美源伯根 (ABC) 2012 Q4 法說會逐字稿

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

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

Later we will conduct a question-and-answer session and instructions will be given at that time.

(Operator Instructions) Also as a reminder, today's teleconference is being recorded.

At this time we will turn the conference call over to your host, Ms. Barbara Brungess.

Please go ahead.

Thank you, Tony.

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

I am Barbara Brungess, Vice President, Corporate and Investor Relations; and joining me today are Steve 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 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 express 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.

Before we begin, I just want to say a few words about the storm we have all experienced over the last few days.

Our thoughts are with all of those who have lost loved ones, lost their homes, and have otherwise been severely impacted by the storm.

I want to thank our ABC associates who have worked tirelessly to ensure that we would continue to be able to meet the needs of our customers and the patients we all ultimately serve throughout this difficult week.

Turning now to our results, I'm delighted to report solid results for our fourth-quarter and our fiscal-year 2012.

In my first full fiscal year as CEO, we overcame a challenging year-over-year comparison while executing very well on generic conversions.

We renewed and expanded our contract with our largest customer; we integrated four acquisitions; and we returned funds in excess of our free cash flow to shareholders.

In the September quarter, our revenues were down 4% to $19.5 billion, but our GAAP earnings per share from continuing operations were up 23% to $0.65.

For the fiscal year our revenues were down about 0.5% to $79.5 billion, and our earnings per share were up 10% to $2.76, which excludes $0.04 earned by AndersonBrecon.

I am very pleased with the performance that AmerisourceBergen associates delivered in fiscal 2012.

We executed extremely well against our key strategies of generics and specialty, and we are well positioned heading into fiscal 2013.

In addition, we made important investments in our more forward-looking strategies of expanding our manufacture services businesses and beginning to build out our international platform for growth.

This morning we also announced that our Board of Directors approved a 62% increase in our annual dividend and authorized a new $750 million share repurchase program.

We completed a $650 million accelerated share repurchase program during this quarter, bringing our repurchases for the fiscal year to nearly $1.2 billion.

We are confident undertaking these capital deployment initiatives, due to the tremendous underlying strength and resilience of our business.

Since the merger that created AmerisourceBergen, we have generated free cash flow of $8.8 billion.

Of this amount, we have return $6.6 billion to investors via share repurchases and $600 million through dividends.

In total, we returned 82% of our 11-year free cash flow to our shareholders, truly outstanding performance for our investors.

I am very proud that in fiscal 2012 we generated $1.1 billion in free cash flow, repaid $450 million in debt, completed nearly $800 million in acquisitions, and repurchased over $1 billion of our stock.

And heading into next year we continue to have excellent financial flexibility.

Our high-quality balance sheet combined with our ability to generate cash affords us the opportunity to continue to invest in our business, fund our strategic initiatives, and return value to shareholders.

Our legacy of outstanding financial stewardship is one of the bedrocks in the foundation of AmerisourceBergen and one which gives us a firm footing upon which to grow our business in the years ahead.

Another important aspect of our financial stewardship has been our careful management of our existing assets, investing in carefully selected acquisitions, and divesting of assets that do not serve our long-term objectives.

This morning we announced that we are pursuing the sale of AndersonBrecon, our contract pharmaceutical packaging business.

While AndersonBrecon is a market leader, has excellent customer relationships, talented and dedicated associates, has performed well, and is on a growth trajectory, we have not realized significant synergies between AndersonBrecon and our other lines of business.

We remain committed to expanding our remaining manufacturer services businesses with a particular focus on expanding our consulting services and specialty third-party logistic business in the US and in select global markets.

The acquisitions we have made this year support those efforts, and we have made excellent progress on the integrations.

And all four are performing as expected.

The two largest acquisitions, TheraCom and World Courier, made modest contributions to our earnings in fiscal 2012 and are expected to contribute more meaningfully in fiscal 2013.

TheraCom is part of one of our fastest-growing business units, the consulting group, and we expect the demand for the services this group provides will increase as manufacturers seek to bring products to market as efficiently as possible and to demonstrate the value of the products in the marketplace.

The integration of World Courier is also progressing very well, and we are pleased with the performance of its core business as it has transitioned to becoming part of AmerisourceBergen.

As these two businesses have come together, our cultures and our vision for the future have aligned seamlessly, and I am more excited than ever about the potential we now have to begin to expand our market-leading specialty, 3PL consulting, and other manufacturer services outside the US.

After a year of substantial change, I believe we are very well positioned to continue to add to our legacy of success and innovation in the years ahead.

Our diverse revenue base continues to position us well to benefit from organic growth across the entire spectrum of pharmaceutical care.

While overall pharmaceutical market growth will likely continue to be slow in calendar 2013, IMS Health sees compounded annual sales growth in the US in the range of 1% to 4%, and 4% to 6% worldwide through 2016.

We are part of a strong and stable industry, and we have demonstrated both resilience and solid performance in a variety of economic and market situations.

As changes continue to roll across the US healthcare markets for both our manufacturer and healthcare provider customers, the opportunity for us to provide value should continue to increase.

One of the hallmarks of the US market is the quality of our relationships wholesalers have 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 them meet the challenges of today's changing healthcare landscape.

Just last week I served on an international wholesale panel at the IFPW, the International Federation of Pharmaceutical Wholesalers, biannual meeting.

I was again reminded by listening to the comments of others on the panel about the robust and transparent relationship we are privileged to enjoy with both our provider and manufacturer customers here in the US.

Turning now to our two operating segments, Tim will provide the detailed financial results, but I would like to highlight a few key trends.

In the Pharmaceutical Distribution segment, AmerisourceBergen Drug Corporation had a truly stellar year, delivering strong performance on generics in a historic year for new launches.

The Drug company's performance helped overcome a $0.33 headwind in EPS due to a difficult comparison with specialty generic performance in the prior year.

In addition, strong results in our US-based business offset disappointing results in our much smaller Canadian distribution business, where reimbursement changes have challenged the market and further unforeseen reimbursement cuts are on the horizon.

In addition, we continue to work out some issues with the implementation of a large retail contract.

While the distribution market in Canada is challenged, the small but growing specialty business in Canada continues to gain traction.

Drug company revenues in the September quarter declined 8% due in large part to a larger than expected decline in sales to our largest customer, as well as the previously reported loss of a large retail customer beginning last September.

For fiscal-year 2012, the Drug company's revenues are down 2%, somewhat lower than anticipated.

However when adjusting for nonrecurring items, the Drug company demonstrated disciplined expense management, gross margin expansion, and significant operating margin expansion.

In addition, we renewed and expanded the contract with our largest customer and began to serve a significantly higher volume with that customer beginning on October 1. As you would expect with ABC, the conversion has proceeded very well; and we are excited about the relationship we are developing with our largest customer.

Given the difficult generic comparison we will have in the Drug company in fiscal year 2013, we are optimizing our resources to ensure that they are deployed and utilized in the most efficient manner possible.

Some of those efforts resulted in the severance charges we recorded in our fourth quarter.

One example is that we are leveraging some of the efficiencies gained through the SAP implementation, particularly in back-office administrative areas, which has allowed us to reduce the numbers of our Drug company operating regions from four to three regions.

As you would expect, we continue to look at ways to streamline our operations.

But we never sacrifice our ability to provide world-class service to our customers.

Another example of where we continue to invest is in our Good Neighbor Pharmacy program, which is the largest independent network of community pharmacists in the US.

We believe our pharmacy customers play a critical role in the healthcare throughout the country by offering a compelling value proposition to patients and payers alike.

We negotiate on behalf of GNP members to ensure that they continue to have access to third-party networks.

Looking ahead, we are working with GNP member stores in order to help them ensure they are able to take full advantage of the expansion of healthcare under the health reform legislation.

The Drug company has performed admirably over the last years while the overall market has been flat to down.

The implementation of our SAP platform continues on schedule with 20 distribution center conversions completed and six remaining.

We have made excellent progress, and we expect the remaining conversions to be completed by the end of the March quarter in 2013.

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

The Drug company is and always will be the foundation of AmerisourceBergen Corporation.

The excellent, consistent financial and operating performance it has achieved over the years and the resilience it has demonstrated are hallmarks of the value we provide.

Furthermore, the Drug company is a key driver in our ability to generate tremendous cash flow and, as such, enables us to fund our growth initiatives.

We take deep pride in this business.

And while its performance in fiscal 2013 won't be quite as strong as it has been historically, we expect it to return to its normal growth rates in fiscal 2014 and beyond.

AmerisourceBergen Specialty Group had another strong quarter with revenues up 6% in the quarter, which led to record revenue for the full fiscal-year 2012.

Revenue growth was driven by another particularly strong performance in third-party logistics and in our vaccine and physician distribution business.

Our oncology business performed well as a difficult comparison eased.

We were, however, somewhat disappointed in the pricing of oxaliplatin during its release in mid-August.

ABSG did continue to benefit, however, from the launch of a branded ophthalmology product earlier this year, continuing to help establish significant market share for the manufacturer.

Our success in the ophthalmology market demonstrates the unique value proposition of our Specialty franchise.

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

Our Consulting Services group achieved strong results for the fiscal year as demand for commercialization, reimbursement, and patient support services continues to be robust.

We believe these combined service offerings distinguish AmerisourceBergen in the marketplace 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 healthcare environment, we believe the demand for these services will only increase.

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

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

As Tim will detail, the solid performance across our business once again 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 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, our performance in fiscal 2012 sets us up very well for continued success in fiscal 2013.

As we said in our press release, our guidance for GAAP EPS growth from continued operations in fiscal 2013 is to be in the range of $3.06 to $3.16, an 11% to 14% increase over the $2.76 that we earned in fiscal 2012, excluding of course the contribution from AndersonBrecon.

Tim will provide the details on our assumptions for next year, but I want to highlight that we continue to have tremendous financial flexibility.

We are undertaking initiatives across our entire business to help ensure that we are as efficient and effective as we can possibly be.

The enormous strength and resilience of our business in a year of significant change for AmerisourceBergen and for the healthcare industry more broadly reinforces my confidence in the long-term prospects for our business.

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

Over the last year we have made important investments in our future while we continued to focus on helping our customers and our selves take advantage of the unprecedented growth in generics and the many opportunities in Specialty.

Our distribution business is not only a cornerstone of AmerisourceBergen, but it's a cornerstone in a stable and growing industry.

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.

Lastly, I believe that we have built up an exceptional management team with a diverse background and deep experience that is excited about the opportunities we have in front of us.

The knowledge, passion, and creativity our associates bring to the market each day set us apart from our peers.

I thank them all for the work they do to continue to drive innovative solutions in a dynamic environment.

I am proud to be their leader.

Here is Tim.

Thanks, Steve, and thanks, everyone, for joining us today.

We had a solid finish to what has been a good year.

We are pleased with our financial results, and we have momentum entering our new fiscal year.

So let's start with our review of fiscal 2012.

We will compare our performance against the guidance we gave back in July when we discussed Q3 results.

Our revenue expectation for fiscal 2012 was flat to modest growth.

We were off a little bit.

We finished down about 0.5%.

This was due primarily to sales to our largest customer being lower than what we estimated.

This decrease was offset by revenues from our two large acquisitions, TheraCom and World Courier.

In fiscal 2012, our operating margin expanded by 10 basis points, which was slightly above our expectation.

This is the seventh consecutive year we expanded our operating margins.

Free cash flow.

We had $1.1 billion in free cash flow for the year, and this exceeded our expectation of $800 million to $900 million.

Finally, our GAAP diluted EPS ended at $2.80, a 10% increase over our GAAP EPS from fiscal 2011.

This EPS amount includes $0.04 from AndersonBrecon, which we classified as a discontinued operation.

As Steve mentioned, we plan to divest this business within the next six months.

You may recall that our guidance assumed $20 million of nonrecurring charges for the fiscal year.

Our $2.80 GAAP EPS includes $31 million of nonrecurring charges.

That is $11 million higher than we expected, and the equivalent of $0.03.

Excluding this $0.03 negative impact, our EPS results for the fiscal year would have been $2.83.

One more important item, cash deployment.

As Steve mentioned, our Board approved a 62% increase in our annual dividend per share to $0.84.

Why do we increase our dividend now?

Three reasons.

One, the long-term financial outlook for our core distribution business continues to be very positive.

Two, we expect growing contributions from our recent acquisitions.

And three, we continue to generate consistent, significant free cash flow.

We are pleased that we can provide added value to shareholders.

Looking ahead we expect to grow our annual dividend approximately in line with our earnings growth.

We believe that our business will generate enough excess capital to continue with meaningful share repurchases and at the same time to have flexibility to complete acquisitions in the strategic areas that we have discussed in the past.

We also announced that we completed an accelerated share repurchase for nearly $650 million, about 17 million shares.

Additionally, our Board approved a new share repurchase authorization of $750 million.

We still have about $97 million remaining on our May 2012 authorization.

In total, we have approximately $850 million remaining on share repurchase authorizations.

Now, let's move to our fourth-quarter results.

Starting with the top line, revenues were $19.5 billion, down 4.4% compared to last year's quarter.

Drug company revenues were down about 8% and were partially offset by Specialty revenues that were up nearly 6%.

Our acquisitions contributed a combined $335 million of new revenues.

Gross profit was approximately $720 million in the quarter, up 19% from last September, with a gross margin of 3.70%.

Our acquisitions, primarily World Courier, contributed $76 million in the current quarter.

We also benefited from a $15 million of antitrust settlements.

We consider this income nonrecurring.

Finally, in the quarter we had a LIFO credit of $11 million.

This credit reduced our fiscal-year LIFO charge to about $1 million less than we expected.

Two factors contributed to our fourth-quarter LIFO credit.

One, our sales of brand inventory were especially high at the end of the quarter due to the purchasing patterns of a few large customers.

And two, our mix of inventory was weighted heavier towards generic inventory at our LIFO calculation date.

Let's move to operating expenses.

This quarter, operating expenses were $423 million, up 15%.

This amount includes $65 million related to the operating expenses of our acquired companies.

Also included is $29 million of nonrecurring charges related to optimizing our field operations and corporate organization.

As you have come to expect from ABC, we continue to manage our expenses tightly.

Excluding acquisitions and nonrecurring costs, our comparable operating expenses would have decreased about $10 million or 3% compared to the same quarter last year.

Operating income of $296 million in the quarter increased about 25%.

Our operating margin was 1.52%, up by 35 basis points compared to last September quarter.

When excluding the nonrecurring items from both the fourth-quarter 2012 and 2011, our operating income is up $44 million or 16%.

This growth demonstrates our strong performance in our core Drug business as well as contributions from our acquisitions.

Moving below the operating income line, interest expense of approximately $24 million in the September quarter increased 22% compared to last year.

This is a result of issuing new senior notes back in mid-November.

As a reminder, we repaid $400 million of debt in September 2012.

Moving to income taxes.

We had an increase in our effective income tax rate in the current quarter to 41.6%.

This rate is higher than our normal tax rate of 38.6%.

The primary reason for the increase is that we recorded a tax valuation allowance against our Canadian drug distribution business due to their operating loss.

Going forward, we expect our ABC annualized tax rate to be about 39%.

Our GAAP diluted earnings per share in the quarter of $0.66 increased by $0.12 or 22% over the same quarter last year.

In the current quarter, again, the negative impact of nonrecurring items was $0.03.

Our EPS benefited from a 9% reduction in average diluted shares outstanding.

At September 30, 2012, we had 235 million outstanding shares.

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

Starting with Pharmaceutical Distribution, total revenues were $19.1 billion, down just under 6% versus the same quarter last year.

Drug company revenues were down about 8%.

The decrease was due to three primary drivers.

One, branded generic conversions offset by very strong brand price appreciation.

Two, lower sales to our largest customer.

And three, the negative impact from the loss of the former Longs Drugs last year, about $400 million.

Specialty group's revenues increased 6%, led by strong performance in three of its businesses, with growth significantly above market rates at Besse Medical, ASD, and ICS.

Pharmaceutical Distribution gross profit increased about $33 million when comparing the fourth-quarter 2012 to the same quarter last year, and our gross profit margin increased 35 basis points to 3.23%.

Most of the increase is due to our Drug company business, where we had strong generic revenue percentage growth in the low teens, due in part to three meaningful launches in the quarter.

This segment also benefited from the LIFO credit.

As expected, we did see gross profit dollars associated with Specialty oncology generic drugs decrease substantially, specifically gemcitabine and docetaxel, a negative impact of $0.06.

We did have a minimal positive impact from the relaunch of oxaliplatin, below expectations due to market pricing.

This segment managed operating expenses very effectively.

Overall, expenses decreased approximately $11 million or 3%.

We continue to review spending in our distribution businesses to ensure we are at appropriate levels.

Pharmaceutical Distribution operating income grew 16% or nearly $44 million to $308 million in the fourth-quarter 2012.

The increase was primarily the result of strong performance in our drug company business, which offset disappointing results in our Canadian distribution business.

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

Moving to the Other reporting segment, as a reminder this segment is comprised of Consulting Services and World Courier.

TheraCom, our November 2011 acquisition, is included in Consulting Services.

As discussed previously, our AndersonBrecon packaging business has been excluded since this business is reported now as a discontinued operation.

Segment revenues increased nearly $350 million to $422 million in the fourth-quarter 2012.

As mentioned previously, World Courier and TheraCom accounted for nearly $335 million of this increase.

Their revenues are tracking well against our expectations.

Operating income increased $21 million for the same quarter.

About $6.5 million of the increase is related to an intangible impairment expense we incurred in the fourth-quarter 2011 in one of our Consulting businesses.

Our acquisitions contributed about $0.02 to our Q4 2012 EPS.

Let's switch to our fiscal-year performance.

I'll highlight a few key points.

Back at Investor Day, we discussed the large negative headwind from oxaliplatin that we'd have this fiscal year, about $100 million of lost gross profit.

Our Drug company business more than offset this headwind.

This year they launched over 30 generic drugs, negotiated a number of sizable contracts, managed expenses tightly, and implemented SAP in 16 DCs.

On a fiscal-year basis, Drug company excluding Canada -- greater operating income margin, a very strong 18 basis points.

And finally, it was a record revenue year for our Specialty business, $16.4 billion of total revenues -- a lot to be pleased about.

Now, let's turn to our balance sheet and cash flows.

Capital expenditures were $164 million for the year, lower than expectations as a large DC automation project is shifting to fiscal 2013.

Free cash flow was $1.1 billion, better than expected.

This is our ninth straight year where free cash flow exceeded our net income from continuing operations.

The increase was primarily due to improved committed capital at our Specialty business, where certain manufacturers provide extended payment terms.

Our gross debt to total debt and capital ratio at the end of September was 37%, which is slightly higher than our target range of 30% to 35%.

This is due to accelerating our share repurchases.

This percentage will gradually decrease during the year.

During the fiscal year, we bought back just under $1.2 billion of our shares.

This amount far exceeds our original guidance of $400 million for the year.

Our philosophy has consistently been to upsize returns to shareholders if we haven't otherwise deployed our capital and when market conditions permit.

We are pleased that we continued with this practice in fiscal 2012.

Our cash balance of about $1.1 billion at September 30 leaves us with financial flexibility as we move forward.

Now let's turn to expectations for 2013.

EPS.

We expect GAAP diluted EPS from continuing operations to be in the range of $3.06 to $3.16.

This translates to EPS growth of 11% to 14%.

We are using $2.76 as our base EPS.

This number excludes the $0.04 from the AndersonBrecon discontinued operations.

Revenues.

We expect revenue growth to be in the 6% to 9% range, driven primarily by our new Express Scripts contract.

This customer will represent just over 20% of our revenues.

As a comparison, the former Medco represented nearly 17% of our revenues in fiscal 2012.

Operating income.

As discussed in the past, our Express Scripts business is for brand drugs and is bulk-like in nature, meaning that the business has very low operating income margins.

Our operating income margin assumption also includes the loss of a large food/drug combo retail buying group during the year and, most importantly, fewer oral solid generic launches.

In terms of operating expenses, excluding nonrecurring expenses we expect operating expenses to increase 12% to 14% in fiscal 2013.

However, most of this increase is related to the full-year impact of World Courier.

Excluding this impact, our growth in OpEx is primarily due to cost to service our large new customer and general wage and benefit inflation, offset by cost savings from our network and corporate optimization efforts.

Again, our current assumptions do not include any meaningful nonrecurring expenses for fiscal 2013.

The items that I just covered all impact our operating income and margin.

For fiscal 2013, we expect our operating income dollars to grow 3% to 5%, while our operating income margin will decrease in the low double-digit basis point range, probably in the low teens.

Free cash flow.

We expect that our free cash flow will be in the $750 million to $850 million range.

Capital expenditures should be in the $180 million range, with less ERP spending but new spending on a number of business initiatives.

Share repurchases.

We are assuming at least $200 million in share repurchases.

The lower amount is due to ABC completing an ASR in Q4 2012.

Let's transition and cover high-level expectations on our segments.

We can start with Pharmaceutical Distribution.

For the Drug company, we expect revenues to grow in the 6% to 9% range, again due primarily to the new Express Scripts contract.

On the Specialty side, we expect to grow in the 7% to 9% range, which is considerably above market growth.

This includes solid growth in our oncology drug business.

Our segment operating income margin will decline in the mid double-digit basis point range.

Again this decrease is due to our new Express Scripts contract that significantly increases our mix of lower-margin brand business, the impact of previously discussed customer contract renewals, and fewer generics launching year-over-year.

It is important to note that after we anniversary the impact of the Express Scripts contract, we expect to return to our normal pace of annual operating income margin expansion.

Moving to the Other segment, revenues will increase significantly as we have World Courier for the full year versus the five months in fiscal-year 2012.

This should benefit the Other segment by about $300 million.

Combined, the Consulting group and World Courier are expected to contribute 8% to 10% of our total operating income in fiscal 2013.

As a reminder, we do not give quarterly guidance, but I will say that directionally our EPS growth will be higher in quarters 3 and 4. As you know, Q2 is traditionally our strongest EPS quarter, but we will have a tough comparative against Q2 2012 due to the contributions from generic Lipitor and Zyprexa.

I know that our comments today were longer than usual due to all the moving parts.

So thanks for your attention, and let me finish by reiterating we are pleased with our results for the quarter and the year.

We expect solid performance in fiscal 2013 in a challenging year for generic launches, and we are working on a number of internal initiatives to streamline and strengthen our business.

The future continues to look very bright for AmerisourceBergen.

Now, here is Barbara for Q&A.

Thank you, Tim.

We will now open the call to questions.

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

Go ahead please, Tony.

(Operator Instructions) Bob Willoughby, Bank of America Merrill Lynch.

Thanks.

Steve or Tim, I thought I heard somewhere you cited the larger purchase of branded drugs by a particularly large customer as a reason for the LIFO charges, I guess.

I am just curious.

If it is a bulk customer predominantly, does that -- purchases by that customer impact your LIFO assumptions on any particular year?

Bob, this is Tim.

No, I cited two reasons.

Yes, larger brand purchases by certain customers, a few of our government customers in particular; and then also just the mix of inventory between brand and generic, generic being a little bit heavier.

That impacted.

Then in terms of next year, we expect to get back to a modest LIFO charge.

Okay, so it didn't sound like that in itself was a particular --

No, it wasn't.

Okay.

And just broadly speaking, maybe for Steve, what kind of competition are you seeing from a business model perspective given your share in the oncology market?

What kind of new entrants or challenges are you seeing in that business?

Well, you know, we have been the leader in oncology for several years and we still retain that position.

I think we have really built up some unique drivers for value with our physician services organizations.

I think we have also built out the non-oncology businesses.

I am very proud of what we have built out in the non-oncology business and the way that we have integrated a lot of the services, say, from a Lash and an Xcenda, and increasingly a World Courier.

The formative businesses we do with new manufacturers in our ICS and a lot of the work we do with compliance in Lash -- so we've got a great franchise and we intend to support it.

Just quickly on oncology, I will tell you one of the things we are focusing on is what we are calling hybrid models, which is more oncology taking place within a larger health system.

We believe we have got a dynamic role to play there as well.

Are others making any type of inroads with different models, though?

Sure.

Well, you know, I think obviously we have got one company that is trying to gain a foothold in Specialty.

I don't want to comment about their strategies.

But we like where we are.

We believe we've got the largest community-based oncology customers that have been loyal customers for a long time.

And those discussions tend to be very promising and a lot of commitment to remaining within AmerisourceBergen.

That's great.

Thank you.

Thanks, Bob.

Next question, please.

Tom Gallucci, Lazard Capital Markets.

Hi, good morning.

This is Colleen Lang on for Tom.

Generics are clearly strong in the quarter.

Can you talk about the performance of generics in Q4 relative to your expectations and what went better?

Well, you know, we really do focus on our generic offering.

I mean we have really two generic offerings, the PRO Gen, which is our preferred formulary, and we have many customers that take advantage of that.

And then we also have our non-PRO Gen generic customers, and both segments were very robust.

We executed as expected.

I don't know, Tim, if you have any color you would like to add.

Yes, I would say we had a couple of generics that launched in the third quarter that rolled into fourth quarter, plus we had some launches in Q4 that really helped us.

And then let's not forget we have a good base of our generics where we saw expansion.

That provides a benefit, and utilization is also up.

So I think it is really all those things together really help grow our generic top line.

In my comments I said in the low teens we saw revenue increase.

So it was a really good quarter for generics for the Drug company.

Okay, great.

Then on the branded side, it seemed like branded inflation was particularly strong throughout your fiscal 2012.

What is your expectation for '13?

Thanks.

Yes, thanks, Colleen.

It was.

It was a strong year.

In fact, with our mix of inventory, it was a record year for brand inflation.

And we expect that to continue; our assumption next year is brand inflation in the 8% to 9% range.

Thanks, Colleen.

Next question, please.

Robert Jones, Goldman Sachs.

Yes, thanks for the question.

Steve, on the decision to divest the packaging business, I was hoping you could share your thoughts in a little bit more detail there.

I have always understood this to be a pretty steady, high-margin business.

I know it is not core to Specialty or Distribution, but just wondering if you could share your thoughts on divesting this business now.

No, Bob, you're absolutely right.

The contract packaging business has been successful and it has grown significantly since we established it really by acquiring Anderson several years ago.

The business has always operated as a separate entity, while under the ABC umbrella, and while we have been pleased with its performance we have not really realized the many synergy opportunities between contract packaging and our other lines of business.

The way that we've been running the Company since I have been CEO, I think we really do look at the Company holistically, even more so as we react to the marketplace.

So I think as we have done some deep analysis, there aren't really enough touch points on the overall business development with manufacturers to warrant maintaining this as a separate entity going forward.

And also the business is growing, and I think the capital needs there are going to increase.

We just see that we have got better opportunities to invest our capital going forward.

Yes.

On the capital deployment going forward, actually, is there any change in strategy if we think about the lower buyback that is baked in for next year?

It looks like the free cash flow is $750 million to $800 million.

You have $400 million from the buyback and the dividend.

Any comment on the use of the rest of that cash going forward?

Well, I would just tell you, look at what we have done this year.

And I could not be more proud.

I mean, $800 million in acquisitions; I think we are performing well on those acquisitions.

Yet we did well over $1 billion in share buybacks.

We are increasing our dividend.

So there is just not much not to like about how ABC uses our capital.

I think we are among the best stewards of capital that you will find anywhere out there, and we will continue to maintain our flexibility and use our balance sheet appropriately.

Tim?

Yes.

No, I would just echo what Steve said.

I don't think you can read anything into that.

As I mentioned in my comments, Bob, we are very consistent.

When we have excess cash, we return it in some form or fashion.

So that is our guidance for now, and we think it is pretty reasonable compared with -- in relation to the ASR.

And as we go through the year, we will just see how we are tracking.

Great.

Thanks so much.

Thanks, Bob.

Next question, please.

Glen Santangelo, Credit Suisse.

Yes, thanks and good morning.

Steve, I just wanted to talk to you a little bit about the pricing environment.

Last quarter, you gave us somewhat of a candid assessment of how you viewed the sell-side pricing environment.

I am just curious, now that you had another quarter under your belt and we have seen some contracts come and go, I am just curious if you could give us maybe an updated assessment.

Yes, well, a couple of things.

I mean we typically -- about 25% to 30% of our business is up for renewal each year.

And last quarter was really unique because literally the next week we were able to announce our exciting new contract with Express Scripts.

So it was truly unique if you look at the timing of what we were facing then.

So, in the three months since we have last been on a call with you, we have been through several contract negotiations, and honestly they have all gone very much as expected.

There has been one exception, which was a shared customer.

But I would say that things have really stabilized and that the industry really remains fairly competitive.

We're stable, with most large customers not really showing an inclination to change wholesalers.

Okay.

Thanks for that.

If I could just ask one follow-up on the Specialty pharmacy side as well as the Other segment.

Steve, could you maybe give us your view on how we should think about that portion of your business from a growth rate perspective?

And as I look out through 2013 and 2014, any potential generic launches on the Specialty side that could even come close to rivaling what we saw in oxi, Gemzar, and Taxotere?

Well, Steve, you said Specialty pharmacy, so we more are characterized by Specialty distribution.

There is a distinction.

Specialty pharmacy of course is largely carried out by some of the retail chains, but most notably the PPMs; and those are often customers for us within AmerisourceBergen Drug Company.

But there is more and more the specialty product management taking place within large health systems, within mail order, infusion centers.

So our Specialty pharmacy franchise -- Specialty distribution franchise is a very important characteristic for AmerisourceBergen.

I think the way we understand this business, both in the community and health system setting and what we call our alternate care setting, is really our unique characteristics and differentiators for AmerisourceBergen.

I think that it leads to some outsize performance in areas that you don't traditionally expect us to benefit from specialty.

Like in our health systems area, where we have done very well and I think you see more and more specialty therapies being administered in a health system setting.

So, again we keep on adding to this franchise.

We have got excellent leadership here, and you will continue to see us investing and maintaining market leadership there.

Okay, thank you.

Thanks, Glen.

Next question, please.

Lisa Gill, JPMorgan.

Thanks very much.

Tim, I had a question around your free cash flow guidance.

If I look back to last year, the initial guidance was $800 million to $900 million; and you clearly did $1.1 billion.

Can you maybe just talk about the $750 million to $850 million this year?

Is there any impact because of the relationship with Express Scripts and inventory?

Or is there anything else that is a one-time item for free cash flow?

Yes, thanks, Lisa.

Yes, we do have a slight impact.

I mean, on the new contract our terms, our AR terms, are slightly lower than what we had with the former Medco, so that is probably a one- to two-day impact.

So that is part of the reason why you see that cash a little bit lower.

But as always, we are going to work hard to get that up.

But that is the reason.

Then just as a follow-on to that, just trying to understand two things.

One, is there anything else of note in the new relationship with Express Scripts?

Then secondly, Steve, I just had a question for you on this new hybrid model with the hospitals.

Is there any change in the way that you are being reimbursed, or any different level of risk, or anything else you are taking on in your specialty distribution business?

Tim, you go first and then I will.

Yes.

No, in terms of -- no, I don't think there is anything else.

In terms of the Express Scripts, your first question about anything else in that Express Scripts contract, no; I don't think there is anything else really to call out.

I mean I think we have hit the highlights.

Again it is pretty much all brand, virtually brand; and it's a little bit over 20% of our expected revenues.

Yes.

Look, we had a great relationship with Medco and I think we have made a very profound transition to now servicing the overall Express Scripts contract, which we are pleased to be the wholeseller and we will continue to work on the strategic relationship.

Of course, I think the priority for both organizations has been really working on implementing the contract; and now we can look forward to broadening and strengthening the relationship over the next couple of quarters.

The hybrid model was the second part of your question.

And, no, I think it is just really taking advantage of a lot of the services that we offer to community oncologists and allowing those services to transition into more of a hospital setting.

I think it is also getting the manufacturers some of the information that they like on the patient side and the protocol and formulary management side that we have been able to give them in the community setting.

So you are seeing us make investments there, but we think that that will preserve some of the unique financial as well as therapeutic characteristics of our oncology business.

So very important for us to continue to move with the markets.

And again, a great example of how we are looking at the Company very holistically and less hard lines between, say, Specialty and Drug.

Okay, great.

Thank you.

Thanks, Lisa.

Next question, please.

Eric Coldwell, Robert W. Baird.

Thanks very much.

On the lost account that you acknowledged on the call today, the regional food/pharmacy combo, a GPO business I guess, I am curious if you could help us understand the ultimate revenue impact compared to what your expectations would have been had you retained that.

You did mention that as one of the contributors to the operating margin compression.

So should we assume that it is a higher operating margin contract than perhaps your overall book?

Then finally, still sticking with that contract, in terms of the phasing of that loss, I know sometimes with GPO contracts you don't lose all of the business on day one.

Could you give us some sense on the phasing of the revenue rolling off?

Thanks.

Yes, sure, Eric.

Hey, I think that, if I counted right, that is a three-part question.

Really, that first one, we are not prepared to size that contract.

I mean it was -- it is a large contract.

It has got a nice mix of brand and generic business.

So again you could definitely say it is more profitable with that brand mix.

Part of it we will have for about half the year in total, so it doesn't entirely roll off in Q1.

We have it through about March, March quarter.

But yes, it definitely impacts.

It is definitely an impact to our margin.

So, Tim, I'm sorry; I guess I will go to part four here.

When you say that you will have the contract through March -- the total contract or a piece of it?

We will have a piece of it.

Okay.

We will have a piece of it.

There is a piece that comes off in November, and the remaining piece will come off in March.

I think it is about 60/40.

Okay.

Thanks very much.

Thanks, Eric.

Next question, please.

Ricky Goldwasser, Morgan Stanley.

Yes, hi.

Good morning.

Can you just provide us some more color around fiscal-year '13 guidance?

What I'm basically trying to understand is what is the contribution of acquisitions.

I think you mentioned that operating income in fiscal-year '13 is going to grow 3% to 5% but that 8% to 10% is going to come from acquisitions.

So I just wanted to clarify that comment.

And then I have one follow-up question.

Yes, Ricky, let me answer your question this way.

Between World Courier and TheraCom, we will have World Courier for the full year, so that (technical difficulty)

Ladies and gentlemen, please stand by as we reestablish the host line.

(Operator Instructions)

Thanks for your patience, everyone.

We lost power.

Ms. Goldwasser's line is now open.

Thank you.

Okay, thank you.

Ricky, can you hear us?

I'm here.

Hey, Ricky, sorry.

Yes, we lost power.

Our building went dark.

So apologies, everyone.

Getting back to your first question, Ricky, I think you were asking about impact of acquisitions, and I will answer it this way.

World Courier and TheraCom should be about 4% to 5% of our EPS in terms of fiscal '13.

Okay.

So 4% to 5% of EPS is from the acquisition.

And I think that you provided a comment on the EPS; it was around 3% to 5% from EBIT?

That's correct.

Okay, that is helpful.

Then on the -- on your margin expansion guidance, just help me better understand the numbers.

Because when I think about your revenue guidance and your EBIT guidance, I get to EBIT margin contraction in the mid single digits versus your comments around low double digits.

So if you could just help me reconcile the difference, maybe you could just -- corporate versus drug distribution.

Yes, Ricky, I guess the best thing I could say on that one is as we get closer to Investor Day we will give more specific information by business in terms of margins.

But again let me just say that there is a big impact from the new contract with Express Scripts.

We talked just before with Eric about -- we gave some comments on that Topco contract which -- again with generics, that is a big impact to our margin.

And then clearly the generic launches being down.

So those three items clearly impact our operating income margin and in fact cause it to be down, like we said, in the low double-digit range.

Thanks, Ricky.

I think in light of everyone's time, we will wrap up the call here.

But Steve has some final closing remarks.

Yes.

Again, sorry for this and we want to really thank you for your attention today.

I hope you found the call helpful and informative.

There was a lot of detail provided, and we really appreciate your attention, especially with the strong close we had there thanks to Sandy.

I hope Tim and I conveyed to you our excitement and confidence in our Company.

And I hope you share our firm believe that AmerisourceBergen is a great company to invest in.

Thank you all and have a great day.

Thank you.

I just have a couple of closing comments.

We will be holding our Investor Day on December 12 in New York City.

There will be more information about that on our website next week.

And the next conference we will be attending will be the JPMorgan Healthcare Conference on January 9 in San Francisco.

So thanks very much and thank you for your attention today.

I will turn it back to the operator for replay information.

Thank you very much.

Ladies and gentlemen this conference will be available for replay after 1 p.m.

today running through November 8 at midnight.

You may access the AT&T executive playback service at any time by dialing 320-365-3844, using the access code of 266794.

(Operator Instructions)

That does conclude your conference call for today.

We do thank you for your participation.

You may now disconnect.