders. Now I'll turn the call over to the operator to open the line for questions.

Our first question for today comes from Elizabeth Anderson of Evercore.

Can you discuss the succession plan and how it developed? Looking ahead, what are the key priorities of that succession plan for the next few months? Bob, as you take the reins later this year, what will your initial set of priorities be?

Yes. Elizabeth, thanks for the question. I'll take it. And so our Board has been obviously a company of our size and the enterprise that we manage, is focused on the practice of succession planning, and two weeks ago, I actually had my 30th anniversary at the company, and of course, 13 years as CEO, and Bob has been in the COO position for two years. So we've been focused a lot on making sure that key executives have the right development opportunities. For me personally, it was really imperative that we have an internal candidate because of the importance of culture in our relationship, the importance of knowledge of our customers and the complex enterprises. Honestly, any new executive that comes in the company, after six months, the first thing they say to me is, I'm shocked how complicated everything is. And that's because it's a lot. We have a lot of different aspects to our business. And it's important that someone that knows the business well would be my successor. During the last few years, Bob has exemplified the sort of leadership characteristics that we look for, that the Board and the management team look for in leadership. He's also a pharmacist, which I think is also my model where one of the major public wholesalers that has been led by pharmacists. So I think that that's a really nice part of Bob becoming the third CEO in Cencora's history. But Bob and I have worked closely together as well as all the executive management team has worked closely with Bob and Jim and myself as we have guided the enterprise. And we have got six months left until the actual transition takes place on October 1. It's business as usual. Of course, Bob is thinking a lot about the future and what he will be like. And he'll be joining us on the next call, and you'll all get to know him better at conferences, etc. And the company is in very, very good hands. And the company is also in very good shape. So I think our investors should feel very good about how Cencora is positioned. So thanks for the question.

Our next question comes from Lisa Gill of JPMorgan.

I wanted to focus on the improvement in margins. As we consider this, Jim, you mentioned a couple of key drivers: specialty, non-specialty, and expense growth, which is quite impressive. Can you provide us with more details? Are you observing anything, particularly in the biosimilars sector? Secondly, I want to clarify my understanding of the below-the-line impact. I calculated an approximate impact of $0.12 due to a slight increase in the tax rate and share count. I would like to understand these two aspects as we look ahead for the remainder of the year. And Steve, I hope this isn't the last earnings call we have with you.

I'll go quickly. No, it's not. I will definitely be here next quarter. Thank you, Lisa, and I'll pass it over to Jim.

Yes, Lisa, thanks a lot. We did have a very good quarter from the standpoint of both gross profit percentage and operating income percentage during the quarter. So thank you for calling that out. We did have very nice margins during the quarter. And I'll talk about a number of things that drove the margins. One is the WAC reductions that I talked about in my prepared remarks, particularly with regard to insulin, that brought down revenue growth, but it caused an improvement in gross profit margin. As we've talked about in the past, when this sort of thing happens, our team works with manufacturers to make sure that we continue to be fairly compensated, which is what successfully happened in this case. So the WAC reductions brought down revenue growth but improved gross margin percentage. Another thing that impacted GP percentage is the GLP-1 growth was less than we had expected. And I talked about this in my prepared remarks also. GLP-1 growth during the quarter was $1.3 billion of growth versus $2.1 billion of growth in the first quarter. And that again caused revenue growth to be a little bit lower but caused gross profit percentage to be a little bit higher, and the GLP-1s were a little bit less than we had expected. Another thing that really drove gross profit margin during the quarter and during the first half was contributions from COVID vaccines. The margins are good on COVID vaccines, and our performance was better than we expected, particularly in the second quarter, and so that helped our GP percentage, and we'd expect that to drop off in the third quarter. And also, a GP percentage was higher year-over-year in the International segment. So all those things helped our margins. And then from an operating margin standpoint, it's not only all those things, but we've done a very good job focusing on managing operating expenses. We had the OpEx efficiency initiatives that we executed a year ago, and we've continued to focus on OpEx. And so we had GP growth of 7%, OpEx growth of 5%, and so that operating leverage helped us which drove our 11% OI growth. And so I think that addresses your margin question. And on the below the line stuff, we just are seeing incrementally higher tax rate, and that would have to do with mix. And we're just seeing a little bit more income and growth in the U.S., which has a little bit higher tax rate. And then on share count, our guidance is now 201 million to 202 million shares. After the first six months, we're at 201.5 million. As we do some repurchases in the back half of the year, it impacts fiscal year '25 more than fiscal year '24. And so as a result of that, we increased EPS guidance by increasing it in a $0.05 at the bottom end of the range. So our EPS guidance overall is up by $0.025 at the midpoint of the range. And so I think that addresses all of your questions, Lisa.

Our next question comes from Daniel Grosslight of Citi.

Congrats on a great run as CEO, Steve, and congrats Bob on your new role here. I wanted to stick with guidance and really around margins for the remainder of the year. Guidance does imply a step down in the second half AOI year-over-year growth, even when you back out the impact of COVID. So I'm curious if you can just provide a little more detail on the year-over-year growth as you step down in the second half, and perhaps how the efficiency plan that you put in place last year in the second half of '23 is impacting that year-over-year growth rate.

Yes. Great. I'd be happy to address all those things. So our updated operating income guidance reflects our strong first half performance and continued operating income growth in the back half of the year. The difference in growth rate in the first half versus the back half of FY '24 is largely due to COVID vaccine seasonality. Related to that, the COVID vaccine contribution we saw in the first half of FY '24 as well as the contribution we saw in the fourth quarter of FY '23. And then also the back half has a headwind due to the $0.05 and $0.08 of contribution from exclusive COVID therapies that we had in the third and fourth quarter of fiscal year '23. And then you referenced the efficiency actions we took a year ago in April. So in the back half, as you mentioned, we do lap the expense efficiency initiatives that we implemented last year. So in the U.S., the first half, we saw segment level operating income growth of 16%, well above our initial expectations. As I said in my prepared remarks, when you exclude COVID vaccine contributions, our growth was 8% in the first half. Our guidance implies very good growth in the back half in the U.S. due to expected continued strength of specialty and solid utilization trends that we've talked about for some time, and the growth rate is impacted versus the first half for the specific reasons that I mentioned, which are mostly COVID related. And so I think that addresses your questions.

Our next question comes from Eric Percher of Nephron Research.

I might switch gears to a question on the competitive environment at large. And so for Steve and Bob, I'd be interested to hear your views given some volatility at the pharmacy, new leadership and some consideration at mail and specialty of in-sourcing that they seem to be sticking with the channel. Do you see any significant change? And what do you need to do to compete in the low margin, high volume end of the market? And then maybe for Jim, I'd come back to how are the Walgreens synergies you've identified progressing? And I just want to make sure that, that contract extends through 2029 in its original form.

Thank you, Eric. I have been in this industry for 30 years with the company, and I believe our value proposition is as strong as ever. In fact, it may be even more robust given the complexity of regulatory environments and the data and insights we can offer. We've developed our businesses in ways that rely on partnerships and established channels within our industry. I recently returned from NACDS, where I met with many strategic customers. While there are documented challenges in the industry, especially regarding reimbursement, the post-pandemic landscape is still evolving. This emphasizes the importance of maintaining close relationships with our customers. We typically manage to renew our customer contracts, which reflects the value we provide. This is particularly true with Walgreens, where we have a long-term distribution contract through 2029, and with Boots through 2031. Our focus remains on these customers, and I've noted in past discussions that one significant change has been the increased closeness we maintain with both large and small customers, not just during the RFP process but throughout the entirety of the contract and in our long-term strategic relationships with them.

Yes. I think, Steve, you fully addressed it in your answer, that we are always working with Walgreens and our other large customers on mutually beneficial opportunities and synergies, and our management teams need to pursue those sorts of things.

Our next question comes from Allen Lutz of Bank of America.

I guess more of a high-level question here. How should we start to think about the Inflation Reduction Act, and how that could impact Cencora? Is there any way to think about any direct impact to revenue and margins? And then could there be more upstream opportunities to work with manufacturers around some of these benefit design changes? Just wondering if you have any initial thoughts around that.

Yes. We are paying close attention to the Inflation Reduction Act. There are ongoing negotiations, and we are following the steps for the 10 Part B products. In the short to medium term, we don't anticipate any direct impact on us. Starting in 2028, Part B drugs will be subject to negotiation, and we want to ensure that innovation remains a priority. It's crucial that the U.S. continues to be a hub for research and development, as a significant portion of it happens here. We believe it's vital to maintain and encourage this innovation. Additionally, manufacturers may consider changes in policies regarding formats with longer patent loss, but we do not think that should influence product development. Furthermore, we recognize that benefit design has been challenging for pharmacies, and spreading out the burden could be beneficial for the industry and patients. We believe that the perception of pharmacy costs is often linked to how copays are structured at the pharmacy counter, and promoting pharmacy as a more efficient healthcare option should be encouraged. Thank you for the question.

Our next question comes from Stephanie Davis of Barclays.

Congrats on the quarter. Given some of the GLP-1 accessibility issues that haven't called out, continues to assess through the year, should we assume that GLP-1 revenue tailwinds are going more on this 1 to 2-point contribution range versus the historical closer to mid-single digits? And just given the lower caliber nature of this revenue stream, how should we think about the benefits to your margins versus what we looked at prior.

Sure. I'll take that, Stephanie, and thank you for the questions. As we've mentioned before, the GLP-1 products are a significant factor in our revenue growth, but their profitability is limited. They do contribute to our profits, although minimally. We believe they will continue to drive our top line growth. In the second quarter, we achieved a revenue increase of $1.3 billion from GLP-1s, compared to $2.1 billion in the first quarter. However, we still expect them to be a key factor in our growth. We are very pleased to be part of an industry that fosters such innovation that benefits patients, and we look forward to reaping the rewards of this innovation for years to come.

Our next question comes from Charles Rhyee of TD Cowen.

Congrats, Bob and Steve, great working with you and look forward to hopefully catching up with you in person before you head off. I wanted to ask a question related, maybe one more for the World Courier side of the business. Obviously, there's talk of the BIOSECURE and that could cause some restriction of doing business with companies of concern. And also for companies that do business with companies of concern. I just wanted to see if there's any potential impact and if you sort of analyzed sort of where maybe your customers of the World Courier side are partnered with? And if you thought through some of that impact and how that might affect you on that side of the business.

I'm not exactly sure what regulations are, but I can tell you, I feel incredibly good about Cencora's ability to manage a complex regulatory environment really whatever jurisdiction we are. And if we feel that we can't be comfortable with the regulations and the jurisdiction, we just don't participate in the business. The enterprises have sufficient size and scale that nothing ever makes us want to compromise any of the standards we have. In fact, we keep on increasing those standards. We want to be the leader in them. Charles, I think World Courier, in particular, is one of the most complex but also compliant and thoughtful and planned for businesses that I've ever had the privilege of leading while I'm at Cencora. So I think we'll be able to cope. And I think maybe we can follow up directly with you and see if there are any particular concerns.

Our next question comes from Michael Cherny of Leerink.

Great. Congratulations on a nice quarter. Maybe just a follow-up, I guess, to Lisa's question earlier about the guidance. I hate doing math on the slide, but I'm giving rough math of call it, $0.14 operating uptick in terms of your EBIT increase. Is that the case in terms of the breakdown into guidance? And then relative to the core U.S. health care business, as you think about your long-term guidance relative to where you're shaking out this year against what's also a tough comp. How do you reconcile those two pieces? And how do you think about the future? I'm not asking for an increase in guidance, but what could drive growth guidance continuing to be above where your long-term targets are?

Okay. All right. Great. Thank you for the question. There was a lot in that question, so I'll try and address it all. I think Lisa had commented that she thought that the OI increase in guidance was about $0.12, and I think you said $0.14. And I'll just say that's kind of the increase in guidance implies, yes, that does imply that sort of increase, and it's really offset by the higher tax and the higher shares. And so as a result of that, we basically increased EPS guidance by $0.025 at the midpoint of the range. And then I think the rest of the questions you asked, yes, we have a lot of confidence in our long-term guidance of 5% to 8% organic operating income growth and then another 3% to 4% from capital deployment. And so long-term EPS growth guidance of 8% to 12%. Importantly, that's double-digit at the midpoint of the range. We have had a lot of success for quite some time, particularly in the last couple of years, and have posted some very good growth rates that have been driven from many factors, from things like our leadership in specialty to solid utilization trends. In particular, as I called out on this call, some of the numbers, some of the COVID-related earnings we've had have been particularly helpful in our operating income growth. As I said before, we're a company that's well positioned to benefit from innovation, and that's one of the things that gives us confidence in our long-term guidance.

Our next question comes from George Hill of Deutsche Bank.

I guess first thing I want to say is congrats to Bob on taking over the CEO role. And Steve, you guys are now the little engine that did, not the little engine that could. But I guess I want to hop in with two quick questions. Just number one, I want to follow up on Eric's question about the competitive environment more generally just because we've seen two sizable pieces of business which has in the last six months. So I guess, maybe just talk about if there's anything that we should be alluded to in the competitive dynamic? And then Jim or Steve, just one of the things we continue to hear is about the large drug retailers trying to increasingly go-direct to the brand drug manufacturers on terms not necessarily on logistics, trying to claw back some economics from brand drug manufacturers. I guess, can you comment; is that anything that you're seeing or anything that you're facilitating? And do you expect it to have any impact on your business either positively or negatively?

Yes. Thank you, George. I remember that article. We are extremely proud of how Cencora has evolved over the past few years and the strength of our positioning. I mentioned earlier how effectively we communicate on a regular basis with our strategic customers. There aren't many customers that decide to change their wholesaler relationships. In the U.S., particularly where the significant contracts are, there are three public companies that I believe excel in their operations, making this a stable industry. We are all well-integrated and maintain close relationships with our customers, making changes uncommon. We aren't observing a significant trend in customer movements. Mail order can be different due to the high-value products directed to a limited number of distribution points, which sometimes leads to direct contracting that has existed for a long time. Overall, the trend appears to be collaboration within the industry. Moreover, regulations continue to grow more complex, with new intricate pedigree rules being introduced. Despite our strong results, it's clear that we are not just an example of efficiency, but are also very well-adapted to a low-margin environment. We're building upon that with our cash flow, as Jim outlines in his long-range guidance. I feel confident about our value proposition and that of our industry, which I believe will remain strong, with not much else to highlight. Jim, do you have any thoughts to add regarding the competitive environment?

Yes.

Thank you for your answer. That concludes our question and answer session. I'll turn the call back over to Steve for closing remarks.

Okay. Thank you, everyone, for joining us on a busy Wednesday. We are really proud of the performance we reported in this quarter, which reflects the dedication, expertise, and teamwork of all of our team members. As you can see, Cencora is very well positioned for the future. Our role in the supply chain is well established, and we will continue to innovate and invest in support of our customers. Thank you very much for your time. Have a good summer. We'll see you in early August.

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