美源伯根 (ABC) 2009 Q4 法說會逐字稿

Welcome to AmerisourceBergen fourth quarter earnings conference call.

Thank you for standing by.

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

(Operator Instructions).

Today's conference is being recorded.

If you have any objections you may disconnect at this time.

Now we will turn the meeting over to Mr.

Mike Kilpatric.

You may begin, sir.

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

I am Mike Kilpatric, Vice President, Corporate and Investor Relations and joining me today are David Yost, AmerisourceBergen President and Chief Executive Officer and Mike Dicandilo, Executive Vice President, Chief Financial Officer.

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

Also, AmerisourceBergen assume no obligation to update the matters discussed in this conference call and this call cannot be taped without the expressed permission of the Company.

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

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

Good morning and thank you for joining us.

As you probably know from our press release this morning, AmerisourceBergen delivered a strong fourth quarter in a series of strong quarters and a strong year in a series of strong years which speaks to the resiliency of our industry and consistent performance within that happen industry.

We enter our new fiscal year which began October 10, with great positive momentum.

Mike will provide the financial details on the quarter and year but I will hit the high points.

Revenues for the quarter were a record 18.7 billion, up 9% over the same quarter last year.

Again, this quarter our dollars of operating expense were lower than last year and operating margin continued to expand.

We reduced receivable days and generated cash.

Diluted earnings per share from continuing operations were $0.44 on a GAAP basis, up a robust 22% over last year.

And we had a tough comparison since our EPS was up 18% in the September quarter last year.

Lots to like about this quarter.

The highlights of the year are more of the same.

Revenues with the right customers, good expense control, operating margin expansion, strong asset management, robust cash generation and a diluted EPS from continuing operations increase of 17%.

You will recall we raised our EPS guidance during the year and then exceeded that raised guidance and during the year we split the stock and increased our dividend twice.

This is the fourth consecutive year that we have increased our operating margin by 5, 6 or 7 basis points per year and the fourth consecutive year we have increased our EPS by at least 14%.

We generated well over $600 million to free cash flow and had over $1 billion of cash on our balance sheet at the end of September.

Reflecting our continuous actual management of our two key financial assets of receivables and inventory.

Since the merger that created AmerisourceBergen in 2001, we have a compounded EPS growth from continuing operations of 16%.

Very consistent performance demonstrating our resiliency and the resiliency of the industry.

So the sound bite for ABC would be consistent performance in a resilient industry with positive momentum going into FY 2010 driven by a great customer mix featuring Generics and Specialty.

A couple of comments on the industry.

First, Healthcare Reform, we continue to be engaged in the process.

The final outcome of course remains to be seen.

We are encouraged by the fact that pharmaceuticals are being viewed as part of the solution to controlling total Healthcare expenditures and anything that increases the number of prescriptions that are dispensed should be good for our industry and ABC.

Emphasis on Generics and Biosimilars will be particularly good for ABC given our customer mix.

Second, on the topic of industry growth, we have stated previously that the forecast of negative total industry growth for this calendar year seemed over pessimistic and that low single-digit growth seemed more realistic.

With just two months to go in the calendar year, our intents would seemed to be validated.

IMS has recently revised their estimate of US market growth to 4.5% to 5.5% for calendar 2009 and 3 to 5% for calendar 2010 which seems more realistic to us.

Third, the pricing environment.

I would continue to describe the pricing environment as competitive but stable with few billion dollars pieces of business in the wholesale drug business in play in the next 12 months or so.

Now, a little closer to home for ABC.

During the quarter, we announced that Steve Collis, formerly Head of our Specialty Group would be transferring to our drug company as its President.

Many of you know Steve from our previous investor days or company presentations at investor conferences.

Steve is a proven performer of course, having started our Specialty business and growing it to over a $15 billion revenue business with a wide array of value added services.

Mike Mullin has taken over the leadership responsibilities at Specialty.

Mike is a Specialty Group veteran having performed well at a series of jobs at our Specialty Group with escalating responsibility.

Both Steve and Mike will report directly to me and both plan to be presenters at our Investor Day on December 15, our packaging group, supply chain management, IT and business transformation will continue to report to Mike Dicandilo.

Our business transformation process, our ERP centered drug company initiative continues on schedule and on budget with testing scheduled to begin in our second fiscal quarter that begins in January and back office implementation beginning toward the end of our fiscal year.

Our 9% revenue increase for the quarter to a record $18.7 billion reflected both the strength of the market and good performance in literally all segments of our business.

Generics continue to be a key component of our value added offering at ABC and during the quarter Generics grew in the mid teens.

In our traditional drug company, each of our customer segments of independent retail chains, hospital, and alternate site had strong revenue growth with both hospitals and independents reporting double-digit revenue increases reflecting strong and balanced growth.

We continue to enjoy increasing Generic penetration in hospital and alternate sites as well as retail.

Our good neighbor pharmacy franchised like program for independents and regional chains crossed the 3,700 store mark and our GNP Performance Network, a third-party access program continues at well over 5000 participating stores.

Our Specialty Group continued its strong performance.

Revenues and earnings were a record for the quarter with revenues now at a $16 billion run rate.

Our Specialty Group benefited from a good mix of product and value added services and the successful launch of Generic [Oncologic] earlier than originally expected.

Our Specialty Group continues to be extremely well positioned with the broadest offering of value added services in the industry.

Our Oncology business features the strongest physician interface in the industry.

Our third-party Logistics and Reimbursement Counseling businesses continued to do extremely well.

We have a robust Plasma and Vaccine business and had a good flu season this year.

Our Reimbursement Counseling business is gearing up for the calendar year end transition season and will employ 1,300 people by calendar year end.

Our Clinical Services Unit features a pool of over 400 registered nurses.

The depth and strength of our product and service offering within our Specialty Group continues to deliver attractive margins.

Our Packaging Group had a challenging year due in large part to delayed product launches but is extremely well positioned for FY 2010 with a robust pipeline.

It is important to note that the ABC customer base features very low concentration with only one customer representing more than 10% of our revenues and the next largest less than 5%.

We have no $ 1 billion customer contracts up for renewal this year.

Substantially, all of our customers except the one large mail order customer buy Generics from us.

Let me take a moment and focus on cost control and receivable management at ABC and give our people in the field the credit they deserve for delivering that performance while maintaining superior customer service that helps drive our revenue growth.

In FY '09 our total operating expense dollars were lower than FY '08 and FY '08 was lower than FY '07 net of the two acquisitions we made.

This cost control was delivered while our physical workload was actually increasing and our just completed quarter for example our total costs were down 2% year-over-year while our invoice lines our actual unit of work increased in double-digits.

Our invoice lines are increasing faster than our revenues in part because our product mix is reflecting an increased proportion of lower priced generics.

We have been able to drive down our cost in spite of this increasing workload in part because of the investments we have made previously in automation and in part because of the quality of our field management and work force.

Cost control is an important element of the DNA at ABC and positions us well for the future.

On the receivable front, our day sales outstanding were down this quarter versus last year in an environment that could easily be described as challenging.

I think our receivables performance speaks volumes about the quality of our customer relationships and the quality of our customers.

With our large cash position at the end -- at our fiscal year end let me reiterate our position on acquisitions, although none are contemplated in our guidance, we have said on a number of occasions that we are receptive to acquisitions and have spent over 1 billion in the last 7 years on acquisition our largest Bellco Health at 162 million, being our most recent.

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

We are in an excellent position for acquisitions both financially and organizationally.

Now, looking ahead to our fiscal 2010 which began October the first.

Mike will hit the details but here is the summary.

We expect revenues to grow well ahead of the market in our first half due to new customer wins last year and to grow with the market after we begin to anniversary that new business in March.

We expect flat to low single-digit operating margin expansion.

We expect to continue our share repurchase program in the $350 million range.

We expect to grow our EPS from continuing operations in the 8 to 14% range and that of course is on top of the 17% we delivered this year.

So the dead net here is, we expect to deliver the kind of consistent performance that has been characteristic of ABC since our 2001 inception.

We have begun FY 2010 with great momentum in a great industry.

I have been in the industry for more than a third of a century and I'm as excited as I have ever been about our industry and ABC's prospects within that industry.

Here is Mike.

Thanks, Dave and welcome to all of you who have joined us this morning.

It is very gratifying to have such a tremendous end to what was already a fantastic year, especially when you consider the macroeconomic environment over the last 12 months and we certainly have strong momentum as we enter fiscal 2010.

Before I get to our quarterly results followed by next year's guidance, I would like to take a moment to reflect on our 2009 performance against our original guidance for the year.

As a reminder our financial model is based on revenue growth, operating margin expansion and significant cash generation and we met or exceeded all of our financial targets in these areas that we set in the beginning of the year.

Our revenue growth guidance for fiscal 2009 was a range of 1 to 3% and we finished solidly in the middle of the range while new customer wins during the year have positioned us for strong growth in fiscal 2010.

We expect to have FY '09 operating margin expansion in the low to mid single-digit basis point range and we finished the year with operating margin expansion of 5 basis points.

This margin expansion was driven by both gross margin expansion and expense reduction.

From a gross margin perspective, our diverse customer base enabled us to capitalize on strong Generic market growth and our higher margin Specialty business delivered once again.

At the same time, we reduced our expense margin by decreasing total expense dollars while focusing on our future with significant investment in our ERP enabled business transformation program.

Our free cash flow of $638 million far exceeded our forecasted range of 460 to $535 million and we used that strong cash flow to enhance our total shareholder return by increasing our dividend twice during the fiscal year and by repurchasing $450 million of our stock well above our targeted $350 million of share repurchases in fiscal 2009.

All of these factors, contributed to drive our GAAP diluted EPS from continuing operations to $1.69, well above our original split adjusted guidance of a range of $1.54 to $1.63 per share.

Also, very importantly in these challenging economic times, we continue to improve our already strong balance sheet.

We achieved a ratings upgrade from S&P and ended the year with great financial flexibility.

Again, truly an exceptional year and we thank all of our associates who worked very hard to make it happen by delivering superior customer service every day.

Now moving to our quarterly result.

Total revenue increased 9% in the quarter to a quarterly record of $18.7 billion.

The Drug Company grew its top line 10% in the quarter and the Specialty Group grew 8%.

New business in the Drug Company, including the new CPA Retail Buying Group and the relationship with the HPG Group in the Hospital segment contributed 6% of the Drug Company growth and 5% of the total Company growth.

The majority of this new business anniversaries in the March 2010 timeframe and as a result revenue growth in the first two quarters of fiscal 2010 should continue to benefit from this new business.

The Specialty Group hit a new milestone in the quarter exceeding $4 billion in revenue for the first time and its 8% top line growth was driven by ASD our Nephrology Blood products and Flu distribution business and Oncology Supply, our Oncology Distribution business.

The Specialty Group exceeded $15.5 billion in revenue for the full year as be expected and continues to have unparalleled offerings in Physician Distribution, in Specialty Services that make us the market leader in this fast growing space.

Gross profit for the total company increased 2% in the quarter despite a very tough comparison to last years quarter which benefited from a significant Glaxo price increase and a $12 million favorable settlement with the supplier.

In the current quarter we continued to benefit from improving product mix as higher margin Generics grew in the mid teens percentage range including from an increasing contribution from Generics Oncologic in the Specialty Group.

The margin contribution from Generics more than offset the non-recurring prior year items, the faster growth of our largest customers and the Kaiser repricing, which was effective July the first.

We had a LIFO credit in the quarter of $5.7 million compared to a charge of $3.4 million in the prior year quarter.

This credit was primarily due to having a higher mix of deflationary Generics in our ending inventory as a result of our strong Generic growth.

For the year, our LIFO charge was $15 million compared to a charge of $21 million last year.

From an operating expense standpoint expense dollars in the quarter were down nearly $11 million from last year and as a percentage of revenue were down an impressive 21 basis points as we managed the additional volume from the 9% revenue increase at a very low incremental cost through our automated distribution facilities.

In addition to our normal cost discipline, we also benefited from a normalized bad debt expense compared to last year's quarter and a reduction to asset write-downs in other Specialty items.

In total from the year, operating expense dollars declined from 2008, which is very impressive considering the significant amount of new business we added in the second half of 2009, and the increase in investment spending for our business transformation project where we incurred incremental expenses of $14 million compared to last year.

The increase in gross profit combined with the operating expense decrease led to an impressive 11% increase in operating income in the quarter with operating margin expansion of 2 basis points.

For the fiscal year our operating margin of 123 basis points expanded by 5 basis points compared to fiscal 2008.

Moving below operating income, net interest expense of just under $15 million in the quarter increased 11% compared to the prior year due to a decline in interest income of $2.4 million resulting from significantly lower yields on invested cash compared to last year, even though we had significantly more average invested cash on hand in the September 2009 quarter than we did last year.

As I mentioned last quarter we expected our fiscal 2009 effective tax rate to be approximately 38%, and we came in just under that rate at 37.9% for the quarter and for the fiscal year.

GAAP diluted EPS from continuing operations of $0.44 in the quarter significantly exceeded our expectations and was 8% -- or excuse me was $0.08 or 22% higher than the prior year.

EPS growth was well above the 13% growth in income from continuing operations due to the reduction in average outstanding diluted shares as a result of our share repurchase activity over the last 12 months.

Average diluted shares outstanding in the quarter were just under 296 million, down nearly 7% from the prior year quarter.

Now, let's turn to our cash flow and the balance sheet where we continue to demonstrate stellar performance.

Cash generated from operations in the September quarter was $353 million, bringing our full year cash from operations to 784 million.

Our free cash flow, which we define as operating cash flow less capital expenditures was $638 million for the year, well above our guidance of a range of 460 to $535 million primarily due to better than expected working capital management, primarily in receivables.

Consistent with last year we had an average of 25 days of inventory on hand in fiscal 2009 and 18.1 days DSOs were down more than a half day from last year.

Average days payable outstanding were flat with the prior year.

Our ending inventory and related accounts payable balances increased by more than our 9% quarterly revenue growth compared to last year, due to $400 million in inventory buys during September, primarily Generics and Blood products.

Our gross debt to total debt and capital ratio at the end of September was 30.2%, within our target range of 30 to 35%.

Our better than expected cash generation during the fourth quarter allowed us to repurchase significantly more stock than originally expected as we purchased $177 million of our stock in the quarter bringing our annual total to 450 million, a $100 million above our targeted range.

Including share repurchases and dividends, we returned approximately 80% of our free cash flow to shareholders in fiscal 2009.

Our cash balance at September 30, was just over $1 billion and after factoring out our normal maintenance cash levels and working capital timing we have approximately 1/2 of that amount available for deployment leaving us with great financial flexibility as we enter 2010.

Turning to next year's guidance, our fiscal 2010 guidance for diluted earnings per share is a range of $1.82 to $1.92, an increase of 8% to 14% over our fiscal 2009 diluted EPS from continuing operations of $1.69.

The assumptions behind this guidance include revenue growth of 5 to 7%.

Operating margins are expected to range from flat to expansion in the low single-digit basis range and we expect free cash flow in the range of 500 to $575 million.

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

The guidance also assumes we will have higher interest expense in 2010 versus 2009, anticipating that we will take advantage of low long-term interest rates and term out amounts outstanding under our revolving credit facility.

In addition, we expect our effective tax rate to be 38.4% slightly higher than the 37.9% in 2009, which benefited from certain net adjustments.

Capital expenditures which were $146 million in fiscal '09 are expected to be relatively similar in fiscal 2010 at about $140 million.

Average outstanding diluted shares are expected to be down between 5 and 6% reflecting our anticipated share repurchase activity net, of stock option exercises.

To drill down a little more on our revenue and margin assumptions the revenue growth assumption expects both the Drug Company and Specialty to grow between 5 and 7%.

The Specialty growth reflects mid to high single-digit market growth less a 2% top line impact from Generics in that space.

Again, as a result of our new customers, total company revenue growth will be significantly higher in the first half of 2010 than in the second half where our top line growth should approximate market growth.

Flat to low single-digit operating margin expansion reflects 1 to 3%, expense dollar growth which includes increased ERP spending.

It also includes the impact for nine months of the Kaiser repricing and normal competitive pressures on gross margins.

Before turning the call back to Mike Kilpatric for Q&A, I would like to finish by saying that we are very proud of our performance in fiscal 2009, as once again we showed great resiliency in the face of a challenging market.

As Dave mentioned our GAAP EPS from continuing operations has grown at an average compounded rate of 16% since the merger in 2001.

We have significant momentum as we enter 2010.

That momentum combined with our cost and working capital discipline positions us very well for another strong year in 2010, even as we continue to invest in our future.

Now here is Mike Kilpatric.

Thank you, Mike.

We will now open the call to questions and I would ask you to limit your questions and follow ups so everyone has an opportunity this afternoon.

(Operator Instructions).

Our first question is from Eric Coldwell with Baird.

Good morning.

Dave, I think you are marking a milestone this quarter.

Congratulations on, I believe, 50 quarters now.

Thank you very much for noticing.

You bet.

Congrats on the Fillies keeping it alive for another game.

The question is on Specialty.

A couple questions about the higher margin and the mix of services there.

You might make us wait until December.

I hoping to get validation to what you guided to this year of which was operating margin of around 1.6% in the segment and more importantly what drivers there might be to actually maintain or grow that operating margin into fiscal 2010 or maybe Generics would be one driver but other opportunities in the Services business?

I don't want you to think Mike is choked about delivering the strong results.

He is having trouble with his throat.

I would say say one of the issues for sure in the Specialty business is the opportunity in generics.

We had objection Latin which I mentioned earlier was an opportunity for the Specialty business.

That demonstrates the fact that Generics within Specialty do provide opportunities going forward.

We have a very, very strong Specialty Services business and this quarter did particularly well.

Our things are well positioned for us going forward.

We continue to be excited about the Specialty business.

Eric, we will break out the margins as we usually do in December.

I would like to stay away from that now.

You will see an up tick in the Specialty margin.

That's great.

Thanks so much.

Next question is from Glenn Santangelo of Credit Suisse.

I wanted to explore the revenue guidance a little bit.

I was expected 5 to 7%.

If I look at the first half given the new contract wins you should be significantly above that.

Are you taking more of a conservative cut in the guidance in the June and September quarters next year or does that include some of the run off from loans?

I'm not sure if there is an update on that situation or the timing around that, any kind of clarity would be helpful.

Thanks.

This is Mike.

Let me comment on that and Dave can jump in.

What we expect -- obviously we had 9% this quarter and there is no reason why we shouldn't continue at that pace until we start to anniversary some of our new business wins and we start to anniversary those wins in the March time frame.

The first half of next year should look similar to the fourth quarter of this year.

As I mentioned 5% of our 9% revenue growth came from that new business.

As we anniversary that, the second half of next year will pretty much grow at the market rates and again take 5 off the 9 that in the 4% or so range.

Our expectation is that we will continue to service the launch business throughout the full year of 2010 and that's not a factor in that guidance.

Nothing new to report on [Longs] Glenn.

We continue to do business with them, service them.

We expect to continue that through our fiscal 2010 and that's included in our guidance.

Thank you very much.

Next question is Tom Gallucci of Lazard Capital.

Two quick questions.

First, Mike as you think about the range for next year in terms of the earnings, what do you think the bigger wild cards are versus the top end and bottom end.

You mentioned a strong flu season would you care to frame in some respect whether it is top line or bottom line what the impact is this year?

Thanks.

Tom, I will start with the earnings range and I will turn to flu over to Dave.

Certainly, I think our progress in Generics is a big factor in the range of next year.

The better we do, the higher we will be in that range.

Certainly, we have got the revenue momentum and we feel very confident from that perspective.

I think some of the other variables, one of the things I mentioned was we were going to have higher interest expense next year than we did this year.

We expect it to be 10 to $20 million higher.

I think the variable there is when we go to market to term out some of that short-term financing and how to term out some of that short-term financing and how much we raise.

That's one of the variable.

Timing of share repurchase could be a variable as well.

Right now we contemplate doing that fairly evenly over the year.

Of course, that can always change.

Tom, if you look at our third quarter versus our fourth quarter our revenues are up about $300 million or so sequentially with the majority of that coming from new business.

It is hard for us to make the case that the flu is the dominant factor in our September quarter.

To the extent that it provides -- it is strong in quarters going forward, it is upside.

I would not isolate that as a big factor for us.

Next question is from Larry Marsh with Barclays Capital.

Congratulations on the quarter and Dave on the pronunciation of that Generic launch you are a better man than me.

So I wanted to follow-up on two points.

One is a little bit discussion of the ERP expansion or timing here.

It seems you had a bit increase in CapEx in the fourth quarter.

I think Mike you talked a little bit about 14 million in incremental expenses.

Could you elaborate in total investment in the ERP in the next couple years and how much of that will show up on the income statement and compare it to this year?

Sure.

Our ERP project is really going to cover three fiscal years, 9, 10 and 11.

In 2009 our guidance was we were going to spend roughly $100 million with a third of that being expense and we were pretty much right on those targets.

In 2010, a key year in the product as Dave said, we started our testing in January and we start our training and implement the back office piece towards the tail end of the fiscal year.

Because of that, our spending is going to increase a bit.

I would expect it to be in the 110 to $120 million range with slightly over 1/3 of that being an expense in 2010.

As we move towards 2011, we move to our Distribution Center and customer implementations and because of that, the total amount of spending is going to drop fairly dramatically between 2011 -- from 2010 to 2011, maybe 50 to 60% of what we spend in 2010.

However, you are probably going to have a much higher percentage of that be expense versus capital due to the nature of the work we are doing in that we are going to be in the training and implementation phase of the projects.

So expense should be slightly up next year though -- slightly up in 2010 as is the capital.

The capital will be roughly a little bit more than half our total 140 total capital expenditures.

As we move to 2011, total cost down but the expense should be pretty similar to 2010.

That's included in our guidance.

And the benefit I guess is what -- holding the line on SG&A makes you to continue to be a more efficient company.

Is that how we look at it on the expense line?

Yes, the same benefit we are getting today handling incremental volume at our warehouses at facilities at a very low incremental cost.

The goal is to have that same dynamic for really our back office -- our back office infrastructure as well.

In addition, giving our customers great flexibility and making it really easier -- easy for them to do business with us which is really our goal.

Very good.

Just one quick follow-up then.

I think Mike you talked a little bit about more investment opportunities in blood products and plasma.

This particular quarter, is there something unique in the market there that is more encouraging?

Is that more typical seasonal?

Our inventories were up about $400 million at the end of the quarter.

It was Generics and Blood products.

Probably more Generics.

We had a manufacturer shut down for a period of time and we had to load up on their products and we had some opportunities with [Oxvalplatin] in addition to that, our blood inventories are up some mainly because our volumes are up.

ASD had a strong quarter as I mentioned in the prepared remarks and really were adding inventory for them to meet some of the demand there.

Thank you.

Our next question from Lisa Gill at JPMorgan .

I think you made a comment at the beginning of your prepared comments around customers buying Generics from you, that the majority of our customers buy Generics.

Can you talk about what the future opportunities are for Generic penetration rates?

I know you don't want to get into specifics.

Is it just the opportunity of the number of drugs that are going Generic like over the next couple years.

Can you give us your thoughts around branded drug price inflation now that we know Pfizer is moving to the fee-for-service agreement.

How should we be thinking about that as we move into 2010.

I will take the first part and Mike can comment on the inflation.

To answer your question, Lisa, it is really both.

We expect to get additional penetration with our customers and sign up new customers who buy Generics from us.

It is our customer base with the exception of one large mail order facility that looks to us for their Generics.

We have a great opportunity to increase our Generic sales as products come off of patent.

As we look over the next year and next fiscal year, we see some great products very balanced, quarter by quarter.

That continues to provide great opportunities for us and the other thing that occurred this quarter and we will continue to have benefit of that the next quarter or so is the issue of [Oxvalplatin] the Generic [Aloxitin] which is a Specialty product, we participate somewhat disproportionately in that.

I would make the case that our customer base and role in Specialty allows us to have very strong generic opportunities as we look out over the next couple quarters.

When we think about the penetration rate we have today, can you ballpark that?

Do you have more than 50% or more than 80% of the Generics they are buying from you or a smaller number where you are trying to get them to buy more Generics from AmerisourceBergen?

Lisa, this is Mike I think from a retailer perspective we are get a a very large percentage of their Generic buys today.

We have had great growth this year and had great opportunity going forward continues to be in the alternate site segment.

We have done very well with nursing homes, providers as an example and other non traditional institutions and I would say our penetration there is maybe 50 to 60%, versus retail where we had the good -- we have the large majority of that business.

In addition, obviously we have started doing business on the oral solid Generic side with [Novation] and we see that as inn increasing trend going forward where I think the GPOs are starting to recognize that our expertise and scale in the Generic area can add great value to their hospitals.

I think the difference there is we are getting most of the Generic business today.

We are doing a lesser percentage and we expect to increase that percentage that we do from our proprietary program as we go forward.

I don't want to make this answer too long, Lisa.

The one thing I will say is we track Generic penetration very, very closely by customer.

We have our sales people properly incentivize for capturing our Generic business its a high profile issue for us.

I will be addressing our sales force as Mike will be and it is one of the key issues I have got.

We are watching the Generics very, very well and think we are doing a good job there.

We don't want to lose --

I think your other question Lisa, was around price inflation and the impact of the Pfizer change on that.

First off, as we measure it for our fiscal year, drug names inflation was north of 8% consistent with what it was last year.

Our expectations going into 2010 was some moderation of that and probable the 5 to 6% range, as far as our impact to our profitability, it is very little.

As most of you know with fee-for-service, about 85% of our business or so is not subject to variations and manufactured price increases and that percentage is only going to go up January 1, with the Pfizer contract.

I think the impact of Pfizer to us for the year is very little even though we only have nine months of the fee-for-service contract in fiscal 2010, we think the dollar profits will be pretty consistent with what we experienced in fiscal ' 09.

If anything, most of our profits historically have been recognized in our second and third fiscal quarters and you will have some spreading of that next year to the fourth quarter as well.

Thanks.

Charles Boorady with Citigroup.

Thanks, good morning.

First wondering how you would characterize the tone of business for independent pharmacies right naira how they have weathered the economic storm.

I know you have kept a tight lid on that in the past and if they are still concerned about implementation of AMP or other industry trends that are challenging their business.

I would characterize it Charles as very up beat.

We got back from the National Community Pharmacy Association, NCPA.

You get your most successful retailers attending.

I will tell you the mood was very, very up beat.

We think as you implied that they have gotten through the worse here of some of their financial challenges and they are very well positioned going forward.

We continue to think this is a very strong sector for us and for the industry.

In terms of future trends for them and how that might impact your business.

For example, the patent cliff as more drugs go Generic, does that level the playing field anymore for the independents versus the chains.

Is there anymore that would lead you to expect a change in their tone of business going forward?

I would say the Generics are clearly a level playing field.

In fact, it might tip it a little bit in the independent direction.

It makes the interface with that patient, the differences are very, very important.

We are delivering to the independents pricing that is very, very competitive, allows them to be very, very competitive in the marketplace.

We see the independents future as bright.

As I have said in a number of occasions I have been in this industry for a long, long time and people have been worried about the strength of the independents and they are very resilient we talk about AmerisourceBergen being resilient so are the independents.

We think the trend will continue.

You commented on a few large $1 billion contracts up for renewal.

I think you said none of yours are up for renewal.

What kind of accounts are those retailers or are those with manufacturers on the Specialty side and what you built into your guidance in terms of your chances of winning some of those accounts?

We have no $1 billion piece of business, Charles.

That was the most important point I wanted to make and the other point I wanted to make was there are very few in the industry.

The implication is it is somewhat stable going forward.

What typically happens on the $1 billion accounts and it has been clearly true for us as well.

They get renegotiated and part of that is because the forward integration that the current supplier usually makes with a $1 billion customer.

The point I was making there is that we don't have any large piece of our business at risk for any pricing in the industry appears to be stable in the next 12 months as far as large contracts coming up.

None of those assumed in your guidance for next year.

Absolutely right.

We don't anticipate any large movement of big customers in our guidance.

Thank you.

Next question is from Steven Valiquette with UBS.

I know we discussed Generics quite a bit.

How would you specifically compare the Generic industry pipeline outlook for fiscal 2010 compared to what we had in fiscal ' 09, the same, greater or smaller based on what you see right now?

For us it matches up pretty nicely.

Even by quarter by quarter, it is not dramatically different.

You can never tell when somebody will go at risk.

Those are hard to forecast but we don't see any dramatic differences year-over-year and even quarter-over-quarter.

Just real quick, fiscal 2010 distribution revenue guidance of 5 to 7% growth.

I may have missed it, did you give a breakdown of how much you expect for growth of direct store delivery versus bulk within distribution?

First off, bulk is a very, very small proportion of our business.

We don't break it out.

Again, it is 5 to 7 for both Drug and Specialty and the bulk which is a small part within that Drug number.

Thanks.

Next question is from Helene Wolk of Sanford Bernstein.

I just have a question about the operating expense guidance and how does it reconcile the 1 to 3% growth relative to what you just accomplished in terms of fiscal ' 09 and given the increase in ERP spending, I can't quite get there.

The guidance that I gave was 1 to 3% over the current year and that's on revenue growth of 5 to 7%, we will continue to have operating margin expansion from that expense leverage.

This year we were down some but that was with an average 2% revenue growth.

Of that 1 to 3%, a good piece of that, up to about half of that could come from our increased ERP spending which is up 10 to 20 million in total and a little bit -- as I said, a little bit more than a third will be expensed this year versus a third last year.

You are looking at a piece of that being from the ERP, good piece.

Again, it is important to note that our unit of work is going up faster than revenues as I mentioned in my prepared remarks.

We are doing more and more business with Generics.

You have more items per dollars.

The money that we have spent on our automation and cost controls out are really paying off and we are getting good leverage from that as we go forward.

Just a corollary to that, what we are hearing from Generic manufacturers around, supply availability, any impact on your business or increased penetration in terms of expectations around supply?

Supply is a a general rule supplies has not been an issue.

As a general rule we have been able to supply -- get adequate supply for our customers and I think part of that is because of the large base of business that we have, the customers that we have who look to us for their Generic supply.

I think the manufacturers look to us as a very strong partner here.

We have not had any problems apart from those in the market that resulted from recalls.

I think there has certainly been -- a couple of well public sized cases of Generic manufacturers having issues.

In our business we have been able to have continuous supply through the use of the supplier that is we do partner with and from a pricing standpoint in some of those cases it has caused prices to rise a little bit but our general expectation is not for significant price increases on the Generic side going forward.

Thank you.

Next question from Richard Close from Jefferies & Company.

Just a follow on the discussion of Pfizer switching to a fee-for-service.

Mike, you had touched on this a little bit.

Maybe if you can give us a little bit more granularity here, the second quarter, I think the street estimate is for $0.51, typically your seasonally strongest if I'm not mistaken.

Can you walk us through should we see a little bit more a smoothing on a quarterly progression, maybe not as -- not such a large gap up in the March quarter as far as the earnings per share.

Richard, there will be as I mentioned some smoothing between the second, third and fourth quarter.

I don't think it will be real significant or real noticeable.

Certainly the up tick from 1Q to 2Q that we have had historically will still be there.

It will moderate a little bit but it is not going to be a dramatic change in our trend between Q1 and Q2.

Okay .

With respect to follow-up on Generic discussion and talking about first half greater growth than the second half in overall revenues.

I assume with respect to Generics double-digit growth if not higher in the first half because of the new customers, maybe moderate into the mid single-digits on the second half in Generics.

Is that the way we should be thinking about

I think we expect our Generic growth to be above the total growth and that pertains for both the first half where the total is higher as well as it does for the second half where we are more in line with market.

Thank you very much.

And we will take one more call, please.

Our next question is from Robert Willoughby BAS-ML.

No question.

I yield to the next guy.

Dave, you want to give some closing remarks, please.

Just to wrap up, let me again thank you for joining us.

We delivered a strong quarter, a strong year in a series of strong quarters and strong years in an industry that has remained strong in a turbulent economy, very consistent growth in a resilient industry as we mentioned a couple of times we have grown at a 16% compounded annual growth rate.

We have great momentum going into our new fiscal year and we look forward to a more detailed update with you at our Annual Investor Conference which is scheduled for December 15, in New York City.

Thank you very much

This concludes the AmerisourceBergen call for today.

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