Cencora Q4 2021 Earnings Call Transcript

AlphaStreet
Provided by AlphaStreet
November 4, 2021
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Operator

Good day, and welcome to the AmerisourceBergen Fourth Quarter Fiscal Year '21 Earnings Conference Call. [Operator Instructions]. Please note, this event is being recorded. I would now like to turn the conference over to Bennett Murphy, Senior Vice President, Investor Relations. Please go ahead.

Bennett S. Murphy
Senior Vice President of IR at Cencora

Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen's Fourth Quarter and Fiscal Year 2021 results. I am Bennett Murphy, Senior Vice President, Investor Relations. 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 investors.amerisourcebergen.com. We've also posted a slide presentation to accompany today's press release on our investor website. During the conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes.

Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed permission of the company. You'll have an opportunity to ask questions after today's remarks by management. We ask that you limit your question to one per participant in order for us to get to as many participants as possible within the hour. With that, I'll turn the call over to Steve.

Steven H. Collis
Chairman, President & Chief Executive Officer at Cencora

Thank you, Bennett, and good morning to everyone on the call. Today, we will focus our remarks on the exceptional progress that AmerisourceBergen team has made on our strategic priorities during fiscal 2021, and how we will capitalize on that momentum to continue executing and innovating in fiscal 2022. Before I begin, I want to take a moment to comment on the distribution industry's recent milestone regarding the proposed settlement agreement to address opioid-related claims of U.S. State Attorney Generals and political scout divisions in participating states. Throughout the litigation process, we have been consistent in stating our desire to addressing the enormity of the opioid challenge by bringing solutions to the table. If the industry's proposed agreement and settlement process leads to a final settlement, it would collectively provide thousands of communities across the United States with substantial financial support. Clearly, the process is in an advanced stage, and we will not comment deeply at this time.

We take our role in the supply chain seriously and continue to work closely with stakeholders concerning these complex matters. AmerisourceBergen will continue to work diligently and alongside partners to combat drug diversion while supporting real solutions to help address the crisis in the communities where we live, work and serve. In fiscal 2021, AmerisourceBergen advanced its role as a key pillar of pharmaceutical innovation and access, as we look at our purpose of being united in our responsibility to create healthier futures by supporting our partners, customers and our own team members through challenging times. As the pandemic persists, the importance of our purpose in an evolving environment and an efficient global pharmaceutical supply chain is being felt by all our stakeholders.

We are proud to be able to offer our expertise, capabilities and infrastructure as part of the solution on facilitating the national distribution of COVID-19 therapies, to supporting the distribution of more than 75 million vaccines to patients in over 30 countries through our expanded global footprint. Our business has leveraged its position of market strength to become an increasingly vital partner of choice through differentiated solutions for our upstream and downstream customers. Our continuous investments and ongoing focus on being a strategic partner for our customers have deepened our relationships with all our stakeholders during this time of increased focus on the pharmaceutical supply chain, enhancing our position as a provider of key solutions for our customers, both big and small. We also leverage our core capabilities as a leader in pharmaceutical distribution and a differentiated provider of unique solutions for manufacturers globally and health care providers locally.

In the U.S., we are a key partner for our community pharmacies, veterinarians and physician practices. In community pharmacy, we are particularly proud to support our Good Neighbor Pharmacy members trusted role through our innovative tools and programs that allow independent pharmacists to optimize their operations and spend the most possible time serving their patients and communities. In July, for the fifth year in a row and for the tenth year of the past 12 years, Good Neighbor Pharmacy network was ranked highest amongst brick-and-mortar chain drug store pharmacies by JD Colin. In our Animal Health business, we support veterinarian practices in similar ways to help them manage their practices as they continue to experience increased demand for its services due to growth in pet ownership.

The cherished role of pets within families and increased importance based on ensuring health and well-being of all family members. We also continue to differentiate ourselves as the leader in specialty distribution and commercialization services. This fiscal year, we launched a variety of new services and solutions, bolting upon our historic investments to further drive our leadership in specialty with our customers and orders. For example, through our ION and other value-added solutions, we form new partnerships that offer industry-leading technologies to specialty physician services customer practices, enabling them to be even more efficient on enhancing their ability to improve the patient experience and ultimately, outcomes. We are also pleased to continue to support the growing adoption of biosimilar products in physician offices and community hospitals and health systems, facilitating patient access to important treatment choices, to improve their health and well-being. Internationally, we remain a leading provider of global pharmaceutical distribution services and differentiated solutions in key markets across the globe.

Earlier, I mentioned the distribution of tens of millions of doses of the COVID-19 vaccines to patients in more than 30 countries. Through our market-leading manufacturer solutions, including our global specialty logistics and commercialization offerings, we're also facilitating direct-to-patient clinical trials and helping manufacturers around the world navigate the ever-increasing complexities of global logistics. Furthermore, we are leveraging our now expanded portfolio of international relationships, partnerships and solutions to facilitate patient access to the rapidly evolving landscape of new pharmaceutical technologies. As we continue to differentiate our business, we remain focused on being strategic partners with our customers as we help them achieve operational efficiencies and support growth in their businesses with innovative solutions. In fiscal 2021, we completed a significant technology investment by bringing the specialty distribution business onto the SAP platform, which will help improve efficiency, increase flexibility and support continuity.

As a global health care company, we understand and appreciate the importance of ensuring our businesses have the technology they need to support their operations and enhance their capabilities. Importantly, an increasingly critical part of our global role and responsibility is being strong corporate stewards, that is ensuring our financial health, investing in our people culture and ensuring long-term and sustainable value creation. In terms of our financial health, we continue to take a thoughtful and strategic approach to capital deployment that focuses on value creation and maintaining financial strength. This includes our focus on maintaining our strong investment-grade credit ratings, and we remain on track to delivering on our commitments to the rating agencies. Notably, our financial and strategic position has enabled the continued enhancement of our health care capabilities, including the acquisition of Alliance Healthcare, which we completed in June. Since then, our culturally-aligned teams have worked diligently to integrate our teams and businesses, conducting deep dive into strategically optimizing our operational and business development synergies to exploring ways to enhance the value we grade to our partners. As we are seeing through financial results and expectations, our new team members are talented, and I thank the combined AmerisourceBergen and Alliance Healthcare teams for the ongoing support of our integration efforts. Our financial strength also enables us to continue to invest in our people and culture.

At AmerisourceBergen, we know our team members are our most valuable asset, and we are committed to inspiring them to achieve their fullest potential. Our efforts go well beyond the table space of offering market align pay, and we understand the long-term advantage of being a fair and equitable employer, who offers competitive wages at all levels. We have surveyed our team members to find out what's most valuable to them and have invested in attractive benefit programs, such as increased paid parental leave, child and dependent care, and enhanced mental health and wellness programs. Our team members also value a culture of flexibility, and we responded with a thoughtfully designed, new way of working that provides options for flexibility while balancing the need for in-person connection and innovation. On ensuring the safety of themselves and their loved ones during the pandemic to investing in world-class learning technology and models, we understand that it is absolutely critical that our talent is cultivated and empowered to help drive our long-term growth.

Our efforts have been recognized, and we have once again been certified as a great place to work company and named a best place to work for LGBTQ equality by the Human Rights Campaign. Meaningful value can also be unlocked when individuals are empowered to bring their whole selves to work, and we embrace our collective differences. This year, we furthered our diversity, equity inclusion efforts with the rollout of new employee resource groups and new diverse candidate slate objectives. To further align our people strategy with our business strategy, we also introduced a new leadership competency model that will be embedded throughout all of our talent programs. Based on the collective feedback from team members across AmerisourceBergen, the new model focuses on developing the initial competencies aligned to four key business and cultural poles, diversity, equity and inclusion, collaboration, innovation and executional excellence and purpose. As a foundation for how we will recruit, engage and develop our people, this new model and the principles behind them will enable us to create value now and for the long term.

Another aspect of our culture, one which helps ensure sustainable value creation, is our dedication to operating in a sustainable and responsible manner and to supporting healthy and resilient communities, where we live and work. During the quarter, we are proud to have become a participant of the UN Global Compact, the world's largest corporate sustainability initiative. We also held our third annual AmerisourceBergen Foundation Conference, which helps Foundation grantees connect and learn from each other and the Foundation team to help them become even more effective in their work to positively impact local communities around the world. Our continued progress in areas like ESG, diversity, equity inclusion and strategic planning are made possible by the expert oversight and guidance to our board as well as the ability of our management team to drive execution and operational excellence. Looking ahead, our key growth pillars enable us to maintain our leading market position and to solidify our differentiated value proposition in fiscal '22 and beyond. First, we are focused on our customers.

Through our unique partnership model, we formed long-term lasting relationships and integrate us operationally and enable us to provide value-added solutions that help further strengthen our ability to lead with market leaders. Second, we are focused on expanding on our leadership in specialty by leveraging our global reach, market-leading capabilities and ability to support rapidly accelerating and global pharmaceutical innovation, we strengthened our capabilities to support both upstream partners and downstream customers. Third, we are focused on execution excellence. This includes continuously investing in our business, which increases our flexibility, expands our suite of capabilities and enhances our customer experience. Fourth, we are focused on supporting pharmaceutical innovation around the world. With a global manufacturer services platform, we aim to be the strategic partner of choice to global manufacturers as we help them innovate, solve the complex challenges of global logistics and market access, and capture the opportunities of rapidly accelerating pharmaceutical innovation. Downstream, we provide data-driven insights, efficiency solutions and our unmatched scale to help optimize customer operations and support access for patients in the -- on the smallest to largest populations across all sites of care and across all classes of trade.

And finally, our growth is supported by investments in our people, culture and all dimensions at ESG. By investing in our people and culture, we advance our most important resource. By committing to ESG, we create healthier futures around the world and unlock the added value of being a responsible and impact for enterprise, which ultimately enables a strong and healthy financial position to achieve long-term sustainable value creation for all of our stakeholders. AmerisourceBergen has made exceptional progress on our strategic priorities, further enhancing our differentiated value proposition and driving consistent outperformance throughout the year as we continue to capitalize on our positive momentum into fiscal 2022. We remain driven by our purpose of being united in our responsibility to create healthier futures. Now powered by 42,000 team members globally, we remain confident in our pharmaceutical-centric strategy and capabilities as a leader in pharmaceutical distribution services and differentiated manufacturer solutions. Thank you to all our team members for their inspiring dedication this year, and we look forward to a great year ahead.

Now I will turn the call over to Jim for a more in-depth review of our fourth quarter and fiscal 2021 results and to discuss fiscal '22 guidance. Jim?

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Thanks, Steve, and good morning, everyone. For AmerisourceBergen, fiscal 2021 was a momentous year as we celebrated the 20th anniversary of the Amerisource and Bergen Brunswick merger completed, both the acquisition of Alliance Healthcare and the extension of the Walgreens contract through 2029, and our teams delivered another year of strong performance, driven by our continued execution and strategic decisioning. Our pharmaceutical-centric business, robust customer relationships and leadership in specialty distribution and services position us to be a partner in supporting pharmaceutical innovation and access on a global scale. Before I turn to our results, as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. Growth rates and comparisons are made against the prior year September quarter. For a detailed discussion of our GAAP results, please refer to our earnings release.

I will provide commentary in three main areas this morning: first, I will review our consolidated results and segment performance in fiscal 2021, and then we will discuss our new reporting segments beginning in fiscal 2022 and will conclude with fiscal 2022 guidance. Beginning with our fourth quarter results, we finished the quarter with adjusted diluted EPS of $2.39, an increase of 26.5%, which was driven by both a full quarter's worth of contribution from Alliance Healthcare and the strong performance in our Pharmaceutical Distribution Services segment. Our consolidated revenue was $58.9 million, up approximately 20%, reflecting growth in Pharmaceutical Distribution and Other. Excluding Alliance Healthcare, our consolidated revenue would have been up 9% from the prior year quarter. Consolidated gross profit was $2 billion, up 51%, driven by increases in gross profit in both Pharmaceutical Distribution and other, which benefited from the inclusion of Alliance Healthcare.

This quarter's gross profit margin of 3.4% is 71 basis points higher than the prior year quarter as we had a full quarter of Alliance Healthcare in our consolidated results. Consolidated operating expenses were $1.3 billion versus $795 million in the prior year period, primarily due to the addition of Alliance Healthcare as well as investments in our talent and initiatives to support the company's current and future growth. This quarter's operating expense margin of 2.23% is 61 basis points higher than the prior year quarter, primarily reflecting the full quarter impact of Alliance Healthcare in our consolidated results. Also as a reminder, in the fourth quarter of fiscal 2020, we had a bad debt reversal of $13 million that impacts the year-over-year comparison of operating expenses. Turning now to consolidated operating income. Our operating income was $694 million, up 31% compared to the prior year quarter. This growth was driven by increases in both the Pharmaceutical Distribution Services segment and Other, which I will discuss in more detail when I review segment level performance.

Operating income margin was 1.18%, an increase of 10 basis points as a result of the contribution from Alliance Healthcare and the continued benefit from some of our higher-margin businesses. Moving now to our net interest expense and effective tax rate for the fourth quarter. Net interest expense was $55 million, up 57% due to debt related to Alliance Healthcare. Our effective income tax rate was 20.3% compared to 21.7% in the prior year quarter. The lower effective tax rate was due to a change in the mix of domestic and international income from the prior year quarter. Our diluted share count was 210.8 million shares, a 2.2% increase due to the impact of the issuance accumulated shares delivered to Walgreens as part of the Alliance Healthcare acquisition and dilution related to employee stock compensation. This completes the review of our consolidated results. Now I'll turn to our segment results for the fourth quarter. Pharmaceutical Distribution Services segment revenue was $51.2 billion, up 8% in the quarter, driven by increased sales of specialty products, strong execution across our Pharmaceutical Distribution businesses and overall positive prescription utilization trends.

Pharmaceutical Distribution Services segment operating income increased by 11% to $472 million. Operating income margin expanded by two basis points to 0.92% in the quarter. AmerisourceBergen's continued leadership in specialty distribution allowed us to capture the benefits of strong utilization trends during the quarter. I will now turn to Other, which includes Alliance Healthcare, MWI, World Courier and AmerisourceBergen Consulting. In the quarter, Other revenue was $7.7 billion, up from $2 billion in the fourth quarter of fiscal 2020, driven by a full quarter's worth of contribution from Alliance Healthcare as well as growth in the global commercialization services and Animal Health businesses. Other operating income was $223 million, up from $105 million in the fourth quarter of fiscal 2020 due to the inclusion of Alliance Healthcare. That concludes our fiscal fourth quarter discussion. Now I will turn to a discussion of our full year fiscal 2021 results. Our consolidated revenue was $214 million, up 13%, driven by growth in Pharmaceutical Distribution and Other, which includes four months of contribution from Alliance Healthcare.

Excluding Alliance Healthcare, our consolidated revenue was up 9% from the prior year. Consolidated operating income grew 20% for the year to $2.6 billion, driven by strong performance across our businesses and the four-month contribution of Alliance Healthcare. Excluding Alliance Healthcare, our consolidated operating income increased by an exceptional 12% from the prior year, driven by growth in our higher-margin businesses, strong fundamentals across our business and the important work our team has done to support the COVID therapy distribution for hospitalized patients. From a segment perspective, Pharmaceutical Distribution Services had operating income growth of 13% due to strong performance across our portfolio of businesses and customers. In fiscal 2021, we continue to capitalize on our leadership in specialty distribution, both in the physician space and health systems. We saw a significant contribution from health systems as our differentiated solution set was leveraged by manufacturers to meet their complex logistics for the distribution of COVID-19 antivirals and therapies to hospitals across the country. Additionally, we continue to have strong performance in Specialty Division Services this fiscal year as the health care system has become more accustomed to operating in the current environment.

This supported physician diagnosis and related testing and screening processes, resulting in more normal levels of new patient starts. In Other, operating income grew 54% year-over-year to $615 million. Other meaningfully benefited from the four months of contribution from Alliance Healthcare results, while World Courier and MWI also delivered strong results. As global logistics continue to be challenged by the pandemic, World Courier provided its expertise and innovative solutions to manufacture partners around the world, facilitating the movement of temperature-sensitive and other high-priority shipments. World Courier's direct-to-patient in home clinical trials continue to be a differentiator as patients and manufacturers saw alternative lower acuity care sites. MWI continued to experience strong performance in the companion animal market as pet parents maintain their focus on their pet health and the production animal market, the reopening of restaurants and return of travel boosted protein demand. Turning now to tax rates. Our adjusted effective tax rate for fiscal 2021 was 21.3% compared to 20.8% in the prior fiscal year, which has benefited from discrete tax items.

Turning now to EPS. Our full year adjusted diluted EPS grew 17% and $9.26, primarily due to strong growth and execution across our business, including continued leadership and outperformance in specialty and the four-month contribution from Alliance Healthcare. Adjusted free cash flow for the year was $2.1 billion, which was better than our expectations due primarily to the timing of certain customer payments in September, a benefit that will reverse in the December quarter due to the higher supplier payables. There was also better-than-expected cash flow at Alliance Healthcare. If you normalize for the timing-related benefit, our adjusted free cash flow for the year would have been roughly $1.7 million. We ended the year with a cash balance of $2.5 billion, excluding restricted cash of approximately $500 million. That completes the review of our fiscal 2021 results. I will now discuss updates to our segment reporting, which will go into effect in fiscal 2022. Following the acquisition of Alliance Healthcare and the subsequent change to the geography of our business, we undertook a strategic evaluation of how we report our segments in order to provide alignment with business operations. Following this review, which concluded in October, we will begin reporting our results in two new segments in the first quarter of fiscal 2022, U.S. Health Care Solutions and International Health Care Solutions.

The U.S. Healthcare Solutions segment will consist of our legacy Pharmaceutical Distribution Services segment, excluding Profarma Distribution plus the following businesses, which had previously been reported in Other, MWI Animal Health, Xcenda, Lash Group, and ICS 3PL. The International Healthcare Solutions segment will consist of our non-U.S.-based Pharmaceutical Distribution and Services solutions, including Alliance Healthcare, World Courier, Innomar and Profarma Distribution and Profarma Specialty. As a reminder, we consolidate Profarma's results due to our ownership interest and governance of the publicly-traded entity. Profarma Specialty was previously reported in Other. This morning, we are also filing a Form 8-K with three segmented financials for fiscal 2021 in order to help your quarterly modeling. Our new reporting segments, like AmerisourceBergen, are built on the foundation of leading in pharmaceutical distribution and differentiated by complementary higher-margin businesses offering value-added solutions in key markets. Turning now to discuss our fiscal 2022 guidance.

And as a reminder, we do not provide forward-looking guidance on a GAAP basis. So all of the following metrics are provided on an adjusted non-GAAP basis. Starting with revenue. We expect consolidated revenue to grow in the high single-digit to low double-digit percent range. On a segment level, we expect U.S. Healthcare Solutions revenue to be approximately $207 billion to $212 billion, representing growth of 2% to 5% year-over-year. In International Healthcare Solutions, we expect revenue of approximately $26 billion to $27 billion. Moving on to operating income. We expect consolidated operating income to grow in the mid- to high teens percent range. On a segment level, we expect U.S. Healthcare Solutions operating income to be between $2.325 billion and $2.4 billion, representing growth of 3% to 6% on a year-over-year basis. The only business that was included in Pharmaceutical Distribution services that is not going into U.S. Health Care Solutions is Profarma Distribution, which contributed less than 1% of revenues for Pharmaceutical Distribution Services in fiscal 2021 and roughly 1% of segment operating income.

As a reminder, as I said back in February and again in August, we had a significant tailwind in fiscal 2021 related to the financial contribution from sales of COVID-19 therapies. We did have higher-than-expected COVID therapy sales in the fourth quarter, primarily driven by sales in the month of August with a subsequent substantial decline in September. The final EPS benefit from COVID therapy sales for full year fiscal 2021 was $0.30, $0.14 of which was in the first quarter. If you estimate the first quarter of fiscal 2022 based on even lower October trends, the contribution from COVID therapy sales would be $0.03, which means the first quarter would have an $0.11 headwind for U.S. Healthcare Solutions segment. While this reduces the segment's growth rate in the first fiscal quarter, we expect full year operating income growth of 3% to 6% in U.S. Health Care Solutions. We expect International Healthcare Solutions have operating income between $685 million and $715 million. Alliance Healthcare represents a little over 2/3 of operating income in the segment, with World Courier making up the majority of the remainder of segment operating income. As you think about your first quarter models, we expect about 25% of the International segment's operating income to occur in the first quarter. As you look at fiscal 2022 for the International segments, there are a couple of things to keep in mind. First, we have agreed to sell Profarma Specialty as we focus on our core operating assets.

The transaction is under regulatory review and is expected to be completed in the first half of fiscal 2022. Successful completion of the divestiture is factored into our guidance and represents a 2% headwind to our International Healthcare Solutions segment's operating income. Second, in fiscal 2022, we will have a step up in expenses at Alliance Healthcare that was fully contemplated when we announced the acquisition and is generally related to IT modernization. As Steve said earlier, we view technology and systems as fundamental to our operations and business continuity, and this step-up in fiscal 2022 expense will help align Alliance Healthcare's business technology, operability and infrastructure with AmerisourceBergen. Alliance Healthcare continues to deliver on our expectations for the business, and we expect Alliance to be high teens accretive to our standalone adjusted diluted EPS in fiscal 2022. Since closing the transaction, our teams have engaged both in person and virtually and have furthered our strong relationships. Most recently, we held a deep dive with leaders across AmerisourceBergen and Alliance Healthcare, focused on Alliance Healthcare's manufacturer services businesses.

I continue to be impressed by the strong and efficient business and team at Alliance and appreciate the collective thoughtfulness around creating long-term value for stakeholders through our innovative solutions. Moving on to interest expense, tax rate and share count. We expect interest expense to grow in the mid-teens percent range as a result of debt related to the Alliance Healthcare acquisition. We expect our tax rate to be approximately 21% to 22% for fiscal 2022, based on current tax rates in effect for fiscal 2022. Without the tax rate benefit from Alliance Healthcare's operations, our range would have been 1% higher on both the top and bottom end of the range. Finally, we expect that our share count will increase to approximately 212 million shares as a result of the full year impact of the two million shares delivered to Walgreens as part of the closing of the Alliance Healthcare acquisition and normal dilution from stock compensation expense. As a reminder, as part of our commitment to maintain our strong investment grade credit rating, we are committed to paying down $2 billion in total debt over the next two years in lieu of share repurchases.

We currently expect to pay down roughly half that amount toward the end of fiscal 2022. As a result of these expectations, reflecting the strength of our business, we are guiding for adjusted diluted EPS to be in the range of $10.50 to $10.80, reflecting year-over-year growth of 13% to 17%. Turning now to capital expenditures and cash flow expectations. capex is expected to be in the range of $500 million as we continue to invest to further advance our business or to buy Alliance Healthcare's IT infrastructure and support additional growth opportunities. For adjusted free cash flow, we expect adjusted free cash flow to be in the range of $2 billion to $2.5 billion, which includes the benefit of Alliance Healthcare in our results for the entire fiscal year. In closing, fiscal 2021 was another successful year for AmerisourceBergen as we continue to execute on our strategic priorities while the pandemic persisted. I am proud of our 42,000 team members, who worked tirelessly to support our customers, partners and patients and drove our strong financial results. Given the steps we took in 2021 to advance our business, I'm excited about our 2022 fiscal year as we continue to deliver stakeholder value.

As we continue to drive our business forward, we will maintain our focus on our differentiated capabilities supported by our dedicated team members. AmerisourceBergen is guided by our purpose of being united in our responsibility to create healthier futures, built on a foundation of leadership in Pharmaceutical Distribution and differentiated by complementary higher-margin businesses that leverage our pharmaceutical scale and expertise to create unparalleled value for our manufacturer partners and health care provider customers. With that, I'll turn the call over to the operator to open the line for questions. Operator?

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Operator

[Operator Instructions]. And the first question will be from Lisa Gill from JPMorgan.

Lisa Christine Gill
Analyst at JPMorgan Chase & Co, Research Division

Good morning. Jim, I just want to go back to your comments around the U.S. drug distribution. I understand that there's a number of incremental businesses that are now within that segment, but you made a comment about COVID-19 therapies. So when we think about 2022, one, is there nothing built into your expectation around that? And two, just given the number of new therapies that are coming to market, for example, I think about the new Merck therapy that's just been announced, is it not reasonable to think that there's going to be some benefit as we go into 2022 for COVID therapies, would be my first question.

And then secondly, can you just help us to understand the underlying trends? So for example, what are your expectations around utilization trends? What's your expectation around cough, cold, flu, acute scripts kind of coming back and people visiting the physician office again, etc. If you can just help us to better understand that, that would be great.

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Lisa, thank you. Great question. I'll answer that question from a financial perspective, and then I think Steve will want to add in and talk a little bit more about the business. But as you know, our guidance for this year for our U.S. Healthcare Solutions segment, revenue growth of two percent to five percent and adjusted operating income growth of three percent to six percent. And it's based on continued strong performance really across the business, where we continue to benefit from our differentiated position.

Now with regard to your question on COVID therapies, we don't expect to repeat the benefit that we had in fiscal year 2021 from our exclusivity on the distribution of the main commercial COVID therapy. The benefit we got from COVID therapies in fiscal year 2021, as I said in my prepared remarks, was $0.30. And kind of let me give you some of the breakdown there. During the first quarter, it was $0.14, second quarter was $0.07, third quarter was $0.03 and fourth quarter was $0.06. So I'm sure that will help you in your modeling.

And as we're looking at fiscal year 2022, we expect the benefit that we get in the first quarter of fiscal year 2022 to be $0.03. So we have an $0.11 headwind in the first quarter of fiscal year 2022. And so we do expect to have lower operating income growth in U.S. Health Care Solutions in the first quarter of fiscal year 2020, but of course, as I said, expect three percent to six percent operating income growth for the full year, which includes, of course, Q1. Now you asked about other COVID therapies. And of course, it's early, but we may very well get some benefit from other COVID therapies.

And that's exactly why one of the reasons why we have a range, and we have a $0.30 range in our EPS between $10.50 and $10.80. We don't expect a lot of incremental benefit in the first quarter, but it could come later on in the year. Now you also asked about utilization friends, which is a great question. And we are seeing strong utilization trends across our business, which has improved sequentially from the positive trends that we noted in our third fiscal quarter. And prescription trends are strong and have returned to pre-COVID-19 levels.

And we have seen strong utilization improvement trends across the business in the second half and expect that to continue to benefit us in fiscal year 2022 across our businesses and customers. And I see that Steve would like to just add a couple of things on the overall business.

Steven H. Collis
Chairman, President & Chief Executive Officer at Cencora

We're entering 2022 with all of our businesses performing very well, Lisa, and benefiting from a somewhat normal environment, but it is the innovation factor that remains. And I saw that the Merck [Indecipherable], while we're on the call, the Merck got approved in the U.K., an oral. So continued innovation and it's possible that we could be working with some therapies in the future, as we have in the past, particularly in the emergency use authorization phase is where we've been successful in working on an exclusive basis.

So we're happy andif I look back on 2021, I think of it as the year that the last deal got done and the year that we responded so well to assisting with the need for corresponding to the COVID pandemic and including keeping our people safe. So that's what I think would be the highlights. But Jim, I think you gave an exhaustive answer. So we'll probably move on to the next question, please.

Operator

The next question will come from Charles Rhyee from Cowen.

Charles Rhyee
Analyst at Cowen and Company, LLC, Research Division

Thanks for taking my questions. Jim, I just wanted to follow up on the guidance, particularly in the International Health Care segment here. You said, you were planning to sell the Profarma Specialty business and said there was a two percent headwind. That's two percent headwind to the full year operating income, but it's not going to sell until -- so it's really double that for the back half of fiscal 2022. And did you give a revenue impact as well?

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Yes. No, we haven't given revenue impact, but you are right, it is a two percent headwind for the whole year. And we're assuming we're going to sell that business during the first half of the year. And of course, our International Healthcare Solutions segment is really driven by Alliance Healthcare being the largest part of the segment, and we feel very good about the performance of Alliance. It's operating at or above our deal model. And then the next biggest piece of the International Healthcare Solutions segment is, of course, our World Courier business, which is also performing well.

Operator

And the next question will be from Steven Valiquette from Barclays.

Steven James Valiquette
Analyst at Barclays Bank PLC, Research Division

Thanks. Basically, a lot of the discussion points around freight costs, the ability for drug distributors to pass some of that through or have to absorb that. There's a lot of components to that. It can be higher labor costs. It could just be higher fuel costs, etc. But just curious to hear about how you guys are handling that? And whether there's any impact in your business one way or the other? Or can you fully either pass that through or just not have that be as a material impact to the company? Thanks.

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Yes. I think really in the summary that it is fully reflected in our guidance. And in fiscal year 2022, and we do expect to continue to have higher expenses associated with picking, packing, shipping. There are some offsets from certain other FY 2021 expenses that are not planned to repeat in FY 2022. But of course, we keep a close eye on economic trends that can impact our business, and we have seen wage and transportation inflation across our business.

During the summer, we moved quickly to adjust wages to ensure that they remain competitive and market aligned, and that's reflected in our fourth quarter results. And these things, like higher labor and transportation costs, they're fully contemplated in our fiscal year 2022 guidance, and we'll manage these expenses as we do each year and work with our partners and customers to ensure that we're diligent in maintaining our fair compensation for the services we provide.

Operator

The next question is from Eric Percher from Nephron Research.

Eric R. Percher
Analyst at Nephron Research

Thank you. I want to take the other side of the U.S. question asked earlier. So this also includes MWI animal, Xcenda. Is it fair to assume that that's growing more than the three percent to six percent for the total segment? Are there any headwinds coming out of fiscal year 2021 we should be aware of? And then relative to the resegmentation, when we look at three percent to six percent, is that apples and apples? Are there any changes in corporate expense now allocated to the EU segment or the global service entity in Switzerland that would impact the three percent to six percent?

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Yes. And so there aren't any changes in the corporate allocation, and when we add businesses like MWI Animal Health and the consulting businesses to U.S. Health Care Solutions, MWI has had a stronger growth rate, particularly in fiscal year 2021, the Animal Health business really benefited from the pandemic and the increase in debt ownership. And so that has been a higher growth business in fiscal year 2021, whereas the consulting business has been a lower growth business. And so I think that gives you a little bit of additional color there.

And then one thing that we are doing today is, as I said in my prepared remarks, we are filing an 8-K where we'll show the segments. The two new segments will show that on a historical basis for fiscal year 2021, and how they look in the fiscal year 2021. And I think probably a key thing is that when we look at the U.S. segment for this upcoming year, we're expecting three percent to six percent growth, which is largely apples to apples because of the size of the legacy business that are going into the new segment.

Eric R. Percher
Analyst at Nephron Research

That's very helpful.

Operator

And the next question will be from Jailendra Singh from Credit Suisse.

Jailendra P. Singh
Analyst at Credit Suisse AG, Research Division

Thank you and good morning everyone. I was wondering if you could comment on the potential impacts from the recent changes coming out of Washington around Medicare, negotiating drug prices, among other components. With your leading presence in specialty products, how do you think about the implications as Medicare ramps up a number of drugs it is negotiating?

Steven H. Collis
Chairman, President & Chief Executive Officer at Cencora

Yes. Thank you for the question. So U.S. is -- I think somewhat over fixated on the cost of medications relative to overall health care spending. We've been very interested in benefit design, and we also prefer when the market creates their own solutions for problems, such as high copays for adherence products that are so detrimental to the system when a diabetic patient doesn't take the insulin. So we see some real strong benefits if we can remove some barriers that have been officially created on products like that.

On specialty, it's a little bit too early to tell. I think we've been through many changes in reimbursement, including the change to ASP, a tremendous growth in the hospital outpatient market for specialty drugs. And the wholesalers are very resilient, and we also do believe that -- understand the health care, pharmaceuticals are the most efficient form of health care. So there's nothing that tremendously concerns us as a business.

Our concern is always with preserving innovation and making sure that our providers have a stable reimbursement environment that they can get, continue to run their businesses and take care of patients. But definitely, I think we spend a lot of time, and I'm not very interested in. Thanks for the question.

Operator

And the next question will come from Kevin Caliendo from UBS.

Kevin Caliendo
Analyst at UBS Investment Bank, Research Division

Thanks. Just in terms of in the guidance, I just want to understand the capital deployment expectations. You gave us the share count, we understand that. Should we just assume that the vast majority of the free cash flow then will be to pay down debt? Or how should we think about it?

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Yes. And so as we've said before, we do plan to take down about 2/3 of the Alliance Healthcare acquisition debt by the end of fiscal year 2023. We've started that process, so it's about $2 billion that we'll be paying down during that time frame. We expect to pay down about half of that in fiscal year 2022. And so that is kind of one of the key parts of our capital deployment. We'll also, of course, continue to invest in the business and invest in current future growth in fiscal year 2022.

Operator

And the next question is from Elizabeth Anderson from Evercore.

Eduardo
Analyst at Evercore ISI

Thanks ang good morning everyone. This is Eduardo on for Elizabeth. Just maybe given the Walgreens' new expansion toward becoming a provider of health care services, how do you envision your relationship within them evolving? And what can you do to support their new strategy?

Steven H. Collis
Chairman, President & Chief Executive Officer at Cencora

Yes. Thank you. We're tremendously proud of the benefits we're getting from the recently announced Alliance transaction, including that we have a contract with Boots, who's become a very significant customer of our Alliance division through 2031. And most importantly, we extended our Walgreens contract in the U.S. through 2029. And this is such a fundamental customer for us that helps us establish such a strong base of scale and efficiency. And I think the teams are at a very good state where we're looking to how can we help with one and other priorities.

We have these discussions with all our large customers and the need for the very large customers like Walgreens are very different, than say, the independent veterinarians, the community pharmacists. But yes, for example, we're supporting WBA with their central fill initiatives, and we're looking to understand better how we can help with their strategies on the institutional side. So I just would say that the relationship is in a good place, and we still go back to that 2013 agreement as being very fundamental to the success of AmerisourceBergen over the last decade.

Operator

And the next question will come from Michael Cherny from Bank of America.

Michael Aaron Cherny
Analyst at BofA Securities, Research Division

Good morning, thanks for the color so far. So if I could just circle back a bit on the Americas growth in the U.S. Health Care segment. As you think about the moving pieces -- and I appreciate the color, Jim, you gave so far relative to the market improvement, but in terms of the upside, downside of the range, what are the macro factors have to look like to get to those numbers? And I'm more just curious because on an all-in basis, you have obviously been tracking higher than that and outpacing the rest of the market. And so whether -- antivirals are one component, but what else are the moving pieces that you think about in terms of what encapsulates the range on the U.S. segment?

James F. Cleary
Executive Vice President & Chief Financial Officer at Cencora

Sure. And so one of the key things is something that I've talked about in the prepared remarks and then also in an earlier answer, but I'll just quickly cover it again given the scale. And that's the impact that COVID therapies could have. So that really impacts the range. And again, it was a $0.30 of benefit in fiscal year 2021 and $0.14 of that came in the first quarter of fiscal year 2021, and we're expecting that the benefit will be significantly less in fiscal year 2022. But Steve talked about some of the innovation that's occurring, it could be higher. And so that's something that certainly could impact the range, and that would be one of the larger things.

And then, of course, there's always a number of moving pieces in our businesses. We have very strong performing businesses, but they're moving pieces within the businesses in terms of growth rates. And then there's sorts of things that I've also mentioned, like some higher labor and transportation costs and how those trend. And so those are some of the things that impact us within the range. But I do want to say that we have a lot of confidence in the business, and we are expecting continued strong performance across the business because of our differentiated physician and our strength, both within Pharmaceutical Distribution and Manufacturer solutions.

Operator

Ladies and gentlemen, this concludes our question-and-answer session. I would like to turn the conference back over to Steven Collis for any closing remarks.

Steven H. Collis
Chairman, President & Chief Executive Officer at Cencora

Thank you, operator. It's truly been an honor to spend this hour with you, highlighting a very successful 2021, which the management team is extremely proud of. We're also really proud of and appreciate of the tremendous efforts of our associates. We enter fiscal year 2022 with all of our businesses performing well, and we look forward to building on the success and momentum in fiscal year 2022. Thank you.

Operator

[Operator Closing Remarks]

Corporate Executives
  • Bennett S. Murphy
    Senior Vice President of IR
  • Steven H. Collis
    Chairman, President & Chief Executive Officer
  • James F. Cleary
    Executive Vice President & Chief Financial Officer
Analysts
  • Lisa Christine Gill, JPMorgan Chase & Co, Research Division
  • Charles Rhyee, Cowen and Company, LLC, Research Division
  • Steven James Valiquette, Barclays Bank PLC, Research Division
  • Eric R. Percher, Nephron Research
  • Jailendra P. Singh, Credit Suisse AG, Research Division
  • Kevin Caliendo, UBS Investment Bank, Research Division
  • Eduardo, Evercore ISI
  • Michael Aaron Cherny, BofA Securities, Research Division

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