Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 third quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; Jim Cleary, Executive Vice President and CFO; and Bob Mauch, Executive Vice President and COO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.cencora.com. We've also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including but not limited to EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent 10-Q. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed permission of the company. You will have an opportunity to ask questions after today's remarks by management. We ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the hour. With that, I will turn the call over to Steve.

Bob Mauch:

Thank you, Steve. As I continue to prepare to transition to CEO in October, I'm focused on speaking to and learning from our team members and our customers. In my conversations with customers, I reinforce the value of Cencora's strategy, leadership and expertise, and how we are investing and innovating to be the partner that they need now and into the future. In working closely with leaders in healthcare across every channel, prioritizing customer-centric solutions, maintaining a learning mindset and embracing our enterprise-powered capabilities, we differentiate ourselves as partners, grow together and anticipate advancements throughout healthcare. Our team members are motivated by the important work we do, the collective strength of our business and the collaboration we enjoy across our company. The culture and pride our team members have in their work drive our purpose as we create healthier futures, and our success is a direct reflection of our team's pursuit of operational excellence. We champion the diverse perspectives and backgrounds that our team members bring to the table, which enables us to take a thoughtful and creative approach to addressing industry challenges, enhancing the value we provide to customers, partners, shareholders, and the broader healthcare industry. Looking forward, we will continue to execute against our pharmaceutical-centric strategy, driving efficiency through the supply chain, and supporting the growth of innovative products through our higher-growth, higher-margin services. In closing, I'm incredibly honored to have the opportunity to succeed Steve as Cencora's next CEO. Cencora's position in healthcare is a direct result of Steve's vision and next-minded approach in growing and advancing the depth and breadth of our services. And I want to take a moment to congratulate Steve on his incredible tenure and the mark he made on this company as well as our industry. Under Steve's leadership, Cencora has delivered tremendous growth and demonstrated our crucial role to stakeholders. Steve has led the company through major strategic decisions that position Cencora for long-term value creation, including customer partnerships with leading healthcare organizations, expanding our geographic footprint, and the various services and solutions we provide, as well as successfully navigating significant national and global challenges, all while remaining committed to our purpose and supporting our team members. Thank you, Steve, for your service to Cencora and your unwavering commitment. I'm working closely with Steve to ensure a seamless transition, and I look forward to his continued leadership, partnership and guidance as he transitions to the role of Executive Chair. It's a privilege to work alongside Cencora's inspiring and passionate team members. And I look forward to building on our momentum as we are optimistic and excited about the future of Cencora and intend to keep up the track record of execution and performance. I will now turn the call over to Jim for a review of our fiscal 2024 third quarter financial performance. Jim?

Steve Collis:

Thank you, Jim. You did take me by surprise. But with this being my final earnings call, I want to take a moment to thank our team members, our Board and our stakeholders for the opportunity to serve as Cencora's CEO these last 13 years. In my first call as CEO, I highlighted that we would pursue opportunities to increase our value offering to existing customers, add to our strengths in core competencies and increase shareholder value. Throughout my tenure, we have delivered on that framework and grown significantly, operationally, geographically and financially, as we built upon our scale and expertise as a pharmaceutical distributor and leader in specialty by deepening and broadening our relationships upstream with pharma and advancing our solutions downstream with our provider customers. We have advanced our core distribution capabilities through organic and inorganic growth opportunities, in turn, expanding our reach and providing more patients with the life-saving medications they need. Our leadership and capabilities in specialty makes Cencora a driving force in supporting access and intelligence for cutting-edge therapies. Cencora's demonstrated growth over the past decade-plus speaks to the strength of our execution against our pharmaceutical-centric strategy. Our team's relentless focus has allowed us to continually capitalize on growth across healthcare and to be the partner of choice for both upstream biopharma and downstream providers. Cencora is strategically positioned at the center of healthcare, and as Bob steps into the role as CEO on October 1, the company will continue to build on our momentum, relationships and capabilities, guided by his leadership to drive results and create value for all of our stakeholders. I've had the pleasure of working alongside Bob for almost 20 years and I'm excited to see the future as we watch him lead Cencora. Bob's deep understanding of all facets of pharmaceutical distribution, logistics and commercialization, experience leading all of our businesses during his tenure, and his integral role in helping to shape our strategy over the years makes him incredibly well-equipped to be the company's third-ever CEO. It has been an honor and a pleasure to be a part of the company's evolution and I look forward to seeing how Cencora advances into the future. The numbers that I talked about at the opening of the call would not have been possible without the enormous contribution of so many of my colleagues throughout my 30-year career with the company, and I'm sincerely grateful and humbled by their achievements and dedication to being united in our responsibility to create healthier futures. With that, we will now move to Q&A. Operator?

Lisa Gill:

Thanks very much, and congratulations, Steve. It's been great working with you for a number of years. And Bob, congrats to you as well. My question really is around how we think about things from here. Obviously, a great quarter, great last several years and also under your tenure, Steve, but as I think about '25, really two questions. One, Bob, any change in the philosophy of how you think about whether it's giving guidance to the Street or any of the growth metrics? And then secondly, for you, Jim, I know usually here in the third quarter, you'll give us some headwinds and tailwinds and things to think about as we think about fiscal '25.

Jim Cleary:

Sure. Great. Lisa, I'll answer the second part of your question. I'll start by saying that we'll provide comprehensive guidance at the end of our fiscal year after we've completed our year-end planning process. I'll also say that we do feel good about our long-term guidance that contemplates operating income growth of 5% to 8% and EPS growth of 8% to 12%. And you asked about puts and takes. Items that would move us within a range include things like growth in specialty products to physicians and health systems and the growth rate in that important part of our business, continued positive utilization trends, of course, timing of capital deployment, including any timing of share repurchases. And then also one other thing for fiscal year '25 is comparison to the first season with commercial COVID vaccines. As you'll recall in the first quarter of fiscal year '24, we sold a lot of commercial COVID vaccines and we're preparing for that and -- for the first quarter of '25, but of course, it's hard to predict the absolute level. I'll finish by just saying that we've consistently delivered strong financial performance, driven by our leading market positions and the continued execution by our team members, our pharmaceutical-centric foundation and our competitive position enables us to capitalize on market trends and continue to deliver solid results. So, thanks a lot for the question, Lisa.

Michael Cherny:

Good morning. Thanks for taking the question, and I'll echo Lisa's comments, Steve. It's been a pleasure. I know you're not going too far, but we'll certainly miss you on these calls. And welcome hearing from Bob more. Maybe just to kind of follow-up a little bit on the second part of Lisa's question, as you think about the market today, you talked last quarter about some of the changes in list prices and how it impacted the quarterly results you saw, at least from a revenue basis in the U.S., a nice sequential uptick. Where do you see relative to where you'd expect? I mean, Jim, you mentioned the long-term trajectory, but where do you see the health of the markets today as you prepare to give us that full guidance? And in terms of what could be a positive/negative dynamic, obviously, you have a lot of customers, some big, some small going through strategic changes. How does that factor into how you think about the trajectory going forward for your business?

Operator:

Thank you. The next question comes from the line of Elizabeth Anderson with Evercore ISI. Your line is now open.

Jim Cleary:

Yeah. So, I will start. We've seen some softness in our consulting business as we commented on -- in our prepared remarks, and that's been noted by some other companies in the space. There are some early positive indicators in the market. It's too early to call it a rebound, but we are seeing some early positive indicators. And our team is really focused on identifying and prioritizing revenue-generating action items. And I'll also say that we do remain confident in our strategic decision to acquire the business.

Operator:

Thank you. The next question comes from the line of Allen Lutz with Bank of America. Your line is now open.

Jim Cleary:

Yeah, thanks a lot for asking that question. And the decline in gross profit margin this quarter is very explainable. First, let me say, year-over-year in the U.S., it's due to increase in sales of lower-margin GLP-1s. And then, if you look at it on a consolidated basis, really the balance is simply due to mix. The U.S. business grew faster in the quarter, of course, than the International business did and the U.S. business has lower gross profit margins. The International business has more of the kind of higher-margin businesses in it, and so that mix also had an impact during the quarter. Thank you for asking.

Eric Percher:

Thanks. I can't resist a kind of historic question for Steve, and Bob, I'll welcome you to comment as well. Of late, we've seen quite a few large oncology groups up for sale, and obviously, one of those benefited you last year with OneOncology, and another now in Florida in the news on a possible sale. Steve, do you think that there's a change going on? Is there pressure on these businesses that's leading to this change? Or do you think that they're looking to monetize from a position of strength? And then, the follow-through there is, does that ultimately create opportunity or risk for Cencora?

Bob Mauch:

Yeah, Steve. Eric, thanks for the question. I would add, I think what we're seeing is a real demonstration of the value of community oncology within the healthcare system. And they are a high-quality, lower-cost, side of care. And as they come together, they're building scale, which will actually make them more efficient and more effective. And as Steve said, they'll be even better prepared to participate in value-based care programs when those are more widely available. So, I think as a macro trend, it's positive. And as Steve said, we will do our best to make sure that we continue to lead in that area.

Charles Rhyee:

Yeah, thanks for taking the question. And Steve, I'd like to congrats on a successful tenure here, and Bob look forward to working more with you. I just want to kind of maybe follow-up on some of the earlier questions here. Obviously, when your large customers are undergoing sort of a restructuring here and a lot of details probably have yet to be kind of worked out, but I guess when you guys are doing your planning, is it fair to think that you are in discussions with your clients to kind of work through? Do they share with you sort of their plans on how they're working -- thinking through things like closures et cetera, or is that something that you find out along the way? And just maybe sort of how you factor that in when you're thinking about setting up sort of your projections for the coming year? Thanks.

Jim Cleary:

Yeah, and I'll just very briefly answer the last part of the question. And I think it goes without saying, but of course, we stay close to our key customers and we always are estimating growth and take that into account as we're developing our annual plans.

Erin Wright:

Great. Thanks. So, excluding some of the FX dynamics in the International business, can you detail some of those moving pieces that you're seeing there, like the technology investments that you're making, but also underlying utilization trends kind of internationally? Is there anything else to kind of call out there? And then, just a second question on animal health. Any sort of update on underlying demand trends there across livestock and companion animal? Thanks.

Operator:

Thank you. The next question comes from the line of Daniel Grosslight with Citi. Your line is now open.

Jim Cleary:

Yeah. So, let me address that, and I believe your question was focused on the U.S. segment. And of course, we are increasing our operating income guidance in the U.S. towards the upper end of the previous range. So, we were guiding at 10% to 12% adjusted operating income growth and now we're guiding at 11% to 12% adjusted operating income growth. And really nothing specific to call out there beyond what we have been talking about is solid utilization trends and broad-based, good performance across many business units and particularly strong sales of specialty products to physician practices and health systems. So, the thing that could move us within that guidance range as we kind of get to the end of our fiscal year is just kind of how well businesses perform as the year ends. And then, the COVID part of it is key, and so thank you for asking that. We expect the contribution from total COVID to be down year-over-year in our fourth quarter. And the contribution from commercial vaccines, we expect to be comparable year-over-year, but we expect very little contribution from therapies in the fourth quarter, and we are lapping the fourth quarter of last year when we had contribution of $0.08 from exclusive therapies. And so that is kind of the one thing that creates a bit of a headwind in the comp year-over-year is we did have the $0.08 from exclusive therapies last year and we're expecting very little contribution from those -- from commercial therapies this year. Thank you for asking the question.

George Hill:

Yeah. Good morning, guys. And I'll extend my well wishes to Bob. And Steve, it's been great working with you. And, Jim, I look forward to continuing work with you. But I guess I'll ask a little bit of a pointed question about the Walgreens relationship, just because the management team at Walgreens has been pretty pointed about the idea of trying to extract more value from its relationship with you guys. I know there's a tremendous amount of investor concern, I think, regarding both the relationship and the earning stream that Cencora generates as it relates to Walgreens. So, Steve or Bob, would love to hear you guys kind of open mic on the status of the relationship kind of earnings exposure. If there's a way that you can kind of talk about that on the call? I can see why that would be a challenge. But just kind of like -- or maybe you can just talk about how you guys are collaborating to drive value for Walgreens. I think any color there would be appreciated.

Steve Collis:

Yeah. And it's -- of course, George, as you well recall it since 2013, and I think Bob's got it, we also support Boots. That's a key relationship. So, it's something that we're proud of and you can expect that Cencora, in our usual diligent way, will approach this thoughtfully and with a mind to creating long-term value.

Stephanie Davis:

Hey, guys. Congrats on the quarter. And echoing everyone else, Steve, congrats on a really strong track record over the years. We've seen a lot of movement in your end market, as George has called out, and as contracts kind of have changed hands this year at what feels like an accelerated rate. So, I wanted to ask you a two-parter. First, how are you differentiating yourself versus your peers during your renewals? Like, what are the big ways you're highlighting you are able to add value? And secondly, I know you've had some kind of changeover in how your contracts are structured as it goes through the years of the contract. Could you remind us on how that changes renewal dynamics? Thanks very much.

Operator:

Thank you. The next question comes from the line of Eric Coldwell with Baird. Your line is now open.

Jim Cleary:

Yes. In the discussion of specialty logistics, the specific things that we were referring to when we said early positive signs were some volume trends. And so Eric, it was specifically on that. And I'll also just comment on that, as you know, that's a business that has just outperformed and grown really nicely for many years, and it's just -- it is a fantastic business for the long term.

Eric Coldwell:

Thank you. I realized that...

Jim Cleary:

Thank you, Eric.

Kevin Caliendo:

Thanks. Appreciate the time. And, Steve, just want to say always appreciated your calming voice in this crazy world in which we operate sometimes. Super helpful.

Kevin Caliendo:

Guys, I just wanted to ask, have you been approached yet or have you seen any disruption at all from any of your independence from what's been going on with [NADAC] (ph)? Have they come to you for relief or help, or is there anything that you can do try to offset what's been upwards now a 20% hit to their reimbursement? I'm just wondering how -- what the feedback has been from your independent and small regional chains who are being hit hardest by this.

Steve Collis:

Thank you.

Steve Collis:

With that, we'll conclude our call, and I'll just make some concluding remarks. I just wanted to thank the analyst community for their interest and support and bearing through 53 quarters of the South African accent, which, of course, has been well shared. And also thank all the people that I don't necessarily call out on the call, including, the people in Jim's team who helped prepare these numbers, and Bennett's team that are so outstanding and so committed to the purpose of Cencora. So, in concluding, I just would also like to wish Bob as much success and performance and pride during his tenure as CEO as I've enjoyed. Thank you for your time today.

Operator:

That concludes today's conference call. Thank you for your participation. You may now disconnect your lines.

Steven Collis:

Thank you, Bennett. Good morning, and good afternoon to everyone on the call. Before turning to discuss our second quarter results, I want to take a moment to introduce Bob Mauch, our current COO, who we announced in March will be succeeding me as CEO on October 1. For nearly 2 decades, Bob has been an integral partner in shaping and implementing our strategy. In Bob's time leading operations across our businesses, he has developed deep relationship with our partners and team members and his knowledge of our business and considerable expertise will significantly benefit the company as he leads Cencora into our next chapter.

Robert Mauch:

Thank you, Steve. I'm excited to be joining today's call and look forward to deepening my relationships with our investor and analyst stakeholders in the quarters to come. It's an honor to succeed you to become Cencora's third CEO on October 1. Cencora is positioned as a leading health care solutions organization is rooted in our purpose, pharmaceutical-centric strategy and growth mindset. Our purpose, capabilities, and the critical role that pharmaceuticals have in health care and patient outcomes motivate me personally and professionally.

Steven Collis:

Thank you, Bob. I also wanted to take a moment to acknowledge Gina Clark, our EVP and Chief Communications and Administration Officer, who announced this morning will be retiring at the end of our fiscal year. Gina has had a distinguished career and made an enduring impact, leading large-scale initiatives across the organization, including uniting our company and our new globally inclusive identity, Cencora. Congratulations, and thank you, Gina, for your significant contributions.

James Cleary:

Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to my prepared remarks, I want to extend my congratulations to both Steve and Bob on our recently announced leadership succession plan. Since joining Cencora in 2015, I've had the pleasure of working closely with both Steve and Bob as we have executed on our pharmaceutical-centric strategy and focused on creating long-term value.

Elizabeth Anderson:

I think maybe one sort of on a high-level basis. Can you talk about the succession plan and sort of like how that came about? And then as we think about sort of the next few months sort of the key priorities of that succession plan, and then Bob, is -- you sort of take the reins fully later this year, can we talk about sort of like what your initial set of priorities is there?

Lisa Gill:

I wanted to focus on the margin improvement. And as we think about -- I think Jim, you talked about a couple of the key drivers, specialty, nonspecialty, expense growth, but it's very impressive of what you've been able to do. So can you give us a little more color? Are you seeing anything, for example, on the biosimilars side.

Steven Collis:

I'll just go quickly. No, it's not. I'll be on -- I'll certainly be on next quarter. So thank you, Lisa, and I'll hand over to Jim.

Operator:

Our next question comes from Daniel Grosslight of Citi.

Operator:

Our next question comes from Eric Percher of Nephron Research.

James Cleary:

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

Allen Lutz:

I guess more of a high-level question here. How should we start to think about the Inflation Reduction Act, and how that could impact Cencora. Is there any way to think about any direct impact to revenue and margins?

Steven Collis:

Yes. So the Inflation Reduction Act is certainly something that we're paying close attention to. And we always talk -- I mean even going back to [indiscernible] days, he would say what keeps you up at night and [indiscernible] say [ Washington ] [indiscernible] And I think that's certainly the case more so than ever.

Stephanie Davis:

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

Operator:

Our next question comes from Charles Rhyee of TD Cowen.

Steven Collis:

I'm not exactly sure what regulations are, but I can tell you, I feel incredibly good about Cencora's ability to manage a complex regulatory environment really whatever jurisdiction we are. And if we feel that we can't be comfortable with the regulations and the jurisdiction. We just don't participate in the business. The enterprises have sufficient size and scale that nothing ever makes us want to compromise any of the standards we have. In fact, we keep on increasing those standards. We want to be the leader in them.

Operator:

Our next question comes from Michael Cherny of Leerink.

Operator:

Our next question comes from George Hill of Deutsche Bank.

James Cleary:

Yes.

Operator:

Our next question comes from Eric Coldwell of Baird.

Unknown Executive:

Yes. So there's a lot there. And let me say with regard to our revenue guidance, what gave us the confidence, of course, to maintain that revenue guidance is just we're continuing to see solid utilization trends across the market. We're continuing due to our strength in specialty, and specialty growing better than the broader market. That's another thing that's helping us, Eric.

Steven Collis:

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

Bennett Murphy:

Good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2024 first quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.cencora.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For 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. Cencora 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 you to limit your questions to one per participant in order for us to get to as many as possible within the hour. With that, I will turn the call over to Steve.

Jim Cleary:

Thanks, Steve. Good morning, and good afternoon, everyone. Before I turn to my prepared remarks, as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. For a detailed discussion of our GAAP results, please refer to our earnings press release and presentation. Cencora delivered remarkably strong results in our first quarter of fiscal 2024 as our team capitalized on the opportunities provided by our pharmaceutical centric strategy, commercial partnerships, robust infrastructure, and team member execution. In the quarter, this drove over 20% growth for Cencora's adjusted operating income and adjusted diluted EPS. Our strong performance in the quarter and expectation for continued execution and growth in the balance of year leads us to meaningfully raise our full year fiscal 2024 guidance. I'll now turn to a review of our consolidated first quarter results starting with revenue. Our consolidated revenue was $72.3 billion, up 15% with strong revenue growth in both segments. We continue to see good utilization trends broadly across our business in addition to continued growth in sales of GLP-1 products, particularly in the U.S. Excluding the increase in sales of GLP-1s, our consolidated revenue growth would have been 12%. Consolidated gross profit was $2.4 billion, up nearly 13% with double-digit gross profit growth in each segment. Consolidated gross profit margin was 3.31%, a decrease of 7 basis points. Similar to the past several quarters, our gross profit margin comparison continues to be impacted by sales growth for low margin GLP-1s and less volume of government-owned COVID treatments. The impact of these two items was partially offset by the full quarter contribution from the distribution of commercial COVID-19 vaccines, which have higher gross profit margins given the complexity associated with the products. Consolidated operating expenses were $1.5 billion, up 8% due to higher distribution, selling and administrative expenses to support revenue growth and incremental operating expenses in the international segment related to the acquisition of PharmaLex, which we closed in January of 2023. Consolidated operating income was $886 million, an increase of 21% compared to the prior year quarter. The increase in operating income also included double-digit growth in both segments, which I will discuss in more detail in the segment level results. Moving now to our net interest expense and effective tax rate for the first quarter, net interest expense was $41 million, down 12%, primarily due to higher interest income resulting from higher interest rates on investments and lower interest expense due to the September 2023 divestiture of our less than wholly-owned subsidiary in Egypt. Regarding income taxes, our effective income tax rate was 21% compared to 19.1% in the prior year quarter. We continue to expect our full year effective tax rate to be in the range of 20% to 21%. Turning now to diluted share count, our diluted share count was 201.8 million shares, a 2% decrease compared to the prior year first quarter. This was primarily driven by opportunistic share repurchases over the course of fiscal 2023 and also repurchases in the quarter including $135 million in open market repurchases and $250 million in repurchases in November, concurrent with a transaction completed by Walgreens Boots Alliance. Regarding our cash balance and adjusted free cash flow, we ended the quarter with approximately $2.9 billion of cash and generated $763 million in adjusted free cash flow. In December, we made a commitment to exercise the prepayment option permitted under our opioid settlement agreements. This prepayment of approximately $238 million was made in January and represents the net present value of a future obligation of approximately $345 million. Since this prepayment was unplanned and non-recurring, it will not be included in our adjusted free cash flow consistent with our practices for unplanned and non-recurring payments or receipts relating to legal settlements. We will continue to include the annual planned cash payments associated with our settlement agreements in our adjusted free cash flow and continue to expect adjusted free cash flow to be approximately $2.5 billion for the fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the first quarter. U.S. Healthcare Solutions segment revenue was $65.2 billion, up approximately 16%, as we continued to see broad-based growth in our distribution businesses, which benefited from strong utilization trends, including continued volume growth in GLP-1s, growth in sales to specialty physician practices and health systems, and commercial COVID-19 vaccine sales. U.S. Healthcare Solutions segment operating income increased 22% to $698 million, driven by strong performance across our distribution businesses, including commercial COVID-19 vaccine sales and operating leverage as a result of strong volumes and the expense management actions we called out on our May earnings call last year. Similar to last quarter, we saw broad-based strength across our human health distribution businesses with good volumes and trends in both specialty and full line distribution. Cencora continues to benefit from leading with market leaders and as a result we continue to see good growth across customer segments and broad pharmaceutical utilization trends. We also had particularly strong growth in our animal health business, which delivered good performance in the quarter and benefited from an easier comparison given industry-wide pressures in the prior year December quarter that we called out last year. Before turning to a review of our International Healthcare Solutions segment performance, I would like to provide an update on COVID-19 related contributions in the U.S. segment for both exclusive therapies and the commercial COVID-19 vaccines. First, regarding exclusive product distribution, in the quarter, we had $0.06 of contribution related to exclusive COVID-19 product distribution in the U.S., $0.03 headwind from the $0.09 of segment level contribution in the prior year quarter. This contribution was in line with the $0.02 to $0.10 of contribution we guided on our November earnings call related to our first quarter of fiscal 2024. For the balance of the year, we expect a $0.21 headwind from exclusive COVID treatments in the segment in line with our previous expectations and guidance. We do not expect a material contribution from these COVID treatments in the balance of the year. Second, regarding COVID-19 vaccines, this quarter we saw an incremental and higher than expected benefit from distributing commercial COVID-19 vaccines. And as we said on our November earnings call, this was comparing to a prior year period where vaccines were distributed by other parties prior to their movement to a traditional commercial distribution model in September. The contribution to our operating income from COVID-19 vaccine distribution in the December quarter was highly concentrated in the October and November months and in total was more than double the contribution in the September quarter. Excluding both the commercial COVID-19 vaccine and exclusive COVID-19 treatment distribution contributions, segment level operating income growth would have been 12% as our team's strong execution and our pharmaceutical centric strategy have allowed us to capitalize on good underlying prescription utilization trends and deliver significant growth. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $7.1 billion, up 7% on a reported basis or up 9% on a constant currency basis. International Healthcare Solutions operating income was $188 million, up 16% on a reported basis or up 20% on a constant currency basis. In the quarter, we benefited from higher shipment weights and improvements in airfreight costs in our Global Specialty Logistics business, incremental operating income from the PharmaLex acquisition and excellent performance in our Canadian business offsetting foreign currency pressure and the September 2023 divestiture of the non-wholly-owned subsidiary in Egypt, which was profitable in the first quarter fiscal 2023. That completes the review of our segment level results. I will now discuss our updated fiscal 2024 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. I will begin with EPS and then provide detail on the income statement items contributing to the increase. We are raising our full year diluted EPS guidance to a range of $13.25 to $13.50, up from our prior range of $12.70 to $13, representing growth of 11% to 13%. The increase reflects our expectation for continued strong performance throughout our fiscal year and the incremental benefit from COVID-19 vaccine distribution in the first quarter. Now moving to revenue, we expect consolidated revenue growth to be in the range of 10% to 12% on both an as reported and constant currency basis, up from previous expectations of 7% to 10%. The updated guidance reflects an increase in our U.S. Healthcare Solutions segment revenue growth, where we now expect growth of 11% to 13%, up from our previous expectations of 7% to 10% growth. The new guidance range reflects the strong revenue growth we saw in the first quarter, including the year-over-year growth of GLP-1s and continued good growth for the remainder of the year, driven by expected broad based prescription utilization trends. Moving to operating income, we expect consolidated operating income growth to be in the range of 8% to 10%, up from our previous guidance of 4% to 6%. On an ex-COVID basis, which as a reminder excludes the benefit from exclusive COVID-19 contributions in fiscal 2023 and fiscal 2024, we now expect consolidated operating income growth to be in the range of 11% to 13%, up from our prior guidance of 7% to 9%. In the U.S. Healthcare Solutions segment, we now expect operating income growth to be in the range of 9% to 11%, up from our prior range of 4% to 7%. For our ex-COVID guidance in the U.S., I will remind you that we only exclude the contributions from exclusive COVID-19 therapies in fiscal 2023 and fiscal 2024 and do not exclude COVID-19 vaccine contributions since they are traditional commercially distributed products. On this ex-COVID basis, we expect U.S. segment operating income growth to be in the range of 12% to 14%, up from our prior range of 7% to 10%. The increase in our U.S. segment guidance reflects our strong first quarter and continued momentum across our business as we continue to benefit from our leadership in specialty and alignment with market-leading customers, allowing us to capitalize on broad pharmaceutical utilization trends. Turning now to the International Healthcare Solutions segment, on an as reported basis, we now expect operating income growth to be in the range of 5% to 8%, up from our previous range of 1% to 4%. On an ex-COVID basis, we now expect operating income growth to be in the range of 7% to 10%, up from our previous range of 3% to 6%. The updated as-reported guidance reflects solid underlying performance trends and a slight benefit from current foreign exchange rates versus rates at the time of our initial guidance. Year-over-year currency translation continues to be a moderate full year headwind to our business and on a constant currency basis, we expect segment operating income growth to be in the range of 9% to 12% or 10% to 13% when excluding COVID contributions. Finally, turning to interest expense, we now expect interest expense to be in the range of $185 million to $215 million from our previous range of $210 million to $230 million as our cash flow generation in the first quarter was stronger than expected. From a quarterly cadence perspective, we would expect interest expense to step up meaningfully in the second quarter, similar to the prior year quarter given typical seasonality and cash use. That concludes our updated guidance assumptions. Before I turn to my closing remarks, I would like to briefly comment on our recently published ESG report. This week, as Steve mentioned, we published our eighth annual ESG report that details initiatives we are taking to ensure our business is equipped to operate resiliently, support our team members, and create healthier communities where we live and work. We are proud of the business-aligned approach we take to our ESG strategy and I would encourage those interested to visit our micro site at esg.cencora.com. The report aligns with a number of reporting standards and describes some exciting new initiatives launched over the past year, including our Cencora Healthier Futures Grant Program that aims to support non-profits and charities around the world doing work to advance access to care. We remain committed to fostering transparency and reporting on progress on our ESG strategy. In recognition of these efforts, we were pleased to be named to Sustainalytics 2024 ESG Top-Rated Companies list on both their region top rated and industry top rated lists. In closing, Cencora clearly delivered outstanding results in the first quarter of our fiscal year. I'm incredibly proud of our team's dedication and ability to consistently drive strong performance quarter after quarter. Leveraging the breadth and depth of our pharmaceutical centric solutions, we continue to find opportunities to capitalize on commercial strengths and build upon the momentum in our business to drive value for our stakeholders. Now I will turn the call over to the operator to open the line for questions. Operator?

Stephanie Davis:

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

Steve Collis:

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

Steve Collis:

Next question, please.

Lisa Gill:

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

Jim Cleary:

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

Eric Percher:

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

Bennett Murphy:

Next question, please.

Daniel Grosslight:

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

Jim Cleary:

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

Elizabeth Anderson:

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

Operator:

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

Jim Cleary:

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

Erin Wright:

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

Jim Cleary:

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

Charles Rhyee:

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

Operator:

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

Jim Cleary:

Okay. So let me start out with Egypt, Eric, and we haven't specifically disclosed the size of that business, but let me say, yes, you're absolutely right. Our operating income growth would have been higher in the quarter if we had backed out Egypt, for instance, from the first quarter of last year. But let me kind of give you some data that I think would be helpful, as you do your models over the course of the year. The Egyptian business was profitable in the first fiscal quarter of last year, as we just referenced, and then was essentially flat in Q2 and Q3. And then it had a loss in Q4. And so for the full year, it was a slight -- a slightly profitable business in fiscal year 2023. And so it really doesn't have, if you look at on a full year basis, it doesn't have much of an impact on kind of full year growth rates in the International segment. But as I said, during the first quarter, the growth would have been a little bit higher if we included or if we backed out Egypt from last year. And then with regard to kind of U.S. Healthcare segment and GLP-1. So the U.S. Healthcare Solutions segment in revenue growth, we now expect 11% to 13% growth, up from our previous expectations of 7% to 10% growth. And the new guidance range reflects the strong revenue growth we saw in the first quarter, including the year-over-year growth of GLP-1s and continued good growth for the remainder of the year, driven by expected broad based prescription utilization trends. And so GLP-1 essentially contributed 3 percentage points of growth in the first quarter. And we expect just kind of continued good growth throughout our business during the balance of the year and feel really good about the business overall and really good about our guidance. Thanks.

George Hill:

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

Operator:

This concludes our Q&A. I’ll hand back to Steve Collis.

Operator:

Ladies and gentlemen, this call has now concluded.

Bennett Murphy:

Good morning, good afternoon, and thank you all for joining us for this conference call to discuss Cencora's fiscal 2023 Fourth Quarter and Full Year Results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we'll be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website, investor.cencora.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For 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. Cencora assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the permission of the company. You'll have an opportunity to ask questions after today's remarks by management. We ask you to limit your questions to one per participant in order for us to get through as many participants as possible in the hour. With that, I'll turn the call over to Steve.

Jim Cleary:

Thanks, Steve. Good morning and good afternoon, everyone. Fiscal 2023 was a milestone year as we became Cencora, uniting under a name and stock ticker that are more meaningful and reflective of the important role that we play at the center of health care. Solid underlying business fundamentals, broad-based utilization trends and execution by our team members allowed us to deliver strong results in the quarter and the year. In fiscal 2023, we continue to do what we do best, now as Cencora, driving strong execution, deepening relationships with our partners and continuing to invest in our strengths to advance our pharmaceutical-centric strategy and help drive long-term growth. Now turning to our results. And 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 and fiscal year. For a detailed discussion of our GAAP results, please refer to our earnings press release. Beginning with our fourth quarter results, we finished the quarter with adjusted diluted EPS of $2.86, an increase of 10%, which was driven by operating income growth in both segments and a lower share count as a result of opportunistic share repurchases. Our consolidated revenue was $68.9 billion, up nearly 13% with strong revenue growth in the U.S. Healthcare Solutions segment and also in the International Healthcare Solutions segment. In the quarter, our U.S. Healthcare Solutions segment continued to see significant growth in sales of low-margin GLP-1 products, and excluding GLP-1s, our consolidated revenue growth would have been 10%. Consolidated gross profit was $2.3 billion, up 9% due to gross profit growth in both segments, particularly in the International Healthcare Solutions segment, which also benefited from the addition of PharmaLex. Consolidated gross profit margin was 3.34%, a decrease of 10 basis points. Similar to last quarter, and as expected, the gross profit margin comparison is negatively impacted by 2 U.S. Healthcare Solutions segment items. First, continued volume growth and low gross profit margin GLP-1 products; and second, decreased volumes of government-owned COVID treatments, which have higher margins. Consolidated operating expenses were $1.5 billion, up 10%. This growth was largely driven by higher operating expenses in the International Healthcare Solutions segment, including the addition of PharmaLex. Consolidated operating income was $801 million, up 8% compared to the prior year quarter. The increase in operating income was driven by growth in both segments, which I will discuss in more detail when reviewing segment-level results. Moving now to our net interest expense and effective tax rate for the fourth quarter. Net interest expense was $61 million, an increase of 18%, due to an increase in intra-period borrowings and related interest rates. Our effective income tax rate was 21.6% compared to 19.8% in the prior year quarter. Our diluted share count was 203.4 million shares, a 3% decrease compared to the prior year fourth quarter, driven by $1.2 billion of opportunistic share repurchases completed over the course of fiscal 2023, including $250 million in August, concurrent with the underwritten transaction completed by Walgreens Boots Alliance. This completes the review of our consolidated results. Now I'll turn to our segment results for the fourth quarter. U.S. Healthcare Solutions segment revenue was $61.9 billion, up 13% versus the fiscal 2022 fourth quarter. This was driven by sales growth across our distribution businesses and the continued volume growth we have seen in low-margin GLP-1 products. U.S. Healthcare Solutions segment operating income increased by 9% to $633 million. In the quarter, we continued to benefit from our leadership in specialty distribution to both physician practices and health systems, broad-based strong prescription utilization trends in human health distribution and a great fourth quarter for our Animal Health business. As we said last quarter, we expected $0.01 to $0.02 of contribution related to exclusive COVID-19 product distribution. We ended the quarter with $0.08 of contribution in the quarter due to the late summer uptick in COVID-19 cases. Additionally, in the month of September, we began distributing commercial COVID-19 vaccines, which was an incremental benefit in the quarter. This contribution is comparing to a period where vaccines were government-managed and being distributed by other parties. Given the complexities, temperature requirements and customer channels associated with COVID-19 vaccines, we captured a larger market share in COVID vaccine distribution than we would have previously expected, having used flu vaccine distribution market share as an initial proxy. That completes my review of the U.S. Healthcare Solutions segment. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $7.0 billion, an increase of 10% on both an as-reported and constant currency basis. International Healthcare Solutions segment operating income was $168 million, up 3% on an as-reported basis and up 4% on a constant currency basis. In the quarter, we saw good performance from our Global Specialty Logistics business, which offset a continued degradation of results at Alliance Healthcare's less than wholly owned subsidiary in Egypt. We recently completed the divestiture of the stake in the Egyptian subsidiary, and the results of that business will no longer be consolidated beginning in fiscal 2024. Egypt was a headwind for the International segment throughout the year, including generating an operating loss in the fourth quarter. And we are pleased to have divested our stake in this noncore business. In the quarter, we also had higher bad debt expense in International, driven primarily by a reserve established related to a specific pharmacy customer in Europe. That concludes our fiscal fourth quarter discussion. Now I will turn to a discussion of our full year fiscal 2023 results. Our consolidated revenue was $262 billion, up 10%, driven by growth in both segments. On a constant currency basis, consolidated revenue grew 11%. Consolidated operating income was $3.3 billion, an increase of 4% due to the strong performance in our U.S. Healthcare Solutions segment, offset in part by the International Healthcare Solutions segment, which was negatively impacted by the results of the Egyptian business that I just mentioned and the effects of foreign currency translation for much of the year. On a constant currency basis, consolidated operating income grew 6%. From a segment perspective, U.S. Healthcare Solutions had operating income growth of 6%, driven by strong prescription utilization trends, including continued growth in specialty and good execution in our businesses. International Health Care Solutions operating income fell 2% on an as-reported basis due to the now divested Egyptian business. Excluding Egypt, International Healthcare Solutions operating income would have been up over 3%. On a constant currency basis, the segment delivered 7% operating income growth. In fiscal 2023, we had $0.38 of contribution of adjusted EPS related to exclusive COVID-19 product distribution on a consolidated basis compared to $0.72 in fiscal 2022. At the segment level, we had $0.31 of contribution to adjusted EPS in the U.S. Healthcare Solutions segment and $0.07 in the International Healthcare Solutions segment in fiscal 2023. Turning now to interest expense. In fiscal 2023, net interest expense was $229 million, an increase of 9%, as a result of higher intra-period borrowings for parts of the year due to timing of capital deployment, debt repayment and cash flows as well as higher average interest rates on intra-period borrowings. Regarding taxes, our adjusted effective tax rate for fiscal 2023 was 20.3% compared to 20.6% in fiscal 2022. Turning now to EPS. Our full year adjusted diluted EPS was $11.99, an increase of 9%, driven by our strong operating income growth and strategic capital deployment. Finally, in fiscal 2023, we generated $3.1 billion of adjusted free cash flow and ended the year with a cash balance of $2.6 billion. We continue to be a strong free cash flow generator and have a balanced approach to capital deployment. In addition to our internal capital expenditures, our acquisition of PharmaLex and our investment in OneOncology in fiscal 2023, this year, we also repurchased $1.2 billion of our shares opportunistically, and just this morning, announced that our Board of Directors has approved a 5% increase in our quarterly dividend. The dividend increase demonstrates our commitment to maintaining a reasonable growing dividend, and this is our 19th consecutive year of increasing our dividend. Turning now to discuss our fiscal 2024 guidance expectations. As a reminder, we do not provide forward-looking guidance on a GAAP basis, so the following metrics are provided on an adjusted non-GAAP basis. I will also provide certain guidance metrics on a constant currency basis. We have also provided a detailed overview of guidance metrics on Slides 11 and 12 of our earnings presentation. First, starting with EPS. In fiscal 2024, we are guiding for adjusted diluted EPS to be in the range of $12.70 to $13, representing growth of 6% to 8%, driven by growth in each segment and contributions from capital deployment. Before I detail the building blocks of our solid EPS growth for fiscal 2024, I want to spend some time discussing our approach to COVID-19 contributions in the coming year. Over the past several years, we've recognized benefits related to our role as the exclusive distributor of a number of COVID-19 products, which we have normalized for by providing ex-COVID numbers. As we've indicated from the onset, we fully expected the exclusive distribution products to move to a normal commercial distribution model in the U.S., and as we all now know, that will now occur during the first quarter of our fiscal 2024. The key products driving our exclusive COVID contribution are moving to a commercial model this month. In fiscal 2024, we are anticipating the remaining benefit from exclusivity to be as low as $0.02 or as high as $0.10. We do not anticipate that there will be a meaningful contribution from any remaining exclusive COVID products beyond our first quarter. As we've been doing for some time, we will plan to provide an update on the contribution we recognize from the exclusive distribution of these COVID products. Excluding the benefit from exclusive COVID-19 contributions in fiscal 2023, our fiscal 2024 EPS guidance represents growth in the range of 9% to 12%, with a small $0.02 to $0.10 contribution from exclusive COVID products in fiscal 2024. On Page 13 in our earnings presentation, we have provided a bridge showing the components of our adjusted diluted EPS growth from the adjusted baseline in fiscal 2023. As I mentioned when discussing our fourth quarter results, we began distributing COVID-19 vaccines in the U.S. in September and recognized a benefit from gaining access to these products now that they are commercially available. As I also mentioned, we have seen better-than-expected share in the products, given the complex handling requirements of these temperature-sensitive vaccines and the customer channels. Since these products are normal commercial arrangements, we will include contributions related to these products in our as-reported results and will not provide a category-level contribution on them, consistent with our approach to the other pharmaceuticals that we distribute commercially. We continue to monitor trends for these vaccines, which have generally experienced higher-than-expected presumably seasonal demand alongside flu vaccines. Now I will discuss the key income statement items that drive our adjusted EPS guidance. Starting with revenue. We expect consolidated revenue growth to be in the range of 7% to 10% on both an as-reported and constant currency basis. At the segment level, we also expect U.S. Healthcare Solutions revenue growth to be in the range of 7% to 10% as we continue to see strong prescription utilization trends, including continued growth in products in the GLP-1 class. For the International Healthcare Solutions segment on an as-reported basis, using October foreign exchange rates, we expect revenue growth to be in the range of 4% to 8%. On a constant currency basis, we expect revenue growth for the International segment to be in the range of 7% to 11%. Moving to operating income. We expect consolidated operating income growth to be in the range of 4% to 6% or 5% to 7% on a constant currency basis. Excluding the COVID-19 contributions I detailed, we expect consolidated operating income growth to be in the range of 7% to 9% or 8% to 10% on a constant currency basis. In the U.S. Healthcare Solutions segment, we expect operating income growth to be in the range of 4% to 7% in fiscal 2024. On an ex-COVID basis, we expect U.S. segment operating income growth to be in the range of 7% to 10% as we benefit from continued strong fundamentals in our core pharmaceutical distribution business, our leadership in specialty and good contributions from our Animal Health and upstream pharma services businesses in the U.S. For our International Healthcare Solutions segment, we expect operating income growth to be in the range of 1% to 4% on an as-reported basis or 5% to 8% on a constant currency basis. On an ex-COVID basis, we expect segment operating income growth to be in the range of 3% to 6% on an as-reported basis or 7% to 10% on a constant currency basis. The International Healthcare Solutions segment has seen strong performance from our Global Specialty Logistics business and good execution in our European distribution business, which we expect to continue in fiscal 2024. Now turning to interest expense. We expect our interest expense to be between $210 million and $230 million. Moving on to tax rate. We expect our tax rate to be approximately 20% to 21% for fiscal 2024, similar to the prior 2 years. Turning now to share count. We expect that our full year average share count will be between 200 million and 202 million shares in fiscal 2024. Moving now to our adjusted free cash flow and capital expenditure expectations. In fiscal 2024, we expect adjusted free cash flow to be approximately $2.5 billion. Our continued generation of strong free cash flow supports our ability to grow our dividend and opportunistically return capital to shareholders through share repurchases while also making important investments to advance our business, both externally and internally. With regards to internal investments, we again expect capital expenditures to be approximately $500 million for the year. We remain focused on ensuring our business is well positioned by investing in our systems and infrastructure to support our current and future growth. In closing, fiscal 2023 was a successful year for Cencora as we delivered strong financial performance and took key steps to advance our strategy. We made investments to support our people and culture and united together as Cencora. As we have demonstrated, our business is well positioned to capture opportunities, driven by the strength of our infrastructure, breadth of our capabilities across the supply chain and thought leadership of our team members to proactively navigate complexities. We move into fiscal 2024 with strong momentum as we continue to capitalize on the opportunities presented by our pharmaceutical-centric strategy and capabilities and remain focused on delivering on our purpose as we create value for our upstream and downstream customers, our team members, shareholders and the communities where we live and work. With that, I will turn the call over to the operator to open the line for questions. Operator?

Lisa Gill:

Thanks for all the detail, Jim and Steve. Steve, I wanted to ask a bigger picture question. I think there's been a little bit of an overhang on the stock as you think about your relationship with Walgreens Boots Alliance and the lack of leadership. And even with the former leaders, I would say they had less of a healthcare focus. We now have Tim Wentworth, who's been named CEO. I know you've had a long-standing relationship with Tim. I really just would be curious around 2 things. One, when you think about the relationship, do you think that there's an opportunity to even deepen the relationship? Or are there new verticals you can work together on? And what are your thoughts on the leadership, number one. And then number two, when we think about the sale of your stock -- and they clearly are in a position where they probably need to do something, whether it's cut their dividend or sell more stock. I know that they have some future contracts, and the percentage of ownership of ABC as way down. But how do I think about that and your ability -- maybe this is a question for Jim -- to continue to buy back shares as that continues to happen?

Jim Cleary:

Sure. Thanks for the question, Lisa. And I'll talk about the capital deployment portion. We've successfully collaborated with Walgreens on their latest transactions, repurchasing about $250 million in shares from Walgreens in the most recent quarter and over $1 billion in shares from Walgreens over the past year. And if they were to continue to sell our shares, which wouldn't surprise us, we view it as an opportunity to continue to collaborate with them and repurchase some of the shares and the amount that we've repurchased would be dependent on managing our capital needs and opportunities. And I'm pleased to say that this fiscal year that recently ended, we generated $3.1 billion of free cash flow. So we feel very good about our cash flow generation and our balance sheet and our ability to deploy capital. Thanks a lot for the question.

Elizabeth Anderson:

I appreciate the details on '24. I was wondering if you could talk through some -- in a little bit more detail, some of the underlying profit drivers for 2024? And as I'm thinking about them, sort of core customer growth, GLP-1 benefit. Obviously, some of the new -- the benefit for the new acquisitions you've been doing, just to help us sort of get a better sense on where you're seeing perhaps outsized growth, et cetera for the upcoming fiscal year?

Operator:

Our next question comes from Eric Percher with Nephron Research.

Jim Cleary:

Yes. Okay. So let me address those things, Eric. First of all, with regard to insulin pricing. There's nothing that I'll call out. The anticipated impact is reflected within our guidance range. And I'll say that, as always, when there are changes that could impact our economics, we engage in discussions with manufacturers and other stakeholders to ensure that we continue to be adequately compensated for the value we provide. You'd asked about drug pricing and how that impacts guidance. And what I'll say is we don't put out specific guidance metrics on drug pricing, but our guidance contemplates brand and generic pricing changes being in line with what we've seen over the past couple of years. With regard to brand inflation, it's really less important for Cencora because well over 95% of our brand buy-side dollars are fee-for-service. With regard to generic deflation, generic deflation has moderated in recent months in certain pockets of the market. So it was less of a headwind for Cencora in fiscal year '23 versus prior years. And so that was, of course, positive for us. If deflation were to continue to moderate more broadly across generics, it would continue to be less of a headwind for our business. I'll say that from a supply and demand dynamic standpoint, it remains generally in balance, and we work closely with manufacturers to understand their supply and availability of product given shortages in certain areas. But as you know, our business model is not as reliant on generic pricing as it once was in the past. Several years ago, our leadership recognized the need to have more balanced profitability across the portfolio of pharmaceuticals, so we've rebalanced some contracts to make sure that Cencora receives fair compensation for the value we provide across brand generics and specialty, which has been key, especially as the market continues to shift to include more specialty products. And Steve, do you have a follow-up there?

Operator:

Our next question comes from Daniel Grosslight with Citibank.

Jim Cleary:

Yes. So let me start off, and I'll talk about our long-term guidance. And as you know, our long-term guidance, it contemplates operating income growth of 5% to 8% and EPS growth of 8% to 12%, normalizing for exclusive government-owned COVID products and foreign exchange. This -- we are assuming we'll be able to grow 5% to 8%. And each of our segments and capital deployment contribution will be 3% to 4%. Our guidance is higher than that. As you know, in fiscal year '24, as we called out, as you mentioned, on a consolidated adjusted operating income growth basis, it's 8% to 10% constant currency ex-COVID. And there are a number of things that are driving our guidance and fiscal year '24 and a number of things that drive our long-term guidance. And one thing I think to keep in mind is that the kind of the second half of our fiscal year '24, it compares to 2 quarters of particularly strong ex-COVID growth, including 15% growth that we had in the third quarter of fiscal year '23 and then the 14% growth we had in the most recent quarter. But we have really good confidence in our long-term growth capability, and it will be driven by the things that's been driving our recent growth. It's the growth of our higher margin, higher growth businesses, including specialty distribution and our commercialization services business. It's continued strong utilization trends. It's drug pricing and those sorts of things. And so we have good confidence in our fiscal year '24 guidance and very good confidence in our long-term guidance.

Allen Lutz:

Steve, you spoke about the recent conference that you attended with the Good Neighbor Pharmacy customers. And our work suggested you've been growing the number of pharmacies under that brand pretty nicely over the past few years. I'm curious with some of the headwinds we're seeing for companies like Walgreens, can you talk about the current state of the independent pharmacy market and what you're seeing there?

Operator:

Our next question comes from George Hill with Deutsche Bank.

Jim Cleary:

Yes. And so as we look at growth opportunities, as you called out, specialty is a key driver of growth for us. And after I talk, I'll ask Steve to talk about it also because, of course, he was the founder of all those businesses. And we're seeing very good growth in and with -- in the specialty market with regard to specialty physician services and physician practices. We're seeing good growth with health systems also, and there's so much innovation that's going on in the market. It's really a long -- it has been, and we think it will continue to be a long-term tailwind for our business. The innovation in that market and the capabilities we have, including all of our wraparound services that we offer. And then just -- and one example of our belief there is the investment that we've made in OneOncology. And then with regard to our commercialization services business, our manufacturer services businesses that are higher margin, we are continuing to make investments there and continue to see very good opportunities. And in addition to specialty, it will really continue to be a focus area for us, driving our growth over fiscal year '24 and the longer term. Steve, are there any things you'd like to add?

Operator:

Our next question comes from Kevin Caliendo with UBS.

Jim Cleary:

Sure. So yes, we feel very good about our growth opportunity this year in International. One of the things that's driving the growth rate though, I want to make sure you know, is we do have an extra quarter of PharmaLex in fiscal year '24. We had 3 quarters in fiscal year '23, and we'll have 4 quarters in '24. Also we'll really benefit for the fact that we've recently divested the Egyptian business. And that was a headwind in our fiscal year '23, and it will no longer be a headwind in our fiscal year '24. But overall, we also continue to benefit just from the very strong Global Specialty Logistics business, the World Courier business, which has been an excellent performer. And then also solid execution from the Alliance Healthcare team and the Alliance business. And so those are some of the things that drive our growth rate in International in fiscal year '24.

Charles Rhyee:

Great. Just wanted to follow up a little bit on that, as we think about the acquisition of PharmaLex and you've been moving more into sort of pharma services, are there other areas when you think about serving your biopharma manufacturer partners, areas that you're -- maybe you're not in that you think are sort of strategically, kind of -- tangential to things that you're doing now that could be interesting for you as you think about capital deployment going forward?

Operator:

Our next question comes from Erin Wright with Morgan Stanley.

Jim Cleary:

Okay. Yes, sure. I'll start off with the Animal Health business there, Erin, and thanks a lot for the question. And I'll really focus my answer on our business. And as I mentioned during my prepared remarks, our Animal Health business had a great quarter. Both our companion and production animal businesses grew very nicely during the quarter. And despite the companion market having some headline issues with vet visits, we've continued to see good sales growth. And in the production market, the herd count remains near record lows. But given the high price of cattle producers want to make sure they keep their cattle healthy. And so we have seen very good results there, and it's probably been driven by, I think, just really good execution by our Animal Health team the last few quarters. And then with regard to your other question on major contracts coming up for renewal, we don't have any large upcoming renewals in the near term.

Operator:

Thank you, everyone, for joining us today. This concludes our call, and you may now disconnect your lines.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen fiscal 2023 Third Quarter Results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO.

Steven Collis:

Thank you, Bennett. Good morning and good afternoon to everyone on the call. Today, I am pleased to discuss our AmerisourceBergen's pharmaceutical centric businesses, the strength of our balance sheet and execution by our team members have continued driving our strong performance in fiscal 2023.

Guided by our pharmaceutical-centric strategy, we advanced our business by focusing on 4 key areas:

community providers, specialty medicine and services, global access and opportunity and customer partnerships. We leverage our robust commercial strengths to provide solutions and forge deep relationships with customers and partners globally. Community providers from specialty physicians and local health centers to pharmacies and veterinarians are the cornerstone of access and care in their communities. We work closely with our customers to provide solutions to support their operational needs and strategic initiatives, as they enhance their patient impact.

James Cleary:

Thanks, Steve. Good morning and good afternoon, everyone. AmerisourceBergen delivered another quarter of strong results as our team members' execution continues to create significant value for all our stakeholders. Our results speak to the strength of our business and our continued work to drive efficiencies.

Elizabeth Anderson:

Congrats on the quarter. One that was particularly impressive as we think about the performance in the quarter was obviously the improvement in the OpEx. Can you help us sort of think about the sustainability of that improvement as we think about maybe the fourth quarter and then maybe conceptually beyond that?

Lisa Gill:

Just want to understand a couple of things better on the margin side. So first, in your prepared comments, you talked about exclusive distribution relationships on cell gene therapies. And then you talked a little bit about the growth in GLP-1s, which I understand, high dollar value when we think about it branded, but probably a lower margin as we think about your book of business.

Eric Percher:

Thank you for the commentary on GLP-1. I want to stay on that subject and it's good to hear they're minimally profitable for Amerisource, but what we're hearing from pharmacies, particularly independence is that they're not profitable. And it sounds like maybe even the same for chains. So given the importance of independents, have you had to help them offset that? Or is that the role of the manufacturer and others in the supply chain?

Operator:

Our next question comes from Daniel Grosslight of Citi.

Charles Rhyee:

Congrats on the quarter. I wanted to go back talking about sort of the services that you're looking to do that you are providing for pharma manufacturers here. You talked about more commercial support, the cell and gene therapy hub, et cetera. Can you talk about a little bit maybe how maybe OneOncology fits into this? You look at some of your peers and some of the efforts that they're making in terms of sort of upward facing services to manufacturers. I know you have a lot of that when we think about World Courier as well.

Steven Collis:

Yes. Charles, thanks for the question. That's -- I'll try to cover all the elements you asked. Of course, one of the ways at AmerisourceBergen has a differentiated value proposition is our strong portfolio of distribution capabilities and key strategic relationships are really -- we juxtapose and relate those into our upstream relationships and try to provide more services to manufacturers.

Operator:

Our next question comes from Andrea Alfonso of UBS.

Eric Coldwell:

I'm going to shift topics here a little bit. We're seeing aging of receivables and weaker cash collections in certain of our health care services coverage. Biopharma clients simply trying to hold on to cash as long as possible to take advantage of interest rates. I know payments really never seen as a risk here, but at least on the pharma side.

Steven Collis:

Yes. I can start out. It's an interesting question given the interest rate environment and the different -- the sort of near recession we've had, I'm not the economist on this call, but the terms in our business are very stable. There are longer terms often given to the physician segment, but we are not seeing anything discernible, noticeable on changes in terms.

James Cleary:

Yes. So this is, of course, something that we monitor and something that we manage very closely and constantly, and there's no meaningful change to call out. Of course, in a working capital management and ROIC and free cash flow are such key value drivers for us over the long term. This is something that we really stay on top of. And I said there's -- as I said, there's no major change to call out.

Jonathan Yong:

It's Jonathan Yong on for A.J. Just going back to the generic pricing commentary, and I appreciate that the improvement is in the pockets of products. I guess how are you thinking about this from a competitive landscape? Is the increased pricing perhaps providing an opportunity to gain share in the market if your purchasing might be better than others? Just curious to get your thoughts there.

Operator:

Our next question comes from Michael Cherny of Bank of America.

Steven Collis:

It's very quick. It's very soon. Obviously, that was a plant that manufactured a couple of injectable products. We've actually worked closely with Pfizer in this particular instance to see if we could help, we had a distribution center closed by the impacted manufacturer plant. But nothing to report yet. It's -- we're keeping our eye on this. Our supply chain group does a fantastic job, has managed through COVID has managed through all sorts of setback.

Operator:

Our next question comes from George Hill of Deutsche Bank.

Steven Collis:

George, it's a good question. I mean the growth of these products have been producing headlines, and it has altered. But we are -- far from a rigid organization. We have discussions with our customers. We stay very close to the customers. I think -- in fact, I think one of the things that I've been really proud about the teams in the last few years is we don't just do all customers when it comes to RFPs, the large and the small customers.

Unknown Executive:

That was the last...

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2023 second quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release, which is available on our website at investor.amerisourcebergen.com. We've also posted a slide presentation to accompany today's press release on our Investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today's press release and our SEC filings, including our most recent Form 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express permission of the company. You'll have an opportunity to ask questions after today's remarks by management. With that, I will turn the call over to Steve.

Jim Cleary:

Thanks, Steve. Good morning and good afternoon, everyone. In our second quarter, AmerisourceBergen delivered strong financial performance as our businesses continued executing and delivering a differentiated value proposition to our customers and partners. Operationally, we are focused on increasing efficiency throughout the organization, while continuing to prioritize growth and ensuring that we are innovating to support the needs of our customers across our business. Additionally, we continue to be focused on making thoughtful and strategic investments to power our long-term growth, supported by our strong balance sheet and free cash flow generation. Before I turn to our second quarter 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. Turning now to our second quarter results. AmerisourceBergen finished the quarter with adjusted diluted EPS of $3.50, an increase of nearly 9% over the prior year quarter. This solid growth was driven by strong performance in our U.S. Healthcare Solutions segment, which more than offset the gross profit headwind from lapping the peak of COVID-19 therapy contributions in the prior year; good operating performance in our International Healthcare Solutions segment, which helped to offset some of the foreign exchange rate pressure; and a lower share count due to our opportunistic share repurchases during the past year. Our consolidated revenue was $63.5 billion, up 10%, driven by growth in our U.S. Healthcare Solutions segment and offset by a slight decline in our International Healthcare Solutions segment, which was negatively impacted by foreign exchange rates and the divestiture of Profarma Specialty in June 2022. On a constant currency basis, consolidated revenue grew 11%. Consolidated gross profit was $2.4 billion, up 6% due to growth in both segments. Consolidated gross profit margin was 3.71%, a decline of 13 basis points, due primarily to lower COVID treatment contributions and mix in the quarter. Consolidated operating expenses were $1.4 billion, up 9%, due to higher distribution, selling and administrative expenses. As expected, our year-over-year operating expense growth rate slowed sequentially from the first quarter. As we have called out previously, in the second half, we will lap the inflationary pressures that began in the prior year March quarter. We will see operating expense growth slow significantly, particularly in the fourth quarter, due in part to incremental expense management actions taken, which put us on track to have a more normal growth rate in the mid-single-digit percent range for the full year. We continue to focus on leveraging our existing capabilities and scale to create efficiencies, while also investing in our talent and growth initiatives to drive long-term sustainable growth and value creation for all our stakeholders. Consolidated operating income was $932 million, an increase of approximately 2% compared to the prior year quarter or up 4% on a constant currency basis. Our operating income growth was driven by solid performance in the U.S. Healthcare Solutions segment, which offset currency-related pressures in the International Healthcare Solutions segment. I will discuss more detailed segment-level business drivers when reviewing segment-level results. Moving now to our net interest expense. For the second quarter, net interest expense was $64 million, an increase of 21%, which was anticipated, and we indicated would occur on our February earnings call. For the remainder of the year, we would expect quarterly net interest expense to be similar to this quarter. Turning now to income taxes. Our effective income tax rate was 19% compared to 21% in the prior year quarter. We expect our effective income tax rate to be towards the lower end of our range of 20% to 21% for the fiscal year with higher tax rates in the next 2 quarters. Turning to diluted share count. Our diluted share count was 204.3 million shares, a 3.6% decrease compared to the second quarter of fiscal 2022, driven by share repurchases we completed over the last 12 months. Regarding our cash balance and free cash flow. We ended the quarter with approximately $1.5 billion of cash. In the quarter, we repaid the remaining $675 million of short-term debt related to the Alliance Healthcare acquisition, fulfilling our commitment to the ratings agencies to pay down 2/3 of the acquisition debt within 2 years of closing the acquisition. For the first 6 months of the fiscal year, adjusted free cash flow was $1.1 billion, and we remain on track to achieve our adjusted free cash flow guidance of approximately $2 billion for the fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the second quarter. U.S. Healthcare Solutions segment revenue was $56.7 billion, up approximately 11% for the quarter, with broad-based growth across our customer base, including sales to our largest customers and sales of specialty products to physician practices and health systems. This growth was moderated by a decline in sales of COVID-19 treatments versus the prior year quarter. U.S. Healthcare Solutions segment operating income increased by 3.6% to $756 million, driven by growth in specialty and across our distribution businesses as utilization trends continued to be strong. Additionally, in the quarter, we had good results in our Animal Health business, which is in line with the normalization that we foreshadowed on our February earnings call. As a reminder, the U.S. Healthcare Solutions segment is lapping the March 2022 peak quarter for COVID-19 treatment contributions. Taking a step back, if you look at the segment year-to-date, for the 6 months ended in March, U.S. segment operating income was up 5.6% for the first half of 2023 versus the first half of 2022, if you exclude COVID-19 treatment contributions from both periods. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.8 billion, down 0.2% on a reported basis or up 12% on a constant currency basis. The as-reported decline reflects the divestiture of Profarma Specialty and unfavorable foreign exchange rates compared to the prior year quarter. International Healthcare Solutions' operating income was $176 million, down approximately 6% on a reported basis, driven by a decline at Alliance Healthcare due to the effect of foreign currency exchange rates as well as the June 2022 divestiture of Profarma Specialty, which represented 3% of segment level operating income in the prior year quarter. The decline was offset in part by strong growth at World Courier and the contribution from Pharmalex in the quarter. In the quarter, World Courier continued to perform well as the business saw good trends and demand for international shipments. On a constant currency basis, the International Healthcare Solutions segment delivered 7% operating income growth. That completes the review of our segment level results. I will now discuss our updated 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. I will also provide certain guidance metrics on a constant currency basis. Full details of our fiscal 2023 guidance can be found on pages 8 and 9 of our earnings presentation on our Investor Relations website. Starting with revenue. We are raising our consolidated revenue guidance to a range of 6% to 8% growth to reflect the strong revenue growth we saw in the first half of the year in the U.S. Healthcare Solutions segment and favorable currency movements in the International Healthcare Solutions segment relative to our prior guidance. We now expect revenue growth in the U.S. Healthcare Solutions segment to be approximately 7% to 8% or towards the higher end of our previous range of 6% to 8% growth. In the International Healthcare Solutions segment, we are raising our as-reported revenue guidance to a range of a 3% decline to flat, up from our previous expectation, about 1% to 5% decline. Moving to operating income. We are raising our consolidated operating income guidance to a range of 2% to 4% growth from the previous range of 0% to 3% growth to reflect the strong core performance in the U.S. Healthcare Solutions segment. In the second quarter, COVID-19 treatments contributed $0.11 to our consolidated EPS, with about $0.09 in the U.S. and $0.02 in the International segment. COVID treatment contributions in the quarter were slightly higher than our expectations, bringing our total contribution to $0.23 for the first half of the year, and we now expect the contribution from COVID-19 treatment distribution for the full fiscal year to be around $0.30 compared to our previous expectation of $0.25 to $0.30. We expect the small remaining contribution to be in the U.S. segment. On an as-reported basis, we are raising our U.S. segment operating income growth to be in the range of 3% to 5%, up from our prior range of 1% to 4%, to reflect the continued strength and execution of our core business. Given our expectations for the core U.S. business, we are increasing our guidance for U.S. Healthcare Solutions segment operating income growth, excluding COVID, to be in the range of 6% to 8%, an increase from our previous expectation for growth of 5% to 7%. This metric reflects the core performance of our U.S. segment, which represents roughly 80% of our consolidated operating income and helps provide visibility beyond the diminishing transitory contributions from distributing COVID treatments. Finally, we now expect weighted average diluted share count to be approximately 205 million shares, down from our prior expectation of approximately 206 million shares, due to lower-than-anticipated dilution to date. As a result of these updates, we are raising our full year diluted EPS guidance to a range of $11.70 to $11.90, up from our prior range of $11.50 to $11.75, representing growth of 6% to 8% on an as-reported basis or 11% to 13%, excluding COVID-19 treatment contributions. Before I turn to my closing remarks, I would like to provide a brief update on how AmerisourceBergen is working to help advance ESG initiatives across our industry. Recently, we partnered with the International Federation of Pharmaceutical Wholesalers and IQVIA to develop an industry ESG framework. In this framework, we leveraged our experience reach and relationships to help support pharmaceutical wholesalers aligning on and advancing key ESG initiatives. Through this framework, IFPW members share best practices on key topics, including environmental stewardship, human capital management and health equity. We look forward to continuing to collaborate with the IFPW to move this important initiative forward. In closing, AmerisourceBergen has a strong track record of execution and performance. We have delivered strong performance in the first half of our fiscal year, and our updated fiscal 2023 guidance reflects the continued strength and resilience of our business. We are well positioned to continue deploying capital internally and externally to advance our business while being good stewards of shareholder capital. I want to thank our purpose-driven team members and leaders for their strong execution and commitment to efficiency, growth, collaboration and innovation to help create differentiated value for all our stakeholders. Now I'll turn the call over to the operator to open the line for questions. Operator?

Lisa Gill:

First, Steve, I want to say congratulations on this OneOncology deal. I think it's a great deal for AmerisourceBergen, but I want to focus my question on an area that we've been writing about. And that's really about the changes in the diabetes and insulin market. Can you remind us how the change or the price cut on insulin will impact you as a drug distributor? And then how do I think about new drug classes like GLP-1s that are substantially more expensive? Are they creating an opportunity? And are you seeing that come through your numbers that we saw that were so strong in the U.S. distribution component?

Operator:

Our next question comes from Elizabeth Anderson with Evercore. Please go ahead, Elizabeth.

Jim Cleary:

Yes. Great. I will start off, and I'll talk about the back half of the year, and then I'm sure Steve will want to talk about our positive experience we've had thus far with the PharmaLex acquisition. We -- in our guidance, we're implying strong performance in the back half of the year. And as we talked about during the call, during the prepared remarks, we increased our adjusted operating income guidance in the U.S. ex COVID from a 5% to 7% growth to 6% to 8% growth for the year. And really, what's driving the back half is the same sort of things that drove this recent quarter where we performed very well. We're seeing strong U.S. core growth, particularly ex COVID. We're seeing utilization trends that continue to be strong. We're seeing broad-based growth across our customer base, including sales to our largest customers and sales of specialty products to physician practices and health systems. We also saw good results in our Animal Health business this most recent quarter. And so it's those sorts of things that are driving the continued good performance in the second half. We're also -- as we said during the prepared remarks, we're expecting for OpEx growth to slow during the second half. And we're also expecting some better FX in the second half, where it was a headwind in the first half, we're expecting it to be a slight tailwind in the second half. So those are some of the things that are driving the good performance and the increase in guidance. And with that, I'll turn it over to Steve to talk about PharmaLex.

Operator:

Our next question comes from Eric Percher with Nephron Research. Eric, please go ahead.

Steve Collis:

Yes. Thanks for the question, Eric. As we don't really get into individual product economics. I think one of the things that I think has worked for our industry over time is that we really do provide a portfolio of customers. There's no customer that I'm proud of that we're providing one or two single products to. We like to provide all the products. And I think that's also the value proposition we offer to manufacturers is the knowledge that we have of all classes of trade and truly unique to the U.S. market, as you know. And probably to me, one of the strongest fundamental drivers are of the U.S. market. Having said that, our current fee for service, as I said, provides transparency. We have got certain rights in the event that there's a change in economics to negotiate with those manufacturers. And I think these are some of the manufacturers that we work with literally for decades. We're in the first fee-for-service generation of contracts. And I think they understand that our economics need to be strong and solid, and we need to offer good returns to our investors. And so these are respectful discussions with changes in business conditions. We expect we're not new to reimbursement change of affecting market prices. And again, we think that overall, this is a benefit to patients. And at the end of the day, if it's benefiting our constituencies, that will benefit AmerisourceBergen. So I don't have a tremendous amount of concern on any of these themes. Jim, anything you'd add?

Operator:

Our next question comes from Erin Wright with Morgan Stanley. Please go ahead.

Steve Collis:

I can start off, and maybe Jim can add in some trends. I just would say that in Europe, it's been very resilient. There's nothing that I would report as surprising. Of course, Turkey is a big market for Alliance, and that's got a little bit more economic dependencies based on the economy and inflation. But our core European markets are very stable. I'm actually looking forward. I'm going next week to visit a bunch of the countries for the first time and very much looking forward to that trip and learning more. But demand remains solid. As you know, the winter was better than expected in terms of the energy shortfalls and deficits that were anticipated. And our markets have been performing very well. We continue to engage with regulators. For example, in France, we're looking at how do we help with a switch to doing more specialty in pharmacies in the community setting. Those are the sort of initiatives that really get us excited. How to do more at the retail setting and how do we even service some of the hospital settings through changes in manufacturer contracting, et cetera, looking at our logo business, those are key initiatives for us. World Courier is just a tremendously high-performing asset. We continue to, I think, lift the bar on innovation. Literally, I'd say, and I try to be fairly modest then, but I am incredibly proud of the work that our companies do in World Courier, just foremost amongst that. Every time I get on the phone with them, I'm so impressed with the dedication, the professionalism, the innovation mindset. And this was truly the best of an acquisition that we have completed. This week took a very good private company that was well resourced in a way that had a great footprint. And we've just made it, I think, so much better, professionalized management, really invested in the systems. And this is a sort of thesis that drove also, I'd say, our Alliance investments. So we're tremendously proud of the World Courier. And of course, it's been part of AmerisourceBergen for 11 years now. Jim, anything you'd add on pricing trends?

Operator:

Our next question comes from Charles Rhyee with TD Cowen. Charles, please go ahead.

Steve Collis:

Yes, let me quickly do the OneOncology question first because it's -- I appreciate getting that opportunity. Look, we are not -- first of all, they will be an independent business entity. Our point is that we have a lot of experience, particularly through our IR network or managing analytics and helping aggregate data on behalf of members. OneOncology really will take it a step further. And we're saying that the future, the professional and clinical requirements to be in the community and to be serving cancer patients is only going to be increased. The bar is going to be lifted. So investing in this new model, we think, can benefit, of course, OneOncology and the two partners, that's TPG, AmerisourceBergen, but also the physicians who run the business, many of whom we've known for over two decades. These are very successful professional and business people. And we want to help use that expertise to deepen our relationships with community oncologists. So if you think about AmerisourceBergen right now, we have the distribution business. We have the ION business. And potentially, this is a third way for us to be involved and participate in the market. So I would say that. On the biotech and the funding, our business gets really impacted by long-term trends. I am convinced, and I think everyone in the Life Sciences business should be, that there are incredible investment thesis that makes sense for a venture capital and all other forms of capital to invest behind. We're only getting smarter. I think areas like ChatGPT are going to enhance artificial intelligence, are really going to enhance the drug discovery process. It's going to enhance the ability to share information. I think there are trends of cooperation between a lot of the countries that AmerisourceBergen serves that could help also facilitate launching of drugs. And I just think it's a tremendous time to be in this industry. And we've talked a lot on this call about the GLP-1 class of drugs. I mean, could be incredibly promising. Of course, we all know some good stories here about people who've been prediabetic and have been literally -- the clinical pathway has been altered by this. So tremendously excited to be a part of this. And I think AmerisourceBergen is really of the scale, sophistication and knowledge base that we can help truly make a difference in patients' lives, which is part of our purpose. Jim, anything you'd add?

Steve Collis:

Yes. And just one thing. If we look at AmerisourceBergen, a lot of the work we do, even at companies like PharmaLex, it really doesn't start in Phase I and II. It's -- fortunately, we're more in the Phase III side. So I think that's just another point that Bennett wanted me to make. Got to give the investor guy some credit here.

Michael Cherny :

Jim or Steve, in the press release, you noted how some of the strength in the quarter is from your two largest customers. I guess maybe juxtapose that. Can you give us an update on what you're seeing on the smaller customer side? Where your independents are focused with you? And if at this point in time, given macro worries, if there are any other services that you've either started to provide or other opportunities where you can help and support them as they work to sustain and manage their businesses.

Jim Cleary:

Yes. I would say kind of a key thing about the quarter and is just how broad based the results were particularly in the U.S. business. And we called out sales to largest customers, and we provide details on that in the Q. And we did see our two largest customers have quite good growth in sales. We also called out, as we frequently do, increase in sales of specialty products to both physician practices and health systems. But just -- those are just 2 of the things that we called out. I think probably the kind of the key thing on this quarter in the U.S. is just how broad-based it was, and that would include strong performance in independent -- excuse me, independent pharmacies also. And then as I said earlier, a very good quarter in the Animal Health business. And I think Steve has a couple of things he wants to follow up on.

Operator:

Our next question comes from Steven Valiquette with Barclays. Please go ahead, Steven.

Steve Collis:

Yes. OneOncology is technically an MSO, so they get management fees and then they offer some benefits of centralization. They have focused on leading practices across -- either they're in several geographies. And oncology supply has been the lead distributor for almost -- for all the practices. It's possible that some of the practices may not be fully integrated and using one of our competitors. But as you know, if you exclude OneOncology, AmerisourceBergen's share of Immuno-oncology is pretty high. So really would anticipate that as they bring new practices in that we would benefit from that. But no, we are the primary distributor to OneOncology. Jim, add something?

Operator:

Our next question comes from Daniel Grosslight with Citi. Please go ahead.

Jim Cleary:

Yes, it was a good quarter for the Animal Health business. And we signaled three months ago during our earnings call, but that's what we expected as a normalization of the business. And there was 6% revenue growth, and it was a good revenue growth in both companion animal and production animal during the quarter. We feel there probably are still some staffing pressures at that clinics weighing on visits, but we felt good about the 6% growth, and it was comparable growth rates in both companion animal and production animal. And I think importantly, we saw solid trends exiting March.

Operator:

Our next question comes from George Hill with Deutsche Bank. Please go ahead, George.

Steve Collis:

We don't really comment on it. I mean, obviously, the general trend is that 340B is growing. AmerisourceBergen is growing in our health systems business. It's an important customer segment for us. I think a couple of years ago, we were lagging a bit in market share. We've really been able to enhance the team in the Health System segment of growing with market leaders. We have, I think, good relationships with the hospital GPOs and with other key providers and continue to participate where it makes sense in RFPs. Probably this is a sector where there's more RFPs because of the contractual relationships. And a lot of the hospitals are in the 500 million range in annual volume, which wouldn't be big enough for us to comment on an individual basis, but there's pretty -- every few months, we participate in a large hospital where it makes sense for us to participate. I would say on 340B, we follow the market obviously, some of this historically had hurt some of our Part B car business as it went into health systems. I think we've been very effective at servicing both classes of trade and being objective providers. I think often this channel -- the thoughts of channel conflict can largely be dismissed and objectively by being a fair provider and really being transparent about what your different strategies are. And so we don't really over focus on this and just follow that prescription dollar, and I think that's been the best strategy for us, George. So I see we're a little bit past 9:30. So I just want to say how proud Jim and Bennett and I were to report this quarter. It's a tremendously strong second quarter for AB. I think really enhances the theme of us making the right sort of capital deployments. Our acquisitions that we've made recently continued to track very well. And I think it adds hopefully to our reputation of solid execution and building on our strengths. We are excited to have OneOncology join our family of companies in a way through the investment that we've made. And just in summary, I would say that AmerisourceBergen as a purpose-driven company and future as Cencora is very well positioned for long-term growth, and we'll offer our shareholders a differentiated return. Thank you very much.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2023 first quarter results. I am Bennett Murphy, Senior Vice President, Head of Investor Relations and Treasury. Joining me today are Steve Collis, Chairman, President and CEO; and Jim Cleary, Executive Vice President and CFO. On today's call, we will be discussing non-GAAP financial measures. Reconciliation of these measures to GAAP are provided in today's press release, which is available on our website at investor.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 will have an opportunity to ask questions after today’s remarks by management and we ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the hour. With that, I'll turn the call over to Steve.

Jim Cleary:

Thanks, Steve. Good morning and good afternoon, everyone. Before I turn to our results, I want to join Steve in expressing my excitement on our recent announcement that we intend to change our name to Cencora in the second half of calendar 2023. By becoming Cencora, we will be able to better connect with our team members, customers and other stakeholders on a unified basis across our footprint, and Cencora will better represent our role and impact as a leading healthcare solutions organization supporting pharmaceutical innovation and access. Now turning to our first quarter results, and as a reminder, my remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. AmerisourceBergen delivered solid results in our first quarter that were mostly in line with our expectations. We finished the quarter with adjusted diluted EPS of $2.71, an increase of 5% over the prior year quarter. Adjusted EPS benefited from a lower share count as a result of our recent opportunistic share repurchases, and strong fundamentals in our business helped offset previously anticipated elevated expenses in the quarter. Our consolidated revenue was $62.8 billion up 5% driven by growth in our US Healthcare Solutions segment, which was offset by foreign currency pressure on the translation of our sales in the International Healthcare Solutions segment. While the US dollar weakened from the historically strong levels seen in the fourth quarter of fiscal 2022, the year-over-year comparison still created a headwind as expected, which I will discuss in more detail when reviewing segment level results. Consolidated gross profit was $2. 1 billion, up 5% due to growth in the US Healthcare Solutions segment. While each segment had better gross profit margins relative to the prior year quarter, consolidated gross profit margin was flat year-over-year as the foreign exchange impact on the higher-margin International Healthcare Solutions segment was a drag on margin growth at the consolidated level. Consolidated operating expenses were $1.4 billion, up 9.8% due to higher distribution, selling and administrative expenses to support revenue growth and reflecting inflationary impacts on certain operating expenses. As I called out on our November earnings call, we did not begin to see inflationary pressures in our business until towards the end of the March 2022 quarter. The higher expense growth rate in this year's first quarter was driven by a tougher comparison versus the prior year period. We expect the operating expense growth rate to decline sequentially in the subsequent quarters and to become a more normalized rate for the full year. Consolidated operating income was $734 million, a decrease of approximately 2% compared to the prior year quarter or up 4% on a constant currency basis. The as-reported decline was driven primarily by the impact of foreign currency translation for the International Healthcare Solutions segment, and was partially offset by growth in the US Healthcare Solutions segment, which I'll discuss in more detail when I review segment level results. Moving now to our net interest expense for the first quarter, net interest expense was $46 million, down approximately 14% due to higher interest income resulting from higher cash balances and interest rates on investments. Looking ahead, our average cash balances will be lower following the opportunistic share repurchases we announced in the quarter, the successful early completion of the PharmaLex acquisition, and the upcoming March 2023 debt repayment. Our lower invested cash balances will drive our net interest expense higher in the coming quarters and result in higher interest expense versus fiscal 2022, as I called out in November. Turning now to income taxes, our effective income tax rate was 19.1% compared to 21.2% in the prior year quarter. The lower tax rate for the quarter was in line with our expectations and we continue to expect our full year effective tax rate to be in the range of approximately 20% to 21%. Our diluted share count was 206.3 million shares, a 2.3% decline compared to the first quarter of fiscal 2022, driven by opportunistic share repurchases over the past several months, including $700 million of repurchases completed in November and December. Regarding our cash balance, we ended the quarter with approximately $1.7 billion of cash due to the timing of holidays around the PharmaLex acquisition closed at the beginning of January. We prefunded the acquisition on December 29, which resulted in a prepaid asset on our balance sheet and lower cash balance when we closed the quarter. In the quarter, adjusted free cash flow was $584 million, and we remain on track to achieve our adjusted free cash flow guidance of approximately $2 billion for the fiscal year. This completes the review of our consolidated results. Now I'll turn to our segment results for the first quarter. US Healthcare Solutions segment revenue was $56.2 billion, up approximately 6% for the quarter as we continued to see strong specialty sales and broad based solid growth in our human health distribution businesses. US Healthcare Solutions segment operating income increased by approximately 1% to $572 million. Sales to specialty physicians and health systems were once again strong in the quarter as our leadership in specialty continue to position us well to deliver growth including in biosimilars, where we are seeing good trends in oncology and more recently, ophthalmology. The strength in specialty and broad-based good utilization trends in human health distribution helped to offset the previously anticipated higher operating expenses, as well as softness in the animal health market. As has been widely discussed in the animal health industry, there are short-term pressures in both the companion and production animal markets. From a cadence perspective, however, some of the softness in our animal health business in the quarter is related to timing and will normalize in the second quarter. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.6 billion, down 0.6% on a reported basis or up 17.7% on a constant currency basis. The as reported decline was driven by the impact of foreign currency translation on revenue for Alliance Healthcare as the business is more exposed to currency fluctuations. International Healthcare Solutions operating income was $161 million, down approximately 10% on a reported basis, driven by the impact of foreign currency translation on income for Alliance Healthcare and the divestiture of ProPharma Specialty, which represented approximately 3% of segment operating income in the first quarter of fiscal 2022. When looking at the segment on a constant currency basis, it delivered 11% operating income growth driven by solid underlying fundamentals and favorable manufacturer price adjustments this quarter in one of our developing market countries. From a cadence perspective last year, this price adjustment occurred in our second fiscal quarter. This price adjustment activity offset the negative impact of the decline in the value of the local currency. That completes the review of our segment level results. I will now discuss our updated 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. I will also provide certain guidance metrics on a constant currency basis. Full details of our fiscal 2023 guidance can be found on Pages 8 and 9 of our earnings presentation on our Investor Relations website. I'll begin with EPS. We are raising our full year diluted EPS guidance to a range of $11.50 to $11.75 up from our prior range of $11.30 to $11.60, representing growth of 4% to 7% on an as reported basis, or 6% to 9% on a constant currency basis. Our increased EPS guidance range is primarily a result of our opportunistic share repurchases in the first quarter, which results in our updated guidance on full year diluted average share count. We now expect our share count to be approximately 206 million shares, down from our previous range of 207 million to 209 million shares. Our increased EPS guidance range is also a result of the higher as-reported operating income and international health care solutions, partially offset by the reduced contribution from COVID in the US. Next, I would like to provide a brief update on COVID-19 treatment distribution contributions. In the first quarter, COVID-19 treatments contributed $0.12 to our consolidated EPS compared to $0.14 in the first quarter of last year, with about $0.09 in the US and $0.03 in our international segment. Given trends we have seen to-date, we now expect the full year contribution from COVID-19 treatment distribution to be in the range of $0.25 to $0.30, down from our previous range of $0.30 to $0.35 that we provided in November. For the rest of the year, the majority of the expected COVID contribution is in the US segment with just a few more pennies of contribution expected in the International segment for the year. To reflect the lower expected contribution from COVID treatment distribution, we are lowering the bottom end of our US healthcare solutions as reported operating income guidance. We now expect the segment to deliver as reported growth in the range of 1% to 4% growth widened from the prior range of 2% to 4% growth. Our guidance for the US Healthcare Solutions segment excluding COVID contributions remains unchanged at 5% to 7% growth in fiscal 2023. Now moving to the International Healthcare Solutions updated segment-level operating income assumptions. We are raising our as-reported operating income guidance for the International Healthcare Solutions segment to a range of a decline of 3% to growth of 1% from our previous range of a decline of 7% to a decline of 3%, driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. The accretive and strategic deal is another example of how we create incremental value through capital deployment, and we are excited to welcome the PharmaLex team to AmerisourceBergen. PharmaLex's leading solutions built upon our existing capabilities and will allow us to deepen our partnerships with pharma manufacturers as we provide support throughout the cycle from clinical development to regulatory support and access strategies to providing logistics services. For additional operating income guidance measures for the International Healthcare Solutions segment, I would refer you to our investor presentation deck. These guidance measures also were increased driven by the general weakening of the US dollar and the incremental contribution from PharmaLex. In summary, regarding the updates we have made to guidance, there is no change in our guidance for as-reported consolidated adjusted operating income. And we are raising our adjusted EPS guidance for the full year, all while lowering our expectations for COVID contributions. Before I turn to my closing remarks, I would like to briefly discuss a few highlights about how we are working to ensure a resilient supply chain and mitigate our impact on climate change. As a crucial member of the global pharmaceutical supply chain, we play a key role in ensuring the safe and reliable supply of medications. We take this role seriously and have robust plans and teams in place to support supply chain resiliency. In fiscal 2022, we advance these efforts and expanded the scope of our physical risk assessment process to reflect our expanded footprint since we last conducted a physical risk assessment in 2020. In 2022, we included nearly 400 sites across 24 countries, up from 100 sites. The updated assessment will inform our business continuity planning process to help ensure the continuity of supply in the event of extreme weather or natural disasters. While we prepare for and adapt our business to address the impacts of a change in climate, we continue to look at ways we can reduce our carbon footprint and be good environmental stewards. As part of these efforts, in May 2022, we submitted a near-term target to reduce our greenhouse gas emissions to the science-based targets initiative for validation. In January, we learned the science-based targets initiative approved our near-term science-based emissions reduction target. In addition to the items Steve and I have discussed today, our recently published ESG report contains additional information on how we are living our purpose and creating healthier futures through our ESG initiatives. The report aligns with a number of leading ESG reporting standards and frameworks and key data points have been externally assured. I would encourage you to review the report's entirety on its dedicated microsite at esg.amerisourcebergen.com. In closing, our updated fiscal 2023 guidance reflects our continued strategic use of capital to create value for our stakeholders through a combination of returning capital to shareholders and investing in our business to further our value proposition for our partners. Powered by the continued resilience and growth of our business. As we progress through 2023, we remain focused on executing on our long-term strategy, and through our foundation and pharmaceutical distribution and complementary higher-margin, high-growth businesses, we are well positioned to create long-term sustainable growth. Now I will turn the call over to the operator to open the line for questions. Operator?

Elizabeth Anderson:

Hi, guys. Thanks very much for the question. I was wondering if you could talk about PharmaLex a little bit more. Obviously, that was nice to see the transaction closed early. And now that you've had it for a whole month, I was wondering if you could talk a little bit about what some of the early wins are in terms of from like a client perspective and sort of what they're most interested in, and what are some of the things that have been new to you since fully taking ownership of the asset.

Operator:

Our next question is from Michael Cherny from Bank of America. Michael, your line is now open, please go ahead.

Jim Cleary:

Yes. Thank you, Michael, for asking that question and I think really kind of a key point and a key takeaway is that we really have continued strong performance in our US business and strong performance in specialty and broadly across human health distribution, and we're seeing continued strong utilization trends. And so that's true in the US, and it's really true at Alliance also where we saw international strong performance and utilization trends during the quarter. I called out in my prepared remarks as you referenced that COVID came in below our expectations during the quarter. And as I said in the prepared remarks, we had a softer quarter for animal health and higher OpEx growth rate during the quarter, but we expect that to normalize for the full year. And really kind of, I think, the key takeaway is just strong performance and execution both in specialty and broadly across human health distribution, and that's kind of evidenced in our maintaining that guidance rate, excluding COVID of 5% to 7% in the US segment. And as reported, excluding COVID, on a consolidated basis, improving our adjusted operating income guidance from 3% to 5% to 4% to 6%.

Erin Wright:

Great. Thank you. Can you speak a little bit more about what you're seeing in terms of underlying utilization trends in that international wholesaling business? And have there been any surprises in the most recent quarter that we should be aware of, and how should we be thinking about the quarterly cadence for the balance of the year there? And just more broadly, kind of on international, in the next five years or so, does your international segment and footprint and integration across that business look vastly different to you? And just with the name change and just thinking about how you think about the contribution of international over the next five years or so. Thanks.

Steve Collis:

Yes, thanks, Erin. I think AmerisourceBergen is very is very consistently facing -- is trying to really be squarely in the prescription drug market, our services and distribution are anchored around the prescription market. I've been impressed with Alliance. It's now our seventh quarter reporting them, and they've been very resilient. We have strong market positions in almost every country we're in. and where we've had to, we've complemented it. Some of the smaller markets, for example, Norway and Netherlands, we're in retail. We've also got a very strong Alloga business, which was one of the most interesting aspects of this integration and acquisition for us. We're aligning that very closely with our ICS business, which is being more closely aligned with World Courier in the past historically and is focused on the more complex therapies. And Alliance Alloga business has a very strong basis in core pharmaceutical products. So I'm also excited about what PharmaLex is going to bring to the equation. We have about 2,500 team members that we've added with PharmaLex and about 800 of them have PhD equivalent degrees. I go back to my experience and a lot smaller scale, but when we acquired Xcenda when I was at the specialty group, the uplift in talent and intellectual thought around the manufacturer was so important to the development of the specialty group, and I think that PharmaLex can be analogous to our European and international business growth. So, we're -- I think we're just are very well-positioned. I like what this acquisition is going to bring to us. And Jim just has one more comment I'd like to make.

Steve Collis:

Thanks for the question.

Eric Percher:

Thank you. A question on US health care, I see you pretty consistently called out specialty to physician practices as a growth driver. And I noticed the last quarter or two, we haven't seen mail called out, recognizing it could be reading too much into the -- a few words here. But I'm curious, is there any change to distribution activity or self-distribution for the largest mail and specialty clients, and I know there's been some discussion that we could see biosimilar source directly as we see larger volumes in the pharmacy benefit. Any thoughts on those trends?

Jim Cleary:

I think that covers it. Thanks.

Charles Rhyee:

Yes, thanks for taking the questions. You mentioned before opportunistic share repurchases over the last few months. Can you talk about sort of what the capacity you have to continue to do that if, for example, Walgreens was to continue to take down its stake in the company, can you kind of give us a sense for sort of where you are in terms of that?

Operator:

Our next question is from George Hill from Deutsche Bank. George, your line is now open. Please go ahead.

Jim Cleary:

Yes, and so there was a lot there, and we specifically do not break out the percentage of manufacturer services. But I will say that those sorts of services are a really important part of our international business, just like they are in the US business. And I think one kind of key thing to call out is you'll note that our operating margin is significantly higher in the International segment than it is in the US segment. And the reason for that is those higher-margin services businesses are a higher percentage of sales in our international segment than they are in the US segment. And they're driven historically by things like World Courier, of course. But Alloga also, which is Alliance's very successful 3PL business and some of alliances services business. And now it's an even greater percentage of the business given the exciting acquisition of PharmaLex. And so that's just a little bit of commentary on the international market. And you asked about specialty products. In some cases, a number of the specialty products in the international market are 3PL. And so I think you also asked about the US business. And of course, specialty continues to be a driver for us in the US market, as you know, very well. And we're a leader in the specialty business, both for physician practices and for non-physician parts of the business, and it's really kind of a leading part of our legacy businesses that Steve started many years ago and a super important part of our future through our key partnerships.

Operator:

Our next question is from Steven Valiquette from Barclays. Steven, your line is now open. Please go ahead.

Operator:

Steven, your line is now open. You can proceed with your question….

Operator:

No Problem. Our next question is from Eric Coldwell from Baird. Eric, your line is now open, please go ahead.

Steve Collis:

Thanks. Good to hear from you Eric. So, I'll start off. Obviously, we've talked about this for a while, and it seems like it was never going to be here. But of course, our first biosimilar HUMIRA launched this week, and it's an important drug for the US health system, by some measures, the largest drug in history. And the introduction is going to be an important creator of headroom for the new innovative therapies that AmerisourceBergen is so well-positioned to serve our stakeholders in. So, that's important. The first -- so we're interested to see how the trends go. And again, in July, we'll see some more entrants, and some of them have different clinical aspects to them as you well know. But we've said consistently that Part B is our sweet spot. This is very much a Part D drug, and it will be incrementally better for us in margins, but it's mostly mail order. And as was pointed out previously, some of our Express Scripts, for example, and other customers in that category could be ordering directly, and they have limited locations, and it's a much easier distribution function for manufacturers to fill. So, not -- it won't change our guidance or anything too much, but it is a very serious milestone in biosimilars, and we'll look to see how the market absorbs this product. Jim, anything on the other guidance aspects?

Operator:

Our next question is from Steven Valiquette from Barclays. Steven, your line is now open. Please go ahead.

Steve Collis:

Yes, so not a key area of focus for us. There is definitely a parallel trade market in Europe, which is actually highly regulated. But I haven't heard that there's any intention. This is not something we focus on. I haven't heard that there's any intention to expand that. And we really don't have much further insight on that. Jim, do you agree?

Operator:

Our next question is from Brian Tanquilut from Jefferies. Brian, your line is now open. Please go ahead.

Steve Collis:

Yes, we, AmerisourceBergen, I think if we prove one thing, and our industry, in fact, has proved that we are pretty resilient. And what's important to us is that our -- the patients that we ultimately serve are able to access products. And the payer systems, both the commercial and government systems, continue to work very well. And I think I've told the story many times and in 2009, which is my first year running the full-on drug wholesale business in that time, and of course, the whole world was melting down. And we had less than $4 million or $5 million in bad debt. So but key for all of our businesses, whether it's Europe or US, is continued patient access to care. And in many cases, we are working with single-payer systems. But I just want to stress that one of the beauties about AmerisourceBergen is we go through many cycles, but the core and the specialty businesses and the manufacturer services we provide are so fundamental to the health systems. And then we are also very good at adapting to whatever changes we need to make. So I would say COVID is an extremely applicable application of that. We really were able to adjust so many of our businesses to go virtual and really had one month of disruption, I would say, because of just so much of the economy moving inside. But other than that, I have to say that AmerisourceBergen has proven through all sorts of cycles that we are very resilient and carry on producing earnings and cash flow, which is very important. Jim?

Steve Collis:

Well, that wraps it up for today. And Jim, thank you for ending on that keyword, resilience. I would say that we had an excellent quarter, and I'm excited about the Cencora name change. And whether we're talking about AmerisourceBergen or in the future Cencora, we are highly differentiated and well-positioned for long-term growth anchored in our core distribution and specialty services and also with our very high potential customer base. And we'll continue to benefit from growth in the pharmaceutical market, driven by patient demographics, prescription utilization trends, and continued innovation. Thank you for your time today. It's been a pleasure spending this last hour with you.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's Fiscal 2022 Fourth Quarter and Full Year 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.

Operator:

[Operator Instructions] We have our first question, comes from Lisa Gill from JPM.

Steven Collis:

Okay. 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. And it's interesting because ION 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 Besse and then most importantly, Lash and Xcenda got us into the services area. And we now with the 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.

James Cleary:

Sure. Lisa, you had asked about COVID therapies and our contribution from COVID therapies. In fiscal year '23, 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 that's down, of course, from the contribution in fiscal year '22, which was $0.72. And we said we were a little bit ahead of expectations in the fourth quarter. We had a contribution from COVID therapies of $0.17. And so this is something that is hard to predict, and so we'll be very transparent, and we will indicate what our COVID therapy contribution in 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.

Operator:

We have our next question comes from Michael Cherny from Bank of America.

James Cleary:

Yes, I'll start the comment there. And as you commented on, our guidance for adjusted operating income growth in the U.S. segment ex-COVID is 5% to 7%, and of course, that's driven by continued strong operational performance really across multiple businesses. We continue to really execute very well and have -- and a 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.

Operator:

We have our next question comes from George Hill from Deutsche Bank.

James Cleary:

Yes. And so what I would draw people to take a look at is Page 10 of the earnings presentation that we posted to our website earlier today, which shows the growth rates of our International Health Care Solutions segment. And it really kind of report that we show it on an 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.

Operator:

We have our next question comes from Charles Rhyee from Cowen & Company.

James Cleary:

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 growth and 8% EPS growth in fiscal year '23. 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.

Steven Collis:

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 -- appreciate this tremendous industry we're in.

Eric Percher:

Question on free cash flow trajectory. In the last 5 years, we're not seeing our 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 '23 and the opportunity to see free cash flow expansion post settlement?

Eric Coldwell:

That last Q&A kind of covered my FX follow-up -- or sorry, free cash 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 at least historically in periods of weaker economies and global challenges, maybe production animal support goes down a bit, less animal consumption, et cetera. So just hoping we could get an update on MWI and your outlook for next year.

Kevin Caliendo:

I had 2 international questions tied into one. Is -- do you expect there to be any future recurrence of the Turkish FX remeasurement expense on inventory? And also, were there any excess fuel energy costs in the U.K.? Was that an incremental headwind to you -- a material headwind to you? Because it's certainly something that's popped up on our radar screens, it's being potentially a problem.

Steven J. Valiquette:

Great. So with the U.S. healthcare solutions segment operating growth, 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 not just -- either measured in basis points, et cetera, just within that.

Operator:

We have our next question comes from A.J. Rice from Credit Suisse.

Steven Collis:

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 enter 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.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2022 third quarter 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 investor.amerisourcebergen.com. We have also posted a slide presentation to accompany today's press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change. For a discussion of QS 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 or broadcast without the express permission of the company. (Operator Instructions) With that, I'll turn the call over to Steve.

James Cleary:

Thank you, Steve, and thank you all for joining us on today's call. Before I turn to our results, as usual, my comments will focus primarily on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year June quarter. For more details on our GAAP results, please refer to our earnings press release. In our third quarter, AmerisourceBergen continued to deliver strong results as our teams executed on our strategic imperatives. Our core foundation in pharmaceutical distribution and suite of complementary higher-margin, higher-growth services around the world position us well to deliver differentiated long-term value creation supported by our commitment to talent, diversity, equity and inclusion and ESG. As Steve mentioned, in June, we passed the 1-year anniversary of the Alliance Healthcare acquisition. Our purpose-driven teams have worked diligently on integration and execution, and we are pleased that the acquisition has delivered high teens EPS accretion in its first year as expected. Turning now to our third quarter results. AmerisourceBergen finished the quarter with adjusted diluted earnings per share of $2.62, a 21% increase with solid operating income growth in both segments. Our consolidated revenue grew approximately 13% to $60.1 billion, driven by revenue growth in both segments. Consolidated gross profit increased 27% to $2.1 billion as a result of increases in gross profit in both segments. Gross profit margin grew by 39 basis points to 3.44% driven by the Alliance Healthcare acquisition, an increase in the U.S. healthcare solutions segment and good performance in the International healthcare solutions segment. Consolidated operating expenses were $1.3 billion, up from $996 million as a result of higher distribution, selling and administrative expenses as well as depreciation expense primarily due to the Alliance Healthcare acquisition. Consolidated operating income was $756 million, up 20%. The increase was driven by operating income growth in both segments, which I will discuss in more detail when reviewing segment level results. Turning now to interest expense and the income tax rate. Net interest expense was $53 million in the quarter, an increase of 3% due to an increase in debt related to the Alliance Healthcare acquisition and partially offset by higher interest income on invested cash. Our effective income tax rate was 20.2% compared to 21.0% in the prior year quarter. As it relates to our full year fiscal '22 tax rate guidance of approximately 21% to 22%, we would expect our full year tax rate to be at the lower end of that range. Our diluted share count increased 1.4% to 211.7 million shares as a result of dilution related to employee compensation and the June 2021 issuance of 2 million shares to Walgreens Boots Alliance in connection with our acquisition of Alliance Healthcare, offset in part by share repurchases in the quarter. Regarding free cash flow and cash balance, fiscal year-to-date adjusted free cash flow was $1.55 billion for the 9 months ended June 30. We ended the quarter with $3.3 billion in cash, including approximately $270 million of restricted cash on our balance sheet. In the quarter, we repaid $5 million in senior notes due March 2023 as we continue to make progress in paying down debt issued to acquire Alliance Healthcare. The remaining balance on the senior notes due March 2023 is $1 billion. This completes the review of our consolidated results. Now I'll turn to our third quarter segment level results. Starting with our U.S. healthcare solutions segment. Segment revenue increased by 6% to approximately $53.4 billion driven by an increase in sales across our portfolio including increased volumes in mail order and growth in sales to specialty physician practices. Segment operating income was $580 million representing growth of 9.5% versus the third quarter of fiscal 2021. In the quarter, specialty physician services experienced strong broad-based growth to oncologists and other specialists as our industry-leading solution set continues to drive growth. U.S. healthcare solutions segment operating income margin increased 3 basis points in the quarter due to fees earned from the distribution of government-owned COVID treatments. As a reminder, we distribute both commercial COVID-19 therapies and government-owned COVID-19 therapies. The contribution from government-owned COVID therapies is not a meaningful revenue driver given the fee-based nature of the business. As it relates to COVID therapy earnings impact, COVID therapies contributed $0.14 to the June quarter exactly half of the $0.28 contribution we called out on our May earnings call as remaining for the balance of our fiscal year in the U.S. healthcare solutions segment. As a reminder, our full year estimate for COVID therapy contribution in the U.S. healthcare solutions segment is still approximately $0.60, $0.46 of which we have realized in the segment through our third quarter. If COVID therapy volume trends in July were to continue through August and September, we would expect to see a couple of pennies worth of decline in COVID therapy contribution sequentially but clearly in that $0.60 full year ballpark. I will now turn to our international healthcare solutions segment. In the quarter, international healthcare solutions revenue was $6.7 billion, including $5.5 billion in revenue from Alliance Healthcare. Segment operating income for the third quarter was $176 million up 75% driven by the 2 months incremental contribution from Alliance Healthcare and strong operating performance at World Courier, both of which had good performance despite higher-than-expected foreign exchange pressure related to the strong dollar. Alliance Healthcare continued to have resilient volume trends that were in line or better than expectations, demonstrating the strong fundamentals of its pharmaceutical-centric business. At World Courier, we had better-than-expected performance driven by increased weight per shipment. The World Courier team also ensured that we are getting good value for the incredibly important logistics service we offer for these high-priority shipments. I will also note that in early June, as expected, we closed on our sale of the Profarma specialty business. This business contributed approximately $0.05 to EPS for the international healthcare Solutions segment for the first 8 months of fiscal 2022. This completes the review of our segment level results. Now I will turn to our updated fiscal 2022 guidance. We are raising our fiscal 2022 adjusted EPS guidance from a range of $10.80 to $11.05 and to a new guidance range of $10.90 to $11.10 representing growth of approximately 18% to 20% from the prior fiscal year. The increased guidance reflects stronger-than-expected performance in several businesses and a lower-than-expected average diluted share count. Turning now to operating income. There is no change in our expectation for consolidated operating income growth, which we expect to be at least in the high teens percent range. In our U.S. healthcare solutions segment we are raising the lower end of our operating income guidance. We now expect U.S. Healthcare Solutions operating income to be in the range of $2.44 billion to $2.48 billion, representing growth of 8% to 10%. The guidance range reflects the strong performance the segment has shown to date, and continued strength in execution in the fourth quarter. As a reminder, in the fourth quarter 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 benefit from lapping those prior year expenses. Turning now to international healthcare solutions. There is no change in our full year guidance but I would like to discuss the impact of foreign currency fluctuations on the segment. The international healthcare solutions segment has faced significant foreign exchange headwinds as a result of the strong dollar. Since our second quarter earnings call in May, the dollar has continued to strengthen, increasing the expected foreign exchange impact on our actual dollar results for the fiscal year to approximately $130 million versus constant currency up from our prior estimate of $80 million. Despite this headwind, our businesses have been performing well, and we are impressed with our team's strong execution. While the strong dollar has been a translation headwind for our reported results, there are some items that mitigate the impact. In May, I called out the larger-than-normal annual manufacturer price adjustment in the March quarter in a developing market that offset the negative impact of the decline in value of its local currency. Now given the continued depreciation of that country's local currency and unusual second price adjustment was announced in July, which will offset currency pressure in our fourth quarter, as I said in May, these price adjustments have historically been on an annual basis, but now given the significant decline in the value of the local currency, a second unexpected price adjustment occurred, which will support our full year results. Turning now to share count. We now expect average diluted shares outstanding for the fiscal year to be in the range of $211 million to $211.5 million down from approximately $212 million as a result of the resumption of our share repurchase program in May. In the June quarter, we repurchased $249 million of our shares and have approximately $1.1 billion remaining on our current board approved share repurchase authorizations. Lastly, we now expect adjusted free cash flow to be in the range of $2.3 billion to $2.5 billion and have raised the lower end of the previous range of $2 billion as we continue to have good cash flow trends in the business. That concludes the updates to our fiscal 2022 guidance. While we are in the middle of our planning process for fiscal 2023, I want to repeat the earlier commentary that I gave at our Investor Day in June about our expected organic consolidated adjusted operating income and adjusted diluted EPS growth for fiscal 2023. If you exclude the contribution from COVID treatment distribution, our operating income growth should be in the 5% range and EPS growth in the 8% range, again, x COVID. As it relates to the potential COVID contribution, trends and treatment utilization remain difficult to predict too far out but we continue to believe the contribution from COVID treatment distribution in 2023 could easily be less than half of the approximately $0.70 contribution included in our 2022 guidance. Our segment level COVID contribution expectations remain unchanged for fiscal 2022. As a reminder, we expect about $0.60 of contribution in the U.S. segment and around $0.10 in the international segment. As usual, we will provide our full detailed fiscal 2023 guidance that is fully informed by our comprehensive planning process when we announce our fourth quarter results. Before I conclude my prepared remarks today, I would like to provide a brief update on our ESG efforts in progress. In June, AmerisourceBergen was honored to be invited to the White House as signatories of the administration's health sector climate pledge alongside many of our peers in the health care industry. Signatories of the pledge commit to reducing greenhouse gas emissions while producing detailed plans to prepare their facilities and communities for climate impacts. These commitments align with our ESG strategy with one of the core pillars of our strategy being resilient and sustainable operations. Other related efforts include our commitment to a set of science-based emissions reduction target, and in May, we submitted our draft target to the science-based targets initiative for official validation. As I mentioned last quarter, we've also conducted fiscal risk assessments of our top 100 locations to inform our business strategy and continuity planning process. By having strong business resiliency plans and reducing our emissions footprint, we can help mitigate the impact of climate change and advanced health equity, particularly in communities most vulnerable to climate change. While my comments today focus on our environmental efforts, AmerisourceBergen embraces all aspects of ESG. And in doing so, we live our purpose and help create healthier futures. To close, AmerisourceBergen has proven its ability to deliver strong results throughout each phase of the pandemic driven by the talent and execution of our 42,000 team members, the resilience of our pharmaceutical-centric businesses and supported by the strength of our balance sheet. As we look ahead in the complex economic environment globally, AmerisourceBergen is well positioned strategically, operationally and financially to continue to deliver sustainable earnings, strong cash flow and long-term value for all our stakeholders. Thank you all for your interest in AmerisourceBergen. And now I will turn the call over to the operator to begin our Q&A. Operator?

Elizabeth Anderson:

And thanks for all the details on the back half guidance. I was wondering, given all the puts and takes that you've been talking about and sort of trying to establish, as you said, sort of like phase we are in the pandemics like run rate trends, can you talk about the underlying volume growth assumptions in not only your -- what happened in the third quarter and then sort of underlying your guidance in the fourth quarter? I'm just trying to sort of parse out like where you're seeing strength in those and relative areas of weakness in both the sort of visits and sort of core retail scripts versus maybe some of the mail acceleration that you talked about in both the U.S. and Europe.

Operator:

Our next question comes from Lisa Gill at JPMorgan.

James Cleary:

Okay. Well, I'll start out and talk about 2023. And importantly, there's really no change from what we indicated during our Investor Day. On a consolidated basis, what we'd expect is organic operating income growth of 5% and then an incremental 3% from capital deployment, whether that be share repurchases or M&A. So we'd expect EPS growth of 8% on a consolidated basis. Of course, that's x COVID. So you'd have to start by taking '22 and subtracting out the $0.70 expected benefit from COVID and then grow 8% from there and then add back in whatever the assumption would be for COVID in 2023. And we're seeing a lot of the drivers in 2022 continue to be drivers in 2023, continued strength in our U.S. businesses. Clearly, our leadership in specialty will continue to benefit us. And then when it comes to international, as I said, we're seeing the business is performing well with good fundamentals. Now 2 things that we are monitoring in international

Operator:

Our next question comes from Eric Percher at Nephron Research.

James Cleary:

Yes, sure. I'd be happy to take that question, and thank you for asking it. And first of all, I think you're absolutely right. We've been very pleased with the management team at Alliance. And of course, they have a lot of experience in their markets and really have just shown a lot of expertise in managing the business. With regard to your question on the Turkey high inflation accounting, which was covered in our press release today, very importantly, there's no change in how we translate the P&L of Alliance Healthcare's Turkish subsidiary in our adjusted results. The -- just as you were saying, and when you asked the question, the GAAP to non-GAAP adjustments relate to the accounting impact of remeasuring various components of their balance sheet. And of course, on a consolidated basis, Turkey is a very small part of our overall results, but I will get into a little bit more detail here. The GAAP accounting items driven by Turkey becoming a highly inflationary economy is fine under U.S. GAAP. And the result is remeasurement of lira-denominated assets and liabilities at each balance sheet date using the U.S. dollar exchange rate then in effect, and that impacts recorded in our P&L. And previously, that translation was recorded as an adjustment to their -- to equity on our balance sheet. And there is a detailed discussion of this in our 10-Q, but I think very importantly, there's no change in how we translate the P&L of Alliance's Turkish subsidiary and our adjusted results.

James Cleary:

Yes. And so the way that it works there is due to the due to the currency devaluation that's happened, there's an annual price increase that happens. And that annual price increase is based on the value of the Turkish lira versus a basket of currencies, and that price increase happens every year. And this year, that price increase was particularly large, and there's actually been 2 of them because the devaluation has been higher than typical.

Charles Rhyee:

I just wanted to follow up on international a little bit more and maybe fold into what Eric was asking, but -- so you maintain the full year alliance EBIT guide, right, 6 85 to 7 15. And I think, Jim, you said last quarter, because of the currency headwind, you expect to kind of come in towards the lower end, it sounds like now you're saying that currency has gone even worse. We're maintaining the guidance. So clearly, it kind of suggests that underlying operating performance has been better. I guess 2 questions has been -- when we think about the modeling fiscal '23, should we be -- and assuming currency stays flat, are we actually -- should be modeling on a constant currency basis, let's say, an EBIT profile that's higher than the 6 85 to 7 15 range? And then secondly, or is some of this -- how much of the benefit that keeps us in the range is coming from maybe something like Turkey?

Charles Rhyee:

Great. And just a follow-up on World Courier. Obviously, you've been highlighting how strong it's been performing. When you look at some of the CROs that have been reporting, some have talked about potential slowdown in R&D just kind of delays or cancellations, others seem to have reported fine results. Just maybe what you're seeing in sort of the clinical trial space as it relates to World Courier.

Operator:

Our next question comes from Stephen Valiquette at Barclays.

James Cleary:

Yes. So with regard to your question on generic deflation, it's been in line with the past few years. It's been in line with our expectations. Supply and demand remain in balance. And as we talked about before, our business is not as reliant on generic pricing as it has been in the past. Our teams have done a very good job of rebalancing contracts and ensuring that we receive fair compensation across brand, generic and specialty, which is important, especially as more specialty goes through mail and retail. And with regard to potential generic inflation, there certainly are higher input costs for manufacturers and it remains to be seen if they'll be able to pass on the higher cost. We're not currently expecting generic inflation. But if that does occur, of course, it would be a tailwind for our business. But as a reminder, as I said due to our contract rebalancing our business model isn't as reliant on generic pricing as it once was. Thank you for the question.

Kevin Caliendo:

First, I guess, on the Animal Health segment and MWI, on a year-over-year basis, was the contribution better or worse? What's happening with that business in terms of growth and margin on a year-over-year basis? And then as a follow-up, you mentioned that ophthalmology, you're seeing encouraging signs in the ophthalmology business. What exactly do you mean by that? Is that biosimilar possibilities? Or is that just straight supply/demand?

James Cleary:

Yes. So during the quarter, MWI had growth during the quarter, had revenue growth during the quarter, but that -- but the growth rate was lower than it had been in fiscal year '20 or '21. And of course, as you well know, there are a lot of pet adoptions during the pandemic and really good growth in the companion animal business, in particular, during the first part of the pandemic. And so some of the comps were a little bit tougher now for MWI. But it still had growth in that. And it's a very strong business, and we have kind of very good confidence in the long-term prospects of both the animal health market and our MWI business.

George Hill:

And I hopped on a little bit late, so I apologize if you guys covered this. But Jim, maybe could you talk about the outlook for COVID therapies as it looks like the COVID market is going to prove to be a little bit more durable than we might have thought 3 or 5 months ago. So maybe kind of the contribution of COVID therapy is the evolution and how you guys are thinking about durability.

Steven Collis:

Yes. One other point, we were pleased to see the FDA update to EUA for Paxlovid, making it easier for patients to access treatments at pharmacies. And we're really proud of the increased role that pharmacists will be playing in patient care. And I think that, that's -- as I said in my prepared remarks, that's a tremendous access to consumers and patients as they look to access these treatments conveniently. So when we think about living our purpose during the pandemic, there's nothing more there's nothing that embodies it more than the work we've done with these EUA products, and AmerisourceBergen and our associates are tremendously proud of it. So this is definitely something that has been distinguishing us in the last couple of years.

A.J. Rice:

I might just take a second and ask you about the capital priorities and any updated thoughts on that. I know you've called out that you continue to pay down debt that you took on associated with clients, and you also highlighted continued availability for share repurchases. Maybe just updated thoughts on priorities looking out over the next 6 to 12 months and anything else that will be a major consumption or outlay point for capital deployment.

Operator:

This concludes our Q&A session. I would now like to turn over to CEO, Steve Collis, for any final remarks.

Operator:

Thank you, everyone, for joining today's conference call. You may now disconnect.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen’s Fiscal 2022 Second Quarter 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 will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today’s press release which is available on our website at investor.amerisourcebergen.com. We’ve also posted a slide presentation to accompany today’s press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including but not limited, to EPS, operating income and income taxes. Forward-looking statements are based on management’s current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today’s press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the express 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 to for us to get through as many participants as possible within the hour. With that, I’ll turn the call over to Steve.

Jim Cleary:

Thank you, Steve, and thank you all for joining us on today's call. Before I turn to our results, as usual, my comments will focus primarily on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year March quarter. For more details on our GAAP results, please refer to our earnings press release. AmerisourceBergen delivered exceptional results in our second quarter, as our pharmaceutical-centric strategy continued to drive strong performance across our business. Our long-term leadership in specialty and commitment to delivering innovative solutions for our partners continue to be key differentiators in our fundamental long-term strategic imperatives. Our purpose-driven team members have worked diligently to support our stakeholders, which has driven our strong results. Turning now to our second quarter results. AmerisourceBergen finished the quarter with adjusted diluted earnings per share of $3.22, a 27% increase with strong operating income growth in both our US Healthcare Solutions segment and International Healthcare Solutions segment. Our consolidated revenue grew 17% to $57.7 billion, driven by revenue growth in both segments. Consolidated gross profit increased 47% to $2.2 billion as a result of increases in gross profit in both segments. Gross profit margin grew by 76 basis points to 3.84% driven by the Alliance Healthcare acquisition and the increase in the US Healthcare Solutions segment. Consolidated operating expenses were $1.3 billion, up from $806 million as a result of higher distribution, selling and administrative expenses and depreciation expense primarily due to the Alliance Healthcare acquisition. Consolidated operating income was $917 million, up 30%. The increase was driven by operating income growth in both segments, which I will touch on in more detail when discussing segment level results. Turning now to interest expense and the income tax rate. Net interest expense was $53 million in the quarter, an increase of 53% due to an increase in debt related to the Alliance Healthcare acquisition. Our effective income tax rate was 21% compared to 21.9% in the prior year quarter. Our diluted share count increased 2.3% to 212 million shares as a result of dilution related to employee compensation and the June 2021 issuance of 2 million shares to Walgreens Boots Alliance in connection with our acquisition of Alliance Healthcare. Regarding free cash flow and cash balance, adjusted free cash flow was $951 million for the first half of fiscal 2022. We ended the quarter with $3.5 billion in cash, including $500 million of restricted cash on our balance sheet. In the quarter, we repaid our $250 million term loan prior to its maturity date in line with our commitment to the rating agencies to pay down two-thirds of the debt issued to acquire Alliance Healthcare. As a reminder, we committed to pay down $2 billion in debt within two years of closing the acquisition, and we are well on track to achieve this debt paydown by March 2023, ahead of schedule. This completes the review of our consolidated results. Now I'll turn to our second quarter segment level results. Starting with our US Healthcare Solutions segment. Segment revenue increased by 5.8% to approximately $51 billion, driven by a broad increase in sales across our portfolio, including growth in sales to specialty physician practices, offsetting an over $300 million decline in sales of commercial COVID-19 therapies. Revenue from US Human Health was $49.8 billion, representing growth of 5.8%. Revenue from our animal health business was $1.2 billion, up 3.9% year-over-year as many veterinary practices were closed or had limited hours in January, carrying into February due to COVID-related staffing issues. The animal health market continues to have good fundamentals supported by high levels of pet ownership and spending and increasing global demand for protein, which we expect to be enduring trends in the coming years. Segment operating income was $730 million, representing growth of 11.4% versus the second quarter of fiscal 2021, driven by the important work we are doing to distribute COVID treatments and good performance across our businesses. Our Manufacture Solutions businesses rebounded during the quarter, in line with my commentary from last quarter's earnings call. Our human health distribution businesses continued to benefit from prescription growth across the market, underscoring the resilience and importance of our industry. The segment also benefited from our important work supporting COVID therapy distribution across the country, which meaningfully contributed to our strong growth and margin expansion. US Healthcare Solutions segment operating income margin increased 7 basis points in the quarter, primarily due to fees earned relating to the distribution of government-owned COVID treatments. As it relates to the COVID therapy impact on the quarter, the contribution was higher than previously expected for the quarter and contributed $0.22 to EPS, resulting in a $0.15 tailwind over the prior year quarter. We view this higher than expected contribution in the second quarter as a pull-forward. Our full year expectations for COVID contribution are generally unchanged. For fiscal 2022, we are estimating the contribution from coated treatments in the US to be around $0.60 for the full year. We are working closely with a variety of stakeholders to ensure the treatments reach areas where they are most needed and are encouraged by efforts to make them more accessible, especially as supply improves. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.8 billion, including $5.6 billion in revenue from Alliance Healthcare and high-teens growth for the balance of International Healthcare Solutions segment. Segment operating income for the second quarter was $187 million, up 261% on a reported basis. Alliance Healthcare has continued its strong performance and like the rest of AmerisourceBergen, the pharmaceutical centric nature of the business positions it well to continue delivering solid operating performance. A strong team at Alliance Healthcare continues to impress with their ability to operate through challenges in the region. In addition to the solid performance and execution, the collaboration between our teams globally continues to impress and positions us well to capitalize on long-term synergy opportunities going to market with differentiated global solutions. The strong results in the quarter for the International segment in the face of significant foreign exchange pressure, as well as supply chain cost pressure are a testament to the resilience of the business and underscore the importance of our pharmaceutical-centric strategy. This completes the review of our segment level results. Now I will turn to our updated fiscal 2022 guidance. As a result of our strong performance in the first half of our fiscal year and to reflect continued momentum in the second half, we are raising our fiscal 2022 adjusted EPS guidance from a range of $10.60 to $10.90 to a new guidance range of $10.80 to $11.05, reflecting growth of 17% to 19% from the prior fiscal year, resulting from the increase in our expectations for full year consolidated operating income. In the US Healthcare Solutions segment, we are increasing operating income guidance to be in the range of $2.42 billion to $2.48 billion, representing growth of 7% to 10%. As I said earlier, the US Healthcare Solutions segment operating income includes around a $0.60 full year contribution from COVID-19 treatment distribution, which is generally in line with the COVID treatment expectation we had embedded in last quarter's guidance. The increased guidance for this segment is a result of the continued operating strength and resilience of businesses in the segment, which has been on full display throughout the pandemic. Turning now to international health care solutions. There is no change in our full year guidance for this segment despite the significant foreign exchange pressure caused by the relative strength of the US dollar. Let me take a moment to highlight a few of the key items that impact the comparison between the first and second half. First, our guidance contemplates that the dollar remains strong in the second half of our fiscal year. Our International Healthcare segment's businesses are performing well including Alliance Healthcare, which is performing above expectations at our original budgeted foreign exchange rates; assuming exchange rates in the month of April continue for the second half of the fiscal year, the foreign exchange impact on our actual dollar results for the full year would be north of $80 million when comparing expectations versus constant currency, meaning using the prior year exchange rates. And with April exchange rates, we would expect to finish closer to the bottom of our segment guidance range. Second, while the dollar has been a headwind, favorable manufacturer price adjustments this quarter in one of our developing market countries have more than offset the negative impact of the decline in value of local currency. These annual price adjustments are generally in line with local levels of inflation, but were higher in the current year as a result of the significant decline in value of local currency. Third, the vaccination support work being done by Innomar in Canada and Alliance Healthcare in Europe is expected to contribute around $0.10 to our fiscal 2022, with almost all of it having already incurred in the first half of the fiscal year. Innomar's partnership with FedEx to support Canadian vaccination efforts has been important work and represents a small portion of that $0.10. Alliance Healthcare has played a significant role in the European COVID response across its footprint, distributing vaccines and COVID test to pharmacies and other sites of care throughout Europe. We expect the contribution from this activity to largely subside in the second half as COVID-19 moves away from the emergency phase of the pandemic. The contribution from this important work has largely offset supply chain cost pressure in the first half. Finally, we received regulatory approval on our sale of Profarma specialty in Brazil, which we called out on the November earnings call. The business contributed over $0.04 to the International segment in the first half of fiscal 2022. Overall, in the International Healthcare Solutions segment, we believe it is impressive that we are able to reiterate the full year actual dollar contribution from the segment in spite of the substantial foreign exchange pressure. Without the negative impact of foreign exchange, we would be raising our full year guidance for International Healthcare Solutions segment operating income. As a result of the increase in our US Healthcare Solutions operating income guidance and results in the International Healthcare Solutions segment largely mitigating the foreign exchange headwind, we are raising our expectations for consolidated operating income growth to be at least in the high teens percent range, up from growth in the high teens percent range. This includes approximately $0.70 of consolidated benefit related to our work supporting COVID-19 treatment and vaccine distribution across our footprint. Before I conclude my prepared remarks today, I would like to briefly touch on one of our ESG initiatives. The importance of business resiliency has become more clear than ever as the world around us continues to change and become more complex. Maintaining resilient and stable operations is a key focus as we navigate environmental challenges and to fill our vital social role. To ensure the safety and the stability of the delay of the pharmaceutical supply chain, we maintain robust business continuity practices that include monitoring for potential threats that could impact our business, such as climate related and geopolitical events. This work supported by the outputs of the physical risk assessment of our top locations, enables strong continuity plans to support our critical role of delivering life-saving medications every day. In closing, I have been and continue to be inspired by the strength and resilience of our business and the value created by our team members, robust partnerships, innovative solutions and pharmaceutical-centric strategy. We are well-positioned to continue driving sustainable long-term growth and to deliver on our purpose of being united in our responsibility to create healthier futures. Thank you for your interest in AmerisourceBergen. And I will now turn the call over to the operator to begin our Q&A. Operator?

Elizabeth Anderson:

Hi, guys. Thanks so much for the question and all the color on the quarter. I guess in terms of -- I heard what you said about the contribution from COVID therapies in the quarter and the unchanged expectations for the full year and you're seeing that as a pull-forward. Can you maybe in a little bit more detail, talk us through the other puts and takes as you see things progressing in the back half of the year? Thanks.

Operator:

The next question comes from Lisa Gill from JPMorgan. Lisa, please go ahead. Lisa Gill of JPMorgan. Your line is open. Please ask your question.

Jim Cleary:

Okay. So there are, I think, three things there. Biosimilars and then I think drug pricing and then kind of the $0.70 on COVID therapies and what we would expect for the for the future. So on biosimilars, it's clearly -- it's been benefiting us in our specialty businesses and particularly our specialty physician services businesses, and we expect there to be continued growth and benefit there. Biosimilars, as we've mentioned, particularly in that part of the business are profitable part of the business for us with strong margins. And so the trends and benefits that we're seeing there are quite positive and we'd expect it to be enduring. With regard to drug pricing overall, and I think your question was mostly around generics is there's really nothing new to call out. Overall, the deflation rates are relatively in line with the last couple of years. We expect that to continue throughout our fiscal year from a supply and demand standpoint, supply and demand dynamics remain generally in balance. And as we talked about, a really important point is that our business model is not as reliant on generic pricing as it once it was in the past, our leadership team has done a very good job of rebalancing contracts to have balanced profitability process portfolio of pharmaceuticals, including brand, generics and specialty to make sure we receive fair compensation in all those areas. So really nothing new to call out on the pricing side. And then with regard to the $0.70 benefit from COVID products. Of course, $0.60 of that is COVID treatments in the US and $0.10 of that for this fiscal year is international vaccines and other products. We just wanted to be really transparent to call that out and we'll be -- and we'll continue to be transparent in future quarters in 2022, and I would expect in 2023, calling out what our COVID treatment benefits are. And it's something that, as you can imagine, is to a large extent, beyond our control. And so it's hard to predict what the volumes are going to be next year. And so that's one of the reasons, Lisa, why we continue to be transparent in giving the specific numbers.

Charles Rhyee:

Yeah. Thanks for taking the question. If I could just follow-up, Jim, on the COVID, at least in US Health, if we think about the remainder of the $0.60, I think you did about $0.10 in the first quarter. We're talking about the $0.22 here. Should we -- are you -- is that more weighted here into the June quarter, or are you thinking about it more evenly through the rest of the year? And was the benefit mostly in January, I think Omicron really peaked in January and then really tailed off. What are you seeing here? And how is that demand given that when you look, testing volumes have been falling even though as cases rise a bit, there's not as much people finding out whether they have COVID or not. How does that impact how you get treatments out to folks? Thanks.

Steve Collis:

Yeah. Thanks for the question. So as has been well-documented, COVID case counts have fallen since the winter when there was a high number of cases and very limited supply of oral treatments. AmerisourceBergen stands ready to distribute treatments with our most needed. Pharmacies and other care providers have recognized the value of stocking these oral products and their long shelf lives and effectiveness against new variants has been helpful in driving demand and awareness for the products. And we are encouraged by efforts announced by the administration to make it easier for patients to access these treatments, including expanding test and treatment initiatives at pharmacies. And Good Neighbor Pharmacy has been very helpful in assisting their pharmacists and the critical roles in the community. So -- we -- as we said, we've credited to many of our members, and we are very enthusiastic about the role for community pharmacy in combating the next phase of the pandemic. Next question, please.

Steven Valiquette:

Thanks, good morning. So just regarding the success over the past year or two of your physician-related GPO operations. Is there any update on the -- or change on the percent share of the per unit economics that are flowing to ABC from the – that specialty drug procurement you're doing for your physician customers, or is it status quo on the profit algorithm? And also has that contribution still growing meaningfully year-over-year? Just want to get a little more color around that. Thanks.

Jim Cleary:

I think that covers it well, Steve.

Operator:

The next question is from Eric Percher from Nephron Research. Eric, your line is open.

Jim Cleary:

Yeah. And so let me take a first crack at that. The reason why we're being so transparent, Eric, is because to a large extent, it's beyond our control. Of course, we play a really important part in the supply chain and doing the logistics and providing the access, that's certainly under our control. But in terms of the operating income contribution, it's something that is more difficult to predict than many aspects of our business that we've been planning for years. And so we provided the $0.70 benefit, $0.60 of which is the treatments in the US, specifically because it is a number that is harder to predict for next year. And so we want to be very specific in calling it out. I would expect that in all aspects of -- on COVID, it's going to be something that has an impact and we're going to be playing an important role for many years to come, but it's just a little bit difficult to predict what the profitability is going to be from it, for instance, in fiscal year 2023.

Eric Coldwell:

Thank you very much. My question, I feel like I'm already going to stumble over it before I start. There's a fair number of moving pieces with international. But I just want to confirm, you have a incremental $80 million profit headwind from international due to FX. You're going to sell Profarma, which will have an additional modest headwind to profit at some point in the second half. At the same time, there was a onetime favorable manufacturer adjustment that partially offset those headwinds. And overall, you're maintaining guidance. What I'm trying to get to is what is the net EBIT headwind you're eating between the three items; FX, manufacturer price increase, one-timer and Profarma sell, what is the net headwind you're eating to maintain the annual guidance for the full year?

Operator:

The next question is from George Hill from Deutsche Bank. George, your line is open. Please go ahead.

Jim Cleary:

Yes, sure. So the -- that's one of the things that really attracted us to Alliance is the high margin, higher growth businesses. For instance, the Alloga business is a very strong 3PL business in many parts of Europe. And so just like AmerisourceBergen kind of our largest business is the wholesale distribution, but it's and we have market leadership there, but it's really strengthened by these higher-margin, higher-growth businesses. And also in international, of course, we have the World Courier business, which is a very strong business, doing logistics for drug trials. So we do see very good opportunities, and that's one of the kind of synergy work streams that we're actively working on. As for instance, World Courier and Alloga and things we can do together to make our offering even stronger. So I guess, probably kind of the key point to make is the higher-margin higher-growth manufacture solutions businesses and they are a key part of our international strategy and something that we would expect to continue to grow. And that's one of the things that if you look at our recent performance, as we've been focusing on that and after we've made the Alliance acquisition, it's one of the things that's been enhancing our gross profit margin and our operating income margin.

Operator:

The next question is from Michael Cherny from Bank of America. Michael, your line is open. Please go ahead.

Jim Cleary:

Yeah. And what I'll say is that higher labor and transportation costs, they continue to be embedded in our guidance, and they have been embedded in our results the last couple of quarters. AmerisourceBegen is impacted by higher labor and transportation costs, but less so than most businesses because of the value density of our products. And so we are certainly seeing it and experiencing it as all businesses do now, but it's something that we're able to manage, and it's fully reflected in our guidance. And I think that our teams are doing a terrific job of managing these costs.

Operator:

Ladies and gentlemen, this concludes today's call. Thank you very much for your attendance. You may now disconnect your lines.

Bennett Murphy:

Thank you. Good morning, good afternoon, and thank you all for joining us for this conference call to discuss AmerisourceBergen’s First Quarter Fiscal Year 2022 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 will be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today’s press release which is available on our website at investor.amerisourcebergen.com. We’ve also posted a slide presentation to accompany today’s press release on our investor website. During this conference call, we will make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating income and income taxes. Forward-looking statements are based on management’s current expectations and are subject to uncertainty and change. For a discussion of key risks and assumptions, we refer you to today’s press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements, and this call cannot be rebroadcast without the expressed provision of the company. With that, I’ll turn the call over to Steve.

Jim Cleary:

Thank you, Steve, and thank you all for joining us on today’s call. Before I turn to our results, as usual, my comments will focus primarily on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year December quarter. For more details on our GAAP results, please refer to our earnings press release. AmerisourceBergen delivered another quarter of solid financial results as our pharmaceutical-centric strategy, strong underlying business fundamentals and the contribution from Alliance Healthcare continued to help drive our company forward. Our differentiated value proposition continues to position us well to create long-term stakeholder value and is supported by our investment in our talent and commitment to ESG and our business practices. Turning now to our results. AmerisourceBergen finished the quarter with adjusted diluted earnings per share of $2.58, an 18% increase with operating income growth in both our U.S. Healthcare Solutions segment and our International Healthcare Solutions segment. Our consolidated revenue grew about 14% to $59.6 billion driven by revenue growth in both segments. Consolidated gross profit increased 41% to $2 billion driven by increases in gross profit in both segments. Gross profit margin grew by 66 basis points to 3.38% driven by the Alliance Healthcare acquisition. Consolidated operating expenses were $1.3 billion up from $810 million as a result of higher distribution, selling and administrative expenses and depreciation expense primarily due to the Alliance Healthcare acquisition. Consolidated operating income was $749 million, up 21%. The increase was driven by operating income growth in both segments, which I will touch on in more detail when discussing the segment level results. Turning now to interest expense and tax rate. Net interest expense was $53 million in the quarter, an increase of 59% due to an increase in debt related to the Alliance Healthcare acquisition. We now expect full year net interest expense to be in the range of $210 million to $215 million, representing similar quarterly net interest expense for the balance of the year. Our effective income tax rate was 21.3% in line with our full year guidance range for tax rate compared to 22% in the prior year quarter. Our diluted share count increased 2% to 211.2 million shares as a result of dilution related to employee compensation and the June 2021 issuance of 2 million shares to Walgreens Boots Alliance as part of our acquisition of Alliance Healthcare. Regarding free cash flow and cash balance, adjusted free cash flow was $809 million, and we remain on track to achieve our adjusted free cash flow guidance of $2 billion to $2.5 billion in the fiscal year. We ended the quarter with $3.2 billion in cash with approximately $670 million held outside the United States. This completes the review of our consolidated results. Now, I’ll turn to our first quarter segment level results. Starting with our U.S. Healthcare Solutions segment. Segment revenue increased by 2.7% to $53 billion driven by an increase in sales to one of our larger customers and growth in our specialty physician services and MWI Animal Health businesses, offsetting a $1.1 billion decline in sales of the commercial COVID-19 therapy. Revenue from U.S. Human Health was $51.8 billion, representing growth of 2.6%, and revenue from U.S. Animal Health was $1.2 billion up 6.9% year-over-year. Segment operating income was $569 million representing growth of 0.6% versus the first quarter of fiscal 2021. As it relates to the COVID therapy impact on the quarter, the headwind for the quarter was $0.04, which was a smaller headwind than previously expected. Sales of the commercial COVID therapy in November and December were higher than previously expected, and also there was better-than-expected contribution to operating income from other COVID therapies. This smaller year-over-year headwind helped offset a slow start from our manufacturer services group, which is expected to normalize in the second half. As we look at our full year expectations, we continue to see good performance and trends for our businesses across the segment. Given our nationwide role in supporting COVID-19 therapy distribution, including newly authorized oral therapies, we now expect COVID therapies to be a tailwind for the full year. As a result of our updated expectations for the operating income impact of COVID therapies, we are raising our fiscal 2022 U.S. Healthcare Solutions segment operating income guidance to a range of $2.375 billion to $2.45 billion representing growth of 5% to 9%. This increase also leads us to raise our total AmerisourceBergen consolidated operating income guidance range to high teens percent growth – up from mid-to-high teens percent growth. I will now turn to our International Healthcare Solutions segment. In the quarter, International Healthcare Solutions revenue was $6.6 billion reflecting $5.6 billion in revenue from the Alliance Healthcare acquisition and revenue growth of over 15% for the balance of the International Healthcare Solutions segment. Segment operating income was strong for the first quarter at $180 million, up 253% on a reported basis and 268% on a constant currency basis. As it relates to foreign exchange, the relative strength of the U.S. dollar in the month of December had a negative impact on the segment, and we will continue to monitor the impact of currency translation on the dollar value of segment results. As Steve mentioned, Alliance Healthcare has been performing well since we completed the acquisition in June. Alliance Healthcare’s important work to support the COVID response in a number of countries is inspiring and clearly shows the importance of our capabilities. The contribution from these activities is offsetting higher labor and supply chain cost pressures for the Alliance Healthcare business. Our teams are working closely on IT infrastructure initiatives at Alliance but the ramp of IT spending in the first quarter was slower than expected, benefiting our Q1 segment operating income. In subsequent quarters, expenses in the segment will increase as we continue to work towards modernizing Alliance Healthcare’s business technology, operability and infrastructure. The segment came in above expectations for the first quarter. But normalizing for the lower-than-expected IT expense in the quarter and a one-time discrete country level expense benefit offset in part by the unfavorable foreign exchange, the segment operating income would have been in line with our initial expectations. The Alliance Healthcare team continues to impress and the business continues to deliver on our expectations. This completes the review of our segment level results. So, I will now turn to our updated fiscal 2022 guidance. We are raising our fiscal 2022 adjusted EPS guidance range from $10.50 to $10.80 to a new guidance range of $10.60 to $10.90. The new guidance range reflects the updated full year expectations for COVID therapies offset partially by higher interest expense. And as you’ll remember, Q2 of fiscal 2021 had a $0.07 contribution from the commercial COVID therapy. With that in mind, as you look at updating your fiscal 2022 models, it is important to keep in mind that the increased contribution from the newly authorized COVID therapies will be primarily in the back half of our fiscal year as supply becomes available. Before I conclude my remarks today, I would like to briefly highlight some of our ESG initiatives. Yesterday, we published our sixth Annual Global Sustainability and Corporate Responsibility Report that is presented on its own micro site, which I would encourage you to visit at investor.amerisourcebergen.com. The report aligns with many leading global sustainability frameworks, including SASB, GRI, the UN’s Sustainable Development Goals and TCFD. The report details our progress and initiatives in a number of areas, including our global ESG commitments as we became a signatory of the United Nations’ Global Compact committed to the science-based target initiative and aligned our ESG strategy to include the expanded footprint of Alliance Healthcare. Additionally, as we work to more deeply embed diversity, equity and inclusion and ESG principles into our business, we will look forward to providing updates on our progress in these important areas. In closing, I continue to be impressed with how our teams use our commercial strengths and expertise to find ways to help public and private partners navigate the current complexities and challenges across the health care system. This important work aligns with our purpose and creates value for all our stakeholders, including our shareholders. The proven resilience and strength of our business and results gives us great confidence in our pharmaceutical-centric strategy and our ability to create long-term sustainable growth. To deliver this growth, we will continue to focus on expanding on our leadership in specialty, leading with market leaders, supporting community providers and facilitating global pharmaceutical access and opportunity. We remain steadfast in our purpose of being united in our responsibility to create healthier futures, and we believe our purpose-driven culture and focus on developing our talent will help further our value creation. Thank you for your interest in AmerisourceBergen. And now I will turn the call over to the operator to begin our Q&A. Operator?

Bennett Murphy:

Okay, operator. I think Charles is in mute.

Ricky Goldwasser:

Yes. Hi, good morning. So with Europe becoming a bigger part of the story in earnings, we’re hearing a lot about sort of wage inflation in Europe that’s been picking up. What have you seen ex-U.S. environment in terms of cost structure since you provided the November guidance and sort of what’s included in current guidance?

Operator:

Thank you. Our next question comes from Eric Coldwell from Baird. Eric, your line is now open.

Steve Collis:

Hi, Eric. I’ll start off and let Jim comment. We’ve made the comment that never has our purpose become clearer than during the pandemic of being united in our responsibility to create healthier futures. And the role that we’ve done with in COVID therapies distributing over 100 million vaccines worldwide by doing all the lateral flow tests in the UK – well Korea getting early vaccines out in some difficult areas in Europe, but also probably, most pivotally, the role we play in the U.S. with the antiviral therapies and the tremendous data and relationships that we’ve developed, working with the U.S. government and the state and counties to get these therapies out. We also have always been a very upstream centric company as well and have been honored to be selected as a distributor with so many of these critical therapies. It’s a moving target. Supply is often – is really often ramping up – and then you also have different disease rates in various states. And so we – AmerisourceBergen has shown tremendous adaptability, resilience and also incredible informatics and strong relationship skills, which have enabled us to really be the distributor for these important therapies. Jim, I know you have some other comments as well.

Operator:

Thank you. Our next question comes from Lisa Gill of JPMorgan. Lisa, your line is now open.

Steve Collis:

Lisa the reason – I mean, it’s literally becoming possible to break out, especially because essentially, our brand business has become a specialty business, and we probably think about new areas like precision medicine, cell and gene therapy as the new sort of niche businesses. It would have been almost impossible to conceive just how fundamental specialty products would become to pharmaceutical care as we looked a couple of decades ago when we got started with the specialty businesses. So perhaps I can just give you some comments. Our specialty physician services business, which is a lot of our legacy well-known specialty businesses, including Besse Medical, Oncology Supply and ION are performing extremely well. We’re really proud of the positioning. Like in all our businesses, we focus on long-term partnerships. ION, I left the specialty group about 11 years or 12 years ago. I mean, in terms of closely running it, and we really just had three or four manufacturer contracts. They have several dozen now and continue to grow in the role being the close adviser to the physicians, the practices and the manufacturers. Besse Medical is getting more and more involved in several other physician specialties. They have a key role in ophthalmology. And Oncology Supply is an exemplary business in terms of customer service. I also could not mention what is our legacy. I would be remiss if I didn’t mention what is our legacy hospital specialty business, our ASD business, which continues to really have been the forerunner for a lot of the COVID work we’re doing, a lot of the antiviral therapies because of the limited distribution, the data expertise and the concentrator distribution programs that we’ve learned to do somewhere in ASD. So a little bit of a long answer, but such important work for us. I’m going to just comment on biosimilars, and then I’ll hand over to Jim. So biosimilars has become very important to ourselves, to our customers. The sweet spot for us is Part B drugs. We’ve been encouraged by trends. I think the acceptance of biosimilars is certainly increasing all the time from all elements of the stakeholder system, and we’ve noticed recent interchangeability approvals. Next year will be tremendously interesting from a Part D perspective, which is also important for the system. But for us, the sweet spot is the Part B therapeutic compatibility and the contracting abilities we have through organizations like ION and IPN. Jim?

Operator:

Our next question comes from Eric Percher of Nephron Research. Eric, your line is now open.

Jim Cleary:

Yes. Let me provide some more information there that I think will be helpful. And I think we’ve had a high degree of transparency with regard to impact of the COVID therapies on our bottom line, and we’ll plan to continue to do that. So last year, we – the contribution to the bottom line from COVID therapies was $0.30, and we kind of indicated on a quarterly basis, it was $0.14 in the first quarter, $0.07 in the second quarter, $0.03 in the third and $0.06 in the fourth quarter. What we saw in the first quarter this year was a $0.10 contribution. So it was a $0.04 headwind. What we’d expect to see in the second quarter would be a few cent tailwind, so we made a contribution of $0.07 in the second quarter last year, and we’d expect a few cent tailwind on and then a more substantial tailwind in the back half of the fiscal year as supplies of the product become more available. And so when we originally guided a few months ago, as I said, we were expecting a headwind to maybe breakeven at the high end from COVID therapies. And we increased the guidance as a result of COVID therapies for U.S. health care solutions by $50 million at the low end and the high end of the range. So, I think that gives you a lot to work with there in terms of modeling.

Jailendra Singh:

Thank you, and good morning everyone. Now that we are over a month into 2022, I was hoping if you could provide an update on the drug pricing environment and how that has been trending compared to your expectations, both on brand drugs inflation as well as like generic market overall?

Operator:

Thank you. Our next question comes from George Hill of Deutsche Bank. George, your line is now open.

Steve Collis:

Hi, George. I always remember your little train – could comment after our 20 – little engine that – after our 23 call, so our 13 announcement. So Jim just answered the question about pricing trends. And when you deal with a sophisticated customer like Express Scripts, they understand the business trends as well as we do. And we do a really good job of servicing large customers like that and focus on the long-term relationships. We’re proud because we were a legacy distributor to Medco and went through the Express Scripts transition with Medco and became the distributor for Express Scripts and now of course, are working with the new Cigna management team. So it’s a tremendous example of our focus on long-term partnership with anchor customers. And again, with the understanding and the fact that we reflect the competitive environment that we’re in, there’s no headwind to call out at all. On the train whistle, we are proud to be in new headquarters, which are not as affected by the train whistle, which Jim and I are currently working out of. And we hope that our associates will return to in the next couple of months as things improve.

Steve Collis:

Sorry, I just wanted to also say, George, that there’s really no headwind to call out at all on the Express Scripts renewal. So, we’d pleased to afford that. Thank you, Operator.

Steven Valiquette:

Thanks. Good morning guys. So, I also just had a quick follow-up on Express Scripts as well. As time passes, I forgot just the approximate level of penetration of the generic distribution with Express and whether this is primarily a brand-only contract. Or have you had pretty strong penetration on distributing the generics to them as well. And then also, was there any change in their level of involvement in WBAD with the renewal? Thanks.

Jim Cleary:

Yes.

Operator:

Our next question comes from Michael Cherny of Bank of America. Michael, your line is now open.

Jim Cleary:

Yes. Yes. Thank you for the question. We do expect the manufacturer services business to normalize in the fiscal year and to have a good fiscal year. I mean these businesses are important differentiators for us, and they are very valued by the manufactures and we build, we have, several strong manufacture services businesses. We have realigned the organization to provide better end-to-end solutions for our customers, and there are opportunities for increased cross-functional collaboration between our manufacturer services businesses. And it’s actually an area with the Alliance acquisition, where there’s opportunities to have offerings of our manufacturer services on a more global scale. And there are also good synergy opportunities between our manufacturer services businesses and the Alliance value-added businesses. And so I do expect the businesses to have a good fiscal year and to be on plan. And that was just one of the things that we called out as one of the many puts and takes during the quarter, but we have good long-term confidence in the businesses.

Kevin Caliendo:

Great. Thanks. So, I’m still a little confused by the guidance changes. I guess trying to understand, where we are now versus where we were before with the addition of the Pfizer contract. Is there any change at all to the way you’re guiding the base business? Because the increase in the COVID therapy seems to be more than the guidance range – raise. And I’m just wondering if there’s any change to core earnings or if there’s anything below the line interest expense or anything that’s offsetting some of the benefit. Can you just take us through how you bridge it in a way that’s easier for me to understand?

Operator:

Thank you. Our next question comes from Elizabeth Anderson of Evercore. Elizabeth, your line is now open.

Steve Collis:

No, honestly, nothing important to call out from our vantage point. This has really become much less of an area of differentiation. In terms of the way our earnings momentum rolls out, it’s just the whole way that generics have rolled out, it’s much more wider industry participation than just the wholesalers. So I really don’t think there’s anything important to call out, and Jim agrees. So...

Bennett Murphy:

Next question, please.

Charles Rhyee:

Yes, thanks. Can you hear me guys?

Charles Rhyee:

Okay. It’s great. Okay, sorry about that earlier. I just wanted to – I know you’ve talked about the antivirals a number of times already. But maybe – I think you mentioned briefly about your role there in Europe. Do you guys have any kind of formal agreements similar to the U.S. for distribution in Europe through Alliance? And then secondly, just on these antivirals, I think there’s a very short time window to get some of these oral therapies to patients for them to really be effective. Does that – I guess, what can you do to really speed these products to get to the patients? And then really part of that is does that kind of limit really the potential of these therapies being contributors long term? Thanks.

Jim Cleary:

Yes, Steve. I would add that in the U.S. for the government-owned emergency use authorization products, the process will be that the government will allocate to the states and then the states will allocate to the providers.

Operator:

Thank you for joining today’s call. You may now disconnect.

James Cleary:

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.

Lisa Gill:

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 office -- the physician office again, et cetera. If you can just help us to better understand that, that would be great.

Operator:

The next question will come from Charles Rhyee from Cowen.

James Cleary:

Yes. No, we haven't given revenue impact, but you are right, it is a 2% 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.

Steven J. Valiquette:

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, et cetera. 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?

Operator:

The next question is from Eric Percher from Nephron Research.

James Cleary:

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 '21, 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 '21, 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 2 new segments will show that on a historical basis for fiscal year '21, and how they look in the fiscal year '21. And I think probably a key thing is that when we look at the U.S. segment for this upcoming year, we're expecting 3% to 6% growth, which is largely apples to apples because of the size of the legacy business that are going into the new segment.

Jailendra Singh:

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?

Kevin Caliendo:

Just in terms of the -- 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?

Operator:

And the next question is from Elizabeth Anderson from Evercore.

Steven Collis:

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 with -- 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.

Operator:

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

James Cleary:

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 '21 and $0.14 of that came in the first quarter of fiscal year '21, and we're expecting that the benefit will be significantly less in fiscal year '22. 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.

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.

Operator:

Thank you, sir. The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.

Kate Ruppe:

Thank you. Good morning, and welcome to CoreSite's third quarter 2021 earnings conference call. I'm joined today by Paul Szurek, President and CEO; Steve Smith, Chief Revenue Officer; and Jeff Finnin, Chief Financial Officer. Before we begin, I would like to remind everyone that our remarks on today's call may include forward-looking statements as defined by federal securities laws, including statements addressing projections, plans or future expectations. These statements are subject to a number of risks and uncertainties that could cause actual results or facts to differ materially from such statements for a variety of reasons. We assume no obligation to update these forward-looking statements and can give no assurance that the expectations will be obtained. Detailed information about these risks is included in our filings with the SEC. Also on this conference call, we refer to certain non-GAAP financial measures, such as funds from operations. Reconciliations of these non-GAAP financial measures are available in the supplemental information that is part of our full earnings release, which can be found on the Investor Relations pages of our Web site at coresite.com. With that, I'll turn the call over to Paul.

Steve Smith:

Thanks, Paul, and hello, everyone. I'll review our sales results, and then talk about some notable wins. To begin, we had new and expansion sales of $8.9 million of annualized GAAP rent, comprised of $7.2 million signed during the third quarter, and a $1.7 million large scale lease at SV7 signed on October 7. We believe including the $1.7 million lease signed in early October for purposes of our discussion today is instructive, given the size and as this customer lease is backfilling a portion of the churn at SV7, which we have previously disclosed. The leasing metrics discussed in the rest of my prepared remarks are inclusive of the $1.7 million lease signed on October 7. Keep in mind, our reported new and expansion sales results only include the rental revenue component of the new leases. The $8.9 million of GAAP rent for new and expansion sales reflected 62,000 net rentable square feet at an average annualized GAAP rent of $143 per net rentable square foot, which was lower than the trailing 12-month average, due to lower than average densities for certain scale deployments. Our results also included 28 new logos or $1.9 million annualized GAAP rent. Our best quarter for new logos in terms of annualized GAAP rent since the third quarter of 2019. I will review a few specific new logo use cases in a moment. The $8.9 million of GAAP rent also includes a number of leases that signed SV7, which represents approximately $2.9 million of annualized GAAP rent. Turning to pricing, new and expansion pricing on a kilowatt basis this quarter was above the trailing 12-month average by mid-single digits, reflecting the mix of both size and location of leases signed. From a geographic perspective, our strongest markets for signed leases were Los Angeles, Silicon Valley, and Northern Virginia, which combined represented 88% of our annualized GAAP rent signed. Looking at organic growth, existing customers continue to provide strong demand, which is an essential part of our strategy. Existing customer expansions accounted for 78% of annualized GAAP rent signed, as more businesses adopt digital solutions to meet today's evolving marketplace. Noteworthy expansions from existing customers included a scale deployment from a global online gaming platform, expanding their footprint into our Los Angeles campus, a multi-market expansion by a network service provider in Los Angeles, New York and Northern Virginia, and a large scale deployment from a subscription-based digital content streaming company in the Bay Area. Turning to a new customer wins, the $1.9 million of annualized GAAP rent represents approximately 22% of our sales. As I mentioned, it was our best quarter for new logo sales since the third quarter of 2019. Successfully attracting high-quality new customers that value the interoperability of our portfolio ecosystem, deepens CoreSite’s competitive moat, and helps drive future growth. Enterprises contributed to 55% of new logo annualized GAAP rent signed during the quarter, which included a leading data management and storage systems company in the Bay Area, and email and social networking and marketing firm in Northern Virginia, a cybersecurity company providing prevention and detection solutions signing the scale deployment in the Bay Area, and a well-known domain registrar and web hosting company joining our robust Los Angeles customer community. Lastly, total data center occupancy decreased slightly this quarter, primarily due to the previously forecasted single tenant lease expiration at SV7, which was also included in our third quarter churn. But the majority of this customer’s lease expiration now behind us, we have a clear path towards our targeted occupancy goal in the high 80s range. As we finish out the year, we are encouraged by our solid execution of our core business. However, we have noticed slower processing and response times for certain customers seemingly distracted by other issues, such as supply chains and staffing, which we're all aware. We have specifically revised practices to improve the process and timing of existing certain scale customers and keeping leasing on track, as demand for high performance edge use cases in strategic metropolitan markets continues to grow. Our diligence and discipline in attracting and winning deployments that value or add value to our ecosystem remains the primary focus. We are driven to provide continued profitable growth by attracting high-quality new logos, and delivering incremental value to our customers and shareholders through higher value lease up across our portfolio. With that, I will turn the call over to Jeff.

Operator:

Thank you. At this time we'll be conducting a question-and-answer session. Our first question comes from the line of Jon Atkin with RBC Capital Markets. Please proceed with your questions.

Steve Smith:

Hey, Jon, it’s Steve. Yeah, I think overall, as far as pricing is concerned, on a square footage basis it was down a bit this quarter, primarily just due to lower than average densities. So we have fluctuations in density based on the sales mix every quarter. But collectively, pricing remained strong, and I think you see that, if you look at it on a per kilowatt basis that reflects that.

Steve Smith:

I think that holds true overall.

Jon Atkin:

Got it. And then, wondered if there was any trends that you're seeing in the federal vertical, whether it's government agencies or excise doing work for federal agencies, and if you've had some success with that past, anything around general demands that you are seeing which actually benefit from?

Jon Atkin:

And then lastly, on the new logo generation, what have you seen around cross-connects take up rates within your new logos and several use cases that you mentioned?

Jon Atkin:

And then lastly, I wondered if you could give us a view on M&A and to what extent you feel like it might make sense at some point to become part of a larger platform, whether that's you acquiring somebody or the other way around?

Jon Atkin:

Thank you very much.

Frank Louthan:

Great. Thank you. Are you seeing any impact from inflation on any current leasing negotiations? How do you think that will work? And then, can you give us a little bit more detail on some of the contractual obligations you've got with some of your facilities, from the suppliers or the length of those terms? And how well protected you're on that? Thanks.

Paul Szurek:

Frank, maybe I can just give you some additional color on some of those additional obligations. I would look at it from really two perspectives, one being the development side, which we've substantially locked in all the development we're doing today, just given when we started those projects. So we don't see any inflationary pressures on what we've got under development today, most of that was ordered well before we started development there. But on the operating perspective, we do look at and go out to contractually lock in some of those operating costs, usually out in periods of two to three years. And we generally roll those depending upon the type of service. Some of those are up and we're in the midst of bidding for some of that tier over the next couple of years. And then some have a couple of years before they roll off. My hat's off to our vendors, they've stayed with their contractual obligations on those obligations, even though we know they're getting some pressures. And we'll just have to monitor and see how this next round of contractual obligations go with what we've got out in the market today. We'll know those results probably over the next two to four months.

Jeff Finnin:

Frank, no, we didn't touch on it yet. Just to give you some idea, when you look at our power utilization across our portfolio, we have about 30% of our power use that occurs inside our deregulated markets. I point you to that, because that's the area that near-term where we probably see the most impact. When you look at and factor in ultimately, what's in those deregulated markets, how much of that is really subject to cost increases, it's really our breakered power model, which certain mostly our retail customers pay us a fixed price, and that's probably where we've got the most exposure. When you go through the amounts there, we've got about -- if you assume about a 10% increase in power cost in those markets, it would have an impact of about $0.02 per share, assuming you don't pass any of those costs on to our customers. We do look at that on an annual basis and assess how much of that we're going to pass on to our customers. We do have that right inside our contractual rights and licenses with our customers.

Operator:

Thank you. Our next question comes from the line of Sami Badri with Credit Suisse. Please proceed with your question.

Jeff Finnin:

Yeah, you bet. Sami, I think you probably saw the notes and heard the commentary on the prepared remarks around the timing around SV9 and its impact on our 2021 CapEx. As you think about 2022, we will obviously give detailed guidance in early February. Here's how I would think about it. When you look at us over the past few years, we historically have had somewhere around $200 million of CapEx, in those years, when we're building out inside existing corn shell. So without including any type of ground up development. And so I would think about 2022 in the range of $200 million, and then it could be elevated when and if we start development that ground up development at SV9. And as we said in our prepared remarks that's going to be dependent on overall market absorption and as Paul alluded to finalizing our agreements with Silicon Valley Power. But that's why I think about it $200 million and then probably elevated from there, as and when we start development on SV9.

Jeff Finnin:

Yeah. No problem, Sami. Get back in the queue, when you can.

Erik Rasmussen:

Yeah, thank you for taking the questions. Just circling back on the comment you made about customers slower response times and response to the supply chain. So just trying to -- is this just for scale or is it just enterprise, or is this all customers that you're talking about? Is this sort of the main reason why we haven't seen much scale business beyond sort of this early Q4 deal that you've looked at SV7?

Erik Rasmussen:

Great. Maybe just to follow up on that. And this speaks to sort of the lack of scale deals we've seen, but you had the 40 million leasing guideposts for the year. I think year-to-date you're around 24 million. Based on where we sit today, how realistic is it as you sort of looked to close the gap on this, or timing of this in these large scale deals is so lumpy, that maybe it's just the things sort of slide into the next year, and maybe there's a better set approve in next year?

Erik Rasmussen:

Great. Thanks.

Richard Choe:

I just wanted to follow-up on the new logos in the signings. You said they're lower density. But will that change over time as those customers mature? And can you remind us what the kind of normal process you see with signing new customers and how they take more space and power over time?

Jeff Finnin:

Richard, the only thing I'd add on the second part of your question, typically when customers deploy and their subsequent growth inside our portfolio, I would tell you that for our retail customers, once they deploy, they will probably get to a stabilized power draw and cross-connect utilization column within 12-months, assuming they don't take additional space and power from us. On the scale of customers, it takes them a little bit longer, I would point you probably somewhere between 12 to 24-months, as they ramp up and deploy their gear. And so, much of what you see from some of those scale customers over that period of time is increases in the power consumption and utilization. And then they're continuing to connect on the interconnection side to those parties that they need to exchange into business will, again, for the larger ones takes about a 12 to 24-month time period, before we see them start to stabilize.

Jeff Finnin:

Yeah Richard, I mean, that is a reflection on very consistent with what I was stating on customers getting deployed. And what you're really seeing drive, I think Paul commented on that is really increases in our power revenue, and increases in interconnection revenue. Those are really the two components driving that, at least in the third quarter. At 5% on average, we generally see that MRR per cabi grow somewhere in the low to mid-single digit growth rates. And I think that that's where in large part we expect to be on a go forward basis. And it'll just depend on how quickly we see that based on customer installs, and overall utilization of their space and deployments.

Operator:

Thank you. Our next question comes from the line of David Guarino with Green Street Advisors. Please proceed with your question.

Paul Szurek:

Well, I wouldn't roll it out forever. But we've had plenty of good things to focus on here, and quite honestly, just building a better model and stronger campus ecosystems, and perfecting the playbook that we can take elsewhere. I think a lot of what you've seen, I don't have a detailed view into it as you probably do, but much of that has been hyperscale. And as you know, that's just not our bread and butter. But we do believe that down the road, maybe there's an opportunity to expand to additional markets, domestically or maybe abroad with the mousetrap that we're building, especially the improved connectivity products that we've been implementing over the last two years, to make interconnection more scalable, more flexible, more dynamic, more diverse, and more automated for customers, and therefore avoid the need for them to have extensive network engineering expertise within their own systems, within their own companies. And pairing that up with these very dense customer ecosystems that are dense with cloud onramps, networks and diverse enterprises. So it's a good playbook. It's a good program. And, we've gotten a lot better at it over the last few years.

Paul Szurek:

So, let me take a stab at that, and then Jeff can jump in if he needs to. But, it's important not to focus on a single variable like price per square foot, because as Steve explained, that will move around quarter to quarter based upon the density and locations of our sales mix each quarter. On a per kilowatt basis, we're still seeing the same and even slightly stronger pricing. And meanwhile, we continue to see good margin increments from these deployments and use cases that drive additional margin from power, from interconnection, and even from a lesser amount of other services. So, between all of that, we haven't felt the need to change our guidance on what our return on invested capital will be. And I know some of your peers track that and they see how we continue to do relative to the rest of the industry. But I want you to remember that ROIC achievement is a derivative of the main focus, which is providing value to customers. The best way to provide value to customers is to create these campus ecosystems in the right markets, where companies need to interoperate, and where the most important data use cases for the future are likely to take place. And that makes them more magnetic, more sticky, and more sustainable in terms of growth, relative to other ways to deploy capital.

David Guarino:

Thanks for the color, Jeff. That's really helpful. I mean, given you guys don't have property level disclosure anymore, it's harder from our seats to figure that out. But to the extent you can provide some anecdotes like that, that's really helpful.

Operator:

Thank you. Our next question comes from the line of Jordan Sadler with KeyBanc Capital Markets. Please proceed with your question.

Paul Szurek:

No, Jordan. The development schedule on SV9 -- and I'm glad you asked a question because I do want to clarify that is driven more by the timing of permitting, and especially now, the last important pole in the tent is securing power from Silicon Valley Power, which we expect to achieve by the end of this year. We've done a significant amount of pre-construction work already, including demolition of the existing building, all the off-site work for connectivity and utilities, all of the design and everything. And we have some decision points that we have going forward as to other things we can do to shorten the pot once we aggressively go vertical. But now, we don't need the capacity immediately. But we've got about 7, 8 megawatts available in Silicon Valley. And we've been absorbing about 5 to 6 megawatts per year. So, that probably gives you some indication of what our decision trees look like. But we're not going to do anything obviously of significant magnitude, until we finish the power procurement process.

Paul Szurek:

The power procurement process?

Paul Szurek:

I think I said earlier, I apologize if I wasn't clear. We expect that to be done by the end of this year. And understand, it's a process where you have to get agreement with the power company, which we have in principle, and then it has to go to City Council for approval. And then we can execute contract for it.

Paul Szurek:

I mean, honestly, it really depends on what the funnel looks like, what pre-construction leasing negotiations look like. I can't give you a definitive formula right now. That's based solely on absorption.

Paul Szurek:

Not necessarily, but it's also possible that we do.

Jeff Finnin:

Yeah, no, great question. Jordan, I should have included that in there. Our policy generally is to try and hedge about 50% of that power use in those markets, to give us some idea of balance and we used to go out two to three years.

Jeff Finnin:

So, really look at it from two components, one, certain of our customers, about 45% of our portfolio wide revenue is on a metered basis. So those are just pure pass through, irrespective what's happening, right. So those customers just pay those costs. The other 55%, that's more on a breakered model, some of which is in our deregulated, obviously, some of it's in our regulated markets. Generally, we have the ability to pass through those costs to those customers. From a practical perspective, we've looked at it on an annual basis, because you just haven't seen power rates increase that significantly, that quickly, to where we'd have to do it more regular than that. If you start to see power price increases, spike significantly short amount of time, it would probably necessitate us looking at that a little bit more timely than on an annual basis. But generally, we'll look at that late in the year, like as we're talking today, and then put the process in place to address that early so that it's in place for early in the next fiscal year.

Operator:

Thank you. Our next question comes from the line of Colby Synesael with Cowen. Please proceed with your question.

Jeff Finnin:

Colby, I’ll start and address your first question, then toss it over to Steve. In terms of what we've seen so far in 2021, our rate increases in those deregulated markets, it hasn't been all that significant, I'd say depending on the market somewhere around 3% to 6%. What we are seeing going forward in 2022, obviously, it's a lot of anticipation, and that's where we're continuing to watch closely. You're starting to see future somewhere around 5% to 10%, depending on the market. It remains to be seen if that ultimately materializes, but it is something we're watching. And as I said earlier, we really try to hedge roughly 50% of that exposure two to three years out. But that gives you some perspective of what we're seeing to-date. Steve?

Colby Synesael:

I mean, presumably, if you're still -- you're not talking down to 40 million, which, unless I'm misunderstanding, you're not, I mean, almost by definition, the fourth quarter should be the strongest quarter relative to the previous three, is that – am I misunderstanding?

Colby Synesael:

So one real quick follow-up on that, are those deals that you haven't logged yet, have you seen any of them going to competitors? Or, is it more function of they just haven't signed with anyone yet?

Colby Synesael:

Thank you.

Brendan Lynch:

Great. Thanks for taking my questions. First, just to follow-up on SV7, it looks like you guys had some retail and small scale demand in the third quarter prior to the large scale lease in October. Do you have a preferred mix going forward? I know there is some back and forth on how you're looking to fill that capacity. And in terms of the large scale lease, are you reserving any additional space so that they can expand if they choose to do so?

Brendan Lynch:

Great. And just to follow-up, you clearly have some tech advantages and a lot of cloud onramps. I wonder how the value proposition of those cloud, onramps is evolving with customers’ ability to bring the cloud directly into the cabinet or even on-prem with the likes of an AWS, Outpost or a similar product. Just having that availability right in the cabinet, how does that change the value of the onramp itself?

Brendan Lynch:

Great. Thanks for the color.

Michael Rollins:

Thanks. First question was, if I think back, you used to provide a chart, and it would share your inventory in each major market, your absorption and extrapolate the years or months of inventory that you had on hand. And I'm just curious if you could provide an update overall, in the portfolio, where you see that relationship? And maybe for some of the major markets, where that relationship is, and where there could be some risks of bottlenecks, or constraints? And then, just separately, I want to go back to a question that you've discussed at a high level before, and that's segmenting retail versus scale performance. And just curious internally, are you just spending more time thinking through what that retail revenue growth rate is versus the scale growth rate? And, the total portfolio grew about 6% year-over-year, what would be the differential in terms of how much better was retail versus slower for scale? Thank you.

Steve Smith:

I'm sorry, go ahead. Okay, all right. As it relates to retail and scale, I think it's important to look at those as it relates, especially as you move up the size to hyperscale and large scale, because as I mentioned, we typically get better pricing, we get more interconnection per square foot. And, it also gives us more diversity across our base. Collectively, as you look at our performance over time, retail has remained very consistent, and we continue to get more results out of kind of the scale environment. While size is important, and we need to manage that, it's also important to look at the customers that are actually deploying behind that, and looking at really kind of that mid to large enterprise, that it's really kind of rolling out of their legacy data, data centers, refreshing their IT infrastructure, adopting a hybrid multi cloud environment. And those are the customers that we're looking to target and the ones that we're actually winning. So those deployments that can be very large customers that may come in a retail environment, but then grow to a scale or even large scale environment over time, as they complete that migration over time. So, we look at the overall mix, because it does drive profitability in the short-term, but we also look at the growth opportunity long-term, and where that is likely to show up, and that's where we're targeted.

Michael Rollins:

If I could just follow-up for one other question, there's a comment that was made, I think it was a couple of times on this call. And there is a connection between the exiting of the single tenant lease in SV7, and visibility into increasing occupancy. Given you knew the inventory was coming up, can you just help frame like, what was important about connecting those two things together, about improving the visibility for future leasing? Or is it just now that they're gone, you're closer to adding tenants walking through? Just kind of curious.

Paul Szurek:

And then let me just, again, I think what you're alluding to is what we said earlier in the call about 5 to 6 megawatts of absorption for us in Santa Clara, Silicon Valley over recent years. The SV7 space is just part of our available leasable capacity, because of the tenant that's now gone, it received a lot of attention. But the 5 to 6 megawatts per year of absorption in ways that strengthen our ecosystem, is probably the right way to look at that market and our capacity in that market.

Operator:

Thank you. Our next question comes from the line of Nick Del Deo with MoffettNathanson. Please proceed with your question.

Paul Szurek:

I think, there's been firming of pricing over the last couple of years. It hasn't declined like it did three four years ago. Maybe it's come up a little bit but not discernibly. And thank you for this question, because, I guess we haven't really made it clear, there's a quite a big leap between the pricing and the ecosystem value and all these incremental revenues that we get from the deployments that we’re focused on, compared to what is available with the undifferentiated hyperscale in these markets. And it's not just about getting the right returns, it's about building the right ecosystems, and frankly, future proofing your ecosystems and your leasing significantly relative to churn and other events. I mean, in our past history, our unpleasant churn related to undifferentiated hyperscale type activities. So, yeah, maybe it takes a couple quarters, or less sometimes, but sometimes around that time to get to the right levels. But meanwhile, you're making up for it with better margins and incremental revenue, and building a much more valuable campus ecosystem for the long-term. Does that make sense?

Jeff Finnin:

Yeah, Michael, two things on the Tis. A majority of our tenant improvement costs really come from the building out the customer deployments, as we're getting those customers deployed and ready in set up for their gear. So that's just a factor of the volume of infrastructure needed for those customer deployments. Nothing unusual there. To be honest, it's just, some of those take a little bit higher cost up front, depending on complexity and the power needs. As it relates to the recurrent CapEx, really two things going on. As you know, we were building out this chiller plant in Boston earlier this year, some of those dollars ultimately came in the final parts of, it came into Q3. And so some of that's impacting those numbers. And then secondly, we accelerated some recurring CapEx from future periods into the third quarter, as we were looking around trying to take care of a few areas that needed to be addressed. And so that's really what elevated that a little bit this year. As you think about Q4, and more importantly, even 2022, we would expect our recurring CapEx to come back down to those levels that we've seen historically, which over the past 10 to 20-years has been 2% to 4% of revenue. And that's what we expect to see. This year was unusual, just given the investment we made with very good returns on that Boston chiller facility.

Jeff Finnin:

And the office build out that we did in the Bay Area.

Jeff Finnin:

You bet.