美源伯根 (ABC) 2009 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the AmerisourceBergen fiscal 2009 first quarter conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session.

(Operator Instructions).

As a reminder this conference is being recorded.

I'd like to turn the conference over to our host Mr.

Michael Kilpatric.

Please go ahead.

Good morning, everybody, and welcome to AmerisourceBergen's conference call covering fiscal 2009 first quarter results.

I am Mike Kilpatric, Vice President, corporate and investor relations, and joining me today are David Yost, AmerisourceBergen President and CEO, and Mike DiCandilo, Executive Vice President, Chief Financial Officer and Chief Operating Officer 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 cause our actual results to differ materially from our current expectations.

For a discussion of some key risk factors we refer you to our SEC filings, including our 10-K report for fiscal 2008.

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

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

Good morning and thank you for joining us.

AmerisourceBergen had a solid December quarter, our first fiscal quarter following a strong fiscal year ended in September.

Our revenues, operating margin and EPS were all up over the same quarter last year, reflecting the resiliency of our Company and the wholesale pharmaceutical industry.

We continue to do a good job controlling our costs and our receivable days and both are down versus last year.

Our two primary growth drivers, generics and specialty distribution services, were strong contributors to the quarter.

Revenues were $17.3 billion, up over last year, and up $180 million over last quarter.

The revenues reflect the negative impact from the loss of direct warehouse business to a large retail chain customer that was discontinued July 1, 2008.

Mid of this warehouse business revenues would have increased 4.8% over the same period last year.

Operating margin continued to expand.

You will recall our operating margin has expanded in the mid single-digit basis points each of the last three fiscal years and this quarter's increase of three basis points was in line with our expectation of continuing that trend.

This year we expect our operating margin to expand to the low to mid single-digit basis points.

Our margin increase was driven by our strong generic sales, excellent expense control and good fee-for-service performance.

We spent fewer dollars running our business this quarter, excluding special charges, than we did this quarter last year, demonstrating excellent internal discipline.

Controlling costs is part of our operating mindset at AmerisourceBergen, as reflected in a philosophy we call CE2.

CE2 stands for customer efficiency and cost effectiveness.

Customer efficiency relates to delivering what the customer wants and needs and is willing to pay for and cost effectiveness means challenging every element of every expense.

EPS of $0.73 was up 12% on a GAAP basis.

You may recall that the December quarter of last year was positively impacted by $0.04 from a $10 million litigation settlement and a $1.4 million, net of special items.

If that 4% is excluded our EPS this quarter is up a robust 20%.

Revenue in our proprietary generic program, PRxO Generics Solution, increased in double digits versus last year and our AmerisourceBergen specialty business, ABSG, grew 5%, reflecting the excellent fundamentals of the specialty market coupled with our unequaled broad based solutions offerings for this market.

So lots to like about the quarter as we continue to track, to deliver the results in this fiscal year that we outlined in October.

Before I hit some Company specifics I'd like to comment on what we are seeing in our nation's capitol.

Obviously the new administration has only been in office a couple of days, but we think that healthcare reform will be addressed as soon as the stimulus package is resolved.

Within healthcare we think the immediate focus will be on the 46 million or so uninsured, and particularly providing them access to pharmaceutical therapy due to this cost effectiveness.

The recent expansion of the SCHIP program to an additional four million more children passed by the house is a step in the direction of expanded coverage in our opinion.

The clear take away here is that we think government-paid pharmaceutical care will be expanded under this administration and anything that increases the volume of pharmaceuticals dispensed is good for our industry and AmerisourceBergen.

Now, regarding our industry, the wholesale distribution industry continues to reflect strong fundamentals.

While IMS Health forecasts that the growth has slowed versus historic standards, it is important to note that the industry continues to grow in an economic climate that could easily be described as turbulent.

IMS is forecasting 1% to 2% total market growth in calendar year ' 09 with increased growth rates in the outer years.

Our forecasted revenue growth incorporates this market sentiment, which hopefully will prove conservative, providing upside to the industry.

I would continue to describe the selling environment within the industry as competitive but stable.

Now, a little closer to home.

Our AmerisourceBergen Drug Company, ABDC, had a strong quarter, driven by product mix and cost control.

We continue to focus on the right customers, customers where we can provide value-added services that are recognized by the customer.

As I mentioned previously, our proprietary generic program, PRxO Generics Solution, had a double-digit increase in revenue this quarter, far outpacing our total revenue change in the drug company.

Both operating costs and receivables were closely controlled.

We ran our drug company and total business with fewer expense dollars this year than last year despite continued investment spending, most notably on a new ERP system for the drug company corporate office.

Our day sales outstanding, DSO, are down both year over year and sequentially, demonstrating good management and excellent customer relationships.

Again, the right customers.

In the quarter we benefited from new fee-for-service agreements that continue to reflect our value to our manufacturer partners.

Of particular note, we have signed an agreement with Pfizer, our largest supplier, with a fee-for-service provision to take affect January 2010, about one year from now.

As I have noted previously, our relationships with our manufacturers, in part due to fee-for-service, have never been better.

Though it is early in the year, we expect brand name price increases in the 5% range, or slightly higher, in line with our earlier expectation mitigated, of course, by fee-for-service agreements.

AmerisourceBergen Specialty Group, ABSG, had a strong quarter across its broad spectrum offering, with revenues up 5% and an annual run rate now of over $15 billion.

Our oncology supply group was up 3% over last year.

Though the ESA's erythropoietin stimulating agents continue to be down versus last year and last quarter, as expected, other products and services more than outpaced the shortfall.

We continue to be extremely well positioned in the specialty business, with broad offering of solutions to both manufacturers and physicians that is unequaled in the market.

Our services business had particularly good performance this quarter.

AmerisourceBergen packaging group, ABPG, is on track to meet their expectations for the year and is extremely well positioned to benefit from the continued manufacturers' outsourcing of packaging we expect.

The AmerisourceBergen management team is now totally focused on the pharmaceutical distribution and related services business and that focus continues to drive performance.

Since we expect to generate significant cash this year and with the continued financial turbulence in the market it is appropriate to reiterate our position on acquisitions.

We are receptive to acquisitions and have spent over $1 billion in the last seven years on acquisitions.

Our largest, [Velco] Health, at $162 million was completed last year.

We have said that the $200 million or so acquisition in our basic business for pharmaceutical distribution, including specialty or related services like packaging, would have appeal to us and we would consider something larger in this space if it made sense.

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

Before I turn the floor over to Mike for some added color, I want to emphasize my optimism for the wholesale pharmaceutical industry and ABC's position in that industry.

The fundamentals of the industry continue to be strong as far out as any of us can see.

The ABC circle of life continues to hold.

The older people they get, the more drugs they take, the more drugs they take, the older they get.

The growth engines for ABC, generics and specialty, continue to be the premier space within the industry.

At our investor day we described our Company and industry as resilient and that description continues to hold in the current financial environment.

Our guidance remains unchanged from that provided at the beginning of our fiscal year.

And in anticipation of our question, this January is off to a nice start, but is still early in the quarter and, of course, early in the year.

Here is Mike.

Thanks, Dave, and good morning, everyone.

I'm very pleased to report on a quarter that is solid in every respect and very straightforward, with earnings above expectations for the quarter.

It's a tremendous start to a new fiscal year and should give everyone even more confidence in our ability to deliver strong results in a tough economic environment.

Our growth drivers of generics and specialty were very much in evidence during the quarter and combined with stellar expense control generated operating margin expansion.

In addition to our operating income growth our significant year-to-year share reduction helped us generate very nice double-digit EPS growth.

We continued to manage our working capital very well with our normal seasonal increases in inventory and we decreased DSOs, both sequentially and on a year-to-year basis.

Now turning to the income statement, which I'll walk down starting with our top-line growth.

Revenues increased 0.3% from the prior year, in line with our expectations.

Net of the decline in Walgreens warehouse sales, which we discontinued on July 1, 2008, sales would have increased 4.8%.

Drug company revenues were down 1%, as very impressive 9% growth in institutional sales, including the growth of sales to our largest PBM customer, nearly offset the reduction in Walgreens warehouse sales.

Our specialty group grew 5%, despite one month of OTN sales still remaining in last year's quarter, with strong growth broadly across virtually all of its distribution and services companies.

Our scale in specialty distribution, combined with the breath of our value-added services to biotech suppliers and physicians, uniquely positions us as the leader in this fast-growing segment of the market.

The packaging group, which represents less than 0.05% of 1% of our total revenue but 5% of our operating profits was down in total revenue versus the December quarter last year due to delays in certain of its customers receiving FDA approvals for new drugs but continues to be on track to meet forecasts in fiscal 2009, as the contract packaging outsourcing trend remains very favorable.

Gross profit margins in the quarter were up a strong three basis points versus last December, driven by the double-digit growth in our proprietary PRxO Generics Solution program, increased contributions from our fee-for-service agreements.

and good profit growth in our specialty services companies.

We did have two gross profit items of note in the quarter, which had the net affect of offsetting each other.

First, during the quarter we signed several new fee-for-service agreements and recognized $10 million of fees in the quarter related to prior periods as a result of signing the new contracts.

This benefit to gross profit in the quarter was offset by the second item, a loss on our flu vaccine program of $13 million.

This loss was primarily due to a write-down of excess flu vaccine inventory at the end of December as a result of a soft flu season.

To put this into perspective, our total flu vaccine season revenues were under a $100 million and our total gross profit for the season, which encompasses flu sales in both the September and December quarters and also includes the inventory write-down, was a loss of approximately $1 million.

Turning back to our prior-year quarter, last December's gross profit included $11.6 million of litigation gains, including $10 million from a competitor and $1.6 million from supplier antitrust litigation.

Excluding these items from the prior-year gross profit our gross margin would have been up nine basis points in our current-year quarter.

Our LIFO charge in the quarter was $5 million versus $3 million in last year's quarter, reflecting a strong supplier price increase environment.

Operating expenses in the quarter, excluding facility consolidation and employee severance costs, were down slightly compared to last year, consistent with our guidance for the full year.

This decrease represents our continued discipline and attention to costs at every business unit and corporate department throughout ABC and is reflective of our CE2 customer efficiency, cost effectiveness philosophy.

This decline was achieved despite increased investments in our business transformation program as we outlined during our investor day in December.

As a reminder, we expect to spend $100 million during fiscal 2009 on our ERP-enabled business transformation program, two-thirds of which we expect to capitalize and one-third of which we expect to impact operating expenses.

From an operating margin perspective, the combination of increasing gross profit margins and expense control led to three basis points of operating margin expansion in the quarter, in line with our guidance of low to mid single-digit basis points operating margin expansion expected for fiscal 2009.

Interest expense of $14 million declined 14% from the prior-year quarter due to lower net borrowings and reduced variable borrowing rates on our revolver.

Our effective tax rate in the quarter of 38.6% was up slightly over last year and we continue to expect our annualized effective rate to be in the 38.4% range.

Our EPS growth from continuing operations of 12% exceeded our income from continuing operations growth of 4%, due to the significant $12 million, or 7% reduction in average outstanding years compared to last December's quarter, primarily as a result of our share repurchase program over the last 12 months.

Excluding the prior-year quarter benefit from litigation gains net of special items of $0.04 EPS from continuing operations in the quarter of $0.73 were up a very impressive 20% compared to last year.

Now let's turn to our cash flow and the balance sheet.

We used cash from operations in the quarter of $304 million compared to usage of $101 million in the prior-year December quarter.

As a reminder, we typically build our inventories by two or three days in the December quarter to prepare for supplier closings for the holidays, which combined with payables timing often results in cash usage for our first fiscal quarter.

Inventories are already down in January and we continue to expect to generate free cash flow in the range of $460 million to $535 million for the full year in fiscal 2009.

We had $42 million of capital expenditures in the quarter and continue to expect approximately $140 million of CapEx for the year.

From a statistical standpoint, DSOs were down a half day from last year and averaged 18.3 days for the quarter.

I know that customer payment and solvency trends are on everyone's radar in this economic environment and we continue to be pleased with the decline in our DSO and to date we have not seen any deterioration in our customer aging.

Obviously we are going to continue to monitor the financial health of our customers very closely and we are really served by having a diverse customer base that lacks significant customer concentration, with Medco being the only customer contributing greater than 10% of our revenue or receivables.

Our average inventory days on hand during the quarter declined by a half day to 26 days and average payable days were up about a day from last year.

From a share repurchase perspective we bought back $88 million worth of our shares during the quarter and continue to expect to purchase approximately $350 million of our shares for the full year.

Our gross debt to capital ratio -- to total capital ratio at the end of December was 30.4%, in line with our stated goal of 30% to 35%.

Now, turning to our fiscal year 2009 guidance, our diluted EPS from continuing operations range of $3.08 to $3.25 per share remains unchanged as do the assumptions supporting that range of 1% to 3% revenue growth, operating margin expansion in the low to mid single-digit basis range, free cash flow of $460 million to $535 million, and share repurchases of $350 million evenly throughout the year.

So to summarize, another strong quarter and a great start to fiscal 2009, driven by both our growth engines, generics and specialty, with the expense and working capital management you expect to see from us.

And now I'll turn it become to Mike Kilpatric.

Thank you, Mike.

We'll now open the call to questions, so I'd ask you to limit yourself to one question and a follow up until we've had an opportunity for everyone to have a chance and then you may ask a different -- additional questions.

Go ahead, Val.

Thank you.

(Operator Instructions).

You have a question from Glen Santangelo with Credit Suisse.

Please go ahead.

Yes, thanks.

David, I just had two quick questions.

In your opening remarks you suggested that you saw revenues in your generic program up double digits.

I'm kind of curious, is that really just a function of the patent expiration or are you seeing increased penetration within your customer base in terms of your generic book of business.

What I'm really getting a sense for is, as the generic fill rate climbs is anybody trying to purchase generics on their own or are basically your clients coming to you more with the help of your generic one-source program?

I'm glad to answer your question.

It's a function of three things.

It's a function of new products, increased utilization, but increased penetration as well.

I would say, to answer your question specifically about our customers, we find our customers relying on us more and more for their generic decisions and it's a great value that we bring to them by searching the market for the best value in generics and bringing that to them.

Generics continue to be a big emphasis for us and it is definitely getting some traction.

Thanks for the question.

Hey, Dave, maybe if I could just ask a follow up on Longs.

Now that the CVS merger's closed I think you have some contract protection through some point in 2010 or '11.

Have you really had any conversations with Longs post that deal closing and any sense for what they may be thinking?

We really haven't, Glen.

Our focus at this point has been on the integration; assisting them, assisting CVS with the integration of Longs and that's our primary focus and we really don't have anything new to report on status of our contract or Longs ongoing relationship.

Thank you, Glen.

Thank you.

And our next question will come from John Ransom with Raymond James.

Please go ahead.

Hi.

Some of the early data out there suggests a little bit of a rebound in prescription volumes in January.

Do you think from where you sit, is this a head fake, one week, a couple weeks of bad data or are you seeing any signs that the market may be stabilizing and rebounding?

Thanks.

John, I think first of all we (inaudible) number of cases.

I think you got to be a little careful with just looking at prescription data, because whether the prescription is a generic or a brand name makes a big difference to us, whether it is a 30 supply or 90 day makes a big difference to us, whether it's a specialty drug or [provision] drug makes a big difference.

But I think -- more to the point you got to be really careful about looking at short-term trends within a week or two to figure out what's going on long term.

I think you described it as a head fake, but it might be.

I think you just got to be careful with short timeframes.

Okay.

And our next question will come from Larry Marsh with Barklays Capital.

Please go ahead.

All right, thanks, and good morning.

Good results.

Dave, it didn't take long for you to communicate some good news on Pfizer moving to a fee-to-service relationship.

I know you'd thrown out a provocative statement at analyst day, so that was good.

Love to get a little bit of elaboration now that it's official as to the supplier's thinking along the process, because they were obviously very adamant in not doing it, and then how does that -- how do we think about your other big hold out, Glaxo, who I think you also said could move to a fee-for-service in the next couple of years?

And then finally, how do we think about impact, if any, on quarterly trends starting next fiscal year?

Larry, thanks for the question.

We think Pfizer's signing is a good endorsement of fee-for-service and we've said all along we think that the fee-for-service brings mutual benefits to both sides, the creating partner relationship, and we think Pfizer moving in this direction, even though it doesn't take affect until 2010, is a good sign for us and for the industry.

We're a little uncomfortable talking about the specifics of it, but we think a very good sign.

There's one other large -- one of our other large suppliers who does have a fee-for-service agreement but it doesn't have many of the traditional functions so we hope that they would view it as positive.

Mike, do you have anything?

Yes, just from the quarterly trend perspective, Larry, as we get into 2010 you will see more of an equal spreading of the profit, obviously, that we made from that agreement.

Historically it's been concentrated in the March quarter because they've had a large January price increase for a number of years with some spillover into the June quarter and I think that you'll see that be levelized across the entire year.

Thanks.

Thank you.

We have a question from Eric Coldwell with Robert W.

Baird.

Please go ahead.

Thanks, good morning.

Good results and most of my questions were addressed, but I'm just hoping we could get the quantification on the ESA results besides the qualitative comments?

Could we get nominal dollar sales in oncology-related ESAs and also the trends on growth quarter to quarter and year on year?

Eric, just as a reminder to everybody our expectation was that the ESA sales would be down in fiscal 2009 about 20% from the run rate in the fourth quarter of fiscal 2008.

In the quarter they were down about 12%, so a little bit less than the 20% we expected.

That still remains our expectation for the year, and as a total percentage of revenues the oncology-related ESAs are still just under 2% of our total revs.

Super, thank you.

Next question.

We have a question from Lisa Gill with JPMorgan.

Please go ahead.

Thanks very much.

Dave, can you maybe just go into a little more detail on what you're seeing for fee-for-service agreements?

It was, what, five years ago that the first agreements were signed, now we're finally getting to where everybody will be under fee-for-service.

Are you seeing the increase every year that we had anticipated five years ago as far as you do more services that the manufacturers are paying for that?

And then secondly, Mike, if you can comment on specialty.

Specialty is a way that Amerisource has differentiated themselves in the marketplace and it's clearly a higher-margin business.

Can you put parameters what that's contributed to your growth as far as the three basis points?

Did one basis point of that come from specialty?

Thanks.

We may chime in on both of these together, Lisa.

First of all, on the fee-for-service I will tell you, I think I've said on a number of occasions, this is the new way that we're going to do business and I don't think anybody's going to go back any other way.

I would say that the discussions and negotiations we've had as we moved into the second or third generation of fee-for-service have been good, both for us and the manufacturer.

I think what fee-for-service allows both of us to do is to focus on what's important to the manufacturer and the way you tell what's important to the manufacturer is what he's willing to pay for and what he's willing to incentivize us to do.

So we're very happy with how it's progressed and we continue to get more efficient, I think, in the eyes of the -- meeting the expectations of the manufacturers as we go forward.

The one point I would make about the specialty business, Lisa -- , turn the floor over here to Mike in a second -- but I just want to emphasize in the specialty business how important all the value-added services that we provide in this business are.

It's not just about distributing the product, getting it it to the right place at right time for the right price, which, of course, continues to very, very important, but it's the ancillary services that we provide, both to the physician, who's frequently dispensing this product, and the manufacturer, as well.

So it continues to be business that we like a lot.

It's got a great, great growth potential as we go forward, particularly as we lap the erythropoietin issues.

So we're very excited about the space of new products coming here.

Mike, you want to

Yes, Lisa, to add onto what Dave said and as a result of a lot of those value-added services, the guidance we gave back at investor day was we would expect operating margins in the specialty group to be in the range of 155 to 165 basis points for the year, which is substantially above the operating margin guidance we gave for the drug company, which is in the 1 03 to 109 basis points range.

So to the extent that specialty grows faster than the drug company at those higher margin rates, it does contribute in increasing share of that gross profit growth.

I think those are the parameters that people should have in mind.

Thanks.

Thank you, Lisa.

Next call, please.

Thank you.

And the next question will come from Robert Willoughby with Banc of America Securities.

Please go ahead.

Thanks.

This is [Erin Wilson] actually in for Bob today.

Most of our questions have been answered, but do you have an estimate of what facility consolidation costs will be for the year?

We would expect them to be pretty low for the rest of the year.

What we had in the first quarter was a little bit of a continuation of our CE2 program and also reflected the consolidation that we continued to do up in Canada where we've reduced the number of DC's, particularly in the Montreal and Toronto area.

So Ex this quarter this quarter I think very minimal costs are forecast for the rest of the year.

Thanks, Erin.

Thank you.

And our next question will come from Ricky Goldwasser with UBS.

Please go ahead.

Hi.

Hi, Ricky.

Hi, Ricky.

Just a few follow-up questions.

First of al,l on the generic side you talked about the revenues up double digits, how does that -- what do you think the growth was for the market?

The growth you're seeing is above market or in line with it.

Then there were a number of products that moved from exclusive status to multiple players in January and is the environment you're seeing around these products in line with your expectations?

Lastly on the specialty, what is the normalized growth rate for specialty going forward.

This quarter obviously you were still --- it was still the OTN setback, but starting next quarter what should we be factoring in for the top line on the specialty side?

First question, Ricky, in terms to the market growth, we think we are growing faster than the market because we're getting increased penetration with our customers on the generic side, so we think our double-digit growth is outpacing that in the marketplace.

Mike, do you want to talk about the other?

Yes.

In specialty, Ricky, I think our guidance for t he year is 5% to 7% and in the first quarter the 5% reflects the fact that we still had a bit an anniversary issue with OTN.

Ex the OTN sales in October of last year their revenues would have been up closer to that 7% figure and as we move throughout the year I would expect them to be in a little bit of the higher end of that range.

Traditionally the specialty business -- or what we call the specialty business -- has grown about 2X, two times what the overall market has.

Since we've got such a large share of the market it's hard for us to dramatically outperform that., but I think going forward the thinking broad terms in the specialty market growing twice that of the traditional market is probably the right range.

Next question, please.

Thank you.

We have a question from Charles Boorady with Citi.

Please go a head.

Thanks.

I have a question then a follow up.

First, can you identify some of the main specific sources of operating expense reductions in the quarter and size the opportunity for additional reductions over the course of this year and next?

Charles, I will tell you it's really broad based and when I talk about it being a mindset and this CE2 being a philosophy, I really mean that.

I was just recently in a distribution center of Sacramento -- distribution center and Mike and I walked in there and I will tell you they outlined half a dozen items that had not been present the last time I was there and it's just a demonstration of how it has really gotten down to the grass-roots level.

You'll recall we streamlined our executive ranks, so we've hit both the top end of the expenses, the bottom end.

We're very excited about our business transformation, which we're looking to have technology replace some of our expenses.

I will tell you, there's just not a single expense that we do not challenge and we've got our associates very involved in this.

It is not unusual for me to get a couple e-mails a day from associates with some ideas on how we can save some money.

So it is -- I think we've been successful in really getting that operating philosophy pushed down to our people.

I do a little video at the end of every quarter for the associates and it's one of the things we start out so I think we've pressed that down and we're not done, Charles.

I think we can continue to drive costs out of the system as we go forward and we're very optimistic that we'll continue to run this business with the same dollars this year that we ran last year.

Thank you.

Our next question will come from Charles Rhyee with Oppenheimer & Co.

Please go ahead.

Thanks for taking the questions.

Just two questions and the first for Dave.

At the beginning you talked about the potential for healthcare reform here and you highlighted access to a pharmaceuticals as a positive.

Can you perhaps address the potential on the flip side as government takes a bigger stake in providing healthcare, the concerns over price controls on drugs itself?

And then secondly a question for Mike.

I think last year when you were providing guidance you talked about access to commercial paper to fund daily working capital was limited, meaning that you needed to keep -- wanted to keep more cash on hand to fund daily working capital.

Can you give us a sense on what's happening on the commercial paper market, are you back into it and what do you think going forward here?

Thanks.

Charles, from the 50,000-foot level of how the additional pharmaceutical coverage gets reimbursed is still being kicked around.

I say I would not be surprised, though, that if the pharmaceutical coverage increases that it will -- it could very well involve some kind of rebates or the like from the manufacturer participants that could, in fact, be directly to the government, so I think those details remain to be seen.

But what is really encouraging to us is the fact that in the discussions that are ongoing in Washington and we're participating in the efficacy of pharmaceutical therapy is being acknowledged.

The issue here, particularly for the uninsured, is, gee, the uninsured are getting coverage now.

They're frequently getting it in hospital emergency rooms, which is the most expensive medium for the care to be administered.

So if you can increase the pharmaceutical coverage, if you can get people on proactive therapies, you can keep them out of the emergency rooms.

So there's a very high likelihood here that this can be a self-funding initiative, that the amount that is saved through people -- the uninsured showing up in emergency rooms can actually fund the pharmaceutical therapy.

The good news is that this is very positive discussion that's going on.

As I mentioned in my prepared remarks, when the stimulus program is addressed -- and I think we're talking about days for that -- I think the next issue that's going to be addressed is healthcare and I'm ver -- at this point the devil's in the detail, of course, but we're very encouraged by the dialogue that's taking place and the prominence that the pharmaceutical therapy is taking in that discussion.

Charles, in regards to the liquidity market certainly the last time we talked was right following the Lehman Brothers issue and the freezing up of the commercial paper markets.

I think with the government intervention that has happened since then the liquidity markets have eased up some and we, like most others, are able to access those markets pretty readily at prices that have really normalized.

I think our borrowing costs under both our credit revolving facility and our securitization facility, which accesses the commercial paper market, average between 3% and 4% for the quarter and that was actually down from short-term rates that were in the 5.5% range or so last year and is one of the reasons our interest expense was down.

So we feel a lot better about the short-term markets.

The long-term capital markets are still tight and rates are still very high for -- versus historical norm, so I think we're going to continue to tread cautiously and keep our eye on the environment and we're very happy with our balance sheet today and the flexibility that it gives us.

Thanks.

Thank you.

Our next question will come from Richard Close with Jefferies & Company.

Please go ahead.

Mike, I think you said the ESAs you were looking for part of your forecast was down 20% in fiscal 2009 from the fourth quarter run rate and mentioned down 12% in the first quarter so it seems as though you're doing a little better than you thought at the beginning of the year.

Is there any reason that we would move backwards towards that 20% down year over year?

Well, I think you're right, Richard, we did a little bit better than we expected, but we're going to continue to have the 20% guidance.

It is early in the year.

I don't think there's been any new news that would generate any further reduction, but I think it's still early and we'll keep that guidance right now.

Thanks.

We have a question from [Helene Wolf] with Sanford C.

Bernstein.

Please go ahead.

Hi, thank you for taking my question.

I have two questions.

First starting with the gross margin improvement, I wanted to understand what the mix is between the progress on generics and specialty versus the loss of the Walgreens contract and the low margin of that contract?

And then secondly on the restructuring charges and the expense management side, with the bolus of restructuring in Q1 should we expect a bolus of savings and what is the timing expectation around those?

I will handle the first one.

From the gross margin improvement perspective, I think the order that we had some of the comments and really determined the magnitude of their importance.

Certainly, the generics growth I think was far and away the most important element of the gross margin improvement.

Certainly our mix was helped by the loss of the low-margin warehouse business, but some of our growth also came from some of our larger customers who received very favorable pricing and so some of that was offset.

Far and away, I think the generic double-digit growth was the most important factor and I'd say second with the growth in the specialty services.

What was the question on restructuring?

I missed that.

If you could repeat the second question, Helene.

She's probably off.

Helene, one moment, your line is open.

Go ahead please.

Sorry about that.

Thank you.

On the restructuring charges in Q1, which you mentioned or stated in the call would be significant relative to the balancing of the year, should we expect some payback for -- you talked about closing DCs, should we expect to see some payback or expense savings on the operating expense line and how should we expect those to flow in terms of the progression?

First of all, Helene, before Mike gets into the details I want to make sure that -- we do not anticipate closing any distribution centers during the balance of this year so I want to make sure that we make that clear.

Okay.

Yes, the amount of the costs that we did incur during the quarter were $1 million, Helene, so it's not a huge amount in relation to our total expenses.

And as I mentioned, some of that came from our CE2 program and those savings are built into our forecast for the year of expenses being down versus fiscal 2008.

Some of that came as planned from some of the Canadian consolidation work that we have done and that is also factored in our guidance of expenses being below last year.

Thank you.

Thanks.

We have a question from Harlan thunder ling with We have a question from Harlan Sonderling with Columbia Management.

Please go ahead.

Thank you and good morning.

My question is for you, Mike, please, on the cash use in the quarter.

It's materially that above that of the cash use in the prior-year period and I wanted to know is that simply opportunistic buying by you and what might be -- what might the prospects be going forward?

Harlan, the cash usage was $300 million in a quarter, as you stated, versus $100 million last year.

A lots of that was due to the inventory build up that we normally have from a seasonal perspective and some timing in the accounts payable.

I think one thing to keep in perspective this is a business that does $200 million a day in activity and whether the month ends on a Monday versus a Tuesday versus a Wednesday can have some impact on timing at the end of the quarter and I think that's all we saw at the end of December.

I think I mentioned during my comments that the inventory levels that increased significantly between September and the end of December are already down in January so that inventory increase that we saw has flowed through and we don't see any change to our estimates for the entire fiscal year where we continue to expect our free cash flows in the $460 million to $535 million.

So just a little bit of timing in how we built the inventory and how the payables came through but no real changes from historical trends that should impact us for the year.

Super, thanks.

We will take one more call.

Okay, thank you.

We have a follow-up question from John Ransom with Raymond James.

Please go ahead.

Hey, you sounded like you are a little more willing to use your balance sheet on the acquisition side.

Could you just tell us what's out there?

I know there are a couple regional wholesalers left, but what kind of things are out there that could move the needle?

Well, John, there continue to be opportunities out there.

There still are some -- there's a half a dozen or so regional wholesalers out there.

There're still a couple of coops that are out there.

There are -- within the specialty business there's some specialized companies that could broaden our broad service offerings.

We definitely keep our eye open and in these turbulent financial times what may well happen is smaller companies who had trouble accessing the credit market in the past might have a little bit more trouble and might appeal to us.

So we're very receptive, as I mentioned.

The biggest one we've done was last year, Velco, and I will tell you one year later we're happy with the acquisition and how it turned out.

Thank you, John, and now I'd to turn the call over to David to make a few final remarks.

Well, thanks, everybody.

Again I'll just thank you all for joining us and just tell you that we continue to be very optimistic about our industry and the position that we have within that industry.

We think our key growth drivers of generics and the specialty are the premier space within a premier industry and we look forward to sharing with you our continued success in April when we announce our second quarter fiscal results.

Thank you very much.

That ends our call, operator.

Thank you.

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