美源伯根 (ABC) 2012 Q3 法說會逐字稿

Ladies and gentlemen thank you for standing by.

Welcome to the ABC third quarter earnings conference call.

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

you will have an opportunity to ask questions after the presentation.

Instructions will be given at that time.

(Operator Instructions) As a reminder, this call is being recorded.

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

Good morning, everyone.

Welcome to AmeriSourceBergen's earnings conference call covering our fiscal 2002 third quarter results -- 2012 third quarter results.

I am Barbara Brungess, Vice President, Corporate and Investor Relations, and joining me today are Steven Collis, AmeriSourceBergen President and CEO, and Tim Guttman, senior Vice President and CFO.

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

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

For a discussion of some key risk factors we refer you to our SEC filings including our 10K 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 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, Barbara, and good morning, everyone.

I'm pleased to report AmeriSourceBergen overcame a challenging year-over-year comparison and delivered solid quarterly results.

In the June quarter our revenues were down 2% to $19.8 billion, but our GAAP earnings per share were up 8% to $0.71.

We made excellent progress integrating recent acquisitions, including World Courier which closed in early May.

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

Through nine months, we are well positioned to meet our objectives for the full year.

Our diverse revenue base continues to position us well to benefit from organic growth across the entire spectrum of pharmaceutical care, and our customer mix helps drive benefits from the historic influx of generics.

Even as generics mitigate the top line dollar growth in our industry [IMS] health sees compounded annual sales growth in the US in the range of 1% to 4%, and 4% to 6% worldwide through 2016.

In addition, continued scrutiny of health care expenses and cost containment efforts underway by the US federal government and commercial payers demand continuous improvement in efficiency productivity and effectiveness across all aspects of health care.

One of the hallmarks of the US market in particular, is the quality of the relationship wholesalers have with pharmaceutical manufacturers.

Over the last several years, AmeriSourceBergen has significantly strengthened our relationship with pharmaceutical manufacturers, and we continue to put an emphasis on looking for meaningful ways to provide additional services across the supply channel in order to help manufacturers meet the challenges of today's changing health care landscape.

This is the strategic rationale for the material acquisitions we have made in the past 12 months.

As we sit here today, we believe that both the TheraCom and World Courier have significantly enhanced our spectrum of services at the supply channel.

Moreover, they have brought a cadre of valuable new customers, employees and capabilities which have exceeded our pre-closing expectations.

As our provider customers face similar challenges regarding cost containment and reimbursement for services provided to patients, and new challenges such as accountable care organization, they also increasingly turn to AmeriSourceBergen for help in making their health care practices run as efficiently and effectively as possible.

Our provider customers deliver world class patient care, while navigating a complex web of reimbursement, and we believe they deserve fair compensation for the professional services they provide.

AmeriSourceBergen continues to be an active participant in policy discussions in Washington with the objective of helping legislator understand our industry and our importance to the health care system.

AmeriSourceBergen associates remain focused on meeting our objectives for the year in terms of our financial performance and in delivering outstanding service to customers.

I take great pride in the enthusiasm and dedication of our team, and I'm honored to work beside them everyday.

They meet challenges with creativity and determination, and they tirelessly seek new ways to meet the needs of the diverse markets we serve through collaborative innovation and by maximizing efficiency.

As we noted in our press release, we believe it was prudent to separate our Manufacturer Services business from Pharmaceutical Distribution, for financial reporting purposes.

We believe that disclosing this additional level of detail will increase investor understanding of our business and further improve the overall transparency of our financial reporting.

Tim will cover the financials for the two segments, and I will now cover some of the key trends in our business units during the quarter.

AmeriSourceBergen Drug Corporation revenue declined 5%, due in large part to decline in sales to our largest customer, as well as the previously reported loss of a large retail customer, beginning last September.

In addition, we anniversaried last year's addition of a new alternate star customer in May and top line growth continues to be mitigated by the impact of generic conversions.

Year-to-date the Drug Company revenues are only down slightly, as anticipated.

Over the course of the year, the wave of generic launches has progressed as planned and the Drug Company saw significant gross margin expansion in the quarter even as the two largest generics, Zyprexa and Lipitor came off exclusivity.

We look forward to a few more launches still to come in our fourth quarter.

Back in June we held our annual trade show for our independent retail customers, and we continue to be impressed with their resilience and their ingenuity in providing personalized patient care in the community they serve.

Our Good Neighbor Pharmacy members participate actively in the largest independent network of community pharmacies in the US.

AmeriSourceBergen and our independent customers strongly believe that they play a critical role in health care throughout the country by offering a compelling value proposition to patients and payers alike.

ABDC is focused on ensuring that our network, Good Neighbor Pharmacy, remains dynamic by continuous investment in programs and services to meet the challenges of community pharmacy today and in the future.

The implementation of our SAP platform continues on schedule, with 14 distribution center conversions complete, representing over half of our distribution centers and two thirds of our revenues.

We have made excellent progress, and we expect additional conversions occurring in the fourth quarter and remainder planned through the beginning of fiscal year to 2013.

We also continue to strengthen our Canadian operations in support of previously reported new business wins in that market.

We are confident that these and other investments will meaningfully increase the value we bring to all of our customers in the US and Canada.

As we noted in the press release, we continue to participate in negotiations for the distribution contract to serve the newly combined business of Express Scripts and the former Medco.

We believe we are nearing the end of the process, and, while we don't have a firm date for an announcement, we hope the decision will be made within the next few weeks.

We continue to be optimistic about our chances to win the business, however, it is a competitive process, and we believe express scripts will ultimately choose the partner that they believe provides the best overall value.

AmeriSourceBergen Specialty group had another strong quarter with revenue up 8%, driven by another particularly strong performance in third party logistics and in our vaccine and physician distribution business.

Our oncology business performed well, by facing another very difficult comparison due to the strong performance of the three large specialty generic products in the June quarter last year.

The comparison will ease in the September quarter as Oxaliplatin returns to the market.

ABSG continues to benefit from the launch of a branded ophthalmology product earlier this year, continuing to help establishing significant market share for the manufacturers.

Our experience with that product demonstrates the potent value of our Specialty franchise.

While our undisputed strength in Specialty is our oncology business, we have expanded those capabilities to become a instrumental part of the commercialization strategy for any infusible product launched in to the physician marketplace.

As I have previously discussed, we now have a keen interest going forward in further expanding those capabilities into select global markets.

The acquisition of World Courier has given us not only a premium quality clinical trial logistics services provider but also an international framework upon which to further capitalize on our strengths by driving our specialty logistics, consulting, commercialization and reimbursement services into other geographic markets.

The integration of World Korea is going well, and we are very excited about the new insights and opportunities that are being discovered as we bring the two great organizations together and gain operational exposure to international markets.

Our Consulting Services group continues to have a strong year as demand for commercialization, reimbursement, and patient support services continues to be robust.

We believe these combined services offerings distinguish AmeriSourceBergen in the marketplace, provide unmatched value to manufacturers, and will be an important driver of our growth going forward.

As manufacturers seek to bring new products to market or expand sales of existing products in a challenging health care environment, we believe the demand for the services will only increase.

In terms of financial performance, the Consulting Services group delivered a solid quarter while making excellent progress in further integration of TheraCom which is performing well.

Even setting aside the contribution from TheraCom, the last group alone had outstanding results.

As Tim will detail, the solid performance across our business contributed to excellent cash flow in the quarter.

Given the strength of our balance sheet we continue to explore opportunities to deploy our capital in order to increase shareholder value including searching 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 specialty distribution and services as well as consulting services.

We also remain committed to returning a minimum of 30% of our free cash flow, to shareholders in the form of dividends and share repurchases, a hurdle that we have handily exceeded over the last several years.

Looking ahead, the results we've had in the first nine months of our fiscal year put us well on our way to meeting our objectives for the full fiscal year.

As we stated in our press release, we have narrowed the range of diluted EPS expectations for the full year to $2.80 to $2.84, Tim will provide the details on our assumptions for the remainder of the year, but I want to highlight, as a result of our tremendous financial flexibility, we have repurchased $514 million of our shares in a year, when we spent over $800 million on acquisitions and will pay down $400 million in debt in September.

This speaks to the enormous strength and resilience of our business in a year of significant change for AmeriSourceBergen and indeed for the health care industry more broadly as well as the quality of our financial planning and financial stewardship.

As you know, we are deeply engaged in our business planning process for our fiscal 2013, and we do not yet know the future status of the business we do with our largest customer.

As we noted in our press release, however, we do expect that new generic launches in both ABDC and ABSG, as well as contributions from our recent acquisitions and other favorable items would help drive earnings growth next fiscal year.

The impact of customer consolidation and competitive market dynamics on our margins is expected to offset some of that growth.

As our provider customers across the health landscape prepare for the full implementation of the federal government's health care reform initiatives, we are being challenged to help find new ways to reduce costs.

Across the industry, big customers are getting bigger.

Whether they are mail order pharmacies, acute care networks, or independents seeking greater strength in number through joining buying groups.

Over the long term, this should lead to an even more stable and resilient industry.

Of course, we will continue to manage our own expenses and working capital.

In addition, the strength of our balance sheet affords us additional opportunities to drive shareholder value through acquisitions, share repurchases and dividends.

With all that in mind, our preliminary expectation is for high single digits to low double digit diluted EPS growth in fiscal 2013.

Over the last year, we made important investments in our business with an eye to the future while we continue to focus on helping our customers and ourselves take advantage of the unprecedented growth in generics and the many opportunities in specialty.

Demand is strong and growing for the core products we distribute, and we play an essential role in the pharmaceutical supply chain ensuring integrity and security of the distribution of life improving and life saving therapies.

Our Manufacturer Services businesses help ensure products get to market as efficiently as possible and that patients have access to both traditional medications and the most innovative and complex products.

As cost containment effort mount across the health care spectrum our customers increasingly turn to us for help in meeting the challenges of the marketplace without sacrificing patient care.

I take great pride in the energy and creativity our associates bring to our business, each day I see the result of their innovative thinking and their dedication to exceeding customer expectations, and I'm proud to be their leader.

Here is Tim.

Thanks, Steve, and good morning, everyone.

As you just heard ABC delivered a solid quarter, and through nine months, our performance is tracking well to our financial targets.

The key highlight this quarter was our ability to overcome oncology generic head wind we mentioned in the past.

Going into this fiscal year, we knew that Q3 would be the toughest EPS comparison.

We consistently called out a $0.33 head wind this year from specialty generics.

Of this head wind, we anticipated about half of the $0.33 would negatively impact the third quarter.

We are pleased that we were able to successfully overcome this Q3 head wind and show solid EPS growth.

Two other highlights for the quarter -- we continued our discipline in terms of managing expenses across the organization, and we integrated World Courier in to ABC reporting.

Our results include two months of their operations.

Before I start with the quarterly financial details, let me highlight that, in our press release, we expanded our disclosures to include detail for two reporting segments, in addition to our ABC consolidated results.

The Pharmaceutical Distribution segment includes our Drug and Specialty group operating segments.

The other segment includes our Manufacturer Services businesses, which consists of the Consulting and World Courier operating segments.

Upon review of the financial reporting requirements, we determined that there was a need to separate Drug Distribution and Manufacturer Services due to the nature of their business operations and different revenue growth rates and operating margins.

The disclosure of our two reporting segments will improve investor transparency going forward.

Now, back to the quarterly details.

I will cover ABC consolidated results first.

Starting with the top line revenues were $19.8 billion, a 1.9% decrease over last year's quarter.

Drug company revenues were down about 5%, offset by higher Specialty revenues of nearly 8%.

We also had the benefit in our June 12 revenues, from two of our acquisitions, TheraCom and World Courier.

They contributed a combined $300 million of new revenues in the current quarter.

Moving along, gross profit was $689 million in the quarter, up 5.4% from last June with a gross margin of 3.49%.

Just to remind everyone, World Courier is included in our financial results, and they have a fairly high gross profit margin due to their best in class service model.

World Courier and our other acquisitions contributed nearly $60 million, to our gross profit in the current quarter.

Our LIFO charge was $4.7 million in the quarter, down $6.7 million from last year.

We expect a LIFO charge of between $12 million and $15 million for the full year, down significantly from last year.

Finally, the generic benefit we received in the current June quarter from new generic launches and price appreciation was in line with our expectations.

Let's move to operating expenses.

This quarter operating expenses were $375 million, up 11.6%, but this amount includes approximately $50 million of operating expenses related to our recent acquisitions as well as approximately $5 million, of nonrecurring charges, related to the World Courier transaction.

Excluding impact of acquisitions, our operating expenses would have decreased about $10 million, quarter-over-quarter.

Our businesses continue to do an excellent job at managing their expenses.

Operating income of $314 million, in the quarter decreased about 1%, while operating margin was up by 2 basis points compared to last June.

Our third quarter was slowed by the World Courier transaction costs and, more importantly, the difficult comparison versus the prior year.

Moving below the operating income line in other income, we had income of $4.8 million, primarily related to an increase in the valuation of a note that is due to ABC from the October 2008 sale of our prior PMSI business.

Interest expense of approximately $25 million, in the June quarter increased 33% compared to last year as a result of our $500 million senior notes that we issued back in mid November.

Our affective income tax rate of 38.3% was slightly higher than last year's 38.2%, and is in line with our expected annualized rate of 38.4%.

Our GAAP diluted earnings per share in the quarter of $0.71, increased by $0.05 or just under 8% over the same quarter last year.

Our EPS benefited from a reduction in our average diluted shares outstanding due to our ongoing share repurchase programs.

Average diluted shares for the quarter were approximately $256 million, down just over 8% from last June.

At June 30, 2012, we had 251 million outstanding shares.

Let's spend a few minutes discussing our segment results for the June quarter.

Starting with Pharmaceutical Distribution, total revenues were $19.4 billion, down about 3.3% over last year's quarter.

Drug Company revenues were down about 5%, due primarily to lower sales with former Medco and the impact from the loss of a large chain customer last year, the former Longs Drugs.

Slightly over half of the decline came from lower sales to former Medco, driven by generic conversions and changes in their book of business.

Without these two negative impacts, our Drug business would have had growth of 2%.

Also during the quarter, the Drug Company anniversaried a large customer win from the prior June quarter.

Specialty groups revenues increased nearly 8%, led by strong performance in two of its businesses, with growth of significantly above market rates.

ICS, our third party logistics business, and Besse Medical, our vaccine and physician office distribution business.

From a segment standpoint, gross profit decreased about $25 million, and our gross profit margin slipped somewhat.

Most of the dollar decrease is due to oncology generics head wind, a high margin contributor last June quarter offset by the contribution from generic Lipitor and Zyprexa, both of which had their exclusivity periods end during the June 12 quarter.

We did have other generic launches during the quarter and also gross profit contributions from our specialty businesses.

These positives were offset by the decrease in our revenues and margin pressure.

It should be noted that Drug Company, if viewed on its own, had gross profit margin expansion of 20 basis points in the June 2012 quarter.

This segment managed operating expenses very effectively, especially payroll and benefit expenses, as well as external consulting expenses which enabled us to offset some of the gross profit dollars we lost with the oncology generic head wind.

Overall, we are very pleased with the operating results for this segment.

Moving to the other reporting segment, which again is Consulting, which includes our Packaging business and World Courier.

As mentioned previously, our two large acquisitions accounted for nearly $300 million, of new revenues in the third quarter.

World Courier revenues are tracking well against our expectations which we provided back in our press release that announced the acquisition.

Operating income from the other segment increased $11 million from last year's quarter.

Of this increase, about $8 million is related to our fiscal '12 acquisitions.

The remaining increase is related to our legacy businesses.

I would like to highlight that our nonrecurring charge of about $5 million, is not included in our segment level reporting.

For the June quarter, the impact of our World Courier acquisition was essentially break even due to the transaction costs.

Now let's turn to our consolidated balance sheet and cash flows where trends continue to be favorable.

We generated $92 million of cash from operations in the quarter, bringing our 9 month total to $760 million.

Our businesses continue their focus on working capital.

In fact, our cash conversion cycle, based on a rolling four quarter average, improved by one day to 1.7 days in the current June quarter, from 2.7 days in the June 2011 quarter.

Capital expenditures were $39 million in the quarter and $128 million for the 9 months.

For the full year we are still tracking to our guidance for CapEx of $200 million.

During the quarter, we bought back $186 million of our shares.

For the nine months we purchased $514 million of shares, and this slightly exceeds our March quarter guidance of $500 million.

At June 30, we have $744 million left on our May 2012 share repurchase authorization.

Our cash balance at June 30 was $1.7 billion.

As we've discussed in the past, we need approximately $500 million in available cash to account for swings in working capital and to run the business.

As a reminder in mid-September, we will be using cash to retire our $400 million 5.625 senior notes.

Now let's turn to updated fiscal 2012 guidance.

We now expect our GAAP diluted EPS to be in the range of $2.80, to $2.84.

This includes an estimated $20 million of nonrecurring costs related primarily to transaction and severance expenses.

With narrowing our EPS range, this means that we will have EPS growth of 10%, to 12% this year, after absorbing the $0.05 negative impact from nonrecurring charges.

Revenue.

We continue to expect revenue growth to be flat or up modestly for the full year.

We expect our operating margin expansion to be in the high single digits.

As previously communicated, Q4 is our easiest operating income comparable for the year.

Because of this, we expect most of our operating margin expansion to be achieved in the fourth quarter.

Free cash flow is still tracking to finish in the $800 million to $900 million range.

Looking ahead we are deeply engaged in our business planning process for fiscal 2013, and there are still many moving parts including of course, the Express Scripts RFP.

As Steve outlined, as large customers consolidate, they are seeking better pricing which includes generic pricing.

And as recent contract discussions have demonstrated, our customers want us to be part of the solution in helping them meet the economic demands of the new health care landscape.

Our high single digit to low double digit EPS growth range is based on assumption on several moving parts and includes possible outcomes on the Express Scripts contract.

Our EPS range is preliminary, and we still have quite a bit of work to complete in our planning process.

But it does incorporate the best information we have right now.

Before I turn it back to Barbara, let me reiterate, that,9 months into our fiscal year, we are well positioned to meet our financial targets for fiscal '12, and we are hard at work on our fiscal '13 plan.

Here is Barbara to start our Q&A.

Thank you, Tim.

We will now open the call to questions.

We ask that you please limit yourselves to one question and a brief follow-up so we can accommodate as many callers as possible within the hour.

Please go ahead, Mary.

(Operator Instructions)

Tom Gallucci, Lazard Capital Markets.

Thanks for the information.

I guess my first question was on some of the commentary that you had on the press release, and I think you echoed it a bit on your prepared remarks, where you talked about competitive pricing pressures and certainly the competitive landscape.

Could you expand a little bit on what you mean there, is it something we always see as a persistent part of the business or are there new dynamics that you are referring to?

I think -- thanks for the question, Tom.

What we are seeing is that the larger customers are getting larger.

We have said that the larger customers get the biggest -- the best deal.

We are seeing some of that.

I think in addition, we have got much more generics as a percentage of sales.

Don't forget we have a very diverse customer base, almost all of whom buy generics from us.

So, generics as a percentage of the overall portfolio have increased.

So I think we just -- people are looking at their businesses and their potential financial impacts from health care reform and reimbursement pressure.

And we -- they are expecting us to participate with them in a much tougher future -- tougher future where we all have to be more efficient, and I think we are just not immune from some of that.

So, those are the trends that I point out.

Okay.

And then just to clarify your comments on guidance, I guess to ask it specifically, it sounds like it's early, maybe there is conservatism because there are so many moving parts.

On Express, specifically, we all know that's a pretty big moving part.

Would you be able to meet this guidance range if tomorrow you find out you didn't retain the Medco -- the legacy Medco business.

This is Tim.

I will answer your question, this way.

Our guidance includes, like you said, different assumptions on moving parts, one of which is which is Express Scripts and it contemplates both scenarios, winning it and losing it.

Again It's Express Scripts and other factors looking out over the next years.

Okay.

Thank you.

Larry Marsh, Barclays

My question is elaboration on Tom's around next year.

So, and I appreciate providing some clarity here with perhaps a tone of trying to be prudent here.

But, Steve, if we think about a scenario where your largest customer Express chooses not to continue to do business or splits the business, can you remind us of some of the factors that you would -- could go through to help mitigate some of those lost revenues from the cost side that would keep you still in the range of guidance?

And, along with that, could there be a situation where there might be a quarter or two of timing mismatch between revenues and cost that could cause you to vary around your guidance ranges.

Good morning, Larry.

Thanks for the question.

We really are deep in this.

In fact, the team is going out to visit all our drug regions this week, which is really the start for us in detail -- the detailed planning process.

We had information that we have information that we think is material that we felt it was incumbent on us to share with all of you.

That's the way AmerisourceBergen is run.

We are proud of that.

We are not backing off that.

Absolutely, if we lose Express Scripts -- don't forget our current Business is really a lot of the green field we set up during the merger is set up to handle big mail order business that we have done with Medco traditionally for as long as I can remember.

I've been with the company 18.5 years.

We've always had the account.

It's very little expense.

In fact, many of the characteristics of this Business are what we call dock-to-dock business, and of course you remember that very well.

There is not too much expense there.

Coincidentally, a lot of the facilities that we service in Medco out of all our most highly efficient modern facilities.

We absolutely have opportunities to cut down our costs and, like Tim said, this current thinking, while it's early, really contemplates all the way from us entirely losing this Business to winning it, including winning the part that we currently do not service, based on our best understanding of what the economic impact can be.

It really is early.

I appreciate the reflection there.

My follow up is around LIFO charge.

So, Tim, you are communicating a reduction in your range of LIFO expectations versus what you had suggested back in April by say $2 million.

At the time you said you anticipated a big impact relative last year for the generic introductions and some moderation in brand price inflation.

What is causing you to further moderate your views in that inflation based cost.

And, as you think about your guidance for the next year, can you give us any sense of general range of LIFO charges you are anticipating for fiscal '13?

Thanks.

You know, Larry, it's probably a little bit early to talk about LIFO for '13.

We are still looking through that.

In terms of LIFO for the June quarter, at the ends of the June quarter we saw pretty good brand pricing, increased percentages for our top 75 brand drug -- a little bit off from last year.

So there is moderation there in terms of brand pricing, and we are seeing a little bit steeper generic deflation, especially with generic Lipitor and Zyprexa.

So that's driving the change -- the slight change in our full year LIFO forecast.

But, again, for next year, we are probably -- it just depends on where brand price inflation is.

It's a little bit early.

Robert Jones, Goldman Sachs

Thanks for the questions.

Steve, I just wanted to go back.

I know you touched on the some of the changing market industry dynamics and, specifically, Tim mentioned the generic pricing.

I was just wondering maybe for perspective if you could share your thoughts or recent trends on both the buy side margin that you have seen recently, and then maybe separate out the sell side margin just to give us some perspective on your dealings on both of the manufacturer and the customer.

Many times -- I will just talk about the buy side first.

Many times on the fee for service agreements we are really in our third generation.

And we have dealt with a lot of pharma consolidation.

And we feel that we have -- that the industry, the manufacturer side really understands the value we represent, and there is no significant erosion there or anything at all.

Obviously, the generic mix, and AmerisourceBergen has the opportunity to sell generics to almost all of our customers.

As you know, we have the most diverse customer base.

It is really has been driven by this generic wave, and we have set out a whole portfolio in both drug and specialty to really recognize this trend in generics.

Hopefully, we will have biosimilars someday and really capitalize on the opportunity that we have for generics and specialty.

The sell side -- I think the biggest things we can point to is somewhat of an anxiety of compressed reimbursement and just a lot of consolidation.

Read the headlines, it's not just the particular one that's on everyone's mind.

There is just a lot of consolidation.

We have community oncologists, for example, that are constantly getting a lot bigger, and our bigger customers get a better deal.

We have independent customers joining buying groups.

These are the biggest trends that I can point to.

We -- I think, of course, there is a lot of marquee customers up for bid.

There has been a pretty well publicized VA process, definitely the ESR process has really kicked up some dust, I could say, from other customers.

Without being too specific -- we don't like to comment on individual contracts.

We have been in this business a long time.

We understand how to contract with customers, and we believe that our best bet is to maintain our key customers and customers that we believe are going to represent us growth in the years ahead.

I appreciate that.

Around the preliminary guidance -- I was hoping you could talk about the major swing factors.

Obviously, we are well aware of the Express contract.

But how you are think about other important contracts.

I know you don't want to name names, but I think Core America is one out there.

Just some of the other major contributing factors, what is the assumption around buy back?

It looks like there is, obviously, some nice contribution from lower interest expense, and clearly World Courier next year.

Maybe just some of the pushes and pulls around the guidance range would be helpful.

Yes, this is Tim.

In terms of the guidance, we are not going to talk specifically about other contracts, certainly we made assumption about Express in there.

As we start the plan process we always look out over the 12-month horizon of what other contracts we may renew and negotiate.

So there is assumption in there about other contracts.

Some of the other things, too, would be Oxaliplatin, and an assumption about how that's going to perform next year.

That's a big unknown.

We don't know how the pricing willing stick in the market, how many suppliers.

So, that's factor.

Certainly we make an assumption about expenses.

And, finally, in terms of share repurchases, the assumption is, I think if you look back what we have done historically the last two or three years, we have been around the $500 million range.

That's probably a pretty safe number to be in -- at for the -- that's our thinking.

Glen Santangelo, Credit Suisse

Wanted to follow up on generics.

And I'm not sure exactly how you're thinking about this with respect to your guidance.

Tim, you mentioned in your prepared remarks you went in to fiscal '12 with a $0.33 hole.

Obviously everyone is focused on this generic calendar, so, as you think about your guidance for fiscal '13, could you give us a sense for what the contribution you are expecting in '13 versus '12, what that looks like?

Glen, I mean we are -- again, we are early in the plan process.

We don't want to get in to specifics.

We do have generics, a couple of good ones that launch at the end of our Q4 that carry over into fiscal '13 that will definitely help us.

We are encouraged.

I mentioned before, Oxaliplatin will be back.

We only have it for six weeks.

We get it next year.

There are some unknowns about that.

Overall, you are not going to have a generic Lipitor and Zyprexa, but there are some good generics that help us early in the year.

But, again, we are not ready to dial in any specific EPS impact numbers.

Okay.

That's fair.

Maybe if I can just ask Steve one follow-up question.

Steve, I want to talk about a comment you made with respect to acquisitions.

You said I think the Company is still receptive to the idea of acquisitions.

And it sounds like you are pleased with the progress of both TheraCom and World Courier Group.

And, as you think about where you are with respect to those integrations, do you feel like the Company could handle additional acquisitions in fiscal '13 or are you kind of going to just see how it goes?

Glen, that's a great question.

I do think that we are operationally well situated.

I think, actually, TheraCom is a very good example.

We have had some work to do at the corporate office, yes.

But, obviously, we bought this from a well run company, and it was in good shape, and, really, most of the integration work is carrying on in our Consulting Services business.

I think they are very well equipped to run that.

World Courier was definitey a different expansion for us.

We've had a lot of work to do.

I think Tim pointed out one of the highlights for this year was really getting World Courier into the financial reporting criteria for a public company, and that's gone well.

But we do think that one of the reasons for investing in this company was the platform opportunity, and now when we go consider anything internationally we have local intelligence, which is huge.

Local understanding of tax laws, of who the good players are, who the bad players are.

So, we do think this opens up some attractive markets to us, which we started out our release by talking about obviously -- the obvious fact that pharmaceutical growth in the rest of the world will be hard on the US.

So we are not rushing in here.

We don't think there is anywhere a Nirvana market or anything.

But it is important to us to drive our specialty and consulting practices throughout the world.

And we think we have leading practices in those areas and a lot of good intelligence and methodologies to share with the rest of the world.

I will say -- this is Tim -- I will say after 100 days, we are really pleased with what we have so far, and they are performing right on our expectations.

Like I said, neutral in Q3, and we expect them to contribute a penny or two in four.

So, again, very encouraged this year and looking forward to what they are going to do in '13.

Robert Willoughby, Banc of America Merrill Lynch.

Tim, what is left on deal expenses?

Will we see much going forward in the numbers?

And, I think you hinted at it, but what was the actual dilution from new generics year-over-year to revenues.

The actual dilution, in terms of revenues?

Yes, the revenue growth rate.

What we said in terms of the Medco, Medco was down probably about half.

It's probably in the $500 million or $600 million range, just from our largest customer -- Medco by itself.

Again, not all of that is -- some of that is book of business, right?

And some of it is the generic conversions.

In terms of your other question, I would say, Robert, that we don't have much left in terms of World Courier.

I think we are at $17 million in terms of nonrecurring costs through Q3.

In my comments I said I thought we would end up $20 million.

We probably still have some other nonrecurring charges that will come through about $3 million, not related to World Courier in Q4.

Perfect.

Thank you.

Eric Coldwell, Robert W Baird

I'm going to ask, two if it's all right.

Regardless of correlation or causation in the past we have seen some rather funky behavior from the manufacturers around major US elections.

I'm specifically thinking about the September quarter of 2004, where price inflation contracted fairly dramatically.

Have you considered the possibility of that heading into this election, or do you think it is really not in the limelight here?

I guess any signal on pharma behavior on pricing here in the near term.

And then I have a follow up.

The pharma pricing has been a little bit less than last year, price increases, but still very robust.

As I said, we are spending more time internationally, and everyone is very envious of an environment where we can have price increases.

It's an excellent thought, Eric.

I credit you for thinking of that.

We'll pay it more attention.

But we haven't really seen anything concerning.

I think more of the price increases have to do with patent expirations, is what we are seeing a trend there -- some price variances and pricing strategies ahead of large patent expirations.

But, as you know, we have significant launches in this quarter and less exciting year in brand to generic conversions next year, but still very robust, and we will see impact on brand prices from those.

That's great.

And then my follow up is related to business transformation, the SAP program, you seem to continue to be ahead of schedule and doing great there.

Curious if you can give us an update on the incremental benefits to OpEx compared to your original thoughts for implementation, and then whether you might be looking to fiscal '13 and '14 and thinking that there could be additional juice on that $10 million and $40 million of OpEx savings that you had previously talked about.

I'll let Tim handle this, but I'll just say that, generally, we have done most of our capital spends and now it's really operational spend.

The depreciation is starting to hit us financially, the consulting expenses -- the external consulting is definitely an opportunity we have had to reduce costs.

And we have actually done well against our plan for our BP budget for this year.

But I will let Tim give you more color.

Thanks, Steve.

Eric, actually, to Steve's point, I want to make sure I stress this, we are starting to see a little bit of expense savings now.

Again, when I mentioned external consulting, a chunk of that is from our IT department and the fact we are moving along and deploying SAP really efficiently and effectively.

So, we're seeing a little bit of that now, but we are still -- we're not -- we are still believing that the $10 million is appropriate.

That's what it was when we talked about moving parts in our range.

That's one of the assumptions factored in to our range for '13, and we're still on the $40 million for '14.

At this point we are just not ready to commit to any upside, or juice as you call it out there.

Lisa Gill, JPMorgan.

Steve, I just wanted to follow up on a comment that you made about the Express Scripts new contract.

You said it would be best overall value.

I'm just wondering if there are any changes to the types of services they were looking for, versus what you previously provided for Medco.

Just on the whole upside for that, I think I read in a Philadelphia paper some comments around Specialty and your growth in Specialty and perhaps moving more towards the patient.

I was wondering if you maybe could just also comment on that, as well as potentially competing with a customer like a PBM.

Let me just talk about that.

I think our Business in Specialty is, and we were talking about this with a customer the other day.

Everyone has a different definition of specialty.

But AmerisourceBergen, especially, we are really talking about physician administered products and related services to manufacturers.

I think when a PBM says specialty, it usually means patient self administered products.

I think that that is pretty well defined.

We actually think that there is a lot of opportunities to collaborate in those areas, including with our Good Neighbor Pharmacy network.

And there is an opportunity to do potentially more specialty in the community.

And we do take our specialty franchise and expertise very seriously there, and think we afford a lot of AmerisourceBergen customers that are interested in this area an opportunity to gain from our expertise, including in policy area and in the manufacturer relations area.

The first part of your question had that do with Express Scripts and the overall value that we provide.

I think that was more of a comment that the economic deals, there are very few -- few companies that are qualified to be the provider to Express Scripts.

It's a small universe.

I think economics is part of it, experience is part of it.

I don't think honestly any of the qualifications have really materially changed since the start of this process, which is pretty quick, if you think about it, compared to the others ones we have seen in the recent past.

Just so I understand, Steve, though -- so your comments around commercialization of a product and perhaps working in partnership with a PBM, you don't see that as an opportunity with a new potential contract with a new Express Scripts, or is that a future opportunity but not part of this RFP process.

We see, I think, quite opposite.

I've said I think that our market presence and our market expertises are very complementary.

The focus on this has really been on the core economics.

I think our idea is obviously to win an account, and then we can work on alignment and future opportunities together.

That's really what our strategy is there.

John Ransom, Raymond James

A couple of things, just drilling down to your assumptions next year.

Oxaliplatin comes back, is that -- (Inaudible) for you?

You know, we are obviously excited to have Oxaliplatin back, and at the end of May we are thrilled that the comp is out now.

We enjoyed the ride, but it was good timing to have the comp out.

August we are going to have the product back, but it's going to be very different.

The ASP is pretty high, so that's a positive.

There is no at risk.

There is no exclusivity period, so we are going to have several manufacturers.

We think the pricing will be very dynamic.

It's probably going to be more akin to, again, the specialty drugs, and they are differ in that (inaudible) the prices never get quite as low.

It's going to be more akin to the expirety of 180 days exclusivity period than it is to a new generic injectable launch, is what I would say.

So, while we are expecting with our market share we have and the expertise we have in oncology, we expect them to do very well, as we did with Ositaxil and Gemsydopine.

We don't expect that you are hearing half of our earnings will be devoted to Oxaliplatin in the future.

Those were good times, though, I must say.

(laughter) The second question, if you just looked at the totality of your (inaudible) generics, the contribution that you think you will get next year compared to the contribution (technical difficulties) -- my specific issue is I think from all accounts, Lipitor was just off the charts great during the exclusivity period.

Obviously, you are losing that.

We were having a whole trouble (technical difficulties)

Yes.

I don't think it is going to be quite as robust.

Tim, you --

Yes, John, you were breaking up a little bit, but I think you are asking what does next year look like?

Again, we have a little bit of a benefit from our fiscal year with a couple of large generics launching at the end of our Q4.

But, overall, talking to our generics guys, we think it will be a good year.

It's going to probably be a little down compared to this year.

It's tough to replace generic Lipitor and Zyprexa.

There are a couple of other ones out there that we are encouraged about.

So down a little bit, but not bad.

And, again, Lipitor, because of the class of customers we service and who buys generics from us, it might not have been as big for us as it was for other players in the industry.

Just keep that in mind.

And I guess I would like -- again going back to that -- let's go back and highlight Steve's comment earlier.

A lot of our volume is coming through larger customers on generics.

They get -- their pricing is -- they bring us more volume but their pricing is a little bit more favorable.

Mary, I think we have time for one more question, please.

Ricky Goldwasser, Morgan Stanley.

Quick follow-up questions here.

First of all, Steve, I think on your last comment around the generic volume coming from larger customers, so can you clarify that a little bit for us, because when I think about AmerisourceBergen I think of a big portion of your customer base being the smaller independents.

When you comment about generic volumes, are you referring to the PBM and the OmniCare of the world, or is that, or are you talking about your specialty segment?

If you can clarify who those large customers are.

And then secondly, from data we have seen recently, it seems like there have been some good generic price increases taking place.

How are you thinking of generic inflation in the context of your forward outlook?

In 2011 we did very well on generic price inflation.

It's been much more moderate this year.

I think we even pointed out the numbers, because it was significant to the interpretation.

We haven't seen anything as robust this year.

Ricky, apologies for your last name by the operator there.

We do have, we believe, the most diverse customer base within our industry, and we are very proud of the strong independent business that we have.

We also are doing more business within the health systems on generics, which is a great trend for us given our health systems presence.

We, also, as you know, we never used to talk about generics in specialty.

We talk about it a lot.

So there are really a lot of good trends for us in generics.

Another trend is obviously our large PBM customer doesn't really buy any significant generics from us, which we talked about a lot.

The larger customers, a lot of them say when we're going our last round of contract negotiations, they may have been buying 4% to 7% of their purchases were in generics.

Now it's a lot higher.

And those customers are getting bigger.

We have to share more of the economics on generics with them, because it's a much bigger pot, they're a much higher profile product category to them.

So, those are some of the trends we have been pointing out.

You are absolutely correct to think of AmerisourceBergen as specialty customers and independent pharmacies and large health system presence, and big ultimate [staff] or closed door pharmacy businesses, and that's definitely one of the strength of us, is our diversity in our business that we serve.

In that line, just another clarification --when you think about fiscal year '13, and where you say it might be down a little in terms of generic contribution, you are really looking at a basket which includes the specialty generic and Oxaliplatin, as well as the solid orals rather than separating the two.

The top line brand to generic conversions, and some of it's -- it's complicated -- because some of it will have fourth quarter launches that will impact our fiscal year '13.

But you know it was $30 billion in fiscal year '12, and it's about $11 billion to $12 billion in fiscal year '13.

And, again, quarters move, and we are early in our guidance and we're busy looking at it.

$11 billion is a good year for us.

If you look at our performance over the last ten years, it's a good year.

We look forward to providing more guidance.

We just wanted to give you a benefit of our early look at 2013 and what we know about some large contract negotiations that are going on.

I hope you appreciate the foresight that we have given you and the approach we have taken which is always being as transparent and as communicative with investors as we can.

So, I think with that we will wrap up.

Ricky, thanks for your questions.

And Barb, do you want to make some --

Do you have a strong close?

Okay.

Oh, I have my strong close.

I'm up for the strong close.

My strong close is that I recently completed my first full year as CEO of AmerisourceBergen, which I'm proud to serve in this position, I can unequivocally and very confidently state that ABC's franchise and our place in the industry and our long-term prospects are really outstanding.

We have just reported an excellent quarter, and we are well on our way to completing a successful 2012.

I thank you for you attention today.

I believe that ABC is making the right investments to secure our future.

And we'll look forward to seeing some of you in September at various conferences, and, of course, we'll have our full fiscal year '13 earnings in November.

Thank you.

Thanks, Steve.

And just a couple of calendar items.

We'll be at the Robert Baird Healthcare Conference in New York on September 5, and at the Morgan Stanley Conference, also in New York, on September 11.

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

Thank you.

Thank you.

Ladies and gentlemen, this conference will be made available for replay today after 1pm Eastern time through August 2 at midnight.

You may access the AT&T teleconference replay system at any time by dialing 1-800-475-6701 and entering the access code 253858.

International participants may dial 320-365-3844.

Those numbers again are 1-800-475-6701 and 320-365-3844.

The access code is 253858.

That concludes our conference for today.

Thank you for your participation.