美源伯根 (ABC) 2009 Q2 法說會逐字稿

Welcome to the AmerisourceBergen second quarter earnings call.

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

Later there will be an opportunity for questions and instructions will be given at that time.

(Operator Instructions).

As a reminder this conference is being recorded.

I'll now turn the conference over to your host, Mike Kilpatric.

Please go ahead, sir.

Good morning, everybody.

And welcome to AmerisourceBergen's conference call covering fiscal 2009 second quarter results.

I'm Mike Kilpatric, Vice President Corporate and Investor Relations.

And joining me today is David Yost, AmerisourceBergen President and CEO; and Mike DiCandilo, Executive Vice President, CEO of AmerisourceBergen and COO of AmerisourceBergen's 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.

ABC had a strong second fiscal quarter historically our strongest quarter which speaks to the resiliency of our customer base and Company and our ability to continue to deliver strong performance in turbulent economic environments.

Total revenues were $17.3 billion, down 2.5% versus last year.

You will recall that last year was leap year, resulting in one less working day in this year's March quarter.

You will also recall we discontinued $3 billion of Walgreen warehouse business July 1, 2008, which impacted this quarter's revenues about 4%.

Then of the lost Walgreen's business, revenues on a per day basis were up about 3% this quarter versus last year.

As was demonstrated in our financial metrics, our revenues were high in quality, reflecting our mix of product, our customer base, and lack of customer concentration and our continued focus on customers where we have the opportunity to provide value-added services.

In any environment, but particularly in a slower growth environment, having the right customers is one key to strong performance.

Gross margin increased for the quarter reflecting our generic revenue growth, good performance from our specialty group, and a strong seasonal by side environment.

The associates of ABC again delivered outstanding expense control.

We ran ABC in total with fewer dollars than we did in the same quarter last year excluding special items while continuing to make important investments in our future.

Most notably, our business transformation program.

Our CE2, customer efficiency, cost effectiveness, operating philosophy, continues to pay dividends.

Our operating margin increased again this quarter versus last year.

This time a robust 11 basis points.

I would remind you that we have increased our annual operating margin by six or seven basis points in each of the last three fiscal years, and we will continue to focus on operating margin with a goal of low to mid- single digit expansion this year.

Operating income was up 6%.

Diluted EPS from continuing operations was up a very strong 17% to $0.95 per share.

This is on top of a 21% increase in EPS in the March quarter of 2008.

So we're putting strong earnings performance on top of strong earnings performance.

In addition, we continue to do an outstanding job of managing our assets, with our receivables, at 18 days, and our inventory turns over 14 times generating well over $300 million of cash for the quarter.

It is important to note that in these turbulent economic times, our DSOs have declined which speaks to the quality of our customers, and our organizational structure and associates.

So what's to like about the quarter.

Before we hit some of the Company's specifics on the quarter, I'd like to address a few industry issues.

First, the environment in Washington.

Things are moving very quickly in our nation's capital, and the issue of healthcare reform is frequently in the news.

Probably nothing is going to occur on the national scene that will dramatically effect our current fiscal year that ends in September.

Looking to fiscal 2010 and beyond, we think the 46 million or so uninsured will be addressed which will increase pharmaceutical utilization, a strong positive for ABC and our industry.

Though we're watching the issue of importation closely, we think the security of the pharmaceutical supply channel will dominate and sideline this topic.

In total, we are not seeing anything in the healthcare reform debate currently that we think will be a big negative for ABC, and could in fact be a strong positive.

Next, the competitive climate.

I would continue to describe the industry as I have consistently described it for many quarters as competitive, but stable.

No large multi billion dollar pieces of business have changed wholesale suppliers in the last several quarters, addressing in part the stability of the industry and reflecting the integration of wholesaler and customer that frequently occurs with large accounts.

Gains and losses of smaller accounts tend to be somewhat anecdotal.

And finally, still on the topic of industry issues, the manufacturer pricing environment.

The March quarter is traditionally our strongest quarter due to by side contribution and this year was no exception.

Though fee-for-service has mitigated much of the quarter's fluctuations, resulting from manufacturer price increases, there are still some manufacturers not on fee-for-service, and some on hybrid fee-for-service programs that result in periodic upside often in the March quarter.

This above average March by side contribution will not continue throughout the second half of our fiscal year.

That said, we expect the manufacturer's pricing environment to be similar to last year, with the brand name price increases expected to be in the 7% range for this full fiscal year.

Now a closer look to home and some specifics on ABC.

Our associates delivered an outstanding March quarter reflecting several often mentioned themes.

First, the resiliency of our business and our industry.

Second, the growth drivers of generics and specialty.

And third, the lack of customer concentration and the quality of our revenues.

Regarding resiliency.

Obviously, this is as turbulent an economic environment as any of us have seen with what may be the slowest industry growth in my three and a half decades in the business.

I would say that the resiliency of our Company and industry is being tested, and ABC is passing the test with flying colors.

Our performance in the last several quarters should provide confidence for future performance, even if the current economic environment continues in the near term.

Regarding our growth engines; specialty and generics.

Our pro generic solution formulary continues to gain traction out pacing our retail and institutional growth as we continue to capture more of our customers generic business and expand our total revenues with customers that utilize our value-added services, a key one being generics in both our institutional and retail segments.

Our retail focus continues to be on independence, regional chains, and food drug combos, all of whom look to ABC for their growing generic needs among other services.

Our Good Neighbor Pharmacy program is an integral part of this strategy, now with over 3000 stores participating and double-digit growth anticipated in the next year.

We continue to stress generics in our institutional business as well, with very positive results.

Our AmerisourceBergen specialty group, ABSG, with a $15 billion annual revenue run rate continues to be extremely well positioned within the industry, and grew revenues 8%.

Our oncology business which features the strongest position interface in the industry, our plasma and vaccine business, our physician facing biotech and injectable business, our third party logistics business, and our reimbursement consulting and analytics business all did very well.

ABSG has the widest array of value-added services in this base by far.

Which accounts in part for the attractive operating margins, revenue growth, and its bright prospects for the future.

In concluding our third theme, we have very little customer concentration, with only one customer representing more than 10% of revenues, and no other customer even close to 10%.

We continue to focus on customers that look to us for value-added services, which is reflected in our expanding operating margin, and in doing so, avoid margin impacts that may occur with large customer repricing.

Mike will provide insight on each of our operating units, but let me give you the cliff notes.

Each of our units, AmerisourceBergen Drug Company, AmerisourceBergen Specialty Group, and AmerisourceBergen Packaging Group is properly positioned for the future.

Each is focusing on the right mix of products with the right customers, controlling costs, and managing assets and has the performance to prove it.

Our focus on the future includes addressing our future IT capabilities, and we continue to invest in a new broad-based ERP system with SAP as its base to meet future needs of our customers under a program called business transformation.

A brief comment on our increase in EPS guidance of $3.18 to $3.30 per share, an increase over our previous guidance of $3.08 to $3.25 a share.

We are now halfway through our fiscal year, and have better insight into our expected annual performance than we did six months ago.

Particularly our interest expense, and our share repurchase which are the key drivers of our revision.

We have the organizational depth, cash, and balance sheet to handle midsize acquisitions of $200 million or less within our core business, should opportunities arise and would consider something larger if it made sense.

And we could respond quickly if necessary as I've noted on previous occasions.

Before I turn the floor over to Mike for some added color, I want to emphasize my optimism for the wholesale pharmaceutical distribution 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 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 premiere space within the industry.

Our diversified and unconcentrated customer base continues to be a great strength.

We are a resilient Company in a resilient industry.

Here's Mike.

Thank you, Dave, and good morning, everyone.

Another very strong quarter in a series of strong quarters emphasizing our positioning in the right areas of the market specialty and generics.

Our cost discipline and working capital management were once again outstanding, and DSOs continue to be under control.

Our associates attention to detail, operational execution and customer service continues to distinguish us in our marketplace and with our customers.

In addition to our stellar operating margin expansion, our significant share reduction helped us generate very nice 17% EPS growth from continuing operations.

And during the quarter, we were very pleased to see our performance recognized through our ratings upgrade from Standard and Poors.

While we are extremely pleased with our second quarter results, I would like to remind everyone that our March or second fiscal quarter has traditionally been our strongest quarter from an earnings and margin perspective due to the relatively higher number of brand name drug price increases during the March quarter and this year was no exception.

Despite a number of moving parts, a substantial amount of the increase in gross margin sequentially from the December quarter related to benefits from manufacturer price increases during the March quarter.

Certainly our fee-for-service agreements have somewhat mitigated the variability of the quarterly price increases.

However, the 15% or so of our brand name business that is still subject to the timing and magnitude of manufacturer price increases continues to benefit the March quarter more than any other.

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

Revenues decreased 2.5% from the prior year quarter, primarily due to the expected decline in Walgreen's warehouse sales as well as the impact of having one less business day in the quarter.

Ex the Walgreen business and business day impact, sales would have increased 3% and we continue to expect revenues to grow 1% to 3% for the year, with the highest growth in the fourth quarter as we annualize the lost Walgreen's warehouse business.

Drug company revenues were down 4% in the quarter, reflecting the Walgreen's impact on retail sales.

In addition, institutional sales growth moderated during the quarter as we reached the one year anniversary of our large PVM contract.

The second quarter is the drug company's toughest quarterly comparison to last year.

And we would expect a second half of the fiscal year to reflect solid growth as the impact of net new business wins becomes more apparent.

Our specialty group revenues grew a solid 8%, once again, exhibiting growth broadly across virtually all of its distribution and services companies.

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

We continue to expect 5% to 7% growth for the specialty group for the year as quarterly comparisons get a little more difficult in the next six months.

In our packaging group, which is a reminder, represents less than one-half of 1% of our total revenue, but approximately 5% of our operating profits, revenues were flat sequentially, and down versus last year due to continued delays with certain of its manufacturer customers receiving FDA approvals for new drug introductions.

We expect to have a strong second half in this business, and the future remains very bright as contract packaging outsourcing trends have never been better.

Gross profit was up 3% compared to the prior year despite the lower revenues, due to increased generic revenues from our pro generics solutions program, gross profit increases from the high growth specialty business, and increased contributions from fee-for-service agreements with our supplier partners.

All of these positive factors combine to offset the normal competitive pressures on sale side margins.

There were no large unusual items affecting gross profit during the quarter.

We did have a modest $2 million benefit from a dispute with a former customer, similar in size to a $3 million litigation settlement that benefited us last March.

Gross margins were up a significant 16 basis points, compared to last year for many of the same reasons gross profit dollars increased, including the product mix shifts to generics, increase supplier fees and gross margin expansion in our specialty business.

Our LIFO charge in the quarter was $11.6 million, compared to 9.6 million last year, reflecting the healthy supplier price increase environment.

We had expected price increases to moderate some compared to last year, but they have remained fairly consistent, and as a result, we now expect our LIFO charge for the year to be approximately $20 million, similar to last year's charge.

Operating expense dollars in the quarter, excluding facility consolidations and services expense, were below last year's quarter.

Once again, reflecting continued discipline at each of our business units, significant productivity improvements in our distribution facilities, and continued benefits from our prior year organizational streamlining.

This decline was achieved despite approximately $9 million of increased expense over last year's quarter for our ERP enabled business transformation project.

As Dave mentioned, we continue to be very focused on our CE2 customer efficiency and cost effectiveness philosophy, and those of you who have followed us for a long time know that we have been consistently focused on cost and working capital management over the years and not simply reactive to current economic conditions.

Cost discipline is a way of life at ABC.

Facility consolidations and employee severance costs were $4.3 million in the quarter, compared to $1.4 million last March and consisted of severance costs related to Canadian facility consolidations and our automation business as well as some movement on an old employment issue with a former Bergen executive.

Operating income was up 6% and operating margins were 143 basis points in the quarter, up an impressive 11 basis points, including the impact of the larger facility consolidation and severance costs.

This was due to the combination of our significant gross margin expansion and expense control in the quarter.

For the first six months of fiscal 2009, operating margins have increased seven basis points, which should give everyone confidence that we will expand operating margins for the year.

Interest expense for the quarter of $14.5 million was down 22% from the prior year quarter, due to lower net borrowings and lower than expected variable short-term interest rates primarily on our revolving credit facility where rates were down over 300 basis points from last March.

We now expect that net interest expense for the year will be comparable to last year's $64 million.

Previously we thought current year interest expense would be higher than last year.

Our effective tax rate in quarter of 38.2% was down from last year's 38.9%, and we continue to expect our annualized effective rate to be in the 38.4% range.

Our EPS growth from continuing operations in the March quarter exceeded our income from continuing operations growth of 8% due to the 11 million, or 7% reduction in average outstanding shares compared to last March.

Primarily as a result of our share repurchase program over the last 12 months.

Currently, we are expecting average outstanding shares to be down between 6% and 7% for the full year in fiscal 2009, which is higher than our previous 5% expectation.

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

As expected, we reversed much of our first quarter seasonal inventory build and we generated $337 million of cash from operations in the second fiscal quarter, more than offsetting our first quarter usage.

We had $26 million of capital expenditures in the quarter, and $69 million in the first six months and continue to expect to spend approximately $140 million for the year.

From a statistical standpoint, DSOs were down about one-half day from last year's March quarter averaging 18.2 days for the quarter.

We continue to be pleased that our customer receivables have not deteriorated in the current economic environment.

And we continue to benefit from strong credit management and a diverse customer base in which only one customer exceeds 10% of our revenue and/or receivables.

Our average inventory days on hand during the quarter were 26 days, up a day from last year, offset by average payable days also being up one day compared to last year.

From a share repurchase perspective, we bought back $92 million worth of our shares during the quarter, and $180 million through the first six months.

We remain on track to purchase approximately $350 million of our shares for the full year.

Our gross debt-to-total capital ratio at the end of March was 30% in line with our 30% to 35% target.

Now turning to our fiscal 2009 guidance, we have raised and narrowed our diluted EPS from continuing operations range to between $3.18 and $3.30 per share from the previous range of $3.08 to $3.25.

This new EPS range continues to reflect annualized revenue growth of 1% to 3%, operating margin expansion in the low to mid- single digit basis point range, free cash flow of $460 million to $535 million, and share repurchases of $350 million evenly throughout the year.

The uptick in EPS guidance was primarily driven by a further reduction in expected share count for the year, now between 6% and 7% compared to last year, and reduced expectations for interest expense now expected to be comparable to our prior year interest expense of $64 million.

So to summarize, another strong quarter and a great first half for the year.

We're in the right markets, generic and specialty, with the right customers and our day-to-day execution combined with stellar costs and working capital management continues to distinguish us in our marketplace.

Now here's Mike Kilpatric.

We'll now open the call to questions.

I would ask you to limit yourself to one question until we have all had the opportunity.

And then if there is time you can ask additional questions.

Go ahead.

Thank you.

(Operator Instructions).

Our first question comes from Eric Coldwell with Baird.

Go ahead please.

Thanks.

Good morning.

Good job.

Nice performance in the generics growth again this quarter.

Coming I think very close to what you did last quarter.

Market is concerned that there are not as many brand of generic conversions this year.

Maybe that had some people worried that your generic growth will slow.

I'm curious what your thoughts on that are, and if you have confidence you can keep up the double-digit pace going forward.

Thanks.

Thanks, Eric.

The answer to your question is, yes.

We do think we can keep that up.

And that's a function of us having a growing part of our customer's business, and this is a growing part for them.

So we have a growing part of a growing part.

- - in addition - - we've gone outside of retail to the institutional market where we've also gotten good penetration.

So the two big growth drivers we have going forward, Eric, which we've talked about many times, one is generic, and the other is specialty distribution and services.

And the generics are exactly where we thought they would be, and we're very confident of our ability to continue to grow them in the future.

Dave, just a quick follow up.

Are you referencing penetration into hospital accounts or is it some other channel institutionally?

It's into the hospitals, Eric, and we're very optimistic that that will continue to grow.

Great.

Good job, guys.

Thanks.

Thanks.

Next question, please.

Thank you.

That will come from John Ransom with Raymond James.

Please go ahead.

Hi.

I have one.

And this is kind of a boring question for such an exciting company.

This is a boring question.

The first of all boiler plate, what's your quarter end share count?

The quarter end share count is 151, 150.169.

Could you carry that out a couple more decimals?

(Laughter) That's pretty good.

My question is philosophically, you guys even if you execute your share repo program, in our motto, we have you building an incremental 300 million plus in cash on your balance sheet.

So this kind of puts you close to 900 million in case, and about 1 billion in debt.

Is there any reason that you wouldn't crank up your share repos a bit, given how much cash you're building?

It's a great question, John, and I think our answer is pretty consistent with what we've said in the past.

Our year has progressed exactly as we had expected it to.

We have a significant cash flow generation projected for the second half of the year.

And to the extent we achieve that, and we expect to, we should have a lot of cash on hand.

We've been a little reluctant in this environment to spend it too quickly with the uncertainty in the credit markets.

And - - we continue to have our eye on acquisitions.

And to the extent that some of those acquisition opportunities would not come to fruition, and we have the cash as we've shown in the past, we would not be hesitant to return some of that to shareholders.

So I think our history pretty much tells you our thoughts about that issue.

And on that topic, and I'll jump out of queue here.

There's - - I don't see any way you have 64 million in interest expense.

You did 14.5 this quarter, and like I said, you'll generate most of your cash flow in the back half of the year.

So if anything, it looks like interest expense would be something more like 56 million to 58 million, not the 64 million that you reference.

So are you, is there something in the interest expense number as you deleverage that would cause it to go up?

Good question, John.

It may be a little bit conservative, but we do have, in April, we will renew our Puerto Rican revolving credit facility, our $55 million facility.

And there will be some fees associated with that as well as somewhat higher interest rates on that facility.

And we also expect during the second half of the year to renew our receivable securitization facility which is a $975 million facility.

And again, there will be some fees associated with that as well as - - probably including a facility fee that will be somewhat higher, so - -

Okay.

Both of those events are factored into the second half.

Okay.

Thank you.

Thanks, John.

Next question, please.

That will come from Larry Marsh with Barclays Capital.

Thanks and good morning.

Dave, I don't think you have to convince me or anyone else that you're serious about managing your costs, given your long record.

Thanks.

- - I just wanted to maybe drill down on the market dynamic, and maybe a little bit of pricing.

I know in the past, you said your top line is consistent with market growth, and I know that had been consistent, though I guess IMS is saying now down to 1% to 2% for the US for this year.

- - there's a message there you feel like you're taking a little bit of share now this year or would you disagree with the forecast?

I just had a quick follow-up on pricing.

I'm not sure I want to bet my career on that forecast.

But from IMS, particularly given the recent script things that Dave reporting and what appears to be happening in March, which is a, kind of encouraging.

So I think that's the key take away.

To the effect, to the extent that the market is slowing down because of generics, that's good upside for us.

That gives us a great opportunity.

I guess the last thing I'd add is that if the market is slowing down, I think we've demonstrated in the last couple of quarters that - - given our mix and our customers, we can prosper in a slow growth environment.

The only other thing I would say is I haven't got a chance, I've just kind of seen the headlines.

I haven't got a chance to look at the details.

But I don't think IMS is accounting for any uptick in any government programs for the uninsured.

And I will tell you, it's not an imminent issue, but when you look out at 2010 and beyond, we clearly think that's going to be a factor.

So long answer, but again, not sure I want to bet my career on it.

Yes, fair point.

I guess just a follow-up from Mike on the pricing.

You started talking about 7% brand inflation.

I think you had said 5%, previously.

Most of your brand is now fee-for-service, so you get a little benefit there.

Why wouldn't we see some of that in upside in your gross profits.

Or are you saying basically you're managing LIFO charge to completely offset that uptick in pricing?

Yes, well, Larry, certainly when you look at our performance sequentially, the big increase between 1Q and 2Q.

And the difference between 2Q and any other quarter is the impact of those price increases, and a lot of the business that we have that's still not on fee-for-service is very concentrated into the March quarter.

And when I compare the March quarter to last March, it's very comparable, because we had that same dynamic last year.

I think the real driver year-over-year has been the performance in generics, has been the performance in specialty.

And I mentioned we did have an increase in contribution from fee-for-service.

That's as much due to the fact that we've added some new contracts as it is purely due to a higher than expected price increase environment.

And you're absolutely right when you make the point that the increase LIFO charge does add, does become somewhat of an offset to that FIFO price appreciation.

Right.

Sounds like you continue to be conservative on how you manage that LIFO charge.

So, okay.

That's all I wanted.

Thanks.

Thanks, Larry.

Next question, please.

That will be Charles Boorady with Citi.

Hi.

Thanks.

Good morning.

My one question series is going to be around generics, and I'll keep this to close to one.

How is the M&A among the generic manufacturers, and also some of the manufacturing disruptions in India and elsewhere?

How has that impacted your supply and also the pricing unit cost of generic drugs?

And you mentioned double-digit generic sales growth.

I'm wondering how much of that reflects improved compliance or an improvement in current account sales versus getting new customers on to your generic program?

Well, Charles, that's a lot for one question.

That was actually fewer than the previous question that was asked.

I did okay.

Let me kind of first hit the consolidation issue.

It is not having a big impact on us.

It results in manufacturers who are very, very strong, And we have good working relationships with them and the like.

We do keep a close eye on the supply opportunities for, from India to make sure we've got ourselves covered so we make sure we're supplying our customers' needs.

I mean to put it in perspective, our pro generics formulary has 500 or 600 manufacturers in it, so it's very, very broadly based.

I'm forgetting the next part.

Mike, can you help me out?

Yes.

Charles, you asked a little bit about about compliance, versus market growth.

And I think we're probably a little north of market growth, so compliance does have an element of it, and I think Dave made an important point.

It's not just compliance in the retail sector, which has been a huge emphasize point for us for some time, but we are also starting to making some inroads into the institutional sectors.

Both Dave mentioned that the hospitals where we're entering into new agreements with some large GPOs to start handling their oral solid generics, as well as opportunities in the alternate site space which is an important point because it's some of the alternate site type of accounts, whether they are nursing home providers or clinics, are some of the fastest growing health care providers.

And we have focused very much on tailoring generic programs to that segment, and focusing on it so we've had definitely increases as a percentage of sale in the, in the other than retail parts of our business.

We get all of them?

You did, thanks.

Thanks, Charles.

Next question, please.

That will be from Glen Santangelo with Credit Suisse.

Hey, Dave.

I just had a quick follow-up question on your margins here.

In your press release, you specifically called out the higher margin from the specialty group.

And when you were kind of giving your prepared remarks - - you went through the effort of talking about some of the service offerings that you have within that business.

And as I think about that business historically, I think it's the service piece that has the real high margin, but the specialty distribution piece is even lower margin kind of than your core distribution businesses.

Is the mix within specialty changing, and as that business continues to outpace drug distribution growth, should, ultimately, that continue to pull your margins up?

If you could elaborate and help me to think about the impact, especially on margins, that would be helpful.

First of all, Glen, they are both growing very, very well.

And they are closely related.

And that's the point that I wanted to make - - is that the fact that we have this broad service offering which does carry with it more attractive margins is probably what's drawing, part of what is driving the distribution.

The fundamentals of the distribution business of pure product are not that dissimilar, from the, our base business.

But it's the opportunity to provide this wide array of value-added services with products that are very sophisticated that is really driving that margin.

So the short answer to your question is we do expect the speciality business to outpace - - we expect the speciality revenues to outpace the market in total and our drug business, and we expect to continue to have very attractive margins there.

Okay.

Thanks a lot, Dave.

You bet.

Next question?

That will come from Helene Wolf, with Sanford Bernstein

Good morning, and thanks for taking the call.

Just a quick question about the revenue growth and guidance assumption.

When we look at the IMS data, and much like you commented earlier, we actually expect that the first quarter is going to come in somewhere perhaps around 3.5%, making some assumptions about March.

And I guess I'm just trying to under the difference between the market rate of growth, if that's what it ultimately transpires, and what you're predicting, or what you've shown in terms of the fourth quarter performance.

I would say the big emphasis we have is on quality of revenues, and - - not chasing revenues for revenues' sake.

I think that's the most important take-away here.

We're looking at expanding our revenues with customers where we have a great opportunity for value-added services, one of the prime ones.

- - being generic in the specialty business, wide array of value-added service that we try which I listed.

So that's the first point.

The second point I would make is I'm not sure that you can fine tune the market quite that closely.

But I do think you are directionally correct, it might end up being positive.

I'll just add to that, Helene.

Keep in mind we've got a drag for the first nine months of the year that make sure you have factored in there which would be with that $3 billion of Walgreen's business which is a 3% drag for the year, but roughly a 4% drag each of the first three quarters.

And obviously, when that - - ex that, we've been talking about our growth being in the 3% or so range and obviously, when that anniversary is in the July quarter, we'll have the highest revenue quarter of our year in the fourth quarter, But we haven't seen anything that makes us move away from that 1% to 3% growth target for the year.

And nothing in terms of the environment around any contract changes or anything else that would explain or be significant in the first quarter?

No.

Okay.

Thank you.

Next question?

Next we have Lisa Gill with J.

P.

Morgan.

Thanks very much.

And good morning, everyone.

Mike DiCandilo, can you maybe just walk us through you the expectations around margins in the back half of the year?

I heard Dave make the comment that, obviously, margins thus far for the first half have improved six or seven basis points.

You are still expecting low double-digit expansion.

So as we start to think about the next couple of quarters, obviously, price increases won't help as much.

But do you still have a number of generic opportunities?

I think you just laid out for someone else, the opportunities around specialties.

So it sound like that's still there.

So maybe just talk about what some of the headwinds are for margins in the next couple of quarters.

We still expect to have expansion, Lisa, just not at the rate that we've had in the first half of the year.

And the biggest issue there is keep in mind, we do, anniversary, again the loss of the Walgreen's business in the fourth quarter which actual hurts the margin expansion.

Because that helps it some in the first three quarters.

In addition, you may remember that we had a $12 million one-time item from a customer's settlement, or from a supplier's settlement in the fourth quarter of last year, which added about nine basis points to the fourth quarter.

So it's more a function of us having a tougher comparison than it is to any change in our business prospect as we go forward in the third and fourth quarter.

Mike, are you comfortable with talking about what you think sustainable type margins are for drug distribution as we think about going forward?

I think that's one of the concerns investors have in general is what's the sustainability of a margin in the drug distribution business given all these different factors that are out there right now.

Lisa, I'm very encouraged, particularly because of the product mix element compared with our ability to control expenses.

Our guidance - - I think Dave mentioned in his comments we're up six to seven basis points each of the last three fiscal years from an operating margin perspective.

We expect to be up again this year.

And going forward, I think we expect to have operating margin expansion in the single-digit basis point range.

- - we haven't seen anything that makes us feel any less optimistic about that.

Where we're strong, where the market is strong, generic specialties are both positive margin contributors.

Yes, and I want to make sure - - I'm piling on just so sure there is no question, I'm in exactly the same spot here.

We're very optimistic going forward.

Again, it's picking out the right customers, and focusing on those value-added services where we have opportunities, so we're very optimistic going forward.

Great, I appreciate the comments.

You bet.

Thank you.

Next question?

Thank you.

That comes from Robert Willoughby with Bank of America Securities,

Thanks.

Mike or Dave, did the inventory balances finish the quarter where you thought they would be.

Or were they somewhat high post a weak flu season in a seasonal build?

I think they were very much where we expected to be, Robert.

We do get some opportunities sometimes at the end of the quarter from manufacturers and - - sometimes the end of the quarter is a little bit higher than the average during the quarter, but I think we're exactly where we expect to be.

I mentioned that the days on hand average went up a day during the quarter.

And it's worthy, just the mathematical result of average inventories being almost exactly the same quarter-over-quarter and our sales being down a little bit.

But with the expectation that that's going to pick up in the second half.

That will correct itself over the next six months.

The Walgreen's inventory was not on your balance sheet?

Or was it there?

You mean this time last year?

Yes.

Yes, it would have been.

You do book that - -

July 1st - - we discontinued the business, and the inventory associated with that business would have gone in that quarter.

So last year we would have had inventory from that in our total last year.

From an accounting perspective, you do book that inventory?

Yes.

Okay.

Great.

Thank you.

Next question, please?

Thank you.

That will be Ross Muken with Deutsche Bank.

Good morning.

In terms of the customer base, are you seeing anything on the retail side to suggest to you that there's any bit of need for pricing pressure on that side of the market?

I know you've talked all this sort of positives on the margin side, but as we look forward and if this economy continues to deteriorate, do you get a good sense that kind of your core customers are in relatively decent enough shape that you're not going to see much from either them coming back to you because they're getting pressure in their core business, or potentially, failures on the small retailer independent side?

We're not seeing anything unusual.

I've been in the business for 35 years, Ross, and it's - - we have normal competitive pressure, particularly as your larger customers increase market share and the like.

But we're not seeing anything out of the ordinary.

I will - - I just came back from a National Association of Chain Drug Store convention NACDS.

And I had the opportunity to interface with a lot of the regional chains, which is a big focus for us, the food drug combos, - - regional chains.

And they were very optimistic about where they were in the marketplace and going forward.

So I will tell you from a historic perspective, I don't see anything really unusual from where we are right now.

Great, thanks.

That was helpful.

Next question, please?

Thank you.

That's Ricky Goldwasser with UBS.

Hi.

Good morning.

Good morning, Ricky.

Couple of questions.

One is for on the customer side.

From some former companies have been talking about the stocking going on.

What are you seeing in the marketplace in terms of your customers being more effective in managing inventors?

And then on the bulk revenue, bulk with - - lighter than what you reported in the December quarter.

Do you think this is seasonal thing, or should we model bulk being at that lower level for the remainder of the year?

Let me hit the first one, Ricky, and talk about the issue of our customers.

I would say one of the great values we bring to our customers is them to be able to match up their inventories very closely with the revenues.

I mean literally, they can order merchandise from us late in the day, early evening, and get they get the merchandise the next day - - by truck, by noon.

So one of the great benefits we bring to the customers is allow them to run on very, very thin inventories, and still be responsive to their customers with very high service levels.

It's one of the great benefits of the whole prime vendor arrangement PVA arrangements that we have.

So I'm not seeing anything unusual there.

And interfacing with relatively large number of our regional chains in the food drug combos in the last several days, I'm not hearing anything antidotally that leads me to believe that there's anything unusual going on there.

Your other question, Ricky, about the bulk.

I think the quarterly bulk revenues is a good approximation of our run rate going forward.

Obviously, it's down significantly from the prior year due to the change we made last year in our relationship with our large PVM customer.

Right, but we are also seeing a sequential change.

So you expect that to be consistent for the remainder of the year?

Yes, I think it's going to be pretty much the same now - - understand some of that is in the control of the customer - - as much as it is us.

But we're forecasting pretty much in line with what we have this quarter.

Okay.

Thank you.

Thanks, Ricky.

Next question, please

Thank you.

We have Charles [Ree] with Oppenheimer

Thanks for taking the question.

It kind of relates, Dave, to your comments here about your regional change in food drug combos.

Can you give us a sense here on what share of your generic program this group has sort of become relative to pure independence?

And maybe let us know how that has shifted over time.

And also, you talked earlier about increasing institutional compliance.

Can you just maybe give us some background on how that relationship works, generally.

My understanding is that with the hospitals, you're working through some larger GPO contracts.

How were they buying generics beforehand and how is that changing?

Thanks.

First of all, in terms of food drug combos, versus the independence, versus regional change.

We haven't broken that out in the past, Charles.

Those all kind of weave together, and particularly when you talk about independents, a lot of independents own multiple stores, and in fact are small regional chains.

The important take away here is in that total customer group though, we are getting very good generic penetration.

As a general rule, this group is not doing any warehousing, so we are meeting all of their generic needs.

That's part of the reason we've been able to increase our generic revenue is that we're capturing more and more, if not all of that merchandise category for this customer.

In terms of the institutional compliance though with some of the large hospital groups, historically, they've done some of their own bidding, and that has gone out and gotten their own generic contracts, which we in turn would administer for them.

There's been a movement of late for them to instead of doing that, using the generic program that we have and kind of piggybacking on the generic program that we have which reflects our broad-based volume.

So we kind of add their volume to our volume, and everybody benefits.

I think that's a trend that we'll probably see more and more of.

- - I think it speaks to the close working relationships that many of the hospital buying groups, and other buying groups as well have with wholesalers.

Clearly, AmerisourceBergen I think is an industry trend as well.

So basically, I'm just, just to clarify, you're just saying that the GPO contracts like let's say Premier Novation, - - when you have those, that prime agreement, that's the generic piece is being pulled into the sort of the master agreement?

Well I don't want to call out any individual GPOs by name, but what we're seeing more of is combining the GPOs utilization with our utilization.

Kind of having a bigger pot to go as part of our bidding, part of our bidding volume.

In the past, you might have had that fragmented.

You might have had the GPO doing their own bidding, and several GPOs doing their own bidding in ours, and now we are combining that altogether so we have a lot more scale.

I think it's serving everyone very, very well, and it's also bringing some efficiencies to the manufacturers.

So it's really a win, win situation.

And again, I think it really reflects the working relationships that have developed between the buying groups and the wholesalers over the years.

Great.

Thanks for the comments.

You bet.

Next question, please.

We will go to Richard Close with Jeffries & Company.

Yes, Dave, I think you mentioned competitive environment being stable, no large change of contracts, normal gains and losses, in the smaller contracts.

And I think you have said in the past about one-third of the contracts come up for bid per year, if I'm not mistaken.

Since we're half-way through this current fiscal year, I was wondering if you could give us an update on - - your win rate maybe compared to previous year's retention rates?

I think there's kind of nothing unusual.

The three-year mark has a tendency just to reflect the fact that in general, we have three-year contracts, three to four year contracts, it's not unusual.

We tend to not be involved in the big multi-billion dollar contracts.

There's been a lot, not been a lot of movement, even with the big contracts in the market.

And - - the smaller accounts tends to be somewhat anecdotal.

But we are not seeing any unusual things occurring in the industry that I would call out - - versus my several three decades or so in the industry.

I think it's pretty steady as she goes out there.

Okay.

And then just a follow-up with respect to the guidance for the remainder of the fiscal year.

How much do you guys factor in in the rise in unemployment, and potentially people losing their insurance and access?

I think, Richard, when we gave our guidance from the beginning of the year, we assumed a pretty slow market growth - - 1 to 2 at that point in our 1% to 3% overall guidance.

And again, I don't think we've seen a great change to that.

That assumed a slowdown, that took into account the economic environment.

As bad as the environment has been, it has been pretty much what we expected to see this year.

Okay.

Thank you.

You bet.

We'll take one more question, please, operator

Thank you, and that will come from Harlan Sonderling, with Columbia Management Advisors.

Thank you.

Good morning, gentlemen.

My question is on the build up or cash and your willingness to look at acquisitions of the value-added services to which you refer.

What are some of those value-added services that interest you if you can avoid being too specific?

It would be those kinds of things that would enhance our total offering, primarily the specialty business would probably would be where we would have the greatest opportunities.

And within the specialty businesses, there are a lot of little niche businesses.

One of the recent acquisitions that we made - - a year or so ago reflected that two years ago, reflected that.

So that's the area where we have the greatest, the area where we have the greatest interest.

We would not be opposed to regional wholesalers in our core space as well.

And as the economic environment gets more challenging, we would not be surprised to see some of them come up for sale.

So we're keeping a close eye on the market, and it's one of the reasons we're very careful with our cash so we can respond quickly if any opportunities arise.

Have you made any changing to your optimum balance sheet debt-to-capital mix?

No, Harlan.

I think the 30% to 35% being one of the criteria from a debt-to-total capital perspective.

It continues to be what we think is right and so we've made no changes.

Good luck shopping.

Thank you.

Thanks.

And thank you, everybody, for joining us today.

And now Dave Yost would like to make some final comments.

Well, again, I would just like to thank you for joining us.

We continue to be very optimistic about our industry, and the position in that industry that AmerisourceBergen plays with our key drivers being generics and our specialty distribution and services.

As well as our high quality concentrated revenues.

We look very forward to sharing with you our continued success in July when we announce our third quarter fiscal results.

Thank you very much.

And thank you everyone.

That ends the call.

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