Cencora, Inc.

Hello and welcome to the Sonora first quarter 2024 earnings conference call. My name is Louisa and I'll be the caller for your call today. If you would like to register a question during today's event, please press star followed by one on your telephone keypad. I would now like to turn the call over to Bennett Murphy, SVP, Head of Investor Relations and Treasury. The floor is yours. Please begin.

Thank you. Good morning. Good afternoon. Thank you all for joining us for this conference call to discuss Sancora's fiscal 2024 first 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'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.sancora.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 discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. Sankora seems no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express permission of the company. If you have the 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 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. Sankora delivered an exceptional start to fiscal 2024. with revenue up 15% year-over-year to over $72 billion in the quarter and adjusted earnings per share up 21% year-over-year. Given our continued performance and execution, including our strong first quarter results, I am pleased that we are able to raise our fiscal 2024 four-year guidance. The strength of our business is bolstered by the execution of our teams and powered by our commercial partnerships and strategic positioning. Teams across Sencorra continue to prioritize customer centricity and enhance the services we provide. We are capitalizing on the positive trends across our business, creating value for our customers and stakeholders, and building on the pivotal role we play in the global healthcare system. Our call in pharmaceutical distribution and breadth of higher margin, high growth businesses linked with our scale has provided us with a unique expertise, which positions us to support both upstream and downstream partners to achieve the best outcomes for patients. Our leadership in specialty has spanned 20 plus years. And over that time, we have built an unparalleled suite of services that connects manufacturers and providers. Strategically positioning ourselves in the center of the specialty market, we have created opportunities to partner with leading innovators early in the drug development process through scientific development and consulting, safety and quality compliance, and clinical trial support and logistics. Our downstream services enhance provider efficiency, allowing physicians to spend more time with patients, and includes patient experience insights as well as operational and financial solutions. Specialty medicines and services will continue to be a key area of focus for SYNCORA as ongoing innovation and increasingly complex therapies drive opportunities for growth and allow us to demonstrate the differentiated value we can provide to our partners. We partner with biopharma players who are developing innovative life-changing medications to help improve the lives of patients and advance the standard of care. To support their clinical and commercial success, it is imperative that we invest in all the capabilities we offer and position ourselves to meet their evolving needs. One example is our global specialty logistics business, which offers solutions to transport complex products across our extensive footprint and provides key logistics for clinical trials. We continue to invest to support the growing demand for specialty logistics by enhancing the solutions offered across our footprint and implementing new technologies to drive further efficiency. This quarter, we announced three new transport stations strategically located across the United States. that will improve our ability to handle products in trial and complex products coming to market commercially. Since many of these products require specialized temperature control, we have expanded cryogenic storage and capabilities globally. This ensures we are providing partners with the complex logistics they need for their clinical trial and specialty shipment needs, while investing to remain the best-in-class partner for these promising therapies across geographies and categories as innovation in cell and gene therapies continues to excite and advance. Innovation in life sciences motivates us at Sencora, and we invest in our operational, technical, and logistics capabilities to ensure we are also innovating to support their tremendous potential for improving patients' lives. Growing our capabilities and solutions in higher-margin, high-growth services positions us to be the partner of choice with market-leading innovators and to capitalize on opportunities presented by scientific advancement and the corresponding growing needs for commercialization services and solutions. On the consulting side, Syncora's Global Pharma Services Group helps our partners to accelerate the speed at which their products go to market by helping them navigate the complexity of clinical, regulatory, and access challenges. As we continue to integrate PharmaLex, biopharma innovators are increasingly seeing the value we offer as a partner providing global pharma consulting alongside our abilities to support their logistics needs from clinical trials to 3PL and specialty and wholesale distribution with expertise and significant presence in key markets in the U.S., Canada, and Europe. Our expertise enables us to work with revolutionary medicines and products early in the development process and help support their commercial launches, giving Sencora a key role in healthcare innovation. Our expanded and unified enterprise is advancing Sencora's presence as we continue to make investments and better leverage our infrastructure. Our legacy of investing in technology and enhancing operations to increase our efficiency continues to be front of mind as we pursue ways to enhance our services and customer experience. The sophistication, scale, and flexibility of our infrastructure was on full display as we handled the significant volume of newly commercial and temperature sensitive COVID vaccines in the US in the December quarter without negatively impacting our ability to distribute a normal pharmaceutical volume. This is yet another proof point of the value we provide the healthcare system and validates our continued focus on advancing our capabilities to further Sankora's strength at the center of healthcare globally. As we continue to grow and unite as Sincora, we look for ways to capitalize on our range of services across our global enterprise and invest in platforms to improve the speed, precision, and processes in which we serve customers. Sincora leads with market leaders, and we must continually progress and adapt to help our customers navigate the complexity of the healthcare landscape. As a global pharmaceutical distributor, we are focused on investing to support the growth and needs of our market-leading customers. We are able to use our scale, reach, and expertise to build and advocate for programs aimed at mitigating drug shortages, supporting our customers' ultimate ability to better serve their patients. To that end, we are proud to collaborate with the Drug Supply Chain Resilience and Advanced Manufacturing Consortium, whose mission is to work towards a resilient supply chain. Our work with the group involves partnering with stakeholders across the supply chain to identify effective policy solutions aimed at reducing the frequency and severity of drug shortages. These types of initiatives reflect our intellectual confidence and our organization's next-minded approach to addressing challenges and allow us to advance our purpose to create healthier futures for patients around the world Our position at the center of healthcare uniquely equips our team with knowledge to overcome the obstacles the supply chain faces and plan for future challenges, making us a trusted partner for organizations focusing on pharmaceutical supply chain resiliency. Our ESG and DEI goals are meaningful to the success of our company and our ability to deliver on our purpose We recognize the importance of operating in a responsible manner and set ESG goals aligned with our business that ensures we are maintaining resilient operations, prioritizing our people's growth and well-being in the workplace, and supporting Sankora's long-term sustainable growth. We recently published our eighth annual ESG report, which highlights our progress on our ESG programs and how these initiatives contribute to our overall success. One of the key pillars of our ESG strategy is our team members who remain at the center of our company. At Sencora, we prioritize creating a working environment that fosters growth and support for all our employees. We believe that having a diverse and inclusive team underpins our culture and strengthens our operations as we benefit from the insights that come from having a broader set of view and experiences. As we seek to advance our culture, we have been focused on measuring inclusion and engagement in our workplace. We were pleased in our second annual Global Inclusion Survey, a majority of our team members indicated we have a highly inclusive culture. As a part of the survey, our team members provided leaders with valuable feedback and opportunities for improvement that will inform our efforts to strengthen our employee experience and working environment. Being purpose-driven to create healthier futures, we offer comprehensive benefits and apply policies and practices in our corporate culture that ensure all employees are able to perform to the best of their ability. As an example of this, I am proud that Sincora was a recipient of the Equality 100 Award by the Human Rights Campaign Foundation for our work in providing equitable benefits, policies, and practices. This award recognizes companies that receive 100 on the Foundation's Corporate Equality Index that measure policies and practices related to LGBTQ plus workplace equality. These achievements reflect the dedication by our team members who have taken an active role in creating an inclusive environment and delivering on our critical role in healthcare each day. As we look ahead to the rest of our fiscal year, we are focused on continuing to capitalize on the strength of our business and the opportunities provided by our pharmaceutical-centric strategy in order to deliver value for our customers and other stakeholders. I remain inspired by our team members' execution and drive to deliver on our purpose by demonstrating passion and adaptability as we work through an ever-changing healthcare environment to improve lives every day. I will now turn the call over to Jim for an in-depth review of our first quarter results and updated guidance. Jim?

Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to my prepared remarks, 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 and presentation. Sancora delivered remarkably strong results in our first quarter of fiscal 2024 as our team capitalized on the opportunities provided by our pharmaceutical-centric strategy, commercial partnerships, robust infrastructure, and team member execution. In the quarter, this drove over 20% growth for Sancora's adjusted operating income and adjusted diluted EPS. Our strong performance in the quarter and expectation for continued execution and growth in the balance of year leads us to meaningfully raise our full year fiscal 2024 guidance. I'll now turn to a review of our consolidated first quarter results, starting with revenue. Our consolidated revenue was $72.3 billion, up 15%, with strong revenue growth in both segments. We continue to see good utilization trends broadly across our business, in addition to continued growth and sales of GLP-1 products, particularly in the U.S. Excluding the increase in sales of GLP-1s, our consolidated revenue growth would have been 12%. Consolidated gross profit was $2.4 billion, up nearly 13%, with double-digit gross profit growth in each segment. Consolidated gross profit margin was 3.31%, a decrease of seven basis points. Similar to the past several quarters, our gross profit margin comparison continues to be impacted by sales growth for low margin GLP-1s and less volume of government-owned COVID treatments. The impact of these two items was partially offset by the full quarter contribution from the distribution of commercial COVID-19 vaccines, which have higher gross profit margins given the complexity associated with the products. Consolidated operating expenses were $1.5 billion, up 8%, due to higher distribution, selling, and administrative expenses to support revenue growth and incremental operating expenses in the international segment related to the acquisition of Pharmalex, which we closed in January of 2023. Consolidated operating income was $886 million, an increase of 21% compared to the prior year quarter. The increase in operating income also included double digit growth in both segments, which I will discuss in more detail in the segment level results. Moving now to our net interest expense and effective tax rate for the first quarter, net interest expense was $41 million, down 12%, primarily due to higher interest income resulting from higher interest rates on investments and lower interest expense due to the September 2023 divestiture of our less than wholly owned subsidiary in Egypt. Regarding income taxes, our effective income tax rate was 21% compared to 19.1% in the prior year quarter. We continue to expect our full year effective tax rate to be in the range of 20 to 21%. Turning now to diluted share count, our diluted share count was 201.8 million shares, a 2% decrease compared to the prior year first quarter. This was primarily driven by opportunistic share repurchases over the course of fiscal 2023 and also repurchases in the quarter, including $135 million in open market repurchases and $250 million in repurchases in November, concurrent with a transaction completed by Walgreens Boots Alliance. Regarding our cash balance and adjusted free cash flow, we ended the quarter with approximately $2.9 billion of cash and generated $763 million in adjusted free cash flow. In December, we made a commitment to exercise the prepayment option permitted under our opioid settlement agreements. This prepayment of approximately $238 million was made in January and represents the net present value of a future obligation of approximately $345 million. Since this prepayment was unplanned and non-recurring, it will not be included in our adjusted free cash flow consistent with our practices for unplanned and non-recurring payments or receipts relating to legal settlements. We will continue to include the annual planned cash payments associated with our settlement agreements in our adjusted free cash flow and continue to expect adjusted free cash flow to be approximately $2.5 billion for the fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the first quarter. U.S. healthcare solution segment revenue was $65.2 billion, up approximately 16%, as we continue to see broad-based growth in our distribution businesses, which benefited from strong utilization trends, including continued volume growth in GLP-1s, growth in sales to specialty physician practices and health systems, and commercial COVID-19 vaccine sales. U.S. healthcare solutions segment operating income increased 22% to $698 million, driven by strong performance across our distribution businesses, including commercial COVID-19 vaccine sales and operating leverage as a result of strong volumes and the expense management actions we called out on our May earnings call last year. Similar to last quarter, we saw broad-based strength across our human health distribution businesses with good volumes and trends in both specialty and full-line distribution. SYNCORA continues to benefit from leading with market leaders, and as a result, we continue to see good growth across customer segments and broad pharmaceutical utilization trends. We also had particularly strong growth in our animal health business, which delivered good performance in the quarter and benefited from an easier comparison given industry-wide pressures in the prior year December quarter that we called out last year. Before turning to a review of our international healthcare solution segment performance, I would like to provide an update on COVID-19 related contributions and the U.S. segment for both exclusive therapies and the commercial COVID-19 vaccines. First, regarding exclusive product distribution, In the quarter, we had $0.06 of contribution related to exclusive COVID-19 product distribution in the US, a $0.03 headwind from the $0.09 of segment level contribution in the prior year quarter. This contribution was in line with the $0.02 to $0.10 of contribution we guided on our November earnings call related to our first quarter of fiscal 2024. For the balance of the year, We expect a 21 cent headwind from exclusive COVID treatments in the segment in line with our previous expectations and guidance. We do not expect a material contribution from these COVID treatments in the balance of the year. Second, regarding COVID-19 vaccines, this quarter we saw an incremental and higher than expected benefit from distributing commercial COVID-19 vaccines. And as we said on our November earnings call, this was comparing to a prior year period where vaccines were distributed by other parties prior to their movement to a traditional commercial distribution model in September. The contribution to our operating income from COVID-19 vaccine distribution in the December quarter was highly concentrated in the October and November months, and in total was more than double the contribution in the September quarter. Excluding both the commercial COVID-19 vaccine and exclusive COVID-19 treatment distribution contributions, segment level operating income growth would have been 12% as our team's strong execution and our pharmaceutical centric strategy have allowed us to capitalize on good underlying prescription utilization trends and deliver significant growth. I will now turn to our international healthcare solution segment. In the quarter, International Healthcare Solutions revenue was $7.1 billion, up 7% on a reported basis or up 9% on a constant currency basis. International Healthcare Solutions operating income was $188 million, up 16% on a reported basis or up 20% on a constant currency basis. In the quarter, we benefited from higher shipment weights and improvements in air freight costs, and our global specialty logistics business, incremental operating income from the PharmaLex acquisition, and excellent performance in our Canadian business, offsetting foreign currency pressure and the September 2023 divestiture of the non-holy owned subsidiary in Egypt, which was profitable in the first quarter of fiscal 2023. That completes the review of our segment level results. I will now discuss our updated fiscal 2024 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. I will begin with EPS and then provide detail on the income statement items contributing to the increase. We are raising our full year diluted EPS guidance to a range of $13.25 to $13.50, up from our prior range of $12.70 to $13, representing growth of 11% to 13%. The increase reflects our expectation for continued strong performance throughout our fiscal year and the incremental benefit from COVID-19 vaccine distribution in the first quarter. Now moving to revenue, we expect consolidated revenue growth to be in the range of 10 to 12% on both an as-reported and constant currency basis, up from previous expectations of 7 to 10%. The updated guidance reflects an increase in our U.S. healthcare solution segment revenue growth, where we now expect growth of 11 to 13%, up from our previous expectations of 7 to 10% growth. The new guidance range reflects the strong revenue growth we saw in the first quarter, including the year-over-year growth of GLP-1s, and continued good growth for the remainder of the year driven by expected broad-based prescription utilization trends. Moving to operating income, we expect consolidated operating income growth to be in the range of 8% to 10%, up from our previous guidance of 4% to 6%. On an ex-COVID basis, which as a reminder excludes the benefit from exclusive COVID-19 contributions in fiscal 2023 and fiscal 2024, we now expect consolidated operating income growth to be in the range of 11% to 13%, up from our prior guidance of 7% to 9%. In the U.S. healthcare solutions segment, we now expect operating income growth to be in the range of 9 to 11% up from our prior range of 4 to 7%. For ex-COVID guidance in the U.S., I will remind you that we only exclude the contributions from exclusive COVID-19 therapies in fiscal 2023 and fiscal 2024 and do not exclude COVID-19 vaccine contributions since they are traditional, commercially distributed products. On this ex-COVID basis, we expect U.S. segment operating income growth to be in the range of 12% to 14%, up from our prior range of 7% to 10%. The increase in our U.S. segment guidance reflects our strong first quarter and continued momentum across our business as we continue to benefit from our leadership in specialty and alignment with market-leading customers, allowing us to capitalize on broad pharmaceutical utilization trends. Turning now to the international healthcare solution segment, on an as reported basis, we now expect operating income growth to be in the range of 5% to 8%, up from our previous range of 1% to 4%. On a next COVID basis, we now expect operating income growth to be in the range of 7% to 10%, up from our previous range of 3% to 6%. The updated as reported guidance reflects solid underlying performance trends and a slight benefit from current foreign exchange rates versus rates at the time of our initial guidance. Year-over-year currency translation continues to be a moderate full-year headwind to our business, and on a constant currency basis, we expect segment operating income growth to be in the range of 9% to 12% or 10% to 13% when excluding COVID contributions. Finally, turning to interest expense, we now expect interest expense to be in the range of $185 million to $215 million from our previous range of $210 million to $230 million, as our cash flow generation in the first quarter was stronger than expected. From a quarterly cadence perspective, we would expect interest expense to step up meaningfully in the second quarter, similar to the prior year quarter, given typical seasonality and cash use. That concludes our updated guidance assumptions. Before I turn to my closing remarks, I would like to briefly comment on our recently published ESG report. This week, as Steve mentioned, we published our eighth annual ESG report that details initiatives we are taking to ensure our business is equipped to operate resiliently, support our team members, and create healthier communities where we live and work. We are proud of the business-aligned approach we take to our ESG strategy and I would encourage those interested to visit our microsite at esg.sencorra.com. The report aligns with a number of reporting standards and describes some exciting new initiatives launched over the past year, including our Sencorra Healthier Futures grant program that aims to support nonprofits and charities around the world doing work to advance access to care. We remain committed to fostering transparency and reporting on progress on our ESG strategy. In recognition of these efforts, we were pleased to be named to Sustainalytics 2024 ESG top-rated companies list on both their region top-rated and industry top-rated lists. In closing, Sencora clearly delivered outstanding results in the first quarter of our fiscal year. I'm incredibly proud of our team's dedication and ability to consistently drive strong performance quarter after quarter. Leveraging the breadth and depth of our pharmaceutical-centric solutions, we continue to find opportunities to capitalize on commercial strengths and build upon the momentum in our business to drive value for our stakeholders. Now I will turn the call over to the operator to open the line for questions. Operator?

Thank you. If you'd like to ask a question, please press star followed by one on your telephone keypad. If you would like to withdraw your question, please press star followed by two. When preparing to ask a question, please ensure your device is unmuted locally. First question comes from Stephanie Davis with Barclays. Your line is open. Please go ahead.

Hey, guys. Thank you for taking my questions, and congrats on a very strong start to the year. I was hoping you could tell us more about the strengths in the core business. As you saw, outsized operating income growth, so it looks like there was a lot more than GLP-1 driving the beat. So anything else to call out there in the sustainability And a quick follow-up on the other side of the business, just given some of the geopolitical turmoil. Is there anything you would call out on potential international shipping, Edwin?

Thank you. Sure, Stephanie. Thanks a lot for those questions. And with regard to the BEAT and the core business and the sustainability, kind of let me start out with some of the kind of the drivers of the Q1 BEAT. And I'll call out five things. First, commercial COVID-19 vaccines. We had, you know, very strong performance there during the first fiscal quarter. You know, a second is that just the continued strong pharmaceutical utilization trends resulting in favorable volume trends broadly across our businesses, including in specialty. You know, third thing I'll call out is just particularly strong execution by our SYNCOR team members broadly across our businesses with our key businesses performing well. And then a fourth thing, and this is key, we had, you know, very good performance on operating expenses and good operating leverage as a result of both this OpEx focus and the volumes that we saw during the quarter. And then finally, pricing, including some continued signs of moderating generic deflation during the quarter. And so, you know, how did these benefits impact guidance and how sustainable are these benefits that I just called out? Well, I'd say that the first one, commercial COVID-19 vaccines, we expect these sales of commercial COVID-19 vaccines to come down very significantly in Q2 to Q4 of fiscal year 24 compared to Q1. perhaps with an increase at the end of the fiscal year in the month of September as seasonal vaccine activity begins picking up. And as I said in my prepared remarks, if we, you know, exclude the contributions from both commercial COVID-19 vaccines and the exclusive COVID treatments, our operating income growth would have been 12% in the U.S. healthcare solution segment in Q1 Patrick O' versus the 22% that we reported in the US. And with regard to the other positive trends that I talked about, we expect these positive trends Patrick O' to continue across our business throughout the fiscal year, but perhaps not at the same level of outperformance as in Q1, and this is reflected in our guidance. And, you know, an example I'll give there is operating expenses. On the May call last year, we talked about some operating efficiency initiatives that we took in April of last year, and they were very effective. And as we can see in our results this quarter with, you know, 8%, operating expense growth compared to 13% gross profit growth. And, you know, kind of the comps get a little bit harder on OpEx in the back half of the year. And so, you know, that's one of the things where we would continue to expect to have outperformance, but perhaps not the same level of outperformance. But having said that, you know, I just want to finish by saying we feel really good about the ongoing strong performance of our businesses and our guidance. So Thanks for asking the question. And then there was a second part of the question. Was that on shipping?

I could answer. I think it was more to do with geopolitical risk in Europe, if I understood. And, you know, I would just say, of course, we don't have a crystal end, but I would just say that our business has proved over many geopolitical events, many economic crises to be very resilient. In fact, among the most resilient of businesses, As long as patients keep needing prescriptions, as long as pharma companies keep on innovating, as long as the payers, both government and commercial payers keep paying, we've proven to be very resilient, very inelastic in demand for our core services. It can get a little bit different in commercialization services, depending on what's going on with investments in pharma life cycles. But overall, I'd say we tend to be the most durable of businesses. Jim, you want to add something?

Yeah, I'll just say with regard to shipping specifically, we don't have anything specific to call out. I mean, our teams are experts in this and are very focused on it. And some of the things that we actively focus on are monitoring any shipping disruptions and working closely with our manufacturer partners and our provider customers to analyze and ensure sustainability of supply. And like I said, we don't have anything specific to call out other than to say our teams are experts in it and very focused on it, Stephanie.

Next question, please. Our next question comes from Lisa Gill with JP Morgan. Your line is open. Please go ahead.

Thanks very much and good morning. Steve, first I wanted to start with the international business. And you called out global specialty logistics. as being part of the strong performance on the international side. Can you maybe help us to understand what are some of the keys to that outperformance? Was there anything that was kind of one time in the quarter? And then just as a follow-up, Jim, I was surprised to hear you say generic price, lack of deflation or stabilization in generic price was number five. Can you maybe just talk about what you're seeing in the environment there? Because I would have expected that that would have been maybe a little bit more of a key driver when we think about the operating profit.

Yeah, so on, you know, our logo business and, of course, our world career business, which does more specialized logistics, are both performing very well. You know, and we expect to see continued growth in those businesses. We have a logo closely linked with our traditional RCS business in the U.S., and we're getting away from those names as we move to, you know, Sincora and global programs. But, you know, those businesses continue to be of significant interest to manufacturers. They help with the commercialization process. They provide efficiency, both for large and small manufacturers, and, you know, are a key element of our growth. In Europe, we have some stronger competitors there. It's a more established industry, I'd say. And of course, every country is a little bit different. But as a generalization, I'd say we have stronger competitors there. And certainly, Sankora intends to raise the bar. Our leadership is very focused on becoming the leader in that industry and in all the major markets we're in. And you'll continue to see us making progress because Sankora we have a great understanding of the whole healthcare ecosystem that is hard for others to have. You know, we have it from the provider, the manufacturer perspective, the health system perspective, and we have it across so many different countries and healthcare ecosystems that I think it just gives us some business intelligence that is hard to replicate. And you'll expect us to continue to do very well in those areas. Jim, the second part was for you.

Sure. With regard, Lisa, to the moderation of generic deflation and As we've indicated over the last several months, there's been a moderation in generic deflation, particularly in certain pockets of the market. And we've certainly benefited from that to the extent that it's been a smaller headwind. And if the moderation in generic deflation sustains and is more broad, it would really be a benefit to us, a continued benefit to us as the uh, annual, uh, headwind would be, um, smaller, you know, in terms of ranking them, um, just one, you know, point I want to make, it's just the volumes were so strong this, uh, this quarter with 15% revenue growth. And, um, you know, as, as, as you well know, when you can have 13% gross profit growth and 8% OpEx growth, that really is kind of a big driver. That operating leverage is a big driver of operating income growth. And so, um, you know, that, uh, that volumes driven by a number of things, including commercial COVID-19 vaccines, were a really good benefit for us during the quarter. And so I really wouldn't make too much of the ranking, though, and, you know, the generic moderation trends were certainly positive for us during the quarter. Thank you, Lisa.

Our next question comes from Eric Percher with Nefron Research. Your line is open. Please go ahead.

Thank you. Jim, the gross profit was strong despite the downward pressure you mentioned from GLP-1s and government COVID treatments. Can you remind us when the, how the GLP-1 volumes and also the gross profit have trended over the last year and specifically when the shift in the sell-side discount occurred? how that plays through for the remainder of the year and whether there's any impact on generic discounts built in there.

Yeah, and so let me kind of address that with regard to your questions on kind of the GLP-1 growth and the GLP-1 benefits. profitability and the impacts it has on our business. And, you know, as we talked about, you know, we continue to see strong growth in drugs in the GLP-1 class. You know, the revenue this quarter grew by $2.2 billion versus the first quarter of fiscal year 23. As I talked about in the prepared remarks, our consolidated revenue was up 15%. And if we exclude the increase in GLP-1s, our consolidated revenue growth would have been 12% during the quarter. And then, you know, with regard to profitability, you know, my comment there is, you know, consistent with what we've said in the past. GLP-1s continue to be more impactful from a revenue growth perspective and are minimally profitable growth. um for us given that they're you know a brand with um with cold chain requirements also eric next question please our next question comes from daniel grosslight with city your line is open please go ahead hi guys thanks for taking the question and congrats on the strong guys start here

On the international side, you called out strength in your Canadian business. I know you have a strong vaccine distribution business up there, but I'm curious if it's COVID vaccines there that's driving that strength or if there's some other piece of the business on the Canadian side that is performing well. Thanks.

Yeah, no, thank you. Nice to get a question about Canada, which has been a strong business for us a long time. We did several acquisitions there many years ago, and we have an integrated business model there. You know, the business goes by the name of Enamor, and it's both distribution on the specialty side. We run some infusion centers, which are really part of a manufactured commercialization. We have a lot of patient programs. We do 3PL programs. And it's a health system that is very relevant to our expansion into other countries. And certainly if you look at the value and the way the Canadian government thinks about new products and that, it's very illustrative of the types of pharmacy and healthcare models we see in Europe. So it's been a good formative business for us and one that we continue to do well in. I would also say that we have an entrepreneurial team that understands the market there. That's pretty stable. They've been with us for a long time. Many of them are actually helping us now in international development. So good business for us and really punches outside of their weight and especially marketing Canada and having a global impact for Sankora now. So thanks for the call out. Jim, you want to add something?

Yeah, I'll add one minor point in response to your question. There was growth in vaccines in Canada during the quarter, but it was a small part of the growth. Really, the growth was driven by the core part of the business, which performed very well during the quarter.

Our next question comes from Elizabeth Anderson with Evercore ISA. When it's open, please go ahead.

Hi, guys. Thanks so much for the question. One thing that I wanted to explore a little bit more, you obviously said that you're seeing nice performance from the Pharmalex business as it continues to integrate into the core business. One thing we've been hearing from the manufacturer side of the equation is just sort of maybe a little bit of reduced spending on the commercialization side. Can you talk about how you're seeing the impact of that in the business? Is it something that you sort of maybe a headwind later in the year? Does it present additional opportunities as they seek to outsource additional services? Can you help us sort of think through that as we think about the rest of the year?

Thank you. Yeah, no, it's a very good question. Certainly, I understand that. I mean, investment cycle in life cycles and in life sciences and the approval cycles, you know, we've had experience with this through businesses like Lash and Even in my early days, ICS, as we look at products getting approved or not getting approved, and as you look at the VC funding cycle, and as you look at M&A from big pharma to smaller pharma, I'd say that the market has been a little bit softer than in the last year to year and a half with some of the geopolitical and inflation and market pressures, but you're seeing, you know, I think there's a real thesis of a tremendous investment in innovation, precision medicine, saline gene therapies, which Sincora is uniquely positioned to capitalize on. And you'll see us continue to benefit. You know, we're spending, just getting ready now for our March strategic plan presentation to the board. We're spending a lot of time looking at our commercialization services capabilities, how do we become the best in class in all the various areas that we're in, including the four main segments that PharmaLex is in, development consulting, regulatory affairs, pharmacovigilance, quality management and compliance. And we think that there's a real role for Sankora globally in those launches, in those commercialization services. You'll see us continue to invest. We're happy with the team we have in place. We're happy with the U.S. presences we have there. And you'll see us continue to benefit. And, you know, we'll be a little bit affected by the economic cycles. But there's a global trend here, which is a long-term trend, which we intend to capitalize on.

We now turn to Alan Lutz with Bank of America. Your line is open. Please go ahead.

Good morning, and thanks for taking the questions. One for Jim. We're about a month into the year. Just wondering how are brand price increases coming in versus expectations? Is there anything to call out there? And then what's embedded in the model for mid-year price increases? Thanks.

Yeah, and so let me talk about brand price increases and what we've been seeing, the January price increase activity. was broadly in line with our expectations. And I'll also say that, you know, as we've said in the past that, you know, brand inflation is less important for Sankora than it once was since, you know, well over 95% of our brand buy side dollars are fee for service. And then you know what i'll just say with regard to our kind of expectations and what's in the model for the balance of the year with regard to brand pricing, you know we don't have specific guidance metrics on drug pricing, but our expectations that we have in the model are that will be generally in line with the changes we've seen over the past couple of years. Thank you for the question.

We now turn to Erin Wright with Morgan Stanley. Your line is open. Please go ahead. Erin Wright Great.

Thanks. I have two questions here, if that's okay. But on GLP-1s, is there any way you can achieve better economics associated with GLP-1s, or is it just simply a function of the more complex logistics and there's nothing more you can do there? And then on animal health, you called that out as strong. What are you seeing? in terms of volume and pricing trends across both companion and production animal? How's the landscape evolving, for instance, in terms of alternative channels? Thanks.

Yeah, thank you for the question, Erin. You know, on GLP-1s, I would just say that in the long term, you know, some of the formulations are going to switch. It's such a big category that as we look at renewals of contracts, and, you know, we have on the sell side, we have you know, somewhere usually around three to five years on those contracts. This is a different category that we would work with the customers to understand what our mutual requirements are. Certainly it's a category that is having a weight on those contracts. It's of such a serious top-line significance and has impacts on customers. you know, the different contractor requirements that we have, including mix of products, et cetera. So it obviously will come up in any discussion. We also intend to do more work with manufacturers. We do think that from a clinical perspective, these are products that are interesting at the pharmacy counter, and we're encouraging our independent pharmacists, for example, to stay involved in the dispensing of these products. So, you know, it's certainly something that we are very mindful of, and we would expect that over time, as these sell-side contracts come up, that you'll see them become more typical brand economics than the headwind we've experienced in the early days. Hopefully, that's the aspiration. That's what we would hope to get to. Jim?

Sure, Erin, with regard to your question on animal health, our animal health business had a particularly strong growth in the quarter, and it had, you know, very good performance, and it also benefited from an easier comparison given the industry-wide pressures in the prior year, December, that we called out last year. And so, you know, particularly strong operating income growth and also, you know, very good performance from a revenue growth standpoint. It had a low double-digit revenue growth in the quarter with the growth in both the companion animal business and the production animal business with growth being stronger in the companion animal business. And then one just final thing I'll say is that, you know, we've seen just very strong execution by our animal health team, just as we have by all of our teams across CINCOR. So thank you for that animal health question.

We now turn to Charles Rhee with TD Cohen. The line is open, please go ahead.

Yeah, thanks for taking the question. Steve, you know, obviously a lot of discussion recently around potential changes on how pharmacies are reimbursed by payers and moving to a cost plus model. And I think the argument here is that, you know, that industry is at a tipping point where maybe there's less potential for generic substitutions to offset sort of the reimbursement pressures pharmacies face by payers. From where you sit as a key partner to both, you know, chains and particularly independent pharmacies, could you comment maybe on what you're seeing in the market in terms of the health of your retail customers? Do you think we are reaching sort of a limit to what, you know, pharmacies, particularly independents, can bear? And if the industry does move to a cost plus model, how might that impact the way you interact or how might that impact your business and how you interact with retail customers? Thanks.

Yeah. So, um, you know, I, I think we, we always, uh, one of the things that I learned early on in my career is that we always have to be very mindful of reimbursement for our provider customers. Um, of course we do a lot of work with independence in particular with elevate, uh, PSA. And we've been saying for a while that some of the rates are not manageable. So, um, to see, um, an industry leader step up and really talk about, uh, changing the model, I think is, uh, is very important. We would like to see a fair and transparent reimbursement system for all categories in pharmacy, especially community pharmacy, and especially including independent pharmacists who we feel a special need to advocate on behalf of. So it's early days. It's encouraging that there is some talk about adoption of the cost plus model across the industry. And we'll see how the industry responds and payers respond, et cetera. But we believe that this is a sign that there does need to be an improvement in the base profitability of community pharmacists, which is encouraging.

Our next question comes from Eric Holdwell with Baird. Your line is open. Please go ahead.

Thanks very much. A number of mine have been hit, but I might have two small separate ones. First on international, very strong underlying performance, AOI up over 20% FXX foreign currency. I'm curious if you could parse out the impact of Egypt from both a revenue and AOI standpoint, because I believe your AOI would have been up even more X the year over year headwind in Egypt. And then secondarily, just a quick one on GLP-1s. I know you don't guide to specific revenue or revenue contribution growth rate, but when we look at your raised revenue target for the year, could you give us a sense on how much of that was or was not related to GLP-1 outlook, i.e., has your GLP-1 growth expectation changed since the last update? Thanks so much.

Okay, so let me start out with Egypt, Eric, and we haven't specifically disclosed the size of that business. But let me say, yeah, you're absolutely right. Our operating income growth would have been higher in the quarter if we had backed out Egypt, for instance, from the first quarter of last year. But let me kind of give you some some data that I think would be helpful as you do your models over the course of the year. The Egyptian business was profitable in the first fiscal quarter of last year, as we just referenced, and then was essentially flat in Q2 and Q3, and then it had a loss in Q4. And so for the full year, it was a slightly profitable business in fiscal year 23. And so it really doesn't have if you look at on a full year basis, it doesn't have much of an impact on kind of full year growth rates in the international segment. But as I said, during the first quarter, the growth would have been a little bit higher if we if we included or if we backed out Egypt from last year. And then with regard to kind of U.S. health care segment and So the U.S. healthcare solution segment, you know, in revenue growth, we now expect 11% to 13% growth, up from our previous expectations of 7% to 10% growth. And the new guidance range, it reflects the strong revenue growth we saw in the first quarter, including the year-over-year growth of GLP-1s and continued good growth for the remainder of the year, driven by, you know, expected broad-based prescription applications utilization trends. And so GLP-1s essentially contributed, you know, three percentage points of growth in the first quarter. And we expect, you know, just kind of continued good growth throughout our business during the balance of the year and feel, you know, really good about the business overall and really good about our guidance. Thanks.

Our next question comes from George Hill with Deutsche Bank. Your line is open. Please go ahead.

Hey, guys, thanks for squeezing me in. I'm going to kind of get into a niche topic here with CenterX, Jim. I know that you guys have that EPA business, and we've seen kind of a surge in demand for EPAs, both as it relates to GLP-1s and the increasing use of biosimilars. So we'd just love to hear you talk a little bit about how that business is performing relative to kind of the GLP-1s and the biosimilars.

Yeah, and so, you know, I'll say – Overall, we feel really good about our prospects in global pharma services and patient services and the sorts of things that Center X does. And we feel just very good overall about the growth prospects there and really don't have any comments beyond that other than to say kind of global pharma services and those businesses like Center X are just a key part of our growth this year and over our long-term guidance also. Okay.

This concludes our Q&A.

Thanks, everyone.

I'm Steve Collis.

Thanks, everyone. I appreciate your patience. We ran a little bit long today, so this wraps up our call for today. I just have to make a little note that at the end of our fiscal year 23 call, I received a little pouch and it was 50 quarters from my predecessor to commemorate 50 earnings calls. So once we're counting, 51 is clearly one of the most memorable and exciting quarters that we have presented and even more so to do it under the new core ticker symbol. While we have a lot of work ahead to continue to deliver on our purpose and the potential of Sankora, We are really proud of the work our team members are doing to position us successfully and strategically at the center of pharmaceutical-based health care. Thank you for your time today.

Ladies and gentlemen, today's call is now concluded. We'd like to thank you for your participation. Ladies and gentlemen, today's call is now concluded. We'd like to