美源伯根 (ABC) 2008 Q4 法說會逐字稿

Welcome to ABC's 2008 fourth quarter and year end conference call.

(OPERATOR INSTRUCTIONS)

I would like to now turn this conference over to our host, head of Investor Relations, Mr.

Michael Kilpatric.

Please go ahead sir.

Good morning, everybody, and welcome to AmerisourceBergen conference call covering fiscal 2008 fourth quarter and year end results.

I am Mike Kilpatrick, Vice-President Corporate and Investor Relations, and joining me today are David Yost, AmerisourceBergen President and CEO, and Mike DiCandilo, Executive Vice President, CFO and COO of AmerisourceBergen Drug Corporation.

During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations.

We remind you that there are many Risk factors that could could cause our actual results to differ materially from our current expectation.

For discussion of some key risk factors we refer you to to our SEC filings, including our 10-K report for fiscal 2007.

Also AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be taped without the express permission of the company.

As always, all those connected by telephone will have an opportunity to ask questions after our opening comments.

And here is David Yost, AmerisourceBergen's Bergen's President and CEO to begin our remarks.

Good morning from Philadelphia.

Home of the world champion Phillies, where it is not raining.

Thank you for joining us.

ABC's distribution business delivered strong results for both the quarter and the fiscal year ending September 30, by any metric.

Total revenues were $17.2 billion, and $70.2 billion for the quarter and year, up 5% and 7% respectively.

In the distribution business, gross margin was up in both the quarter and the year, and we continued to demonstrate good expense control resulting in operating margin expansion of 17 basis points for the quarter, and 7 basis points for the year.

You will recall that operating margin expansion has been a key focus for the last three years, and operating margin has expanded in each of the last three years.

Operating income was up 23% for the quarter, and 15% for the year.

We continue to do a good job managing our assets, and generated $737 million of cash for the year,before capital expenditures of $137 million.

Lots to like about the quarter, and fiscal year, and strong performance by any standard in an industry with excellent fundamentals.

The sale of our PMS workers compensation business has been completed so going forward, ABC will consist of Pharmaceutical Distribution and related services only, divided into three operating units, AmerisourceBergen drug company, Specialty Group and Packaging Group .

Before I drill down on some Company specifics, I would like to address three items from 50,000 feet, market growth, price appreciation, and a competitive environment.

First market growth.

I think the total US pharmaceutical growth rate for calendar 2008, will be in the low single digits, and we expect the same will be true for calendar 2009, particularly considering the overall economic turbulence.

This relative -- this relative slow down in growth is fueled by a lack of blockbuster drugs introductions, increased penetration of generics, and anecdotally, a slow down in patient's consumption of medications, a short-term issue in my opinion.

The long-term fundamentals of this industry continue to be excellent.

The population is clearly aging and the demand for pharmaceuticals will clearly continue to increase.

It is up important to put the relative market growth in perspective.

The market impact driven by generic penetration can be a positive for pharmaceutical wholesalers in general, and ABC in particular, given our customer mix, since generics provide wholesalers the opportunity to deliver value added services both up and down the supply channel.

Drug discovery is often is serendipitous, and huge expenditures continue to be made by big pharma in R&D, particularly in specialty pharmaceuticals, the fastest growth segment within the market where our Specialty Group has a strong market position.

It is also important to note, the pharmaceutical growth can be positively affected by political factors since pharmaceuticals can be part of the solution to the challenges of increasing health care costs.

If the new administration and Congress, encouraged the expanded use of pharmaceuticals through increased reimbursement , coverage of the uninsured, and or subsidies for drug insurance, for example, we could see positive impacts on US market growth and ABC.

The key issue here is that the strong performance that ABC delivered in our just completed fiscal year was in the same market conditions that appear to be repeating in 2009.

ABC fundamentals that delivered strong financial performance in the past, focus on the right segments of the market, rigorous cost control, and strong asset management are the same fundamentals that will deliver strong financial performance in the future in any kind of market.

Next, price appreciation.

Though the impact of price appreciation to wholesalers is mitigated by fee for service and LIFO, the brand manufacturer pricing environment which was robust in FY '08 should continue to be strong in the year ahead.

And finally, the competitive environment.

I would continue to describe the Pharmaceutical Distribution market as competitive, but stable, As I have noted previously, there are not a lot a lot of multi-billion dollar contracts in the US Pharmaceutical Distribution market, which will approach $300 billion this year.

And the largest accounts tend to change distributors relatively infrequently.

For example, we negotiated a multi-year contract with our largest customer earlier this year.

Before I drill down on a few specifics in each of our operating units, I want to put total ABC in perspective.

Our company can be summarized as a company with strong operating discipline, strong asset management, and a good market.

We expect our dollar operating expenses in FY '09 to be flat to down versus FY '08.

Please note we are not talking percentages here, but absolute dollars spent.

And we expect to delivers the cost control while continuing to delivery the superior service our customers have come to expect, and while investing in our future with programs like business transformation, our ERP based business initiative.

There's a lot of talk about controlling costs in the marketplace.

We are doing it.

Excellent discipline for any market.

We watch our receivables and our inventory like a hawk.

Our diverse customer base is a strong positive regarding our receivables.

We have only one customer that accounts for more than 10% of our business.

So our risk is not concentrated.

We have lots of relatively small accounts versus a few number of large account, which mitigates our risk and exposure.

We are seeing no degradation in our receivables, and our DSOs were down this quarter versus last year and last quarter.

ABC is well-positioned for any market condition.

Regarding acquisitions, we have said on a number of occasions that we are receptive to acquisitions, and have spent over $1 billion in the last seven years on acquisitions, our latest, our largest Bellco Health at $162 million was completed last year.

We have said that the $200 million or so acquisition, in our basic business of Pharmaceutical Distribution or related business, would have appealed to us and we would consider something larger if it made sense.

Though no acquisitions are contemplated in our guidance, if the tightened credit markets result in unforeseen opportunities, we are in an excellent position to respond quickly,both financially and organizationally.

Mike will provide the financial details, but a few words about each of our operating units.

First, drug distribution.

Great execution, great discipline.

On July 1st, we discontinued doing $3 billion of annual warehouse business with Walgreen's, based on price and other factors, representing a loss of roughly 3% of total revenues for FY '09.

While this will obviously pressure total revenue comps in the short term, it was the right long-term decision, and will have minimal, if any, impact on profitability.

Though our largest retail customer, Long's, has been purchased by CBS, the total long term impact of this transaction is currently unknown, but due to our existing contract, we expect no impact to our FY '09.

On the generic front, we continue to get good traction, in part because of our customer base weighted to regional change, food drug combos, independents, alternate sites, and hospitals.

Our generic program is growing faster than the market, due to increased account penetration, and increased utilization.

Though not built into our forecast, I would not be surprised to see some at at-risk generic launches during our next fiscal year.

We continue to grow our good neighbor pharmacy program for independents and regional chains, and now have over 3,000 active qualified stores participating.

This month the National Community Pharmacist Association, the trade association representing 23,000 independent and regional chain pharmacies, recognized ABC with the NCPA Corporate Recognition Award for outstanding contribution to community pharmacy.

Our Specialty Group .

Great execution, great discipline.

The Specialty Group continues to perform extremely well, and had a very strong quarter.

Our Specialty Group is well-positioned for new products entering this space due to our unequaled, wide array of well established value-added services for both manufacturers and physicians.

We recently signed a new five-year contract with our largest Specialty Group customer, DAVITA, which continues to provide stability to the customer base of this segment, though the anemia business in the oncology continues to present some headwinds, it is important to note, we continue to maintain our very strong market position in oncology, despite a competitor's acquisition in this area about a year ago.

We expect Specialty Group to grow well above overall market in FY '09.

Finally, our packaging business continues to meet and exceed our internal expectations.

We are extremely well positioned for the accelerated outsourcing of packaging that we expect from pharma companies as they continue to rationalize their own cost structure.

So lots to like about this quarter and this fiscal year.

In fiscal '09, we see a bright future.

Revenue growth in the 1% to 3% range in spite of discontinuing $3 billion in annual revenues from Walgreens.

Strong operating discipline, with operating expenses flat to down.

Operating margin expansion continuing our three-year trend.

Strong cash generation, with free cash flow in the $500 million range.

EPS increase of 7% to 12% off a higher FY '08 forecast in a range of $3.08 to $3.25 per share.

Continued strong performance maintaining our historic trend.

Here is Mike to hit some specifics, and then we'll

Thanks, Dave, and good morning, everyone.

I'm very pleased to present our outstanding fourth quarter and fiscal year results, and I will also provide some additional color around our fiscal 2009 guidance.

Before I get to our quarterly results, I would like to first review our fiscal 2008 performance against our original 2008 guidance that I communicated last November.

We have truly had exceptional financial and operational performance in our Pharmaceutical Distribution business in fiscal 2008, and despite slower than expected market growth, we have met or exceeded each of the financial targets we set out at the beginning of the year.

Our model is based on market revenue growth, operating margin expansion, and significant cash generation, all of which were quite evident during fiscal 2008.

Our original revenue growth guidance for fiscal 2008 was a range of 5% to 7%, and we finished at the high end of that range, reflecting our strong customer mix and successful Bellco acquisition.

We expected to have operating margin expansion in the single digit basis point range in Pharmaceutical Distribution and we finished in the high single digits with a significant 7 basis point increase.

This increase was driven by gross margin expansion, despite renewing our largest customer contract early in the year and by a decline in our expense margin, reflecting our streamlined organizational structure and continued cost discipline.

We did this while continuing to invest in our future through the launching of our ERP enabled business transformation program.

Our 7 basis points of operating margin expansion combined with our sales growth led to a very impressive 15% increase in operating income for the year.

Our free cash flow of $600 million exceeded our guidance of $450 to $525 million, and we used that strong cash flow to make our largest acquisition to date, Bellco, and we significantly exceeded our anticipated $400 to $500 million of share repurchases as we returned $680 million to our shareholders through our repurchase program in fiscal 2008.

All of these factors enabled us to drive GAAP EPS from continuing operations of $2.89 per share at the higher end of our original guidance of a range from $2.77 to $2.95 per share, and without any contribution from PMSI.

Also, very importantly in these turbulent financial market conditions, we continue to improve our already strong balance sheet.

We achieved a ratings upgrade from Moody's in July of this year, rare in this market, and we expanded our availability under our liquidity facilities to a more than adequate $1.7 billion and with no scheduled debt repayments for several years, we are well positioned to weather the financial and credit market dislocations.

Again, truly an exceptional year, and we thank all of our associates who worked very hard to make it happen.

Now, moving to our quarterly results.

And before I get into the details, please remember that our prior year consolidated results continue to include our former long-term care business, which was spun off in July 2007, the impact of which I will detail.

Total revenue increased 5% in the quarter to $17.2 billion, driven by the 6% increase in Pharmaceutical Distribution, which includes a 3% contribution from Bellco.

Consolidated operating income was up a strong 15%, driven by the 23% increase in Pharmaceutical Distribution operating income.

As a reminder, prior year fourth quarter operating income was adversely impacted by a $28 million write down of tetanus-diphtheria vaccine inventory.

Additionally, consolidated gross margin profit in the current year included $1.9 million of antitrust litigation gains, compared to $300,000 last year.

Also, special items included in operating expenses in the quarter were $3 million of employee severance, primarily relates to the companies CE2 cost effectiveness initiatives, compared to a benefit of $7.6 million in the prior year quarter.

Long-term care contributed $3.8 million of operating income in the prior year quarter.

Net interest expense of $13 million in the quarter was up significantly over the prior year as expected, due to reductions in interest income as average cash balances of $468 million in the quarter were down approximately $375 million from the prior year quarter, primarily due to our fiscal 2008 share repurchases activity and the Bellco acquisition.

Our effective tax rate in the quarter of 38.7% was up significantly from last year's 35.4%, which benefited from certain adjustments.

Our effective tax rate for the year was 38.4%, which approximates our anticipated effective rate going forward.

GAAP diluted EPS from continuing operations in the quarter of $0.73 increased 18% from last year's $0.62.

The prior year quarter benefited by $0.03 from net special items.

Another $0.03 from a lower effective tax rate, and $0.01 from our long-term care pharmacy business before it's spend.

Negatively impacting the prior year quarter by $0.10 was the vaccine inventory write down previously mentioned.

The quarterly EPS increase of 18% was driven by the strong operating performance in Pharmaceutical Distribution, and the significant reduction in average outstanding shares net of the impact of the increase in interest expense.

Average diluted outstanding shares for the quarter were $158.5 million, down $18 million, or 10% from last year, reflecting our share repurchase activity over the last 12 months.

Now, lets take a more detailed look at our Pharmaceutical Distribution segment, where once again we had a very solid quarter.

The total revenue increase of 6% was driven by the drug company and the Specialty Group, both of which grew that same 6%.

The drug company growth came primarily from our institutional customers, including significant growth from our large effort PBM customer and the Bellco acquisition, which offset the impact of the July 1st loss of the Walgreen's warehouse business, which was $3 billion annually.

The Specialty Group growth was achieved through double-digit increases in each of it non-oncology distribution businesses, and 2% growth in oncology distribution.

This growth rate was achieved despite the acquisition of OTN by a competitor early in the year, and the continued decline in sales of anemia drugs.

For ABC in total, anemia drugs used in oncology represented 2% of total revenues and were down 23% from the prior year quarter and 14% sequentially.

As a result of the recent FDA label change in July, we would expect oncology related anemia drug sales to decline by approximately 20% in fiscal '09 from our September 2008 quarterly run rate.

Gross profit increased 12% in the quarter, 5% excluding the prior year vaccine write down, and as a percent of revenue was up 16 basis points.

This increase was driven by strong performance from our PRO Generics program, which grew in the low double digits and our Specialty Group benefited from a $12 million settlement of disputed fees, with a supplier.

We also benefited from a GLAXO price increase during the quarter, in line with our expectations, but less than we received in the fourth quarter last year.

We had a LIFO charge in the quarter of $3.4 million, compared to a credit of $4.9 million in the prior year quarter reflecting our year end true up.

For the year our LIFO charge was a higher than expected $21 million, compared to a charge of $2 million last year, reflecting a significant increase in brand-name drug price inflation year-over-year.

From an expense standpoint, operating expenses as a percent of revenue in the quarter were a 188 basis points flat compared to last year.

Included in our quarterly operating expenses were fixed asset write downs of $5.6 million, relating to IT assets abandoned as a result of our business transformation program, and $5.3 million of intangible asset write downs related to certain smaller business units.

Similar to last year's fourth quarter, bad debt expense was higher than normal.

This year, the higher expense primarily related to a small subsidiary within the Specialty Group .

Importantly, we have not experienced any noticeable deterioration in payment trends from our distribution businesses.

Operating income was up 23% and operating margins expanded by 17 base points, due to the gross profit increase, including the positive impact from the prior year inventory write downs.

Again for the year, operating margins were 119 basis points, up an impressive 7 basis points, and above expectations.

Now, let's turn to our consolidated cash flow on the balance sheet where we continue to demonstrate solid performance.

Cash generated from operations in the second quarter was $514 million, bringing our full year cash generation to $737 million.

Our free cash flow, which we define as operating cash flow, less capital expenditures was $600 million, well above our target of $450 to $525 million.

While we had some favorable timing impact from accounts payable at the end of September, we continue to have excellent receivables in inventory management.

DSOs for the year were down almost one full day to 18.7 days, and average inventory days on hand during the year of 25 days were down two days from last year.

Our gross debt to total debt and capital ratio at the end of September was 30.5% within our target rang of 30 to 35%.

Our strong cash generation during the year allowed us repurchase significantly more stock than originally expected, as we repurchased $680 million of our stock in fiscal 2008, well above our $400 to $500 million estimate.

In the quarter, we purchased $126 million of our shares, including share repurchases and cash dividends, we returned over 120% of our free cash flow to shareholders in fiscal 2008, the third consecutive year over 100%.

While our cash balance on September 30th, was $878 million, after factoring out our normal maintenance cash levels and working capital timing, we have approximately $450 million of cash to deploy.

Certainly in the current market, with tight credit and liquidity, we will be prudently conservative in our use of this cash to maintain our financial flexibility.

Now, turning to our fiscal 2009 guidance.

Our fiscal 2009 guidance for earnings per share is arrange of $3.08 to $3.25, increase of 7% to 12% over our fiscal 2008 GAAP EPS from continuing operations of $2.89.

The assumptions behind this guidance include revenue growth of 1% to 3%, operating margin expansion in the low-to-mid single digit basis point range, and free cash flow approximating net income in the range of $460 to $535 million.

This -- the guidance assumes share repurchases and $350 million range depending, of course, on market conditions and board approval.

Capital expenditures were were $137 million in fiscal 2008 are expected to be similar in fiscal 2009, around $140 million.

Average outstanding diluted shares are expected to be down approximately 5%.

The revenue growth assumption assumes drug company growth of 0% to 2%, reflecting market growth, the positive impact of our customer mix, and a 3% negative impact from the loss of the Walgreen's warehouse business.

The Specialty Group is expected to grow 5% to 7%.

As the Walgreen's loss will anniversary July 1st of next year, our revenue growth will be backended.

Margin expansion if the low-to-mid single digit basis points range reflects the positive impact of flat to down expense dollars despite an increase in ERP spending, and is moderated by the impact of customer mix and normal competitive pressure on gross margins.

Before turning the call back to Mike Kilpatric for Q&A, I would like to finish by saying that we are very proud of our performance in fiscal 2008, once again showing great resiliency in the face of a challenging market, and we have positioned ourselves for solid performance in a difficult economy in fiscal 2009, through our continued discipline and cost and working capital management while continuing to provide superior customer service and investing in our future.

Now here is

Thank you, Mike.

We will now open the call to questions.

I would ask each of you to limit yourself to only a couple of questions, so everyone can have an opportunity, and Kerry, go ahead.

Thank you.

(OPERATOR INSTRUCTIONS)

And our first question comes from Barclays Capital and the line of Larry Marsh.

Plea go ahead, sir.

Okay.

Thanks, and good morning, Dave and Mike, and Mike.

Thanks for the detail.

Let me just step back a second, and un something off of you Dave.

Which is, if we had had this conversation a year ago, started talking about drug market growth of 4% to 5%, I know you guys did better than that this year, but now we're talking about a much different environment, And as you put on your -- you had a prescience, are you concerned about the rapid decceleraration that we're seeing in the marketplace.

As you think about the next three years, do you worry that there's not going to be a particular catalyst to acceleration, as we sort of think through '09 and 2010 to the economy, or from your sense of perspective, do you have confidence that this is going to be more of a short-term phenomenon, it rather than a bigger change and trend as you work in the market?

Thanks for the question Larry.

There are some bad thing about being old, but one of the good things about being old and having been in the industry for almost 35 years, is you kind of get a perspective, and because of that, Larry, I am not concerned about the long-term growth rates of this industry.

I think what we've got right now is really somewhat of a short-term phenomenon.

I think its aggravated -- exacerbated by the economic financial turbulence that we've got going, so I -- I am not concerned about it.

I think the first thing when you look at growth rates, you have to ask, you know, why.

And if part of the reason that the growth rates, and if you remember we're talking about growth here, which is talking about relative growth rates, and the growth rate is a little slower, and that's a function of generic penetration, that can be very good for companies like ours.

The first issue is why, the second place is where, and if the slowdown may be occurring in segments of the market where we don't have participation, that's -- that's can also also be a mitigating factor, and one of the most important, Larry, we think we have great ability to adapt.

And no matter what those market conditions are, we're highly confident we have the discipline to react to them.

But having said all of that, Larry, I think the most important thing is I think the relatively slow growth rates from historic standpoint, are short term, and that we're going to get back to more historic growth rates in the mid to high single digits that we've experienced.

Look, I can remember when the entire market grew in double digits, and while I don't anticipate that happening anytime soon, I think that has to be factored into the fact that we've got growth rates, now in the low single digits.

So it's kind of a long answer, Larry, but I think it's really important to put in perspective, but the basic fundamentals of this industry are very, very strong.

As far out as anybody can see, the population is going to continue to age.

They're going to continue to have great capacity to take pharmaceuticals.

Pharmaceuticals are part of the answer to healthcare costs, not part of the problem.

And I will tell you, I think we're going to see this new administration and this new Congress get very act actively involved in participating in the encouraging use of pharmaceuticals.

The most noteworthy think I think we can see right off the bat is dealing with the uninsured, and as we deal with the uninsured, you're going to see consumption go up.

So I continue to be very optimistic about this industry and the role we play in it.

Okay.

Maybe just a follow-up, then.

You know, I know that the one thing that's guaranteed to get you to jump off your chair is to talk about big M&A deals.

And -- sort of ask you again, you -- do you feel like -- none of us know the answers, do you feel there's still plenty of opportunities of end market types of acquisitions both for you and Steve Collis, in Specialty that is going to allow you to augment what you're currently doing, and if you sort of think about that, could you be doing something that's, you know, multi-billion in size sometime in the next couple of years, or do we continue to think about much smaller sort of tuck-ins?

We would not be opposed to a multi-billion dollar deal, Larry if one came our way.

I would say we're more comfortable in the smaller deals, a couple of hundred million dollars or so, but I would say if our three segments, Packaging, Specialty, traditional drugs, these turbulent economic times could really present some opportunities for us.

And if you look at some of the small are players, some of the regional players and the like, they may have difficulty getting the financing they've depended on.

I am not predicting ill for them.

But I'm just saying as we work through these turbulent types, that could resident opportunities that we have had and our peers, as well.

We may have more acquisition opportunities in the next year or so than in the past as a result of the turbulent financial market.

And just a final clarification then.

I think you're calling out of the anemia expectations oncology down 20%.

Do you have an estimate of that your total anemia book think can grow or not grow this year?

And just to reflect, is the ADAC recommendations back in July, were they about exactly what you thought, a little bit worse, little bit better?

and I'll stop there, thanks.

And, Larry, just to clarify.

Anemia drugs used in oncology or 2% of our total business, in the fourth quarter, and we would expect it to go down next year about 20% from those levels.

And I think it's very much in line with the original ODAC, when ODAC first came out with its recommendations.

We said there could be another 20% to 40% drop at that time, and we saw a 14% drop this quarter, and we're predicting a 20% drop going forward, so I think we're very much in that range.

Yes, we've been very -- we've tried to really provide specific guidance in the use of anemia drugs and oncology.

Important to point out that anemia drugs are used in other segments of our business as well.

We have a very strong presence in nephrology.

There was an article in the Wall Street Journal yesterday talking about hospital use of anemia drugs relative to transfusion, so anemia drugs are used in a lot of other segments, but we've tried to give you really good insight into the oncology business, because that's where gotten the most publicity.

But, are you talk about how much you can grow (inaudible) oncology?

The overall the Specialty we said was going to grow 5% to 7%, and I think we expect them to return to the 10% type growth that we expect to see in that market,once we're to through the anemia issue, and we have solid prospects in that group going forward.

Thanks, Larry.

Okay.

Thanks.

Thank you.

Our next question comes from Robert Willowby of Bank of America Securities .

Please go

Hey Dave or Mike, it sounds like Medco has made some noise about cutting some of their inventory balances here, I am not so sure how dramatically.

If to they are able to do that is there ramifications for you positively or negatively from a customer action as such?

Well, thanks, Bob, I have to tell you I'm very sensitive about talking about any specific customer, and particularly about the one we refer to around here as the M word, so let me just talk about -- I don't want to talk specifically about any one customer, let me just talk kind of overall about inventory levels.

And if we were to have any customers adapting their inventory levels, that would really be a short term impact, in that over the time frame of a year, it would not have a big impact and an individual customer would not have a big impact.

I think it's certainly consistent with the theme of customers giving more business to us, as they diminish the amount of business they may have done direct in the past.

So I think it's very consistent with that theme, and I think it's reflective of the value that we add to the channel.

One of the things we're finding, Bob, is that, you know, customers are row lying upon us more for inventory.

If you just keep in perspective, we give every customer next day delivery, so they can order in the early evening and get that inventory the next day.

We have very, very high service levels, so there's not a big need for a customer to maintain a high level of inventory, and that's one of the great value ads that we bring to our customers.

So when I meet with customers, I was just with a big hospital earlier this week.

One of the first issues I was drilling down on is how much inventory you have.

You know, you need to free up some money for capital expenditures, maybe there's some money in inventory.

So it's a great strength we continue to bring to the market.

Good question.

And just a follow-up.

Inventories for you were up sequentially, but a modest level relative to what your two other competitors did.

Obviously there is some seasonality I guess to when you guys build and run off inventory, but is there any change in manufacture behavior in the current credit markets?

Are they working with you to put more supply in the charge, or basically just status quo here

Business as usual, Bob.

But our inventories as days are -- our days our down year-over-year.

I think mentioned our average days on hand are two days, and that's the continued growth of our business and the continued day to day inventory management.

I don't think that's reflective of any sea change in our relationship with the manufacturer.

I was actually more surprised by the upticks of some of your competitors.

You guys seem to be fair consistent with what where we thought they would be.

That it.

Thank you.

Next question?

Thank you our next question is from Lisa Gil from JPMorgan, please go ahead.

Thanks, its [Arthur Fuhrheinman] in for Lisa.

Dave, I think you mentioned inflation so far is trending in line with your expectations, and should continue to do so for the balance of calendar year.

But what do you have factored in for the entire fiscal '09 particularly beginning of next year calendar?

We're thinking it's going to probably be in the 5% range that we've seen on a historic basis.

We really don't see dramatic change from what we've seen on a historic basis.

Okay.

And then if you were to break that down between the drug company and specialty, would it be fair to say a specialty inflation is much more beneficial to you, and is it growing faster?

I think historically, the drug price inflation outside of specialty has been higher, than it has been in the specialty area, though, certainly there have been increases in that space, as well.

Okay.

Thanks.

All right.

That's it, thank you.

Next question, please.

Our next question comes from Tom Gallucci from Merrill Lynch.

Please go ahead.

Good morning guys.

Thanks.

Two topics I was hoping to get a little more color on.

First, you mentioned receivables and collections are steady.

I assume that includes the independent business specifically, as well?

It does, Tom.

I mean, it's steady as she goes.

Actually, our DSOs, our day sales outstanding are down, both from last year, and even sequentially.

So, you know, we are not seeing anything unusual at all there, and to answer your question specifically about independents, yes.

How is the growth if that -- of that segment, customer segment?

Well, you know, I -- they're probably reflecting overall market, as well, Tom, and that is, it's -- the growth is slower by historic standards, but again, they're having a great opportunity to participate in generics.

So, when you look at the independents, they do a great job of getting generic penetration, because they have a lot of interface with the patient, so the patient is literally standing in front of them, they can literally talk about the benefits and value of generics, so that the independents continue to do very, very well in that market.

So you haven't seen any changes in growth rate because of the Walmart or the economy or anything else lately?

I don't want to talk specifically about any customer, but since you brought up Walmart, I will tell you, their generic program specifically we've tried to track that very closely, and that has had no impact on our customers that we can determine.

The other thing I was going to ask about was, I assume, Mike, part of the variation in the range that you have next year on EPS is the pace of buybacks.

You mentioned I think in your comments that you said you would be prudently conservative using cash in this environment.

Can you just talk a little bit about your -- you gave sort of your liquidity positions, but just the access to capital, how you feel about spending cash and your buyback short term over the course of the year, given the current environment.

Thank, Tom.

I think it's an excellent question for these financial market conditions.

I mean certainly our -- maybe I'll frame this by just talking about a little bit from a historical perspective.

Our philosophy always has been to keep as low of cash balances as possible to run our day to day needs, accentuated by our liquidity facilities to handle any day to day volatility in our business, and think that continues to be our philosophy going forward.

To the extent that we have had excess cash, you know within that cash has been used to drive the long-term growth of our business, whether it was through internal expansion, or through acquisitions.

And to the extent that we didn't have not any imminent acquisitions, or didn't have some internal projects, we have not hesitated to return that capital back to our shareholders, as evidenced by our cash flow return of over 100% the last three years.

But certainly in these economic times, and historically when we have returned the cash to shareholders, it was based upon the fact that the capital markets were open, and accessible at reasonable costs, and today, certainly the long-term capital markets are not as accessible as they have been.

I mean, I expect that to be a short-term phenomenon, and I would expect it to change over time, but right now, the access is not there, the rates to access are are extremely high, and in that type of environment, I think we would tend to keep more cash on our balance sheet than normal to maintain our financial flexibility, so that when opportunities do arise like Dave mentioned we think they may, from some of our smaller peers that we're ready to pounce upon those.

So I think in this environment, as we're in today, we'll probably be somewhat more conservative and hold higher cash balances.

We still have the expectation that over the course of the year we'll buy back $350 million worth of shares and we'll continue to monitor the market.

Great.

Thank you.

Next question, please.

Thank you.

Our next question comes from Eric Coldwell from Robert W.

Baird.

Please go ahead.

Thanks very much.

Actually I have a couple if you'll bear with me.

First off, the LIFO came in a lot larger than we had expected, which I think is a pretty clear indicator to you're comments that brand price inflation was pretty strong here.

Would you care to give us what your total basket of brand of inflation looked like for fiscal '08?

I don't think you quantified that.

The increase in was in the 8% range, which is higher than it has been historically and what drove the higher than expected LIFO charge.

As we go into next year, we would expect that still to be strong, but as Dave said we would expect that to moderate more towards historical levels and our expectation for a LIFO charge next year would be in the $10 to $15 million range.

$10 million to $15 million, great.

Second question, there's been I think some market chatter or concern about the health of independent pharmacies in this environment, but I believe if I'm not mistaken the NCPA digest just came out suggesting that community pharmacy store count was actually flat this year.

I was hoping we could get a brief update on what you are seeing in terms of independent and community pharmacy store count as well, as what percent of mix in your retail line of your business you would characterize as independent and community as opposed to regional or national business?

I tell you, Eric, I think the community pharmacies are alive and well.

They just had a big convention.

We were actively involved in it.

With my 35 year perspective here, people have been talking about the demise of the inspections for as long as I've been in the industry, and they've a very resilient group and they continue to be just fine.

I have probably talked to half a dozen or so, you know, independents this -- this week, and I will tell you, they're concerned about the turbulence in the total financial markets, but their businesses continue to be strong.

So I think the numbers, for independents, you know, are stable.

I would not even be -- I would not be surprised to even see them inch up a little bit, next year, but I think that they -- they continue to be very, very strong.

One of the things that has taken independents out on occasion have been acquisitions by some of the larger chains.

I don't expect that -- there to be much activity in that this next year, and the reason for that is the three large warehousing chains have other distractions that I think will keep them from making acquisitions.

So I think the independent group is stable.

And doing well.

And just as a follow-up.

The -- (inaudible) historically you've broken out retail business versus institutional.

I think retail has been running a round one third of your revenue.

If we could get the update on that, if if you could not mind potentially parse out of that one third that is retail, parse out how much would be chain business versus independents.

Yes, Eric, I mean, I think that overall 30, you know, one third, two thirds split is still appropriate for our business.

We have not fine-lined the independents versus the chains.

We don't do that in-house here, but our guess would be it would be roughly half and half.

Yes.

One of the problems, Eric, you get into a little with is what is a chain.

You have some other definitions in the marketplace.

Is it three stores, is it five stores and the like, so we have really focused on community pharmacy, and that's where our value added services are focused

and the important thing for us Eric with both the independent pharmacies and the retail chains, they both -- and the regional chains and so on, they all partake in our key programs, particularly our generic program.

That's fantastic.

I think the main take away is that contrary to some opinions out there, your customer base is not approaching quote all community or independent pharmacy, number one, and number two, that customer base is actually showing pretty good resiliency in this market and the store count is flat to slightly up right now.

Well said on both counts Eric.

Thank you very much for the clarification.

Absolutely spot on.

Thanks, guys.

Next question, please.

Our next question comes from [Charles Boorady] from Citi.

Please go ahead.

Thanks, good morning.

I would just like some clarification any your thought process or more elaboration, I guess, on the trade off you see between buying your own stock back and making acquisitions, because while I recognize the value of Asia on acquisition targets, it's probably come down quite a bit.

I recall year ago, your -- you may not have known it, but you predicted the meltdown that we're seeing today, because you saw very high -- unreasonably high valuations on companies that private equity firms were outbidding you on, even though you had greater synergy potential than a financial buyer, But on the other hand, your own stock has also suffered quite a bit, and that's a very low risk use of capital.

So if you can elaborate on what kinds of things would make you buy something else.

Is it going in a new strategic direction, or just expanding in the same businesses that you're in right now, and how you think of the trade off between buying your own stock back, versus making an acquisition?

Yes, certainly we look at relative returns from both of those activities, Charles, and as you said, we're certainly think our stock is a very attractive right now, and our stock is not any different than what's happened to the overall market.

So I think the relative valuations are down as well.

So I think we would do our traditional comparison of returns.

I mean, we always are looking to grow our business.

I mean we want to grow our business.

We want to expand our business, and to to the extent that we have opportunities that are going to provide our shareholders a return well in excess of our cost of capital, we're going to pursue those opportunities, but I think in today's environment, I think we have got to maintain our flexibility and keep our options open.

We're not sure exactly what is going to fall out of the market place today, but I think before we would rush in and use up all of our capital in a market that we might not be able to get it back in the short run I think that's something we would be very cautious about doing right now.

And I will tell you from a strategic standpoint, we are not going to go far afield from our basic expertise here, which is, packaging the specialty business and related businesses.

And we've got a wide offering in specialty in the same is true for growth -- for our basic drug wholesaling business.

We think the countryside is littered with management teams who can run one business well, and so they think they can run a lot of businesses well, and is so we're not going to fall into that trap.

I don't want to sound stodgy but we want to stick to our knitting, our basic expertise here.

So, we're really looking for strategic opportunities in our three basic business units, but we are not going to go far afield, even if some good opportunities present themselves far away from our basic expertise.

Great.

Thanks.

Stodgy is good these days.

Next question?

Our next question comes from [Ricky Goldwasser] of UBS Please go ahead.

Can you tell us in terms of the buy backs that are included in guidance.

What is the timing?

Are they spread throughout the year, are they more weighted to the second half of the year, and also your free cash flow guidance, what are your assumptions regarding to their receivables, inventories and payables.

Would we just assume the levels you were at in 4Q are sustainable heading into fiscal '09, and lastly if you could give us the maintenance CapEx number.

Thank you.

Sure, Ricky.

I think the first question was about our share repurchase, and our assumption is $350 million evenly over the year.

Secondly, from a working capital perspective, of course our cash flow guidance is that our free cash flow is going to approximate our net income, which means essentially very little or no working capital build, and I think you'll see that through a small favorability in our DSO and in our inventory days, a slight decline in each of those, which will keep that working capital flat in light of the growth that we have forecasted with payables staying the same.

And lastly, I think the question was the maintenance cap ex.

Our CapEx is about $140 million for this year.

I would say the maintenance CapEx is probably about $125 million.

We're a little bit above that this year, because of some of the spend on our business transformation program.

But we expect 140, in the neighborhood of 140 next year, about 140 next year.

That's correct , And in light of the fact that there are a lot of conference calls today in the healthcare sector, we'll take one more

Thank you.

And that comes from Richard Close of Jefferies & Company Please go ahead.

Yes Thank you.

How comfortable are you guys that you factored in sort of the worst-case scenario of a prolonged poor environment into the guidance?

I guess I'm trying to gauge your level of conservatism here.

Well, I would say, first of all, we're conservative, you know, STODGY from the last question, conservative, and that's why we have a range and we try to monitor all factors very closely, Richard.

We go through a very detailed planning process, building our model here.

You know, Mike and I, Steve Collis and others, literally go out and meet with all of our business units.

So we think we have a pretty good feel for the market, and we think we've built that into our guidance.

Mike, I don't know if you have anything to add.

No, I think we have obviously reflected the concerns a bite the overall economic activity into our guidance.

Thank you.

Okay.

Thanks.

Did you have a follow-up, Richard

Yes, just really quick.

Do you guys want to go into any more detail on the higher bad debt in the specialty subsidiary that you mentioned

I think it's a short-term issue.

I mean, our bad debt expense is very low.

I think we've averaged about 5 base points 0 as a percentage of revenue ore time.

It just happened to be a little higher in this quarter than the previous quarters, but it -- I think the key point was it's nothing to do with any overall deteriorating economic conditions.

It was a local issue.

Right, absolutely.

Nothing to be concern aid bite in our opinion.

Thank you.

there thanks, Richard.

And thank you, operator and I would now like to turn it over to Dave for a few closing remarks

Well, thank you all very much for joining us.

I know it's a very busy day, and I appreciate your time.

We appreciate your interest in ABC.

We continue to be very, very excited about our industry and the role we play it in it.

I hope that came through loud and clear, the fundamentals in our industry continue to be very, very strong, the population continues to age, pharmaceuticals are clearly a part of the -- of challenge of increasing healthcare, so we think we're in the right spot and at the right time.

We have forecast another strong year for ABC, good revenue growth, operating margin expansion, strong cash generation, good EPS growth, so we continue to be very excited about our company.

We hope many of you can join us at our investor day which will be December 11th in New York City.

We look forward to seeing you there then, and if not sharing you with our results for our December quarter which we'll do the end of January.

Thank you.

Thanks.

And that concludes our call.

Thank you.

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