美源伯根 (ABC) 2013 Q3 法說會逐字稿

Ladies and gentlemen, we would like to thank you for standing by and welcome to the AmerisourceBergen third-quarter earnings teleconference call.

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

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

(Operator Instructions).

As a reminder, today's conference call will be recorded.

I would now like to turn the conference over to your host and facilitator, Miss Barbara Brungess.

Please go ahead, ma'am.

Thank you, Stephen.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our third-quarter fiscal year 2013 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 2012 as well as our quarterly filings for fiscal 2013.

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 thank you to everyone for joining us this morning.

I am pleased to report solid performance for AmerisourceBergen in our third quarter and first nine months of fiscal 2013.

Let me start by highlighting a 13% increase in revenue, which was driven primarily by our base business and less of a headwind from generics.

During the quarter, we have had only a modest amount of new volume from our Walgreens contract.

As we look ahead to the end of our fiscal year 2013, while there are obviously still some moving pieces that could potentially impact our results, we are comfortable narrowing our forecasted range for adjusted earnings per share from continued operations for the full year to $3.06 to $3.11.

As we reviewed our performance, it was clear to me that, as usual, AmerisourceBergen accomplished a great deal in the June quarter.

Our priorities continue to be to strengthen our business, advance our strategic initiatives, and generate long-term value for all of our stakeholders.

In accordance with those objectives, we completed the divestitures of our Canadian drug wholesale business and our contract packaging business.

Most significantly, we obtained regulatory clearance for the equity portion of our new long-term strategic relationship with Walgreens and Alliance Boots.

In light of the expansion of the scale of our business, we improved our financial flexibility by commensurately expanding borrowing capacity under our revolver and securitization programs.

Our associates have worked tirelessly on these diverse initiatives while keeping their eye on the ball and ensuring that our current business is performing well and we continue to meet and exceed expectations of our customers and the patients we all ultimately serve.

It has been just over four months since we announced our strategic relationship with Walgreens and Alliance Boots and I am more convinced than ever that we have before us an incredible long-term opportunity, not only to increase the efficiency with which healthcare is provided in the US, but also to expand the reach of pharmaceuticals across the world and improve patient access to medications across many geographies.

Working in conjunction with Walgreens and Alliance Boots is proving to be very collaborative as we work to estimate the three key components of the relationship -- namely the Pharmaceutical Distribution agreement with Walgreens; the access to the Walgreens and Alliance Boots purchasing joint venture; and the leveraging of our collective strengths in different platforms, both domestically and internationally.

In addition, we always believe the equity warrants that were issued as part of the agreements not only gives our partners the opportunities to share in our future success, but also clearly differentiates our relationship.

We are proud to be collaborating with two of the world's leading and most successful healthcare companies and are very pleased with the energy and creativity with which we are moving forward.

In our various customer and manufacturer meetings, I am constantly reminded how fortunate we are to play such an integral role in the changing healthcare landscape.

The healthcare marketplace is one of the most complex in the world, but we believe that complexity yields opportunities.

AmerisourceBergen's diverse range of services and unique scan and reach places us in a pivotal position to take advantage of those opportunities by improving the efficiency with which products are launched, distributed and dispensed and by helping to ensure that patients have access to the full complement of therapies that are available today.

The strategic initiatives we have undertaken in the last several months have strengthened our ability to provide greater service and more innovative solutions to all AmerisourceBergen's customers and to all of the manufacturers whose products we distribute and support in the marketplace every day.

The increasing rate of change demands that we continuously explore ways to drive efficiency without sacrificing the quality of care and service delivered and we are excited to be able to do that with the help of global partners.

Turning now to the performance of our business units in the June quarter.

Revenues in AmerisourceBergen Drug Corporation were up 16% due primarily to an increase in sales volume relating from our previously announced new contract with our large PBM customer and less of a headwind from generic conversions in the quarter.

ABDC's revenues will continue to ramp up in our fourth quarter as we begin to serve all of Walgreens stores under our new contracts.

We are making great strides in preparing our network for the onboarding of the Walgreens pharmacy distribution business.

In addition to increasing capacity of certain aspects of our infrastructure, we are running pilot programs which today have enabled us to transact with about 6,000 of Walgreens Pharmacy locations on a daily basis.

That number will continue to increase as we approach the September 1 start date of the new contract.

Pharmaceutical distribution is, of course, our primary area of expertise and the foundation of our business; and we remain quite confident that we can provide outstanding service to Walgreens without sacrificing any of the excellent service our other customers have come to expect from AmerisourceBergen.

Over the last several months, we have had an open dialogue with our customers about what a stronger AmerisourceBergen could ultimately mean for them.

Tomorrow, I will be attending our annual retail tradeshow in Las Vegas where we will be showcasing our vision for the future of pharmacy and renewing our commitment to our independent customer base.

Whether it is through an improved Progen formulary, proprietary front-of-store products, new shared clinical systems that will facilitate third-party contracting or enhance payer relationships, our partnership with Walgreens and Alliance Boots will help drive compelling new offerings for our independent customers in the years ahead.

Our new partners share our goal in strengthening Good Neighbor Pharmacy and enhancing the role community pharmacy plays in the provision of healthcare.

We absolutely believe that the innovation that this new relationship will inspire will drive the next generation of services to our community pharmacy customers, and we believe that this message is being understood and [access it] by the marketplace.

Our Institutional segment, including both hospital and alternate sites, continues to perform very well.

Our efforts to expand some of our best-in-class specialty capabilities into the hospital market to support physicians who treat oncology patients continue to gain traction as many of our large health system customers expand their outpatient offerings.

As the specialty market evolves, the breadth of our expertise is more important than ever.

The collaborative approach we have deployed over the last few years, both internally and externally, drives us to utilize all the capabilities of ABC to meet evolving customer needs.

Our work in this area is one of the best illustrations of how we can drive mutual value for our customers while leveraging our portfolio across different sites of care.

Operating income in ABDC was down year-over-year as expected due to the decline in operating margins which resulted from the implementation of the new large PBM contract, the loss of Topco, and fewer significant generic launches available to offset that pressure in the quarter.

As expected, trends in brand inflation, generic utilization and even generic price inflation continue to be strong.

As I mentioned previously, we have had very difficult comparisons on generic launches in fiscal 2013, but those improved in fiscal 2014.

This was our first full quarter that all of our DCs were operating on SAP and we are very pleased with the performance of the system and the advanced business analytics that the system affords us.

The SAP implementation was from planning to completion over five years of incredible effort by ABC Associates.

It is that system that has really placed us in a position to essentially double our volume over the next year or so, and I am incredibly grateful for the professional efforts that so many people at ABC contributed to at the highest level that got us to this position today.

AmerisourceBergen Specialty Group revenues were up 5% in the quarter due to strong sales in ASD and Besse.

As expected, our oncology business slowed in the quarter on a year-over-year basis as physician practices continue to face economic challenges in the face of declining reimbursement rates.

Specialty positions continue to work through the significant reimbursement cuts that resulted from sequestration and while practices are challenged, the smaller practices are hit the hardest.

We continue to work in Washington to help members of Congress and regulators at CMS and elsewhere to make sure they understand the full impact the cuts have had, not just on physician impacts, but also on patient access.

We believe that in order for the healthcare system to operate at optimum efficiency, healthcare providers must be fairly reimbursed for the services they provide through all payer categories.

We also continue to believe that patients are best served in the community practice setting.

Not only do patients tend to have better outcomes being treated in a dedicated specialty setting, but current data supports that the cost of care is lower in the community setting.

We are hopeful that at a minimum the sequestration cuts will be reversed in the current months.

But at this time it is difficult to know when or by what mechanism that would occur.

While oncology supply sales declined year over year, sales saved stabilized on a sequential basis.

Fortunately as oncology sales have slowed, our other specialty businesses have continued to grow above market by winning unique distribution opportunities and programs.

These businesses do have somewhat lower margins than the community oncology business, though, so there has been a mix shift towards lower margin business within ABSG and that growth was not enough to overcome the decline in the operating margin contribution from oncology supply.

While the specialty market is changing and working through near-term challenges, the expertise and capabilities we have developed over the years and investments we have made help ensure that we are the premier partner for manufacturers of specialty products and for providers who administer specialty products to patients.

Turning now to the Other segment that is comprised of our manufactured services businesses, revenues are up 17% due in large parts to contributions from World Courier, of which one month was not included in the prior year.

Operating income was up 18%, driven in large part by good performance in World Courier.

We continue to be very excited about the long-term potential for our manufactured services businesses, both in the US and elsewhere in the global marketplace.

Looking ahead, we are still working through our detailed business planning process and will give our full fiscal 2014 guidance in our new fourth-quarter call.

As we have previously stated, we expect our new Walgreens contract to provide incremental revenues of $25 billion in fiscal 2014 and to contribute a net $0.20 of adjusted earnings per share in fiscal 2014.

As we onboard the Walgreens contract, we will see further operating margin degradation, but once we anniversary that impact, we expect to return to model where we are able to meaningfully increase our operating margins on an annual basis.

There are many moving parts in late fiscal 2013 and 2014 in addition to activities and costs associated with onboarding Walgreens.

These tailwinds include more generic launches in fiscal 2014 [versus] 2013, better industry topline growth due to the generic calendar and the gradual influx of the uninsured into the healthcare system.

The headwinds include unplanned expenses of at least $10 million in our Distribution segment to comply with now-pending track and trace regulations and continued pressure in our oncology business at the current run rate.

This headwind could be mitigated if reimbursement rates improve, but it could also be worse if low reimbursement rates persist and physician practices increasingly struggle with the economics.

Overall, our base business is solid and we do not have any large contract renewals on the horizon.

Our business also provides us with tremendous cash flow and we anticipate that cash flows will be strongest in the second half of 2014.

While ABDC has plenty on its plate at the moment, we continue to look for opportunities to invest in our platform to provide for sustainable long-term growth.

We believe that the scale and breadth of our offering sets us apart in the industry and is a key driver of our future success.

It is an exciting time to be a customer, supplier, associate, shareholder or other stakeholder in AmerisourceBergen.

We have a great deal of work ahead of us, but I am confident that our associates will continue to bring innovative and market-leading solutions to all of the challenges and opportunities that lie ahead and that we will continue to meet the expectations that all of our partners have in us.

Now, here is Tim.

Thanks, Steve, and good morning, everyone.

As has been our practice, my comments on our financial results will be on a GAAP basis.

As expected, we have two unusual material expense items that are negatively impacting our June 2013 quarterly results -- the LIFO charge and the equity warrant expense.

Our LIFO charge was exceptionally high at $122 million and the warrant expense was $36 million.

As a reminder, our previous EPS guidance excluded these two items due to their variability and difficulty in forecasting.

For clarity, I will provide additional comments this morning on our adjusted results, which will exclude the impact of these two non-cash expenses.

We now have nine months completed in our fiscal year 2013 and we are pleased with our progress in tracking to our expectations.

The highlights for the June quarter include solid topline growth in our core drug business; very good operating performance in our World Courier business; an excellent free cash flow of $681 million through the first nine months, slightly ahead of our expectations and setting us up well as we prepare to implement the Walgreen contract.

Let's start our review of our quarterly results.

Keep in mind that we sold our Canadian drug distribution business and our contract packaging business this quarter.

Their operating results are reflected as discontinued in both the current year and in the revised financials for the prior year.

In addition, this marks the last quarter that we have an incremental benefit from the World Courier acquisition in our financial results as we have now anniversaried the May 2012 acquisition date.

Revenues were $21.9 billion, up 13.3% compared to last year's quarter.

Our revenue growth was primarily due to our large PBM contract that began last October and a much smaller headwind for branded generic conversions.

Gross profit decreased to $562 million due to the LIFO charge of $122 million that I mentioned previously.

This charge represents nine months of our anticipated full year or annual charge.

As expected, this charge is material due to the substantial brand inventory build over $1 billion we will have in the fourth quarter as we prepare for the Walgreens business beginning in September.

Based on current inflation and inventory mix estimates, we would expect our Q4 LIFO charge to be in the $50 million range.

Our gross profit also included about $6 million of antitrust litigation settlement received in the June quarter.

Excluding the LIFO charge, our gross profit would have increased nearly $17 million or about 2.5% due to the one extra month of World Courier contributions of about $30 million.

Excluding World Courier, our gross profit was down year over year due to lower contributions from our Pharmaceutical Distribution segment.

Let's move to operating expenses.

This quarter, total operating expenses were $428 million, up about 24%.

Our operating expenses are impacted by the one extra month of World Courier's operations.

Demonstrating our focus on expense management, our operating expenses for the Pharmaceutical Distribution segment are up only 2% year over year while revenues have increased significantly.

Incremental operating costs specifically to support the new Walgreens distribution contract were not meaningful this quarter.

These costs, primarily labor and IT cost, will ramp up beginning in early Q4.

Included in GAAP operating expenses is warrant expense of $36 million.

The current value of the warrant at June 30, 2013, as determined by an independent third party, was $467 million which is an increase of about $153 million from the March 31st value.

The increase in the warrant valuation is due to the increase in the ABC share price and also the increase in the ABC share price volatility assumption.

This quarter, we also had special charges of about $20 million or an equivalent $0.05 negative EPS impact, primarily related to professional fees associated with completing our Walgreens and Alliance Boots transaction.

Included in this $20 million amount is also a loss related to subleasing a [closed] distribution center below our current lease cost.

Operating income.

Our operating income was $135 million.

However, backing out the LIFO charge and the warrant expense, our adjusted operating income would have been $293 million or a decrease of about 10%.

The decrease is due to lower gross profit in our Pharmaceutical Distribution segment and the additional one-time special charges that I just discussed.

Our adjusted operating margin was 1.34%, down by 34 basis points compared to last June quarter.

Moving below the operating income line, interest expense of approximately $18 million in the June quarter decreased about 23% compared to last year, due to the debt that we paid off last September.

Income taxes.

Our effective income tax rate was nearly 45%.

However, our income tax rate is being negatively impacted by warrant expense.

The current valuation of our warrant, the $467 million at June 30, 2013, that I referenced earlier, is in excess of our March 18 warrant valuation of $242 million, which approximates the amount of expense that we will be able to deduct for tax purposes.

Any dollar amount in excess of the initial warrant valuation will not be deductible.

The excess amount is considered a permanent tax difference.

On an adjusted basis, which means we are removing the nondeductible dollars associated with the warrant, our effective tax rate for the June 2013 quarter was 37.4%, which represents a tax provision of about $102 million.

This quarter, we did have a favorable tax adjustment related to the reversal of a reserve that coincided with our federal tax return filing.

Excluding the impact of the warrant and any nondeductible tax amounts, we would expect our full-year fiscal 2013 tax rate now to be approximately 38% for continuing operations.

Our GAAP diluted earnings per share from continuing operations in the June quarter was $0.27.

On an adjusted basis, adjusting for LIFO, warrant expense and the negative tax rate impact, our diluted EPS from continuing operations was $0.73, a decrease of about 1%.

Our EPS benefited from an 8% reduction in our average diluted shares outstanding versus the prior year's quarter.

At June 30, 2013, we had just under 231 million shares outstanding.

Let's spend a few minutes discussing our segment results for the June quarter, starting with Pharmaceutical Distribution.

Total segment revenues were $21.5 billion up 13% versus the same quarter last year.

Growth at our drug company was approximately 16%.

The majority of the increase was due to our new contract with our large PBM customer.

This quarter we expanded our brand business with our PBM customer as we added one new large brand manufacturer that the PBM previously self-distributed.

This incremental business is at the typical margin for our PBM customer.

We also had increased revenues from the Walgreens pilot programs.

But this revenue basically offset the negative revenue impact from the Topco contract loss.

Additionally, our topline growth clearly benefited from having a much smaller headwind from branded generic conversions.

Our Specialty business grew a solid 5% year over year.

We continued our pattern of excellent growth at our ASD, Besse Medical and ICS businesses.

These three businesses were up a combined 16%.

Our oncology supply business, down about 10%, continues to be challenged on a topline basis due to reimbursement pressures and the migration of business to the hospital setting, and also branded generic conversions.

These sales growth percentages are before intrasegment eliminations, consistent with how we communicated these growth rates in the past.

Total adjusted segment operating income decreased $20 million or about 7% to $287 million in the June quarter.

Both Drug and Specialty had decreases in operating income year over year.

Drug decrease was due to lower contribution from our PBM contract and the loss of the Topco contract.

We also had less of a contribution from oral solid generic launches.

These headwinds were mostly offset by better generic price appreciation.

In terms of specialty, they had higher contributions directly related to the increased revenues at ASC, Besse Medical and ICS.

However, these increases could not completely offset the decrease from our oncology supply business.

Moving to the Other reporting segment.

As a reminder, this segment is comprised of consulting services and World Courier.

Segment revenues were $467 million, an increased 17% from last year's quarter.

The increase was primarily due to World Courier having one extra month of operations included in the June 2013 quarter as compared to the prior year quarter.

However, looking at the World Courier revenues on an equivalent sales per day basis, their revenues increased about 10% primarily due to additional contract wins.

Operating income for the Other segment increased 18% to $25 million for the same quarter last year.

The increase was solely related to contributions from World Courier.

This business had one extra month of operations compared to last year's quarter, but World Courier also had several new business wins and they managed expenses tightly.

We expect World Courier to contribute $0.06 to $0.08 earnings this fiscal year.

Our consulting business had a decrease in operating income of about 8% primarily due to timing.

A key program shifted to July this fiscal year versus being recognized in the June quarter last year.

Now let's turn to cash flow and liquidity.

As I mentioned earlier, we are very pleased with our free cash flow performance, $681 million for the nine-month period.

This is just slightly ahead of last year, while absorbing a working capital increase on our new PBM contract.

We ended June with a cash balance of approximately $1.6 billion.

In the June quarter, we purchased about 2.1 million shares of our common stock for a total cost of $116 million.

Our share repurchases basically offset employee stock option exercises in the quarter.

For the nine months, we are now at $401 million of share repurchases which is essentially what we said we would buy back this year.

Moving to our hedging program.

As a reminder this program enables ABC to offset a reasonable amount of the anticipated share dilution which will occur upon the exercise of the warrants.

Earlier in the June quarter, we entered into four capped call options that give ABC the right to purchase a specified number of shares from the investment bank in calendar 2016 and 2017 at agreed upon or fixed prices.

We will use proceeds from the exercise of the warrant to purchase these shares.

At June 30, the investment bank has completed about 20% of the hedge and we have incurred costs of roughly $43 million of which we pay $28 million and accrued the remaining balance.

For accounting purposes, the $43 million of hedging cost has been recorded as a decrease against equity, similar to how we account for share repurchases.

We expect the hedge to be completed by fiscal year-end.

However at any time we can instruct the investment bank to adjust or end the hedging activity based on market conditions.

One final item before we get into 2013 guidance.

As many of you know, we recently announced that we increased our liquidity by amending our senior credit and securitization facilities.

With these two amended facilities, we have increased our liquidity by nearly $1 billion which enables us to meet short-term working capital demand from the new Walgreens contract and, most importantly, to increase longer term flexibility as we now have liquidity available for five more years.

We thank all of our partner banks that continue to support ABC.

Now let's recap our fiscal 2013 guidance.

EPS.

Our full-year non-GAAP adjusted EPS from continuing operations is now $3.06 to $3.11.

Year to date we are at an adjusted EPS of $2.35.

Please remember that our range excludes three items.

One, the LIFO charge for fiscal 2013; two, the impact from warrant expense that we record in operating expenses; and three, the tax impact from the warrants as a portion of this expense is not deductible for tax purposes.

Revenue growth.

Revenue growth remains in the 11% to 13% range from our revised fiscal 2012 revenues which excludes our discontinued operations.

Operating income and margin.

Excluding the impact from LIFO, and warrants, we continue to expect our operating income will be down 3% to 5% for the year as compared to the revised fiscal 2012 operating income and our operating margin will decrease in the 24 to 29 basis point range from the revised fiscal 2012 margin of 1.67%.

Free cash flow.

We expect free cash flow to be in the range of $100 million to $200 million which reflects the significant working capital build to support the Walgreens contract.

This also includes Capex of about $240 million of which about $50 million is to support our new Walgreens contract.

Share repurchases.

As mentioned previously, for the nine months, we stand at $401 million in share repurchases, which is essentially what we guided for the year.

At this time we expect to stay near this level due to short-term capital needs to support the Walgreens contract implementation -- specifically, inventory repurchases and Capex.

Now before I wrap up, let me cover three key items related to our fiscal 2014 guidance.

First, just to reconfirm.

The incremental fiscal year 2014 guidance we gave relating to the Walgreens transaction, the net $0.20 EPS benefit, this amount excludes any accounting impact from LIFO and the warrants.

Also we expect the $0.20 to be mostly backend loaded in terms of our quarters because we are incurring start-up expenses early and ramping the Walgreens generic revenues during the fiscal year.

The second item.

As we look ahead to fiscal 2014, we plan to provide guidance and report our financial results on an adjusted basis in order -- in an effort to improve clarity and transparency.

We will continue to report our GAAP results, but we will also report adjusted earnings.

Our definition of adjusted EPS means we will exclude the following items.

We will exclude the expense associated with the equity warrant, and this also includes backing out the negative tax impact from the portion of the expense that is nondeductible.

We will exclude LIFO charges or credits.

We will also exclude acquisition-related costs, which include intangible amortization.

Any special one-time restructuring, litigation and severance expenses will also be excluded.

And additionally, we will calculate our adjusted EPS using an adjusted diluted share count.

This share count will exclude the accounting dilution resulting from the impact of the unexercised equity warrants.

This quarter, upon further accounting research and consultation, we determined that the fair value of the warrants, which has yet to be expensed, over $400 million at June 30 should be included as assumed proceeds in the treasury stock method calculation.

This inclusion can reduce or actually eliminate the dilution impact of the warrants which are currently in the money.

As a result, the warrants are anti-dilutive for the quarter and for the nine months ended June 30, 2013.

We believe that using an adjusted share count is appropriate as the share count calculation is complex and also has a high degree of variability.

This will ensure a consistent approach with investors when calculating and forecasting our share count going forward.

And finally, the third item regarding our guidance.

With the onboarding of the Walgreens contract, as we've discussed in the past, we will have a sizable working capital investment.

We expect our working capital to improve the second half of fiscal 2014.

Because of this, we would expect that our share repurchases will be much greater the second half of the fiscal year to coincide with our working capital improvement.

As I wrap up my comments, let me say that we are pleased with our results through the nine months.

We have accomplished a significant amount this fiscal year with our ABC team and we are well-positioned for our last three months to meet our expectations for the full year.

Thank you for your continued interest in ABC.

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.

Please go ahead, Stephen.

Tom Gallucci, Lazard Capital Markets.

Good morning.

Thanks for all the details.

Tim, you mentioned that you had some more business with your biggest PBM customer in the quarter and there were some pilot programs going on with Walgreens.

We have got a lot of questions about gross margin in the quarter.

Could you convey where gross margins came in versus your expectations and if they were pressured against incrementally by the Walgreens pilots as well as the extra business to what I assume is Express?

Yes, sure.

I would say that externally our gross profit margins are probably a little bit lower than what people expected, but internally they were in line with what we thought.

Again, we had a mix shift within our drug company.

Two of our large customers, the PBM and Walgreens, both had incremental revenues this quarter and, again, at lower margins.

We also had a little bit of a mix shift in our Specialty business.

The three businesses I called out, revenues are growing faster versus oncology.

So overall, pretty much in line with what we expected, but again I think the important thing is we managed our expenses really well this quarter.

And from an operating margin standpoint, we are right in line with the range that we gave earlier in the year.

And remember earlier in the year we guided down 24 to 29 basis points.

So from an operating margin standpoint, we are right in line with that.

Okay, thanks.

And then, Steve, I think in your prepared remarks you sort of alluded to the idea that conversations with customers were going well.

You also said you had been meeting with manufacturers.

Can you maybe give us a little bit more color on the things that the customers are focused on as well as what the manufacturers are focused on with you, and I guess any updated thoughts concerning the timing of benefiting from the joint venture with Walgreens on the purchasing side?

Yes.

A couple of things.

Just let me start with the manufacturers, we actually may have put probably our largest of manufacturer partner last week and I think just a lot of interest in doing more programs at the retail level.

A lot of acknowledgement that the scale and reach we have has really been greatly enhanced, [intrigue] on the international side.

On the customer side, the idea it really is strengthening and enhancing the role of community pharmacy.

And again, the first time that Greg Watson and Stefano Pessina and I discussed this transaction, it came down to how do we accomplish that?

What are the different attributes that all of our companies have that can help us accomplish that?

And now, four months into it, obviously the focus in the drug company has to be in the contract implementation, but we are really mindful of the fact that our customers are expecting to get strategic benefits from this transaction.

So we are looking at third-party contracting.

We are looking at clinical platforms.

We are looking at front store products, even some of those that -- the very advanced services that Walgreens has.

The Take Care Clinics, could we expand some of those into the community setting?

So all of that is very positive and we [throw about] the collaboration as we see on the international side and now we are adding London with the Alliance Boots folks -- just is a talented successful team of professionals that we think we can do a lot of good work with over the next couple of years.

Next caller please.

(Operator Instructions).

Glen Santangelo, Credit Suisse.

Good morning.

Tim, I wanted to follow up with some of the comments you were making when you were discussing the accretion from the deal.

I think I heard you correctly.

You seemed to suggest that the accretion next year would be more backend loaded.

And I was wondering if maybe you could elaborate a little bit on why that is the case.

I mean, obviously, the branded revenues are going to roll on pretty soon.

Is it more of a function of the timing when generics roll on or is it more of a function of the timing of the benefit from the JV?

Thanks, Glen, and good morning.

No, clearly it is related to the ramp-up.

We are ramping up now.

In July, we are starting the hiring process for our distribution center.

So ramp-up of expenses earlier and then we start with the brand business.

And that generic business ramps up over time, so over the fiscal year.

So again, a lot of it is timing.

Expenses earlier and the generics later and that is probably why, looking at it from a high level, we expect the earnings to be better the second half of the year.

And maybe if I could follow up, Steve, there's been a fair amount of concern about the Company's ability to ultimately get much better generic pricing from this JV.

And so curious, four months after the deal has been announced, are you still comfortable with the level of discounts you'll be able to get through your generic purchasing?

How much visibility do you have into what you think your new pricing will look like at this point?

So, I am just trying to gauge how comfortable you are in terms of the ability to garner those savings.

It is complicated, right?

And I am not -- I am really not being evasive of here.

We have got a lot of work to do.

Again we came into this relationship as the third large entity and, again, we are not really a party to the JV.

That was already established between Walgreens and Alliance Boots and we didn't buy into that.

We are just the third contracting party in that joint venture.

So we have a lot of confidence.

We are spending a lot of time.

We will have a significant role in the joint venture including consigned associates.

But, no, I think our goal is to be very successful in the long term.

Most of the parties on the other side, the generic manufacturers are large public companies.

They have their own forecasts.

Again we will be contracting for 13% to 15% of the world's generics volume.

So we have been very thoughtful and deliberate and the game is to be successful in the long term here and we are more convinced than ever that it is going to be accomplished.

Okay.

Thank you very much.

Robert Jones, Goldman Sachs.

There was some concern highlighted last quarter relative to the oncology business, and you are making mention of softness related to oncology reimbursement landscape again this quarter.

Growth overall for ABSG seems to be up sequentially in year over year.

Just trying to get a sense of how we should be thinking about the overall Specialty segment or the overall ABSG segment in the back half of this year and into next year.

I know you guys had laid out annual ranges at your Investor Day.

Any comments relative to those ranges of how we should be thinking about that segment going forward?

Again, I think we were looking at how we can communicate this.

So, oncology -- our traditional Oncology segment is really sales through oncology supply to community oncologists.

And that clearly has as we announced has been 10% down this quarter compared to the second quarter last year.

That is not really -- we don't believe it is through loss of market share.

It really is that some smaller practices have sold to larger practices, many of which are our customers and we sometimes take -- obviously, larger customers get a better deal.

And a smaller customer is more challenged by the ASP formulary.

So, that has been some of the impact.

There also have been some practices that sell to health systems.

In about one in three cases, we would be the wholesaler there.

So we do benefit, but again it is not as high a margin as we have in our oncology business.

Based on the non-oncology supply, our portfolio, but the other trend that I think is worth noting is that oncology products are often in different formulations now.

Many of them are oral.

They service through specialty pharmacies.

That is a very strong statement in our ultimate had segment within the drug company.

But also in specialized programs that we do say in our ASP and in our non-oncology now are basically Medical segment.

And these are very close manufactured programs with -- often with registries and unique guider components for them.

And I think we have highlighted in the release, we have strong capabilities in Specialty and you have seen that come true with above market growth in our ASP and Besse businesses in particular and some unique manufacturer programs in our ICS business which, by the way, we think we have got a good opportunity to take some of those programs internationally.

Yes, Bob, I would say that your question about the margins, the operating income margins that we put up for Investor Day, we are still in the range, but we probably slid to the lower end of the range for Specialty.

And again a lot of that is the mix shift, right, to the lower margin businesses.

ASG, Besse Medical, ICS.

But, also, remember back in the March quarter we guided down in our range.

We moved down to the lower end.

So, again, that $0.03 or $0.04 movement last March was really pegged to oncology.

So that is probably what you could see maybe going into next year in terms of a little bit of headwind.

Until reimbursement improves or until we anniversary because, again, that was March of last year -- so until we anniversary that is potentially what you are looking at again, as a headwind for next year.

It is also important, Bob, just a final point here, I know we are talking a lot about this, but we are not backing off anything in our oncology business.

Tim and I were down with the oncology guys a couple of weeks ago.

I think our customers need us more than ever.

There's an opportunity to carry on adding incremental value there, and we are very committed to being the leading provider to oncology practices as we have been for well over a decade now.

Got it.

That is really helpful.

And one housekeeping question.

Tim, you mentioned three major adjustments to when you give fiscal 2014 guidance.

I am sure I can go back and look at the transcript, but I just wanted to be clear on the warrants.

Is the change there really for us to think about the warrant as not impacting the adjusted P&L at all at this point?

The expense will be removed?

And then any delusion that could have happened will also now be excluded?

Am I thinking about that right?

Yes, you are thinking about that correctly.

Right.

It impacts operating expense.

It impacts -- the warrants impact the tax rate, and of course the accounting.

There is an impact from the accounting dilution on the share count.

And we are stripping that out, again because of complexity and variability in our share price.

And a big part of stripping that out, too, is the fact that we have implemented the hedge program which will address the share dilution.

So that is why we feel it is appropriate to back that out and not impact in terms of this interim period when the warrants are unexercised.

Got it.

Thanks for the detail.

Mr. Willoughby, Bank of America Merrill Lynch.

Tim, just to be clear on the D&A.

Are we just going to carry forward the current run rate here without any incremental inputs from the Walgreens-Alliance Boots aspect?

Or are you looking at backing out some historical deal amortization as well?

No, I think I -- Bob, thanks for the question.

No, I think we will -- historically the number is not that significant.

So we are thinking about backing out all of it, historical also, and it is probably about $0.01 a quarter.

Most of it -- most of that though is from the last two deals, World Courier and TheraCom.

But there is a little bit extra that we felt like we should back out.

And obviously there was some news from one point today that the Amerigroup contract is going to move earlier.

Any thoughts on sizing that one as yet or too soon for you to make a guess there?

No, too soon, and again the margin is not that significant for us.

But certainly we -- our PBM customer is a very strong grower and you have seen that in the revenue we enjoy in the drug company this quarter.

Thank you.

Ricky Goldwasser, Morgan Stanley.

Good morning.

Steve, in the prepared remarks you talked about a significant margin expansion opportunity for fiscal year 2014.

So if you can just help us with how we model the progression for 2014, 2015, and 2016.

If you can quantify for us [kind of effect] the step down in margin in fiscal year 2014.

And then what should we expect in fiscal year 2015?

I know in the last conference call you guys talked about high single digit, I think it was 8 to 10 basis points expansion in 2015.

So at this point are you still sticking with that?

Or given that some time has passed, you are seeing some potential upside to that number.

We are really deep in our fiscal year 2014 planning process.

And I think you would see from the caliber of some comments here, we have a lot more moving financial pieces than we have historically had.

As somebody once said, it is not as easy as ABC anymore.

But we do really -- I think we have talked a lot, prior to the announcement of the Walgreens-Alliance Boots deal, about improving our operating margin in fiscal year 2014.

And we were laser-focused on that.

Then, came along the transaction and $25 billion in incremental revenue and a lot of the topline revenue is really brand.

And we implemented the generics over time.

And part of that is just not entirely known how we would implement the generics.

Clearly once we anniversary that whole contract it will be better for us from a margin perspective.

We also are -- and we are working through this, of course, when you bring on a contract of this size, some of the expenses that will be taken on right away in September, but also in the first couple of months will probably be enhanced and then will settle down over time.

So I think just to give you the odds you are probably looking for, our expectation right now is that in fiscal year 2015, we would see a high single-digit operating margin increase.

That is where we will be guiding to.

But we are deep in fiscal year 2014 now.

So we hesitate to get to explicit about fiscal year 2015.

But Tim is probably a better guy to ask about this.

So --.

Yes, no, Steve, I would definitely agree.

2014 will take a little bit of a step back with all that incremental revenue coming on board.

For 2015 we definitely will have margin expansion at least, and, again, I say at least high single digits.

And I would expect that to get better after that.

Again, as we ramp-up and enjoy some of the benefits of this transaction.

That would be our internal expectation.

So, when -- again, just when we think about the step down in 2014 because we are trying to figure out how to model this.

Should we assume a similar magnitude of the step down that you saw when you brought on the Express business?

Given that Walgreen, yes, it is a bigger contract, but it does have both branded and generic.

Or should the impact be greater than that?

Ricky, it is a tough one, because we are still in our planning process.

But I don't think the step down will be as great as what we had this year with Express.

Because again next year you have both the brand and some generics coming onboard.

That's helpful.

Thank you.

Lisa Gill, JPMorgan.

Good morning.

I had a follow-up question around the JV purchasing opportunity from Progen.

One, Steve, is there any way to quantify what you expect both synergies or savings to be over time?

And secondly, when you talk about your Progen, can you talk about what your penetration rates are today and where you think they could go based on this new opportunity around pricing on the JV?

Do you see a lot of opportunity in your existing book of business where you can really increase that penetration rate because you are not there today?

How should we think about that?

There is a lot of interest and we don't believe it's -- a lot of interest in exactly what the contribution will be from the JV and we really, as we said, it is complicated, right.

We would be buying from a Swiss entity.

It is a new relationship.

It is a groundbreaking relationship.

So we really feel like we are given enough guidance.

We feel like that $0.20 that we have talked about for next year is as much as we are comfortable saying for right now.

And clearly the benefit will be much more enhanced in fiscal year 2015 when we are distributing all the generics.

So I think that is a lot about what we said and on that front.

Your second question was around Progen.

We do believe that this is going to strengthen Progen.

I think almost every customer inherently recognizes that, not only ourselves, but the whole -- the whole wholesaler industry has been a good partner to community pharmacy.

Our perspective, those community pharmacy and all the customers that buy generics from us have always been essential to the success of our business and that probably even becomes more so because we believe we are going to have a really terrific program, just to bring them greater product portfolio, not only in generics, but in front store.

And also the non-purchasing program.

I think (inaudible) and I think almost every customer inherently recognizes that.

And on Friday I am giving a speech to 2,000 of our stores.

And certainly we will be emphasizing them.

And I think our customers really understand that and the good news is that manufacturers also recognize that this is a truly unique partnership that has got a lot of legitimacy to it because of equity pieces, because of the 10-year distribution contract; and the marketplace is accepting that this is a new groundbreaking opportunity for them and for us as well.

But, Steve, is there any way, even just to quantify this in any way, is a greater than 50% by generics from you today on the independent pharmacy side?

Is it 90%?

Just trying to quantify what that incremental opportunity would be going forward?

We service thousands of stores on some basis.

We have about 4,500 in the Good Neighbor Pharmacy.

Those customers are the ones we really like to focus on.

In fact, we have got some data, we have a couple of customers that are celebrating 29 years with us that will be calling out on Friday in my prepared remarks.

So those customers tend to be very compliant.

I think we see some data that will show that they are buying over 90% of their formulary products from us.

We want to get all customers today.

When we meet with any independent pharmacy that is an AmerisourceBergen customer, we try to get them to be in the Good Neighbor Pharmacy program.

I believe and I believe time will prove me right, Good Neighbor Pharmacy is only going to be greater enhanced.

Actual program is going to be stronger.

So if you are an independent pharmacy and you believe that ABC is a good partner, I think that there is a lot of logic to you being more compliant rather than less and more interested in becoming a part of ABC and a greater customer than you have in the past.

And that is going to be our message and, honestly, I haven't heard anyone that dispels that notion that I have had.

It's understood, it is very logical and compelling frankly.

Great.

Thank you.

Operator, I think we are coming up on noon, so we will take one more question.

John Ransom, Raymond James.

As we think about your Specialty business, the way it is -- the current run rate, can you help us understand the relative contribution of oncology versus the relative contribution of everything else both in terms of revenue and profits, just to get some idea of how much is growing versus how much is under pressure?

John, I would just tell you, I know we got you under the wire, I think we will just have to move you up next year, but it is -- you have always really been interested in our Specialty business.

We appreciate that.

Tim, do you want to comment on the [registered] contribution?

Yes.

We don't -- John, I appreciate the question, but we really don't give specific operating income information.

But from a revenue standpoint, when you look at again the business is the non-oncology businesses, oncology supply, right.

So non-oncology supply.

They are probably about 60% of the revenue.

And oncology supply is about 40%.

Would oncology be higher or lower average margin in your specialty?

I would say that oncology is slightly higher.

Again, those other businesses, those other businesses are higher volume, higher growth, but slightly lower margins.

So it wouldn't be completely off the reservation to think about half of the business growing and half of it being under pressure from a profit standpoint, something in that ballpark?

Well, again, we were really -- we were flat second to third quarter in our oncology supply revenues and, again, some of the reason we got such good growth at our ASP and Besse divisions which were not Besse, but ASC in particular is that they are doing a lot of oral oncology drugs.

So I think it is -- we have had this theme for a while that oncology business is really integrated to our Company.

Including our health systems, ultimate stock business.

And our ASC business would be three of the other beneficiaries of a strong oncology portfolio.

They are just not always in RV drugs.

Yes.

I mean that is the key point, right.

We are down -- when we talk about results versus last year, we are down.

But the good news is sequentially here we've stabilized and we are pretty flat in terms of oncology.

So we think that is very encouraging.

One other quick one.

When we think about next year, I know you are not giving guidance.

But I know you talked about $0.20 from the Walgreen.

Does that include also the benefits of the JV or is that strictly the Walgreen wholesale contract as a standalone?

No, it is both for 2014.

But, again, we expect that it will get better in 2015 and that is why we are fairly comfortable in that (multiple speakers).

And I am sorry if you said this, but you will start doing that generic piece as you said, what did you say?

Back half of the year -- you will start doing the generics?

Have you nailed that down?

I may have missed that.

No.

We haven't.

So we got the brand on September 1. We expect to start some of the generic distribution calendar 2014.

And then we really have the whole year to complete that.

We would hope to maybe grow quicker, but we have -- there's no hurry, again it's a 10-year contract.

So there is no hurry.

And we will go very steady.

I tell you that just having visited a lot of the customer stores there's tremendous excitement about this program.

It is going to be a great program for the stores.

And when do you think you will be --

When it is fully implemented.

Your JV, when will the heavy lifting on all the contracting be done with your suppliers?

Yes.

I think you'll see that come in during the quarter fiscal year 2014.

We'll have a lot more guidance.

But I think everything is on track.

It is just -- it is complicated.

We have got -- Peyton Howell is heading up our global supply chain business now.

She is knee-deep in it.

She is in Switzerland a lot.

So I think you -- we will give you more color on it, but, again, it is important that we have all these three buckets within the contract be profitable and important to our future success.

I think we need to really wrap up.

So thanks, John.

Okay.

Thank you.

Thanks, John.

And now, Steve, do you want to say a few closing remarks?

Yes.

So, we appreciate a lot of interest, terrific questions.

And I think it helps give you a good understanding of how well ABC is positioned for an exciting future.

There's no doubt in my mind that it is very clear from this release that ABC executed superbly against our key initiatives in the quarter that we just reported.

This next quarter is going to be truly a historic momentous quarter for us as we implement probably one of the largest contracts in the history of our industry.

It is important and as some of the questions have come up that we will deliver superbly for all of our customers and will meet the high expectations that all of them have for us including this new Walgreens contract.

So thanks for your time and attention and we will be with you in a couple months again.

Thank you.

Thanks, Steve.

And before we go I would just like to highlight two of our upcoming events.

We will be attending the Morgan Stanley healthcare conference on September 9 in New York and the Robert Baird healthcare conference on September 10, also in New York.

That concludes our call for the day.

And now I will turn it back to the operator.

Ladies and gentlemen, today's conference call will be available for replay from today, July 24, 2013, at 1 PM Eastern time until August 7, 2013, midnight of that day.

You may access that conference by dialing 1-800-475-6701 and entering the access code 297735.

If you happen to be in an international location, please dial 320-365-3844 and the same access code of 297735.

That does conclude our conference call for today.

On behalf of today's panelists, I would like to thank you for your participation in today's AmerisourceBergen third-quarter earnings call.

And have a good day and you may now disconnect.