Cencora Q4 2022 Earnings Call Transcript

Quartr
Provided by Quartr
November 3, 2022

There are 10 speakers on the call.

Operator

Ladies and gentlemen, welcome to the AmerisourceBergen Q4 FY 2022 Earnings Call. My name is Glenn, and I'll be recording your call today. I will now hand you over to your host, Bernard Murphy to begin. Please go ahead.

Speaker 1

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2022 4th quarter and full year results. I am Bennett Murphy, Senior Vice President, Investor Relations. Joining me today are Steve Collins, Chairman, President and CEO and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non GAAP financial measures.

Speaker 1

Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investors. AmerisourceBergen.com. We have 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.

Speaker 1

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 ks. AmerisourceBergen assumes no obligation to update any forward looking call. You have an opportunity to ask questions after today's remarks by management. We ask that you limit your questions to 1 per With that, I'll turn the call over to Steve.

Speaker 2

Thank you, Bennett. Good morning and good afternoon to everyone on the call. Today, my remarks will focus On the successes of our 2022 fiscal year and the ways in which our leading distribution and pharmaceutical solution capabilities are core to advancing global pharmaceutical innovation and access, ultimately driving significant value creation for all our stakeholders. AmerisourceBergen delivered another strong fiscal year, driven by the resilience and strength of our business as our team continue to execute to advance our strategic priorities and build on our foundation for future growth. First, we leveraged the strength of our leading pharmaceutical distribution businesses.

Speaker 2

During fiscal 2022, We were proud to continue to support the continued global response to the COVID-nineteen pandemic as the exclusive distributor of emergency use authorization treatment in the U. S. And by supporting the distribution of vaccines and test kits internationally. Guided by our purpose and empowered by our commercial strength and execution, we played an important role in supporting public health. This also presented an opportunity to enhance relationships with key stakeholders worldwide, including governments, public health agencies and providers and pharmacies.

Speaker 2

Importantly, we also continue to support our community provider customers from pharmacies to physicians to veterinarians, all of whom are integral to ensuring patient access and care in our communities around the world. 2nd, we solidified our global capabilities to further enhance our customer experience. In the nearly 18 months Since our acquisition of Alliance Healthcare, we have continued to integrate the business and facilitate collaboration across teams. As we look forward to the next phase of our integration, we are focused on streamlining our solutions under one commercial leader. Group President, Bob Mausch, will now also oversee Alliance Healthcare and assume the role of Chief Operating Officer.

Speaker 2

By uniting and simplifying our commercial operations, we will engage with our partners as a truly integrated healthcare solutions leader, Fortifying our position at the core of the global pharmaceutical supply chain with our ESG commitments, engagement and reporting, including further aligning our ESG work with recognized international standards, frameworks and initiatives. One important area where we continue to evolve our programs and policies is in diversity, equity and inclusion. And as a sign of progress, I'm pleased to say that our most recent gender pay data in the United States indicates that for every dollar male employees are paid, Female employees in AmerisourceBergen are paid $0.998 an increase from our previous ratio of $0.994 Furthermore, to extend our work in DEI, we are making important investments to support health equity in our communities. These efforts include our Disparities in Cancer Care Task Force, which is focused on addressing disparities and analyzing social determinants of health for oncology patients at the community level. In August, we held our first ever Disparities in Cancer Care Summit, where we brought together researchers, community physicians, patient advocates, payers and healthcare leaders to collaborate and share information.

Speaker 2

By uniting thought leaders and industry leaders, we hope to stimulate innovative partnerships that will address the disparities in cancer care today. We are also focused on supporting our people. Based on feedback we have solicited from our team members, we have evolved our workforce policies To address post pandemic labor trends, reinforce the strength of our culture, invest in our talent and align their development with our goals for the business. We recognize that our people are our most important asset and that the strength of our performance is thanks to the tremendous efforts of our team members around the globe. Our teams are executing against our strategic pillars to maintain a leading share of pharmaceutical distribution and best in class efficiency, while growing our higher margin and higher growth businesses.

Speaker 2

Looking to the year ahead and beyond, we have strong momentum and the importance of pharmaceutical care and the opportunities provided by continued pharmaceutical innovation bolster our Strategy and fortify our ability to create additional stakeholder value. To advance our foundational pharmaceutical distribution business, We lead with market leaders around the world. It's no coincidence that customers are our first strategic pillar because they are at the center of everything we do. Our key anchor customers range from upstream emerging biotechs And large pharma manufacturers to downstream providers across the spectrum of care delivery, including physicians, community and specialty pharmacies, Health systems, veterinarians and government agencies, we form long term strategic partnerships to solve for the current and future need of our customers. And with our expanded footprint and capabilities, we are now able to partner with them on a truly global scale.

Speaker 2

This includes supporting them with a technologically advanced and standard setting infrastructure. For a distributor, maintaining infrastructure is table stakes, and we are proud that our historical investments have enabled us to be a leader in adopting new technologies and innovations to fulfill our purpose of being united in our responsibility to create healthier futures. In particular, our footprint, efficiency And capabilities in data and analytics have enabled us to support the COVID-nineteen pandemic response globally. Today, we are proud to be supporting the response to monkeypox, and we stand ready to facilitate patient access to life changing and life sustaining medication to advance public health around the world. To ensure future readiness, AmerisourceBergen is enhancing our capabilities to grow our higher margin, higher growth businesses to support the rapidly evolving and global nature of Our team members, customers, suppliers and investors Have known and appreciated AmerisourceBergen as a leader in specialty.

Speaker 2

Our specialty business is nearly 30 years old and the tremendous investments that we are today and have laid a strong foundation for us to lead in the specialty of the future. Cell and gene therapies, for example, is one area with a combination of scientific breakthroughs, regulatory support and industry developments by accelerating product pipelines and patient access. To support this cutting edge innovation in patient care, We deploy our broad and expanding platform of capabilities in distribution, commercialization and specialty logistics. This includes assets such as World Courier, Aloga and NMR, which we are able to leverage to provide pharma manufacturers with the expertise needed to solve their most complex problems now and plan for the solutions of tomorrow. Specialty Medicine key role in future pharmaceutical innovation and with our continued innovation investments, we further strengthen our leadership and capture this growth opportunity.

Speaker 2

AmerisourceBergen is also well positioned to benefit from high and increasing demand for outsourced manufacture Consulting and Logistics Services as we solidify our role as partner of choice for global pharmaceutical manufacturers. Through our various investments and partnerships, we offer a differentiated portfolio of commercialization solutions to support pharmaceutical innovation. Our recently announced acquisition of Pharmalex, for example, enhances our portfolio of solutions across our footprint and represents our ability to support clients at every stage of the commercialization journey from providing market access strategies and early stage clinical development consulting services to leveraging our pharmaceutical distribution reach and specialty distribution leadership to bring innovative products to market. We are differentiating and getting closer to our pharma partners by expanding our solution set, advancing our core capabilities and leveraging our existing commercial strength, ultimately contributing to positive pharmaceutical outcomes. We further drive our differentiation by investing in innovation to both advance our foundation and enhance our capabilities.

Speaker 2

Our investment strategy prioritizes continually improving and building on our strengths, supporting customer needs and ensuring our continued leadership in core capabilities such as supply chain excellence, We are also next minded and focused on areas where we see trends leading to future growth, such as clinical trial service, Digital Commerce and Home Health. In clinical trial services, for example, we continue to play a leading role with direct to patient capabilities, helping our customers manage complexities as they increasingly adopt decentralized and hybrid models. Through this capability, we leverage our capabilities and reach to support pharmaceutical innovation and facilitate patient access. And to create the next generation of solutions to power our success long into the future, we continuously innovate through a combination of internal investments, Capability building, strategic partnerships and venture capital. We remain committed to creating differentiated value for our stakeholders.

Speaker 2

Our long term sustainable growth is supported by investments in our people and culture and our commitment to ESG. Our people drive our business forward, and we are committed to investing in and supporting them with a culture that unites, cultivate and empower them. Underpinned by our purpose and guiding principles, we are advancing our talent and culture to support our strategy and innovation to create an energized, diverse and inclusive workplace that helps our talent be action biased, credibly resourceful and next minded. Our business is supported by the right people, including at the top of the organization. We Chris' business acumen and knowledge of healthcare and pharmaceutical innovation will serve AmerisourceBergen well in his new capacity as an independent director.

Speaker 2

We are focused on adding key skill sets and diverse perspectives to help support our business and strategy as we continue our process of Board succession planning. Just as we invest in our people, We also invest in our communities, which have grown in scale and geography. With this in mind, we continue to evolve our environmental, social and governance initiatives To create healthier future, promoting health equity and embracing a culture of transparency, ethics and integrity, We take very seriously our leading role in healthcare and we are committed to being a sustainable and responsible business. We are pleased with the progress we are making towards our long term vision of expanding our leadership in pharmaceutical distribution and growing our higher margin, higher growth businesses. We have the right strategy in place to do so by advancing our foundation, enhancing our capabilities and investing in innovation to further drive our differentiation, we are solidifying our position at the core of global pharmaceutical innovation and access.

Speaker 2

Our leadership and growth are further supported by a strong financial foundation and value enhancing capital allocation strategy, which Jim will discuss shortly. Just as importantly, we live our purposes of being united in our responsibility to create healthier futures with a focus on creating a better future for all of our stakeholders. Now, I will turn the call over to Jim

Speaker 3

for a more in-depth review of our Q4 fiscal year 2022 results and to discuss our expectations for fiscal 2023. Jim? Thanks, Steve. Good morning and good afternoon, everyone. Reflecting on fiscal 2022, I am proud of the strong execution and performance by our teams as we advanced our company connecting pharma manufacturers with providers and patients as a leading healthcare solutions provider.

Speaker 3

Throughout the year, our teams navigated exceptionally well through a complex environment to ensure the delivery of crucial medications and services around the globe. Before I turn to our results, as a reminder, my remarks today will focus on our adjusted non GAAP financial results unless otherwise stated. For a detailed discussion of our GAAP results, please refer to our earnings press release. Beginning with our 4th quarter results, We finished the quarter with adjusted diluted EPS of $2.60 an increase of 8.8%, which was driven by strong performance in our U. S.

Speaker 3

Healthcare Solutions segment. Our consolidated revenue was $61,200,000,000 up approximately 4%, driven by growth in our U. S. Healthcare Solutions segment, offsetting weaker sales in the International Healthcare Solutions segment as a result of foreign currency translation pressure due to the historically strong dollar. Consolidated gross profit was $2,100,000,000 up 5% due to growth in the U.

Speaker 3

S. Healthcare Solutions segment. Consolidated gross profit margin expanded by 4 basis points in the quarter to 3.44 percent driven by growth in the U. S. Healthcare Solutions segment.

Speaker 3

Consolidated operating income was $741,000,000 up 7% compared to the prior year quarter. This growth was driven by a strong performance in the U. S. Healthcare Solutions segment, more than offsetting the decline in the International Healthcare Solutions segment, which I will discuss in more detail when I review segment level performance. Moving now to our net interest expense and effective tax rate for the 4th quarter.

Speaker 3

Net interest expense was $52,000,000 down 5.6% as a result of higher interest income. Our effective income tax rate was 19.8% compared to 20.3% in the prior year quarter. Our diluted share count was 210,000,000 shares, a 0.4% decrease compared to the Q4 of fiscal 2021 driven by opportunistic share repurchases in the second half of our fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the Q4.

Speaker 3

U. S. Healthcare Solutions segment revenue was $54,800,000,000 up 5% for the quarter as we continue to see broad based solid performance and utilization trends Across our portfolio, revenue growth was impacted by lower sales of commercial COVID-nineteen treatments that have traditional commercial revenue associated with them, unlike the government owned products that contributed more meaningfully to operating income in both quarter and full fiscal year 2022. U. S.

Speaker 3

Healthcare Solutions segment operating income increased by 14% to $578,000,000 In the quarter, our specialty physician services business delivered strong growth across specialty classes. We also continue to benefit from strong biosimilar utilization in both specialty physician practices and health systems. Operating income margin increased by 9 basis points to 1.06% due to the distribution of COVID-nineteen treatments and growth in specialty physician services. Also, again, as a reminder, In the Q4 of fiscal 2021, we had elevated operating expenses as we made investments in our talent and growth initiatives. This impacts the year over year comparison for the segment in the quarter as we benefited from lapping those prior year expenses.

Speaker 3

I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6,400,000,000 down 3 percent on an as reported basis. International Healthcare Solutions operating income was 100 $63,000,000 down 13% on an as reported basis, driven by the impact of foreign currency translation and the divestiture of Pro Pharma Specialty, which occurred in June 2022 and contributed $6,000,000 during the Q4 of fiscal 2021. When looking at the segment on a constant currency basis, we believe the underlying business fundamentals are solid. In the quarter, we continued to have strong performance at World Courier and Alliance Healthcare continued to execute well as we navigate inflation in the local economies.

Speaker 3

While the strong dollar continues to be a headwind on an as reported basis, Our teams throughout the segment have delivered good operational performance with solid trends across the businesses. As we look to 2023, We are excited to continue our progress on integrating Alliance Healthcare and to expand our global pharmaceutical solutions platform with the previously announced pending acquisition of Pharmelex. That concludes our fiscal Q4 discussion. Now I will turn to a discussion of our full year fiscal 2022 results. Our consolidated revenue was $239,000,000,000 up 12%, driven by growth in both segments and benefiting from the full year contribution of Alliance Healthcare.

Speaker 3

Excluding Alliance Healthcare, our consolidated revenue was up 5%. As we have indicated throughout the year, We had lower revenue recognized from COVID-nineteen treatments in the United States due to much of the volume with COVID treatments this year being associated with government owned emergency use authorization treatments. In the prior year fiscal 2021, we had approximately $3,700,000,000 of sales related to COVID-nineteen treatments versus $1,700,000,000 in fiscal 2022. Consolidated operating income grew 20 percent to $3,200,000,000 driven by the full year contribution of Alliance Healthcare and solid performance across our portfolio, including sales to specialty physician practices. From a segment perspective, U.

Speaker 3

S. Healthcare Solutions had operating income growth of 9%, While International Healthcare Solutions operating income grew 81% year over year to $706,000,000 In fiscal 2022, we had $0.72 of contribution related to COVID treatment, test kit and vaccine distribution with $0.62 in the U. S. Healthcare Solutions segment and $0.10 in the International Healthcare Solutions segment. Turning now to interest expense.

Speaker 3

In fiscal 2022, net interest expense was $211,000,000 an increase of 21% as a result of debt related to the Alliance Health Care acquisition. In fiscal 2022, we repaid $1,100,000,000 in short term Alliance Healthcare related debt By March 2023, delivering on our commitment to the rating agencies to repay 2 thirds of the debt related to the Alliance Healthcare acquisition. While we project that our total corporate debt will be lower in 2023, we expect our interest to increase somewhat in fiscal 2023 due to local country level subsidiary borrowings at higher interest rates. Regarding taxes, our adjusted effective tax rate for fiscal 2022 was 20.6% compared to 21.3% in fiscal 2021 as we began to realize tax synergies related to the Alliance Health Care acquisition. Turning now to EPS.

Speaker 3

Our full year adjusted diluted EPS grew 19% to $11.03 driven by the incremental 8 month contribution from Alliance Healthcare and solid growth across our businesses. Adjusted free cash flow for the year was $3,000,000,000 and we ended the year with a cash balance of $3,400,000,000 As a result of our better than expected cash flow generation In our strong balance sheet, we opportunistically returned capital to shareholders through the repurchase of $500,000,000 in shares in the back half of the fiscal year during a time of equity market fluctuations. After these repurchases, we have approximately $900,000,000 That completes the review of our fiscal 2022 results. I will now discuss our fiscal 2023 guidance expectations. As a reminder, we do not provide forward looking guidance on a GAAP basis, So the following metrics are provided on an adjusted non GAAP basis.

Speaker 3

I will also provide certain guidance metrics on a constant currency basis. We have also provided a detailed overview of guidance metrics on Slides 9 and 10 of our earnings presentation. Starting with revenue, we expect consolidated revenue to grow in the 5% to 7% range on a reported basis and in the 6% to 8% range on a constant currency basis. On a segment level, we expect U. S.

Speaker 3

Healthcare Solutions revenue to grow in the 6% to 8% range. In International Healthcare Solutions, On a reported basis, we expect revenue to decline in the 1% to 5% range. On a constant currency basis, We expect the International segment's revenue to grow in the 8% to 12% range. Moving to operating income, we expect consolidated operating income to grow in the 0% to 3% persist. Excluding COVID contributions, we expect consolidated operating income growth to be in the 3% to 5% range or 6% to 8% on a constant currency basis.

Speaker 3

On a segment level, we expect U. S. Healthcare Solutions operating income growth to be in the 2% to 4% range. As we've called out throughout the year, in fiscal 2020, we did to distribute COVID-nineteen treatments across the U. S.

Speaker 3

In the Q4, the COVID treatment contribution came in slightly stronger than expected, bringing our total COVID treatment contribution for the segment to $0.62 for the year. In our fiscal 2023 guidance, we have embedded Approximately $0.30 of contribution in the U. S. Segment related to COVID treatment distribution. Excluding the contributions from COVID related operating income, we expect U.

Speaker 3

S. Segment operating income growth to be in the 5% to 7% range in fiscal 2023, generally in line with the long term guidance we introduced at our Investor Day in June. Turning now to our International Healthcare Solutions segment fiscal 2023 operating income guidance. We expect International Healthcare Solutions segment operating income On a constant currency basis, in fiscal 2022, the International segment had a $0.10 contribution related to COVID vaccine and test kit Distribution. In fiscal 2023, we expect a few cents of contribution from COVID related business in the segment.

Speaker 3

On an ex COVID as reported basis, we expect the International Healthcare Solutions segment operating income decline to be in the 1% to 5% range or operating income growth of 7% to 11% on a constant currency basis. If you turn to your models, there are a few items impacting the International segment from fiscal 2022 to fiscal 2023. First, we completed the sale of Pro Pharma Specialty in June, which represented 2% of segment operating income in fiscal 2022. 2nd, the historically strong dollar created pressure in the segment during fiscal 2022, largely in the second half of the fiscal year. While FX pressure impacts the translation of income for our business, there are some elements of our business that mitigate FX risk, including that we operate and source in the local countries where we generate sales.

Speaker 3

While we expect an FX headwind in 2023 over 2022 Using rates as of late October, the impact is fully reflected in our 2023 guidance and would largely be front half weighted As the dollar did not significantly strengthen until the back half of fiscal twenty twenty two. 3rd, as we said in the September announcement Our teams are making good progress and are on track to close the acquisition on schedule. The acquisition is accretive and adds to our higher margin, higher growth pharma manufacturer services platform for long term value creation. Despite FX and inflationary pressures, our International Healthcare Solutions segment has delivered solid operational performance and the businesses and the segment Our core component of our strategic vision with our distribution scale and portfolio of manufacturer services, we're uniquely positioned to Our tax rate to be approximately 20% to 21% for fiscal 2023. We expect that our share count will be approximately 207,000,000 to 209,000,000 shares as we will continue to opportunistically repurchase shares in fiscal 2023.

Speaker 3

Given these expectations, we are guiding for adjusted diluted EPS to be in the range of $11.30 to $11.60 On an as reported basis, reflecting year over year growth of 2% to 5% or 4% to 7% on a constant currency basis. Excluding both the COVID-nineteen contribution of $0.72 in fiscal 2022 and the expectation for approximately $0.30 to $0.35 contribution in fiscal 2023, EPS growth would be in the 7% to 9% range or 9% to 11% on a constant currency basis. There are still many variables that make it difficult to predict the timing and realization of COVID treatment contribution We'll discuss our expectations over the coming months and make adjustments to our expectations as necessary. Turning now to capital expenditures and cash flow expectations. CapEx is expected to be approximately $500,000,000 as we continue to invest to advance our business and support future growth opportunities.

Speaker 3

For adjusted free cash flow, we expect adjusted free cash flow to be approximately $2,000,000,000 Since the opioid settlement agreement has been agreed to And annual payments are now predictable. The cash payments associated with the settlement are now included in our adjusted free cash flow guidance, which is the driver of lower adjusted free cash flow guidance in fiscal 2023 relative to fiscal 2022. As a reminder, in fiscal 2022, we made 2 payments related to the settlement, both the 2021 and the 2022 payments that totaled approximately $775,000,000 Before I make my closing remarks, while we do not provide guidance on Quarterly basis, I would like to provide some color on our quarterly cadence as you turn to your models. First, The dollar did not substantially strengthen until the second half of our fiscal year We're largely in the last 7 to 8 months of the year, resulting in a tougher comparison for the Q1 of fiscal 2023 as we continue to carry those higher costs sequentially. While we feel very good about our growth rates and our full year fiscal 2023 guidance, These two factors create a tougher comparison in the first half of our fiscal year, particularly in the Q1.

Speaker 3

To conclude, fiscal 2022 was a Successful year for AmerisourceBergen as our purpose driven team members delivered exceptional execution and performance. We entered fiscal 2023 with Strong momentum and our increasingly united teams are creating differentiated value for our customers, partners and the patients they serve. We are well positioned to continue to drive value for our stakeholders by continuing to leverage our commercial strengths to create efficiency, Investing in innovation to enhance our capabilities and deploying capital thoughtfully and strategically. With that, I'll now turn the call over to the operator to open the line for questions. Operator?

Operator

Thank you. We have our first question comes from Lisa Gill from JPM. Lisa, your line is now open.

Speaker 4

Great. Thanks very much and thanks for all the comments and color today. Steve, I want to start with a bigger strategy question and that's really around specialty. One, we hear about a number of different JVs and relationships in the marketplace. I'm just curious as to how you're both viewing the Current market, 1 from a competitive landscape perspective.

Speaker 4

And then 2, biosimilars is an area that we've really been focused on. You did highlight that in your commentary as an opportunity. So maybe if you could talk about those two things. And then secondly, if I could ask, Jim, can you just talk about upper and lower end of the COVID range? What's in there?

Speaker 2

Okay. Hi, Lisa. Good to hear from you and thank you for the question. Yes, I could not be more proud to speak about our Specialty Distribution and Services business. We started the business, as you know, almost 30 years ago.

Speaker 2

And it's interesting because ION and Oncology supply, of course, were the formative businesses and we've added a lot of capabilities, of course, on the distribution side with companies like Besi and then most importantly Lash and Xtend that got us into the services area And we now with ICS and World Courier and Pharmalex, we continue to build out our portfolio in ways that are very thoughtful to both our up and downstream customers. But on the legacy specialty business, let me just say, we've always adapted the business for the needs of both large and Small customers, if you look at the market shares we have considering that a good portion of the market in community oncology in the U. S, which is where our biggest business is, is not available to us. The market shares we have are pretty impressive and we've maintained them, Those relationships for a long time. And we do that with exceptional service, pricing and strong relationships on the ground.

Speaker 2

Then you look at the development of services like Ion and the clinical pathways and the information and data that manufacturers require and that help our practices better perform in this current environment and the ongoing needs to enhance that And then refine that and increase it, including areas that AmerisourceBergen hasn't until recently been active in like ESG, like Clinical trial diversity in clinical trials like more and more longitudinal information and we really have a tremendous presence. One of the drivers right now in oncology business is the aggregators and AmerisourceBergen is proud to be partnering with the 3 largest aggregators. So we work, of course, with the small customers, but we are able to be the lead distributor for those 3 aggregator companies which are highly active and we anticipate that they'll continue to grow as the market evolves. We've also developed a good practice for institutional accounts that want to get more in this market. But I could talk about this a lot.

Speaker 2

I feel I also need to talk about investment in services, which really helps expand on the presence that we have in the market. It helps compound our theme of international growth and differentiation. It helps enhance our outcomes and the outcomes for our pharma companies. And you asked about biosimilars. We are going to be working hard on Both Europe and the U.

Speaker 2

S. To help our customers access them, to access them profitably, to access them on behalf of their patients. I think we've already demonstrated tremendous success. And our sweet spot is again like it was with the generics 2 to 4 players. We do best in.

Speaker 2

Once it gets too much beyond that, it's the reimbursement declines a lot for our customers. And We really are evaluating the shifts and what makes clinical and economic sense for our customers, but it's been a tremendous It creates a lot of headroom for our suppliers and for actual drug spending, which we believe is the most efficient form of healthcare. And I could talk a lot about this, but I know you have a question for Jim and thank you for asking me to talk about our business. Last thing I'd say before I hand over to Jim, just this week we celebrated the opening of a new hub for our specialty services on the West Coast And it looks terrific. I can't wait to get there in the next year or so.

Speaker 2

But it just shows you the growth of the actual distribution of specialty products, Including biosimilars and looking at emerging areas like cell and gene therapies is so important for our manufacturers and our provider customers that We've now opened a 3rd large regional center. So Jim?

Speaker 3

Sure. Lisa, you had asked about COVID therapies and our contribution from COVID therapies. And in Fiscal year 'twenty three, as we indicated, we're expecting $0.30 to $0.35 With approximately $0.30 being in the U. S. And a few cents international and which was $0.72 And we said we were a little bit ahead of expectations in the Q4.

Speaker 3

We had a contribution from COVID therapies of $0.17 And This is something that is hard to predict, and so we'll be very transparent, and we will indicate what our COVID therapy contribution is Each quarter, as people will see in their earnings presentation that we posted this morning, this is why we provided guidance Both including and excluding COVID therapies. And I will note In the month of October, it was a little bit lighter than we expected. But we are providing the guidance for the year of this $0.30 to $0.35 and we will be transparent and update on it every quarter. And I'll just finish by saying, of course, we're Very proud of the role that we serve as the distributor of a number of these COVID therapies, Lisa.

Operator

Thank you. We have our next question comes from Michael Cherny from Bank of America. Michael, your line is now open.

Speaker 5

Good morning and thanks for taking the question. Maybe if we could drill down a little bit more on the U. S. Healthcare business and especially the segment EBIT. As you think about the puts and takes heading into next year, script growth, pricing, other areas of business thinking like MWI, How are you thinking about the variability within that guidance, call it, the 5% to 7% ex COVID range?

Speaker 5

And what are the areas, if we can, that you think are most pointed in the right direction versus areas that potentially have some level of overhang or slower growth versus what you would typically expect to see?

Speaker 3

Yes. I'll start to comment there. And as you commented on, yes, our guidance for Adjusted operating income growth in the U. S. Segment ex COVID is 5% to 7%.

Speaker 3

And of course, that's driven by continued strong operational performance really across multiple businesses. We continue to really execute very well and have particularly strong growth in our Specialty Business and of course we would continue to expect to see strong growth there. As I Commented before, one of the other moving pieces in the business is COVID therapies. But of course, if we kind of focus on the ex COVID, I just think, Michael, we're seeing strong utilization trends. And so we haven't seen any surprises there as we would expect.

Speaker 3

Utilization trends are strong and then just really good performance across just multiple businesses That drove the growth rates in 2022 that we would expect to see to continue in 2023.

Operator

Thank you. We have our next question comes from George Hill from Deutsche Bank. George, your line is now open.

Speaker 6

Yes. Good morning, guys. And I'll try to sneak 2 in. Jim, just to make sure I heard you correctly, on Pharmalex, as we think about 2023, you guys are calling for AOI up, call it 7% ex the noise. So with the inclusion of Pharmalex, is the core actually up kind of 11 to 15 ex Pharmalex or should we be thinking up 11% to 15% inclusive of Pharmalex and it's a back end weighted number?

Speaker 6

I just I kind of didn't hear the math clearly on that.

Speaker 3

Yes. And so what I would what draw people to take a look at is Page 10 of the earnings that we posted to our website earlier today, which shows the growth rates of our International Healthcare Solutions segment, and it really kind of report that we show it on a as reported basis, a Constant currency basis, as reported excluding COVID, constant currency excluding COVID, then we also show What the impact of the acquisition is? And for Pharmalex, we're expecting a March 1 close. We are expecting it to contribute $0.15 to fiscal year 2023. And what I'd say is, If you look at International Healthcare Solutions segment, our growth rate constant currency, Excluding COVID, it's 7% to 11%.

Speaker 3

And if we were to back out The impact of the acquisition that would take about 4 percentage points off the both the bottom end and the top end End of that range, which I think answers your question.

Operator

Thank you. Have our next question comes from Charles Rhyee from Cowen and Company. Charles, your line is now open.

Speaker 6

Yes. Thanks guys. And maybe just to look at the guidance again here. You're obviously guiding to very strong growth if we look at excluding COVID On a constant currency basis, back at your Investor Day, you talked about sort of a long term guide about 5% Adjusted operating income growth 5% to 7%. It looks like here though you're kind of guiding Better than what you were kind of indicating on a long term basis.

Speaker 6

Anything coming up in this year that you would kind of call out to say maybe is A near term benefit that you might not see going on indefinitely or is there opportunity to where the long Term adjusted operating income growth could be better than what you were kind of indicating back to at the Analyst Day?

Speaker 3

Yes. I would say that this is in line with the guidance that we provided with at Investor Day where we talked about 5% operating income PS growth in fiscal year 'twenty three and then we talked about 5% to 8% operating income growth over the long term And then an additional 3% to 4% from capital deployment. And I think, Bill, like these results And guidance that we're talking about today are very much in align with what we indicated Back on Investor Day, and it's really kind of driven by our leading presence In distribution, both in the U. S. And internationally, and then our ability to supplement that with higher margin, higher growth Businesses that are able to contribute to our operating income growth and then deliver the capital deployment Both through acquisitions like the Pharmalex acquisition in fiscal year 2023 and share repurchases With about $500,000,000 of share repurchases.

Speaker 2

Yes. Just one comment, Jim, too. I would say we end the fiscal year with a lot of momentum, And it highlights the resiliency and just core demand for our services. We really We should never under appreciate this tremendous industry we're in.

Operator

Thank you. We have our next questions comes from Eric Petcher from Needham Research. Eric, your line is now open.

Speaker 3

Thank you. A question on free cash flow trajectory. In the last 5 years, we're not seeing profit growth and free cash flow. I know there's some obvious Factors around investment and the opioid settlement, but I'd welcome your view on underlying growth in fiscal year 'twenty three and the opportunity to see Free cash flow expansion post settlement. Yes.

Speaker 3

And so, first of all, I'd say, we were Really pleased with our free cash flow in fiscal year 2022, our adjusted free cash flow of $3,000,000,000 in fiscal year 2022. And as I look forward, Eric, I just kind of see the free cash flow metrics Kind of being about the same as they have been. And of course, they've been very Favorable and we've had great performance on free cash flow, but I don't really kind of see anything that would kind of Change those metrics. Of course, as well I commented in the prepared remarks in fiscal year 2023, now that the settlement is known, We will be subtracting the settlement out of free cash flow, not adding it back. But in terms of the metrics, I view Our working capital is one of the very positive things about our business and kind of seeing those free cash metrics being kind of consistent.

Operator

Thank you. We have our next question comes from Eric Cookewell from Baird. Eric, your line is now open.

Speaker 7

Thanks. That last Q and A kind of covered my FX follow-up or sorry, free cash flow follow-up. But I did have a separate question on MWI. I'm just curious, what are you thinking about the performance of that business currently in the outlook? My thought process is the companion side is perhaps on the back half of the COVID pet boom and then in At least historically in periods of weaker economies and global challenges, maybe production animal support goes down a bit, less animal consumption, etcetera.

Speaker 7

So just hoping we could get an update on MWI and your outlook for next year. Thanks very much.

Speaker 3

Yes. And so, it has been a lower growth year for MWI and the animal health market in 2022, I think for the year at MWI, it's about 3% growth And a little bit higher than that in companion animal and a little bit lower than that, but still growth in the production animal market. And of course, it's comping over some Very strong years in the animal health market where there were a lot of pet adoptions during COVID and that really drove the market for a period of time. And then I think what's been happening this year is there have been some staffing issues. Of course, as the labor market There's been staffing issues in veterinary clinics.

Speaker 3

So it's a little bit harder to get an appointment. And so that's impacted the market. But it's a very strong market and a very strong business For the long term and in both good economies and bad economies that markets performed well and I think we would continue to see that over the long term.

Operator

Thank you. We have our next question comes from Kevin Calendly from UBS. Kevin, your line is now open.

Speaker 3

Thank you. Thanks for taking my question. I have 2 international questions tied into 1. Can do you expect there to be any future recurrence of the Turkish FX remeasurement expense fund inventory. And also, were there any excess Fuel energy costs in the UK, was that an incremental headwind to you, a material headwind to you because it's certainly something Popped up on our radar screen as being potentially a problem.

Speaker 3

Yes. And so with regard to Turkey, there is a mechanism in that market. So that Each year, there is a price increase, which really protects us from any devaluation in the Currency. And so we would expect that annual price increase to be recurring in future years like it has been And past years. And so in fiscal year 2022, the price increase really offset the currency Evaluation and our guidance assumes that the same thing happens in 2023, although the level of price increase may be Lower.

Speaker 3

And then with regard to fuel and the U. K, yes, I mean we have had Inflationary pressures, particularly in the second half of fiscal year twenty twenty two in the UK, and we would expect those to continue in fiscal year twenty twenty three, And it's fully reflected in our results and our guidance. And I would say that our team at Alliance is just going to be very good at controlling costs, But we absolutely do have a headwind from inflation that's reflected in our guidance.

Operator

Thank you. We have our next question comes from Steven Van Aelst from Barclays. Steven, your line is now open.

Speaker 8

Great. Thanks. Good morning, everybody. So with the U. S.

Speaker 8

Healthcare Solutions segment operating grew 5% to 7% ex COVID. Can you just remind us at a high level whether or not there's any notable call out just on negative impact from customer contract renewal pricing being absorbed within that 5% to 7% growth assumption. If there is, obviously, it's positive you still get there. But just curious if that was a factor or not just you either measured in basis points, etcetera, just within that? Thanks.

Speaker 3

Yes. No, we have no call outs there. And of course, we're very Proud of our ability to be able to renew with customers and very pleased with our success there. And What we're seeing really in the U. S.

Speaker 3

Is just continued broad based growth and performance across a number of businesses.

Operator

Thank you. We have our next question comes from A. J. Rice from Credit Suisse. AG, your line is now open.

Speaker 9

Thanks. Hi, everybody. Just want to ask about capital And 3 aspects to it really. By March 23, you're saying you'll be done with the need to pay down the debt that you committed to the rating agencies For the Alliance deal, does that impact your priorities and where you think your capital deployment will go? You've also got the strong dollar, which I know it's impacting you on the translation side, but you've got 2 businesses doing very well, World Courier and Alliance.

Speaker 9

Any thought about using The strong dollar for other acquisitions internationally. And then I guess finally just the Walgreens Stake, does that affect your capital priorities in any way? Do you need to hold reserve in case you have an Do you need to buy your shares back or anything they do?

Speaker 3

Yes. So, thank you very much for that Question, of course, our capital deployment priorities remain consistent, continuing to invest in the business, Strategic M and A, opportunistic share repurchases and maintaining a reasonable growing dividend. And with regard to Parts of the question that you asked, we obviously will continue to look at Strategic acquisition opportunities, we feel really good about the Pharmalex acquisition and the opportunity that that And then with regard to the Walgreens question you asked. If Walgreens does decide to sell Additional shares, of course, we'll view that as an opportunity to collaborate with them and be a repurchaser of Some of the shares. And I think through our actions over the last 6 months, We've demonstrated our interest and opportunistically repurchasing shares.

Speaker 3

And this is all enabled By our very strong free cash flow, we really exceeded our guidance on adjusted free cash flow for fiscal year 23 and fully are fully meeting our commitments, of course, as you mentioned, to pay down the Alliance debt.

Operator

Thank you. We have no more further questions. I will now hand the call over back to Steve for closing remarks.

Speaker 2

Thank you everybody for your participation today. I Hope that Jim and Bennett and myself were very clear that we are tremendously proud of AmerisourceBergen's performance in fiscal year 2022. We entered fiscal year 2023 with tremendous confidence, which is only enhanced by the flexibility our strong balance sheet affords us. AmerisourceBergen is making the right strategic, human and operational investments to continue to grow our franchise in ways that will enhance value for all of our stakeholders. Thank you for your time today.

Operator

Thank you everyone for joining the call today. Have a lovely day. You may now disconnect your lines.

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Earnings Conference Call
Cencora Q4 2022
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