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    Cencora Inc (COR)

    Q2 2024 Earnings Summary

    Reported on Jan 10, 2025 (Before Market Open)
    Pre-Earnings Price$239.05Last close (Apr 30, 2024)
    Post-Earnings Price$229.15Open (May 1, 2024)
    Price Change
    $-9.90(-4.14%)

    What went well

    • Cencora reported strong operating income (OI) growth of 16% in the U.S. segment in the first half of fiscal 2024, well above initial expectations, driven by continued strength in specialty and solid utilization trends.
    • The company increased its EPS guidance, reflecting confidence in long-term growth, expecting 5% to 8% organic operating income growth and an additional 3% to 4% from capital deployment, leading to long-term EPS growth guidance of 8% to 12%.
    • Cencora has effectively managed margins, with gross profit (GP) growth of 7% and operating expenses (OpEx) growth of 5%, resulting in operating leverage that drove 11% OI growth. The company has executed efficiency initiatives and continues to focus on operating expenses.

    What went wrong

    • Significant decrease in GLP-1 product revenue growth from $2.1 billion in Q1 to $1.3 billion in Q2 due to supply constraints, leading to uncertainty in future revenue contributions from this segment.
    • Permanent reductions in Wholesale Acquisition Cost (WAC) for insulin have lowered revenue growth, which may negatively impact top-line performance despite improvements in gross margin percentage.
    • Expected step-down in operating income growth in the second half of FY 2024 due to anticipated declines in COVID-19 vaccine contributions and minimal profitability of key revenue drivers like GLP-1s, potentially leading to margin pressures.

    Q&A Summary

    1. Margin Outlook
      Q: Why will margins step down in the second half?
      A: Margins will be lower in the second half mainly due to reduced COVID vaccine contributions and lapping the expense efficiency initiatives from last year. Despite strong first-half margins, these factors will create some headwinds, but we expect continued operating income growth.

    2. Confidence in Revenue Guidance
      Q: What gives confidence in maintaining 11%-13% revenue growth?
      A: We are confident due to solid utilization trends and our strength in specialty. Even with challenges like lower GLP-1 growth and negative WAC price changes, we believe we can achieve our 11%-13% U.S. pharma revenue growth guidance this year.

    3. GLP-1 Impact on Revenue
      Q: Should we expect lower GLP-1 revenue contributions?
      A: GLP-1 products will continue to drive top-line growth, but growth may fluctuate due to factors like supply constraints. These products are minimally profitable, but we are pleased to support innovations that benefit patients.

    4. Competitive Environment
      Q: Any significant changes in competition?
      A: The industry remains stable with no major shifts observed. We maintain strong relationships with customers and continue to provide value in a complex regulatory environment, ensuring our competitive position.

    5. Inflation Reduction Act Impact
      Q: How will the Inflation Reduction Act affect Cencora?
      A: We are monitoring the Act closely but foresee no direct impact in the short to medium term. Starting in 2028, Part B drugs will be subject to negotiation, but we are confident in our ability to navigate any changes successfully.

    6. Guidance on Operating Income Growth
      Q: How does current growth compare to long-term targets?
      A: We have strong confidence in our long-term guidance of 5%-8% organic operating income growth. Recent strong performance, driven by factors like innovation benefits, supports our expectations for sustained growth above our targets.

    7. WAC Price Changes
      Q: How do WAC price changes affect outlook?
      A: WAC reductions, such as those for insulin, are permanent and lower revenue growth but improve gross profit margins. We work with manufacturers to ensure we are fairly compensated, maintaining our profitability.

    8. Walgreens Contract and Synergies
      Q: How are Walgreens synergies progressing?
      A: We continue to work with Walgreens on mutually beneficial opportunities. Our distribution contract extends through 2029, and we are pleased with the ongoing collaboration and synergy development.

    9. CEO Succession Plan
      Q: Can you discuss the succession plan?
      A: After 13 years as CEO, Steve will be succeeded by Bob Mauch on October 1. Bob has exemplified the leadership qualities we value, and his background as a pharmacist adds to his expertise. The company is in very good hands.

    10. Retailers Going Direct to Manufacturers
      Q: Are retailers bypassing distributors?
      A: While some retailers may explore direct contracts, we believe our value proposition remains strong. The complexity of the regulatory environment favors integrated distribution models like ours, and we don't see a significant impact on our business.

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