美源伯根 (ABC) 2012 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ABC second quarter earnings conference call.

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

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

Instructions will be given at that time.

(Operator Instructions)

As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Barbara Brungess.

Please go ahead.

Thank you.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call, covering our fiscal 2012 second quarter results.

I am Barbara Brungess, Vice President of Corporate and Investor Relations.

Joining me today are Steve Collis, AmerisourceBergen President and CEO, and Tim Guttman, Vice President, Controller and acting CFO.

During the 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 2011.

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

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

Now, here is Steve Collis to begin our comments.

Thank you and good morning, everyone.

I am pleased to report that AmerisourceBergen once again delivered solid quarterly results, and our performance for the first half of fiscal year 2012 positions us well to meet our objectives for the full year.

In the March quarter, our revenues were up to 2% to $20.1 billion.

Earnings per share were up 5% to $0.81, and that is on top of a 22% increase in the prior year.

We generated $236 million in operating cash flow and we repurchased $200 million of our shares.

I am especially proud that we overcame a challenging comp to this quarter last year, and exceeded our internal profit goals for each business unit.

During the quarter, we also made excellent progress integrating recent acquisitions and working towards the closing of our World Courier acquisition.

Our strong cash generation and high quality balance sheet continue to provide us with outstanding financial flexibility, and give us the ability to fund our strategic initiatives, grow our Business, and return funds to shareholders.

AmerisourceBergen is fortunate to be an important part of a growing industry.

Demographics and initiatives aimed at expanding access to healthcare coverage should continue to drive organic growth in our industry over the next several years.

In addition, launches of new pharmaceuticals, as well as new indications for existing drugs, should also drive sales growth over the next several years.

Whether the new therapies are traditional oral medications or complex biotech pharmaceuticals, AmerisourceBergen is well-positioned to not only benefit from the distribution of new products, but also to offer pre-launch and commercialization services to manufacturers.

And to support patient access and reimbursement programs to help ensure that patients have access to lifesaving therapies, and that the products achieve their full potential in the marketplace.

Our diverse revenue base positions us well to benefit from organic growth driven by demographics and our customer mix, and puts us in a favorable position to continue to benefit from the historic influx of generics.

As you know, generics mitigate the top line dollar growth in our industry.

They drive tremendous value for wholesalers, healthcare providers, and patients alike.

In addition, close scrutiny of healthcare expenses and cost containment efforts underway by the Federal Government and other payers also drives demand for our services, most notably in our Consulting Services Group.

Over the last several years, we have significantly strengthened our relationship with pharmaceutical manufacturers.

And we continue to look for meaningful ways to provide additional services across the supply channel to help them ensure they meet the challenges of today's changing healthcare landscape.

As our provider customers face similar challenges regarding cost containment and reimbursement for services provided to patients, they increasingly turn to AmerisourceBergen for help in making their healthcare practices run as efficiently and effectively as possible.

Our provider customers work hard everyday to provide world-class patient care, and we believe they deserve fair reimbursement for the professional services they provide.

AmerisourceBergen is an active participant in policy discussions in Washington, DC with the objective of helping legislators understand our industry and our importance to the healthcare system.

Our associates are focused on meeting our objectives for the year, both in terms of providing outstanding service to customers and in our financial performance.

They continue to seek creative ways to meet the challenges in the diverse markets we serve, and identify new opportunities to add value to collaborative innovation and by maximizing efficiency.

I take great pride and enthusiasm and dedication, and it is my honor to work beside them.

Turning now to our business unit, AmerisourceBergen Drug Corporation, as expected, had flat revenue growth in the quarter, as strong performance in the institutional segment was offset by previously disclosed loss of a large retail customer.

Top line growth was also mitigated by the impact of generic conversions, including decreased sales to our largest customer.

Our ABDC associates did a stellar job this quarter, managing several generic launches including five different generic products that launched within one week.

Year to date, the generic launches have performed as planned, and we, of course, look forward to several more launches still to come in the second half of the year.

With over 4,600 members, our Good Neighbor Pharmacy network, the third largest network of pharmacies in the US, continues to play a crucial role in providing pharmacy care nationwide.

Patients prefer choice when determining where to fill their prescriptions, and our retail customers are very adept at fulfilling unique patient needs and adapting to the changing needs of the marketplace.

Our SAP implementation continues to run smoothly with eight distribution center conversions complete, two additional conversions occurring tomorrow, and the remainder planned through the beginning of 2013.

As we have gained experience with the new system, particularly with the corporate and back office functions, we have already begun to realize some operational savings.

Which is reflected, in part, in the good performance we had on the expense line this quarter.

Our investments in our Canadian operations to support significant new business wins continued in the March quarter.

Our associates have done a tremendous job setting up four new distribution centers in six months, in order to support this new business.

There is still much work to be done, but we are confident that our expansion efforts will meaningfully increase the value we bring to both independent pharmacies and specialty providers in the Canadian market.

As we note in the press release, following the closing of the merger of Express Scripts and Medco in early April.

We amended our existing Medco agreement to provide for the contract to end upon the award and implementation of one or more new pharmaceutical distribution agreements for the newly combined business.

Express Scripts has issued an RFP for the combined business, and anticipates that the new contract or contracts will begin on October 1, 2012.

We are participating fully in the competitive RFP process, and we intend to pursue this opportunity to retain or grow the Business under a new contract.

We have had an excellent working relationship with Medco for over two decades, and we are excited about the opportunity to demonstrate the value we can bring to the newly combined entity.

AmerisourceBergen Speciality Group had another strong quarter with revenues up 6%, with particularly strong performance in third party logistics and in our vaccine and physician distribution business.

Our Oncology business performed well, while facing a very difficult comparison due to the strong performance of the three large speciality generic products last year.

While our Specialty Group is based on oncology franchise, we are an instrumental part of the commercialization strategy for any infusible product launch into the physician marketplace.

We continue to execute very well on the launch of a new brand ophthalmology product, establishing significant market share in what was the first full quarter of the introduction.

Our Speciality Group often collaborates with our Consulting Services Group to help ensure patients have access to products by utilizing the full suite of capabilities of our physician networks, as well as our reimbursement and patient support program expertise.

For example, we recently helped a manufacturer launch a new biotech product.

During the March quarter, we were able to not only achieve the leading market share for the distribution of the product, but also to provide third party logistics, contract packaging, and all other reimbursement and patient support programs for the product across the market.

We are very proud that these combined service offerings provide unmatched value to manufacturers, and distinguish AmerisourceBergen in the marketplace.

As we look in the products in development pipelines today, we believe that we will win even more of these opportunities in the future.

Which will be an important driver of our growth in the years ahead.

Our Consulting Services Group delivered a very strong quarter, while making excellent progress in the integration of TheraCom and Premiere Source, which are both performing very well.

The last Group had the strongest quarter in its history, even without the contributions from TheraCom.

While the Group only represents about 2% of our revenues, we believe our packaging and consulting services provide essential expertise to pharmaceutical manufacturers to help ensure that their products are brought to market as safely, quickly, and efficiently as possible.

In addition, our reimbursement expertise helps ensure that patients who can benefit from both new and mature therapies have access to the products.

We continue to make good progress towards closing our most recent acquisition, World Courier.

As we deepen our knowledge and understanding of their business, I am more convinced than ever that World Courier affords us the opportunity not only to acquire market leader in premium niche clinical trial logistic services, but also to begin to build out a fretwork to expand our consulting and commercialization services beyond North America.

In this current quarter, we will begin operating in 50 new international markets and employ about 1,500 new associates outside North America.

This is significant expansion for ABC, and we are tremendously excited about welcoming the World Courier team to ABC.

In addition, we are exploring ways to potentially expand some of our niche specialty distribution services into select markets, as well.

We expect to close the acquisition next week at the end of April, and I am very excited about the potential we see in the World Courier platform in the years ahead.

Given the continued strength of our balance sheet, we continue to look for acquisitions that meet the criteria we have had in place for quite some time.

They should increase our value offering to existing customers, both up and down the channel.

They should be within our established core competency, and they should increase shareholder value.

While we have not contemplated any further contribution from acquisitions in our guidance, we continue to be receptive to acquisitions, and we continue to be interested in opportunities in pharmaceutical and speciality distribution and services, as well as consulting and packaging services.

While we historically have been very comfortable in the $200 million to $300 million range, we would consider something larger as we did with World Courier if it made good strategic sense and would deliver value to our Company and our shareholders.

Looking ahead, the results we have had in the first half of our year have positioned us well to meet objectives for the full fiscal year.

We have a difficult comparison to overcome in 2012, though we continue to expect GAAP earnings per share to be within the range of $2.74 to $2.84, and we are tracking towards the midpoint of that range.

Tim will provide the details on our assumptions for the remainder of the year, but I want to highlight that we continue to remain disciplined on expenses.

Our cash flows are strong, and we have increased our share repurchase assumption for the year.

Looking for further ahead to 2013, we should have a carryover from some of the launches that occur late in our fiscal 2012, including the relaunch of Oxaliplatin, and we should begin to benefit from the completion of our SAP implementation.

In fiscal 2014, we should begin to see the 30 million to 40 million uninsured patients enter the healthcare market, driving demand for pharmaceuticals that should carry over into 2015 and beyond.

In addition, 2014 and 2015 are expected to be good years for generic conversions.

Of course, there is a chance biosimilars may also come to market in that time frame.

Before I turn it over to Tim, I want to reiterate the confidence that I have in our Business and in our future.

Demand is strong for the products we distribute, and we play an essential role in the pharmaceutical supply channel.

We position ourselves well to continue to benefit from the two key growth drivers, generics and speciality products.

And we have continued to invest in our Distribution and our Services businesses.

Over the last year, we worked to make important investment in other areas of our Business with an eye to the future.

We expect demand for speciality products to continue to grow not only in the US, but throughout the world.

And the commercialization and reimbursement support services we provide to manufacturers will help support that growth.

As cost containment efforts continue across the healthcare landscape, our customers increasingly turn to us for help in meeting the challenges of the marketplace without sacrificing patient care.

Finally, the vision and innovative ideas that our associates bring to the market everyday set us apart in our industry, and I am proud to be their leader.

Here is Tim.

Thanks, Steve, and good morning, everyone.

It is my pleasure to be participating in my first earnings call as acting CFO.

I am pleased to report another solid ABC quarter, and most importantly, that our Q2 results are on track with our internal plan.

The highlights of this quarter, excellent top line growth at our Speciality and Consulting businesses, very good execution on new generic launches, and continued focus on expense management across the organization.

And finally, another quarter of strong cash generation.

Now, let us turn to the quarterly details and starting with the top line, revenues were $20.1 billion, a 1.6% increase over last year's quarter.

Drug company revenues were essentially flat, as we guided.

We had strong performance in our alternate site and health systems segments, offset by the loss of a large chain customer last year, as well as the impact from brand to generic conversions.

The Speciality Group revenues increased 6%, lead by two of our Businesses with above market growth.

ITS, our third party logistics business, and Besse Medical, our vaccine and physician office distribution business, which benefited from a full quarter impact of sales of a new ophthalmology drug.

The Consulting Group, though small to the overall company top line, continues to perform well.

Excluding their TheraCom acquisition, they had over 20% top line growth.

TheraCom contributed just under 1% of our overall revenue growth in the quarter.

Moving to gross profit.

Gross profit was $695 million in the quarter, up 1.1% from last March, with a gross margin of 3.46% in the quarter, down about 2 basis points from last year.

As we have discussed in the past, our second quarter was a very tough comp, due to the significant contribution in the prior year from oncology generics.

In the second quarter 2011, these oncology drugs contributed about $0.16 of EPS to our results.

Our gross margin expanded 31 basis points in the March 2011 quarter.

This year, we are able to effectively offset this headwind with contributions from the new oral solid generics, as well as a lower contribution from oncology generics, and gross profit contributions from our acquired companies.

Additionally, our LIFO charge was approximately $4 million in the quarter, down $10 million from last year.

We continue to expect our LIFO charge will be approximately $15 million, down significantly from last year.

Our annual LIFO forecast is based on our expectation that brand price inflation will be somewhat less this year.

And more importantly, we will see significant generic price deflation in the second half of our fiscal year related to key brand to generic conversions coming off exclusivity.

Finally, the benefit we receive from the new generic launches and also price appreciation was in line with our expectations.

This quarter, we did an excellent job controlling our operating expenses.

Operating expenses were approximately $327 million, up 1.5%.

However, this amount includes the operating expenses of about $11 million from our recently acquired companies.

Additionally, we had $9 million of executive severance and acquisition-related transaction costs.

Operating expenses would have been down, excluding the impact of our acquisitions, due to lower compensation costs, including benefits.

Additionally, our SAP implementation is progressing well at the corporate level.

The system has reached a level of stability faster than we expected, enabling us to realize some early savings, especially with external consultants.

Last quarter, our guidance was an annual expense increase of about 3%, due to our acquisitions.

As an organization, we continue to exercise discipline and focus on managing expenses.

We now expect our total operating expenses for our base business, before adding World Courier, to be essentially flat for the year.

Operating income of $368 million in the quarter increased about 1% while operating margin was down two basis points compared to last March.

Our current quarter was slowed by the $9 million of executive severance and acquisition transaction costs.

Excluding these nonrecurring expenses, our operating income margin would have expanded three basis points to 1.88%.

Moving below the operating income line, interest expense of nearly $24 million in the March quarter increased 25% compared to last year, primarily as a result of our $500 million bond that we issued back in November.

The proceeds helped to fund the TheraCom acquisition and will also contribute to the retirement of our 2012 bonds that mature in mid-September.

Our effective income tax rate of 38.4% was slightly higher than last year's 38.1%, and is right in line with our expected annualized rate of 38.4%.

Our diluted GAAP earnings per share in the quarter of $0.81 increased by $0.04 or 5% over the same quarter last year, and again, overcoming a $0.16 headwind from the contribution from speciality generics in the March 2011 quarter.

Our EPS benefited from a reduction in our average diluted shares related to our ongoing share repurchase program.

Average diluted shares for the quarter were approximately 262 million, down just over 6% from last March.

Now, let us turn to our balance sheet and cash flows, where we find trends to be very favorable.

We generated $236 million of cash from operations in the quarter, bringing our six month total to $668 million, compared to generating $577 million for the first six months last year.

We continue to manage AR in inventory levels very closely, and this has benefited our working capital this year.

With our daily revenue volume exceeding $300 million per business day, our quarter-end working capital snapshots are subject to volatility.

Therefore, our six month cash results cannot be extrapolated to determine a full year cash flow estimate.

Capital expenditures were $40 million in the quarter and $88 million for the six months.

During the last two years, we put a number of capital projects on hold as we focused on SAP.

We have a pipeline of attractive internal projects that we have begun to pursue as our SAP deployment moves along.

Additionally, we have CapEx associated with our recent Theracom acquisition.

Because of this, we will exceed our previous target of $150 million for CapEx, and we will be closer to $200 million for the year.

Even with this additional CapEx, we expect that our free cash flow will now be in the $800 million to $900 million range.

During the quarter, we bought back $200 million of our shares.

For six months, we purchased $320 million of shares.

At March 31, we have approximately $180 million left on our current share repurchase authorization.

In terms of key financial metrics that we track, our average day sales in inventory for the quarter remained at 14 days, consistent with fiscal '11.

Average DSOs of 18 days in the March quarter were up slightly from 17.3 days last year, and favorable payable timing helped raise average quarterly DPOs by over three days compared to fiscal '11.

With our recent debt offering, our gross debt to total debt and capital ratio at the end of March was 39%, above our target range of 30% to 35%.

And it will remain above the range until we pay off our $400 million of debt in September.

Our cash balance at March 31 was $2.3 billion.

Keep in mind that we will be funding our World Courier acquisition from cash, and we will be paying down debt in September, as previously mentioned.

After these two large cash outlays, we will still have financial flexibility to fund CapEx, and strategic initiatives, and return capital to our shareholders.

Now, let's turn to updated fiscal 2012 guidance.

We expect our diluted GAAP EPS to track to the middle of the range we previously provided, $2.74 to $2.84 Our assumption for revenue growth remains unchanged, flat to modest revenue growth.

We expect our operating margin expansion to be in the high single digit basis points.

Free cash flow will now be in the $800 million to $900 million range.

And we are raising our guidance for share repurchases for the year to $500 million, which will complete our current share repurchase authorization.

Looking ahead, I would like to remind everyone that Q3 is another challenging comparison for us because of the $0.17 EPS contribution from oncology generics last year.

Also in Q3 2012, we have two of the large generics coming off exclusivity.

When looking out to the second half of the year, we believe Q4 will be somewhat of an easier comparison with a return of Oxaliplatin for half the quarter, a few favorable year-end generic launches for the drug company, and favorable expense comparisons year-over-year.

So, before I turn it back to Barbara, let me reiterate that six months into the fiscal year, we are performing well in our key areas of the Business, and we are well-positioned to meet our financial targets for fiscal 2012.

One final point.

I would like to take a moment and thank our ABC associates, especially those in the finance and accounting areas, that have stepped up the last two months and helped support the organization and me, in particular, during our CFO transition period.

Thanks, everyone.

Here is Barbara to start our Q&A.

Thank you.

(Operator Instructions)

Glen Santangelo, Credit Suisse.

I wanted to quickly follow up, Tim, with respect to some of your comments on the operating margin expansion goals for the year.

Previously, the Company had expected operating margin expansion in the high-single digit, kind of low-double digit range, and now, it seems like you are suggesting high single digit, I guess.

Could you just give me a sense for maybe what has changed in that thinking?

I know there were someone one-time costs that you are now embedding in your estimates.

I am curious if there is anything else that I should be thinking about.

No, we changed our guidance to high-single digit in terms of looking out.

We did an assessment of the full year, and looking out, we had some deal costs in Q2 and some one-time items, non-recurring items.

As we look out, we are going to have similar costs in Q3 with the World Courier transaction, so when we look out and do a reassessment, we felt more comfortable that high-single digit was a realistic target for us for the year.

There is really nothing else factored into that.

Tim, maybe if I could just ask a follow-up on the World Courier group.

You originally sort of guided $0.06 to $0.10 worth of accretion, and I am kind of curious, is there anything embedded from an accretion standpoint in your fiscal '12 guidance, as it relates to World Courier?

It kind of sounds like you're going to be taking down some integration costs or acquisition-related costs next quarter.

I don't know if you care to size those at this point.

Glenn, no, we will have some transaction-related acquisition costs in Q3.

Probably not more than the number that we had for Q2.

There is no accretion in our numbers for this fiscal year.

We expect it to be neutral.

In terms of next year, for fiscal '13, we are still confident with that guidance of $0.06 to $0.10.

Okay, thanks for the comments.

Larry Marsh, Barclays.

My question is as follows; basically around Medco.

Here, you are communicating -- is it fair to say that you voluntarily agreed to move up the termination date of your Medco relationship by six months?

If so, is there any benefit for doing so, and possibly foregoing that profit stream?

Then around that topic, I wanted to confirm.

You said you have already had a relationship with Express Scripts.

How long have you had that?

Have you disclosed, or are in a position to comment about the length of the suggested new contract under the RFP?

Thanks Larry.

First of all, obviously, we are part of a very active process here.

We want to be very respectful of that.

Some of the questions should really be directed to the buyer.

But I think ABC, as you know, has been very proud of over two decades of service to Medco.

You could almost say we are the incumbent here because we have had such a long relationship, so we wanted to demonstrate flexibility.

We wanted to recognize that this is a new entity that has their own requirements, and will have different dynamics to the relationship.

It just made sense for us to be concurrent with their current requirements.

We demonstrate a flexibility.

We demonstrated that ABC is a good partner, and listens to our customers.

I think that will hopefully put us in a good position throughout the contracting process, but it will be competitive.

I guess the only internal benefit I could point to is that it is concurrent with our fiscal year.

Whatever happens, we will be in a good position to plan for it and to communicate that to our investors.

Okay.

It sounds like you are uncomfortable commenting about the length of the contract, as proposed in the RFP at this point?

As far as we know, as far as we can say, it is a pretty standard type of contract term.

Right, so we assume maybe three years, but again, not commenting.

I guess as a follow-up to you and Tim around SAP implementation; I appreciate the update there.

I go back and remember some of the bigger expenses for this seem to be fiscal '10 and '11, $40 million to $50 million a year.

You have mentioned, Tim, I think, stability sooner than you thought.

Can you ballpark expenses around SAP for you this year, and how do we think of that comparable to next year?

Larry, our guidance has been that we will see some benefit for SAP next year, six months after our last DC deployment.

So we expect that to be in Q4.

We have guided to $10 million.

We expect the full benefit of about $40 million to be in '14.

And so far, the benefit that we have had this year for SAP is really incremental to that.

This is just an expense that we have been able to take out of our operating budget, which has probably been a few million dollars.

So again, they are separate; one is not a part of the other.

Oh, I got it, right.

Expenses associated with consultants and such.

But it's again $10 million incremental next year; $40 million for '14.

To clarify, I think it is an important point, the guidance confirming the range.

But you are suggesting the $0.02, which was the severance and transaction cost this quarter, and the $0.02, which ballpark transaction costs next quarter are included now in that range.

You are not breaking that out at all?

No, absolutely, Larry.

We are GAAP and we include that in.

Again, you are saying that is a big reason why your top and your operating margin expansion has been pulled down?

Absolutely.

Okay, very good.

Thanks.

Robert Jones, Goldman Sachs.

Just to go back to the Express Scripts contract.

Steve, it sounds like you mentioned contract or contracts, so I am assuming there is some suggestion that it could be broken up.

Any insight into this view, or maybe more importantly, what benefit that would create for Express to have this contract separated?

Well, I think in terms of pricing, there is not much differentiation between a $10 billion contract or a $15 billion or $20 billion contract.

That is the way these large contracts tend to go.

There could be some geographic or regional benefit based on where they are planning to have their large mail order stocks.

There could be a way to separate the specialty business with the core mail order business.

So, they have two big speciality units.

Again, these are questions that we probably are not that comfortable commenting on, and could probably be best be directed to Express Scripts.

I definitely appreciate that, and just one follow-up Steve.

Given the somewhat more acquisitive nature of the Company as of late -- I know you have gotten this question before, and I imagine as you continue to do acquisitions, you might get it more in the future.

Relative to your peers, any thoughts or discussion between you and Tim about moving to a cash EPS or at least breaking out a cash EPS?

No, we haven't.

We think we report not only good earnings, but very high-quality earnings, and at the moment, that has not been under consideration.

We, in our public company filings, we feel we give pretty good disclosure on some of those differences, especially around intangibles and the reader of those documents can go ahead and do that calculation.

Understood, thanks so much.

Tom Galluchi, Lazard.

Thanks for all the details.

Steve, I was wondering if you could expand on some of your prepared remarks around international, and how you see the opportunity maybe there over not the near term necessarily, but the next few to five years.

It sounds like maybe World Courier is a bit of a platform that you could grow from in different ways.

If you have any thoughts there, it'd be appreciated.

There are a couple things.

First of all, again, we do $300 million in revenue a day as ABC.

But one of the things that we have been very, very happy with is our speciality performance in Canada.

This market works differently than it does in the US, but we have been able to do some joint programs.

We have been able to help with more complex reimbursement environment there, including a pretty robust private market that is not generally known.

At least here in the US we think about single payer market; that has not been the case.

We have very strong presence with new infusible drugs.

What we have seen as a manufacturer environment that ABC is very comfortable in contracting with, that is looking for us to get into more countries.

So we have been prompted to look at international opportunities by manufacturers.

Then comes World Courier; we are in 50 new countries, as of next week, hopefully.

We have 1,500 associates that are very tenured.

We have been extremely impressed with the quality of the World Courier associates.

As you know, healthcare is very local.

We think that we have an opportunity to understand healthcare markets, both organic and acquisitive opportunities with people on the ground there who speak the language, know the trends, know who is the right players, the ethical players, the high-quality players in that environment.

We think that that is going to give us a good opportunity.

We also think that as the products World Courier is managing are commercialized, as more and more of those products are commercialized, and come to market, as middle classes grow in some countries that we have not traditionally thought about as being big biotech, and especially consumers of products, we think we are going to have an opportunity to participate in those commercialization strategies.

Think about it.

World Courier has handled those products, they know their treatment centers.

They know the environment.

We think that we have to re-characterize part of the business, but we think we can do that.

Long answer, but as you can tell, I am very enthusiastic about this.

Sure, that is clear.

Thank you very much.

Just one housekeeping item.

On the CapEx, can you break down your maintenance CapEx verses maybe what is additional, and some of those projects that you highlighted earlier?

Do they seep into next year?

Should we assume that it comes back down a little bit?

How are you thinking about that?

Good question.

When we look at maintenance CapEx, we think it is typically between about $100 million and $120 million.

We have some big projects this year; supporting our expansion up in Canada.

We are looking at another DC project in the US, in terms of expansion, automation, renovation, and our TheraCom acquisition.

I would say that the $200 million is probably a peak, and it definitely should come down next year.

Probably about half of the maintenance CapEx is probably kind of a good range.

Okay, thank you very much.

Robert Willoughby, Bank of America Merrill Lynch.

Steve, what kind of clarity do you actually have on -- does the RFP provide for you?

I assume you would have size of the potential contract, a mail footprint you would be serving, whether or not speciality would be there.

Are there some things you could disclose there that would be helpful for us?

I think we probably said -- Bob, I appreciate your interest in this.

Believe you me, I am really interested in this, and the ABC team is very interested in this.

We just participated fully in the RFP process.

It has just begun.

I could tell you we really do not -- we think it is in the range of about a $20 billion contract.

I will tell you that Medco peaked with ABC at about 19% of our revenues in fiscal year 2011, and it has come off a few percent from that.

Our current run rate is more in the mid-teens, 16% range.

So, we could potentially gain some $2 billion dollars in new revenue here.

Okay.

Any sense on timing, when a decision will ultimately be made?

Obviously, before October 1, but how much time would you need?

Do you anticipate, if you win, is there investment you need to make, or in the unfortunate event you don't win, what kinds of offsets we might see to your cross structure, some initiatives you would pursue?

Well we are mainly servicing the current business out of [three DCs], and we are certainly would start giving consideration to what it could mean if we lose.

But from a more exciting basis, I think we do have the capacity to service this business without much incremental investment.

We look forward to talking about the different capabilities that ABC brings to the table, and we are participating fully in this contract.

And timing, Steve, anything?

No, I just think, you cover Express Scripts; they move quickly.

That is all I can tell you.

They don't let the grass grow under their feet so we are expecting to have a very active and quick and decisive process, unlike this other very public contract that we went through very recently.

So that should make everyone happy.

At least we will all know where we stand very quickly, we believe.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Just a quick follow-up on the Medco Express side.

From what we understand, Speciality is included in your relationship with Legacy Medco.

Should we assume that the services that you've provided to Medco on the Speciality side are more of wholesale-type services, or do you also provide them the added value services that is associated with your Speciality business?

We are both a wholesaler to the former Accredo division of Medco, and now of Express Scripts.

We have obviously worked very collaboratively with them in many areas including the hospital pharmacy area and the speciality area.

I am not comfortable pointing to any particular program, but certainly as our largest customer, we spend a lot of time working on common approaches for the marketplace.

We would expect to bring that expertise and that market knowledge, and the manufacturer relationships that we have to the combined entity now.

Okay.

I had a couple of questions for modeling purposes.

For the SG&A level for the remainder of the year, should we assume same level as we saw in the March quarter, or should we see a step up?

If so, can you quantify it for us and is it related to World Courier?

At this point, Ricky, we do not have World Courier finished yet, completed.

But definitely, with World Courier coming in two months in quarter three, and we will have them for the entire Q4, they will add extra expense.

When I gave the guidance today, this morning, again, I was talking about the core business being flat.

For the core business, we will see a little bit of a step up in three, but probably not dramatic.

And again, we will have some nonrecurring acquisition-related cost in Q3; probably not in Q4.

Okay.

Can you just qualify to us the impact from a basis point perspective of the acquisitions on the margins for this quarter?

In terms of SG&A?

SG&A or operating margin.

Well, again we commented that we had about $11 million of SG&A expense in the quarter from our acquisitions, primarily TheraCom.

Again, it is probably 4 -- 3, 4 basis points.

Okay, thank you.

Eric Coldwell, Robert W.

Baird.

I think a lot of the timely questions have been asked, so I will shift gears a little bit.

Health systems and alternate site in your drug company sound like another good quarter there, above market growth, perhaps.

I am curious if you can define what is leading to this growth?

It must be share capture; I do not want to lead you too much.

But the market is clearly not growing at a rapid pace.

You are primarily doing pharmaceuticals, and not the other broad med-surg lines or other services into the health systems.

Can you give us a better sense on what is driving that growth in health systems and alternate site?

And perhaps if you could frame it, would be helpful, too.

Thanks.

Well, with health systems, we think we have a market share that is at least comparable, maybe even the largest in the US.

We believe we are with the right customers.

We believe that we will be growing with them.

We believe that we have some nice little services that we provide that maybe don't get the headlines, but that there are additives to their business like helping them with 340B consulting, helping them with enterprise pharmacy.

So we have a very good practice in health systems.

We believe we are with the companies that are the leaders in that space.

I think some of our customers are they -- likewise with alternate care.

I think ABC has been a leader there.

Certainly, our knowledge of speciality and our ability to offer an integrated solution on the speciality and drug wholesale side, our knowledge of the manufacturer environment, and the patient environment, and the reimbursement environment has been really, very helpful.

The Humana contract we think, was a direct result of that knowledge.

That is a very fast grower.

We are with a lot of the companies that are growing faster than the market.

When we discuss potential RFP responses, we look at who do we think will be winners in a certain space.

We like to really target that, and try to get them into the ABC portfolio.

I think you can look at it as, it is not a matter of happenstance; it is a matter of strategically planning accounts that we believe will be winners in this space.

Thanks very much, great answer Steve.

Could you put a frame around the growth rates in those two segments?

I think we could maybe look at that, and [invest it out].

I think we have done some of that in the past.

But we don't have a framework that we can share right now.

Fair enough, thanks very much.

Lisa Gill, JPMorgan.

I think that you made a comment earlier around your expectations for LIFO this year.

And within that comment, Tim, I think you talked about branded price inflation being less, and more deflation on the generic side.

Can you maybe just talk about what you actually saw in this quarter?

And then what you are seeing in the marketplace around an increase in competition, as far as the number of generic manufacturers that spend a nice steady state the last couple years?

Are you seeing a trend that is perhaps changing a little bit as we go through the next couple months?

Thanks Lisa.

When I speak of LIFO, just let me say that we look at our portfolio drugs, and our mix.

In terms of brand, last year we had pretty healthy price increases for brand, slightly above 8%.

This year, we are tracking slightly below 8%, again, for our mix of inventory.

So a little bit different, a little bit lower.

But on the generic side, we really expect that we will see some deflation second half of the year, especially on Lipitor and Zyprexa.

The generics, when they come off exclusivity, which will help then give us a LIFO benefit.

In terms of your second question about suppliers, last year we also had a pretty good price appreciation on the generic side.

It is still pretty good, but that is probably off a little bit this year, softened a little bit this year, but still pretty healthy.

Okay, great.

Steve, just one quick question for you on the oncology side of your business.

We know of a number of these pilot programs that have started by Aetna and United, around the way they are paying the physician, and trying to take the drug cost out of the equation.

Are you seeing that impact your business at all?

And what are the physicians saying?

If it does take hold, what does that mean longer term?

Will that change the relationship you have with the physician, where you will now have a relationship with one of the managed care companies?

How should we think about that?

Our strategy with the large payers is really to help them understand how important community oncology is.

We believe that it is not only important from a clinical perspective, but we believe that the patient is best served being in the community.

And even the payer is best served by those patients being in the community.

So our big effort over there is really to help bring the two sides together.

We have taken a lot of effort at ION, our physician services company primarily focused on oncology, to help the two sides communicate better; have a transparent relationship.

We do not anticipate having a direct relationship with a payer, but we intend to help our customers contract more effectively and more transparently with the payers.

I think we are making a lot of progress there.

Okay, great, thank you.

David Larsen, Leerink Swann.

Question for Tim, it looks like, according to my model, your SG&A costs on year-over-year basis declined by about $12 million.

Can you describe the cost control process you go through on a quarterly basis?

Sure David.

When we looked at the year, we knew and we guided that Q2 and Q3 would be very tough comparisons.

We knew it going into the year.

We put the word out to our businesses to really manage expenses this year, and we knew we had to focus in this area.

So I mean, we looked hard at managing labor and payroll expense.

We looked at outside consulting and services.

And then this year, too, we have had some good discipline and credit collections, and our bad debts are down.

So really, it is all of our businesses focusing on head count, on making sure they spend money prudently, and that is going to carry forward into quarters three and four.

If I were to look at like say, 3% of SG&A in fiscal '11, I am coming up with like $35 million.

Will the incremental acquisition costs with World Courier Group and these other ones -- all in, that will be more than $35 million?

And that's why they'll be -- that's why there was a slight reduction on the operating margin expansion guidance, is that correct?

In terms of your question to the $35 million, no, I do not think the all in -- I mean, we should be under that number.

So hopefully, that helps you in terms of some guidance.

But again, we think we are managing expenses well.

We also had the benefit this quarter, and will have for the rest of the year, in terms of SAP being stable.

We are seeing the benefits there.

All in all, I think what we are saying here is that expense management is offsetting the increases from the special charges and the non-recurring charges.

Okay, great.

Your merchandise inventory, it looked like it declined nicely on a sequential basis, maybe leading to an increase in cash flow guidance?

That looked nice.

Definitely.

Like David, in my comments, I mentioned that we really focus on working capital.

All of our businesses are focused on it.

Managing AR, managing inventory, so we are seeing some really good reductions in those areas, especially at our ABSG businesses.

Thank you.

Steven Valiquette, UBS.

Just one more question on the Express Medco.

I might as well get it in at the end here at the -- I think you mentioned in your comments that in some ways, you view yourselves as the primary incumbent on the Express Medco contracts.

I guess my question is are you now happy this is going to an official RFP, verses your previous thought pattern over the past nine months, since this deal got announced?

Or are you disappointed because you thought you were the primary incumbent?

Or are you just indifferent?

I am just trying to get more color on your view now -- the new information verses what you thought previously.

Thanks.

I was actually at our NACDS conference, and I heard one of the political pundits speak about the election, and he said incumbency is a 4 percentage -- 4 point advantage.

I was just trying to get that incumbent advantage in there; but that is just my view.

I do not know if anyone else has that view.

We did, of course, do more business with Medco than the current wholesaler did with ESR, so you could look at it as incumbency.

But I think that is really just my view.

We are pleased that this has been decided realistically early in the process.

It is very helpful from a planning perspective.

Again, it has helped us have a very frequent and interesting discussions with ESR.

We think that it is a positive for the industry, and we think that potentially could be a positive for AmerisourceBergen.

Okay, all right, thanks.

Now, Steve Collis would like to make some final comments before we go.

We know that it is a very busy day.

We really do appreciate everyone's interest and attention with AmerisourceBergen.

I would like to commend my colleague and acting CFO, Tim Guttman for his leadership and contribution during this transition period.

As you can see, Tim has really done a great job.

To wrap up, ABC thinks this was a really good quarter for us, especially given our tough comps.

And we are proud to report good momentum on all fronts at this halfway point in our fiscal year 2012.

Thank you, again for your attention.

Thanks Steve.

Before we go, I would like to quickly highlight our upcoming events.

On May 17, we will be presenting at the Bank of America Merrill Lynch 2012 Healthcare Conference in Las Vegas.

And on June 6, we will be presenting at the Goldman Sachs 33rd Annual Global Healthcare Conference.

That concludes our call for today, and now I will turn it back to the operator.

Thank you.

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