美源伯根 (ABC) 2013 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the AmerisourceBergen 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).

As a reminder, today's conference is being recorded.

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

Barbara, please go ahead.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fiscal 2013 fourth-quarter and year-end results.

I am Barbara Brungess, Vice President of Corporate and Investor Relations, and joining me today are Steve Collis, AmerisourceBergen President and CEO, and Tim Gutman, 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 Company's permission.

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 very pleased to report strong performance in our fourth quarter and solid results for our full year.

In fiscal 2013, we not only performed well operationally and financially, but we also took groundbreaking steps to strengthen the strategic position of our core business and continue to lay the groundwork for meaningful international expansion.

We have made important investments in our infrastructure and we successfully divested certain assets while delivering exceptional value to our shareholders.

We have excellent momentum heading into fiscal 2014 and I have never been more excited about our position in the market and the opportunities that lie ahead.

Since our formation in 2001, AmerisourceBergen has built a reputation for being, among other attributes, experts in capital management and excelling at operational execution.

In the last few years, we have made substantial investments and established new customer relationships that enhance our ability to deliver growth while remaining focused on a pharmaceutical supply chain.

We have improved our market-leading programs and services across our US business and we have begun to expand our specialty and manufacturer service offerings into important international markets.

The changing healthcare landscape demands that providers continue to evolve to meet increasing patient demand and new economic realities.

In our core US market, we are of course very mindful of the pending implementation of the Affordable Care Act.

We have always believed that with increased coverage, there will be greater demand for pharmaceutical scripts.

And while we are modestly optimistic of the positive opportunity for growth that the ACA can bring for next year, we do not expect that any delays or changes to the Act will negatively impact the guidelines for our business, which is renowned for its resiliency in times of change.

Change is also impacting both brand and generic pharmaceutical manufacturers, who also face an increasingly dynamic market where the ability to get products to market as quickly and efficiently as possible and to secure reimbursement for those products are paramount.

Our goal is to help all of our customers and suppliers effectively meet today's challenges and to find and benefit from new opportunities in an increasingly complex healthcare market.

In order to meet that objective, it is important to ensure that it is easy to do business with AmerisourceBergen on a global scale.

Whether our customer is an independent retailer looking for globally sourced generics and fresh merchandising ideas or a sophisticated biotech manufacturer entering new markets and conducting drug trials across the world, we must deliver practical solutions that can be implemented quickly and without disruption.

Over the last few years, we have worked deliberately to remove internal barriers to collaboration and build out an infrastructure that fosters great innovation and creativity.

Our culture remains steadfastly focused on exceeding customer expectations and our organization is flat enough to ensure fast response times.

As a result, we continue to roll out new, innovative programs and the team feels like we always have more that we can and want to accomplish.

It is a source of great pride to me and our senior executives as to how exceptionally well AmerisourceBergen met and indeed exceeded every customer expectation that was placed in front of them during this year of incredible change for our Company.

The strategic relationship we struck with Walgreens and Alliance Boots in March has greatly elevated our core business platform and opportunities, allowing us to take our strategy for our business to the next level.

When we made the announcement, we declared we had an unprecedented opportunity among the three companies to create and develop a unique and differentiated global platform.

Seven months into this significant announcement, I feel stronger than ever that this relationship has created meaningful opportunities for us to further enhance our operations and customer value.

For example, the additional volume flowing through our system now affords us the opportunity to make the investment to expand our Columbus greenfield facility and establish a national distribution center.

When fully operational at the end of calendar 2014, the greatly expanded facility will give manufacturers a new service option for greater supply chain efficiency with AmerisourceBergen and will drive benefits for our own operations as well.

In addition, we plan to replace our existing Orlando, Florida distribution center with a state-of-the-art facility that is over 50% larger than the current facility.

Both of these important investments will yield benefits to AmerisourceBergen's stakeholders for many years to come.

We also make an important investment in information technology infrastructure in order to meet future regulatory requirements intended to further enhance the integrity and security of the pharmaceutical supply chain.

We have worked closely with many others in the supply chain to identify a comprehensive and workable solution for enhancing how products are tracked as they move through the supply chain and we are hopeful that federal legislation will soon set a national standard.

Our solution is a fully-integrated program that takes advantage of the robust capabilities our SAP platform provides and delivers a single, seamless way for manufacturers in particular to interact with all of AmerisourceBergen.

Once implemented, our solution will also position us to manage various international regulations as needed.

I truly believe that the comprehensive global supply chain strategy we have deployed and the collaborative approach we have taken to doing business not only drives efficiency, but also leads to growth and opportunity for our customers and those we serve.

Our growing relationships with both brand and generic manufacturers was on display at last month's supply chain ThinkLive tradeshow, where ABC had record attendance from our supplier partners.

Our One ABC approach in pharma relationships resonates with those constituencies that know and depend on our capabilities day in and day out.

I believe they fully embrace ABC's enhanced platform and welcome an increased role for AmerisourceBergen in driving innovation and value for the supply chain.

Turning now to our results, Tim will cover the details, but I want to take a quick look back on the September quarter and our fiscal 2013 before I talk more specifically about our financial expectations for fiscal 2014.

Our revenue was up 28% in the September quarter to $24.5 billion with the sharp increase due to the onboarding of the Walgreens brand distribution business.

Adjusted earnings per share were up 3% to $0.79 in the quarter.

Better-than-expected generic inflation helped offset the headwind from fewer generic launches and the additional expenses related to onboarding Walgreens.

Price inflation on both brand and generic products was quite strong in fiscal 2013.

Sales of generics have been strong across the board, with only a handful of products contributing the majority of these price increases.

While we continue to expect to see some level of inflation going forward, generic inflation is difficult to predict.

We believe the most recent increases have been extraordinary and we do not expect them to continue at the same high rates.

The Pharmaceutical Distribution segment overall had solid growth in the quarter with a 34% revenue increase in the Drug Company and a 12% increase in ABSG.

I want to take a moment here and give a special word of thanks to our Drug Company associates for the stellar job they did onboarding the brand business for over 8000 Walgreens stores.

The successful rollout is a testament to the talent and dedication of our associates and the value of working collaboratively with a customer.

We challenged our associates to continue exceeding all of our customer expectations while implementing the significant contract.

I have been at AmerisourceBergen for almost 20 years, and despite the momentousness of this challenge, I never had a doubt our associates would rise to the occasion, as they irrefutably did this year.

Importantly, the Drug Company's other customer categories also performed well in the quarter.

Sales to independent drugstores increased sequentially in the quarter and we continue to have an open dialogue with these important customers about the opportunities we see on the horizon.

The importance of our independent offering was verified recently when the JD Power 2013 US National Pharmacy Study ranked our Good Neighbor Pharmacy franchise offering the highest in customer satisfaction among chain drugstore pharmacies.

This is quite an honor for the GNP franchise and our members and a well-deserved recognition of the extraordinary level of service they provide to their patients.

ABSG's revenues in the quarter were up 12%, as strong performance in Besse, ASD and ICS offset a decline in oncology business.

While our Oncology Supply sales have stabilized somewhat, community practices continue to face the challenge of inadequate reimbursement.

We consistently encourage members of Congress to repeal the sequestration cuts that have negatively impacted community oncology physicians, but of course there is no immediate relief in sight.

We continue to expect that our community oncology business will be down year over year until it anniversaries the impact of sequestration.

It is possible that if inadequate reimbursement rates persist for a long period of time, we could see additional pressure on community oncology sales.

Due to some well-established shifts inside of care service, we are experiencing a lot of growth in hospital outpatient sales of oncology products, and we believe that our knowledge of specialty products and our differentiated understanding of manufacturer and patient requirements for these products will help AmerisourceBergen's overall offering, whether it is in our Specialty business, ABCS, or our core Drug business.

Turning now to World Courier and our Consulting businesses, both performed well in the quarter with a strong performance in last year in particular driving operating income growth of 24%.

For the full fiscal year, revenue increased 13% to a record $88 billion across all of AmerisourceBergen and we delivered $3.14 in adjusted EPS, an increase of 6%.

We accomplished a great deal in fiscal 2013 and while 2014 will be a transition year, it positions us very well for a bright future built upon a foundation of strong and diverse customer relationships, innovative partnerships and a dynamic marketplace.

Before I go into fiscal 2014 guidance, I think it is worth mentioning the key priorities that our management team has established for 2014.

One, continue to onboard all of the Walgreens distribution business.

Two, partnering with the Swiss JV and negotiating global generic sourcing agreements.

Three, strengthening our independent retail programs.

Four, driving the expansion of specialty offerings across our entire business.

Five, expanding our service offerings in international markets by building upon the World Courier platform.

For our guidance, it bears repeating that we are changing how we calculate adjusted diluted earnings per share in an effort to provide our investors with greater clarity and transparency.

Tim will walk through the details, but on the basis we will use going forward, fiscal 2013 adjusted diluted EPS was $3.21.

On the same basis, we expect fiscal 2014 adjusted diluted earnings per share to be in the range of $3.60 to $3.73, an increase of 12% to 16%.

We will of course have exceptionally strong revenue growth of 28% to 31% as a result of onboarding the Walgreens business, which also will drive strong operating income through growth.

While we anticipate a modest benefit to our top line from healthcare reform in fiscal 2014, it is ramping a little slower than originally anticipated and we probably will expect a greater impact in fiscal 2015.

Our operating margins will be negatively impacted by the mix shift to lower-margin business, but we continue to expect that we will be able to grow our operating margins after we anniversary the onboarding of Walgreens.

Our capital expenditure expectation is significantly higher than prior years, but as I outlined earlier, we continue to make important investments in our business that will provide benefits and opportunities for growth for a long time to come.

Throughout my career, I have learned that well thought out and executed technology investments have been very beneficial to our business.

They not only drive efficiency, but help us establish the customer intimacy and ease of doing business that ABC is characterized by.

It also helps us be a leader in compliance and ahead of any regulatory challenges that may arise.

We expect our strong cash flow generation will continue, though with some timing impacts as we onboard Walgreens.

We do, however, continue to have financial flexibility and we will deploy capital wisely and with a view to both growing our business and returning funds to shareholders.

We expect to repurchase approximately $500 million in shares in fiscal 2014, but likely in the latter part of the year.

We also continue to have an interest in acquisitions, particularly in Specialty and Manufacturer Services, and potentially on the international front as well.

In conclusion, we are very pleased with both the performance we have had in the last year and the degree to which we have been able to execute against our strategic priorities.

As we continue to expand our relationship with Walgreens and Alliance Boots, further develop our global pharmaceutical sourcing strategy and work to ensure a bright future for all of our customers, I have great confidence that our associates will continue to rise to the occasion.

We have accomplished a great deal in the last year and I have never felt better about our future.

Now here is Tim.

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

We had a very strong finish to what has been a solid year and we are pleased with our fiscal 2013 results.

We did this while executing on several strategic initiatives.

It is interesting to note that we started our fiscal year servicing our large PBM partner under a new contract and we finished the fiscal year servicing our large chain partner, Walgreens, under our expanded distribution contract.

This morning, as has been our practice this year, I will provide my initial comments on our GAAP financial results.

I will then adjust for the exclusion of the two material non-cash items, the LIFO expense and the warrant expense, including the negative impact on our tax rate from the warrants.

As a reminder, results from fiscal 2012 will be on a GAAP basis when I make any comparisons.

I have three main items to cover this morning.

First, I will recap fourth-quarter consolidated and segment performance.

Next, I will spend a few minutes on our full-year performance.

The third item, I will wrap up my prepared comments covering our fiscal 2014 guidance.

In order to facilitate an easier comparison between fiscal 2013 and fiscal 2014, at the end of my comments, I will also provide our adjusted earnings for fiscal 2013 on the new adjusted basis, which we will use going forward.

Let's begin our review of ABC's fourth-quarter 2013 financial results.

Starting with the top line, revenues were $24.5 billion, up 28% compared to last year's quarter.

The increase was due to incremental revenues from our new large contracts, our PBM and Walgreens distribution contracts.

If we were to exclude the growth associated with these two meaningful contracts, our revenue growth would still have been a very good 4.4%.

We did benefit from having one extra business day this September quarter.

The current quarter's GAAP gross profit decreased to $568 million due to the LIFO charge of $154 million.

This charge was significantly higher than previously expected due to much better than expected drug price increases in Q4, traditionally a slower time period for price increases.

We had record brand price inflation for our inventory mix through both Q4 and also the full year.

Also Q4, included a limited number of generic drugs that had large price increases.

Excluding LIFO from just the current quarter, our adjusted gross profit was up 1% to approximately $722 million.

Last year's gross profit benefited from a LIFO credit and antitrust income of about $26 million.

As highlighted in our previous two quarters, we continue to experience a headwind in gross profit in our Pharmaceutical Distribution segment due to fewer new generic launches year over year.

However, this quarter, this headwind was mitigated by stronger price appreciation related to generic drugs.

Let's move to operating expenses.

This quarter, total GAAP operating expenses were $453 million, up about $58 million or about 15%.

Included in these GAAP expenses is warrant expense of about $50 million.

The driver behind the sequential warrant expense increase is the current fair value of the warrants.

At September 30, the warrants were valued at $572 million, which was greater than the June 30 value of $468 million.

The fair value of the warrants increased primarily due to the ABC share price in the quarter ended September 2013.

Operating expenses excluding the warrant expense were about $403 million in the current quarter, up $8 million or about 2% over last year's quarter.

However, last year's quarter had the burden of a large one-time restructuring charge in the amount of $27 million.

Without the impact of the restructuring expenses, our OpEx would have increased about 9%.

This increase was related to our Pharmaceutical Distribution segment, specifically the Drug Company and also corporate IT, both in support of the onboarding of our new Walgreens contract.

Operating expenses in the other segment were virtually flat.

Operating income, our GAAP operating income was $114 million, down significantly due to the material LIFO and warrant expenses.

However, excluding LIFO and the warrants from the September 13 quarter only, our adjusted operating income would have been $319 million, about flat compared to last year's quarter.

Our adjusted operating margin was 1.30%, down 37 basis points compared to last September quarter, due to the significant increase in lower-margin business and the expenses of onboarding the Walgreens contract.

Moving below the operating income line, interest expense of approximately $19 million in the current quarter decreased about 19% compared to last year due to the debt that we paid off in September of 2012.

Income taxes, our GAAP effective income tax rate was nearly 48%.

As mentioned last quarter, our income tax rate is being negatively impacted by warrant expense.

On an adjusted basis, which means we are removing the nondeductible dollars associated with the warrants, our effective tax rate for the September 2013 quarter was 38.2%.

Our GAAP diluted EPS from continuing operations in the September quarter was $0.22.

Our adjusted diluted EPS, consistent with how we provided our revised EPS guidance, which means excluding LIFO, the warrant expense and warrant tax impact in the current September quarter only was $0.79, an increase of about 3%.

Our EPS benefited from a 5% reduction in our average diluted shares outstanding versus the prior-year quarter.

There was no accounting dilution in our share count from the unexercised equity warrants in the September quarter.

At September 30, 2013, we had approximately 230 million shares outstanding.

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

Please note that I will ask the impact of the fiscal 2013 LIFO expense.

Warrant expense is recorded outside of our segment results.

Total revenues were $24.1 billion, up nearly 30% versus the same quarter last year.

Drug Company led the way with revenues up 34% due to two primary drivers.

One, incremental revenues from our large PBM customer.

As a reminder, this month, October, we have now lapped the start of this contract.

And two, we also benefited from starting to distribute brand drugs to Walgreens for the one month, September.

The Walgreens revenues tracked to what was expected.

Specialty Group's revenues increased 12%.

Consistent with other quarters this year Besse Medical, ASD and our ICS 3PL business led the way with above-market revenue performance, having combined growth of about 20%.

Our Oncology Supply business was down about 4%.

The sales growth percentages for the Drug Company and Specialty are before intra-segment eliminations, consistent with how we have communicated these growth rates in the past.

Moving to gross profit.

As mentioned earlier, this segment had a benefit in the September 2012 quarter of $26 million from a LIFO credit and antitrust income.

Excluding this headwind, our Drug Company was up in the September quarter due to very strong generic price appreciation and, to a lesser degree, contributions from the new Walgreens contract, offset by the headwinds caused by the previously announced PBM contract repricing, a GPO customer loss and a modest generic launch year.

The generic price appreciation was limited to a handful of drugs that had large price increases, some of which were related to supply disruptions.

The Specialty Group had 8% gross profit growth due to the strong revenues that I highlighted, offset by the continued reimbursement headwind at Oncology Supply.

Adjusted Pharmaceutical Distribution operating income was about $300 million and down 9% versus the prior-year quarter.

Excluding the $26 million benefit from the LIFO credit and the antitrust income from the September 2012 quarter, this segment's operating income was essentially flat.

Our Specialty Group had a strong quarter with operating income growth in the high teens, driven primarily by their gross profit growth.

The Drug Company's operating income decreased and offset the Specialty increase.

Drug Company had an increase in operating expenses related to the onboarding of Walgreens, primarily labor, delivery cost and IT support cost.

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

Segment revenues increased about 3% to $434 million in the current quarter.

In the September quarter, World Courier corrected intra-Company cross-divisional revenues in the amount of $30 million.

This year-to-date cumulative correction negatively impacted their top-line revenue for the quarter.

There was not an impact to their operating income.

Segment operating income increased a strong 24% to nearly $22 million from the same quarter last year.

Our Consulting business had an increase in operating income, partially driven by timing.

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

Let me switch gears and cover a few key full-year financial metrics.

Overall, we did very well meeting or exceeding our revised guidance targets.

Revenue growth.

On a full-year basis, our growth was 12.7%, near the top of our revised guidance range.

Our large PBM customer contract drove most of this increase, and to a lesser degree, new revenues from our Walgreens contract.

Our Specialty business finished the year with revenue growth of just under 8%, again led by Besse Medical, ASD and ICS, up a combined 20%.

This was offset by a 10% decline in Oncology Supply revenues due to reimbursement pressures as mentioned previously, and to a lesser degree, brand-to-generic conversions.

Our adjusted operating income, excluding LIFO and the warrant expense, from the full fiscal year decreased about 3% to $1.27 billion.

Our adjusted operating margin decreased by 23 basis points to 1.44% from 1.67%.

EPS.

Our full-year adjusted diluted EPS from continuing operations, which excludes LIFO and the negative warrant impacts, was $3.14, above our expectations, due to a strong fourth quarter and primarily due to the benefit of the higher than expected generic price appreciation.

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

Our full-year capital expenditures were $202 million and included about $50 million related to onboarding Walgreens.

Free cash flow was $586 million, significantly better than our revised guidance of $100 million to $200 million.

Part of this improvement is due to timing, as our brand inventory build for Walgreens was slightly lower than what we originally expected, and we had an especially strong September cash collections month.

The additional brand inventory was onboarded in early to mid-October.

During the September quarter, our share buybacks were $83 million, and for the full year, we bought back $484 million of shares, which exceeded our guidance of $400 million for the year.

We are proud of our track record of upsizing our return of capital to shareholders.

We ended the fiscal year with about $1.1 billion available on our share repurchase authorizations.

Moving to our hedging program.

As a reminder, this program enables ABC to offset a reasonable amount of the anticipated share dilution from the anticipated exercise of the warrants through the purchase of four cap call options.

At September 30, 2013, we have completed about 60% of the hedge at a cost of roughly $160 million.

As we mentioned last quarter, we can adjust our hedging activities based on market conditions at any time.

We now expect the program to be completed in early fiscal 2014.

Finally, our cash balance of about $1.2 billion at September 30 leaves us in a good position as we navigate through a large, complex Walgreens onboarding from a working capital standpoint.

Now let's turn to fiscal 2014 expectations.

As we discussed earlier, our guidance going forward will be on a new, adjusted basis.

Prospectively, our new definition of adjusted earnings will exclude LIFO adjustments, expenses associated with the equity warrants and the related tax impact, acquisition-related expenses and intangible amortization, as well as any one-time restructuring, litigation and severance expenses.

We have also decided to exclude antitrust litigation gains, which are infrequent and difficult to predict.

Finally, we will calculate adjusted EPS using an adjusted share count, which will exclude the accounting dilution resulting from the impact of the unexercised equity warrants.

Our guidance this morning excludes any impact from these items.

On the new basis, our adjusted diluted EPS from continuing operations for fiscal 2013 was $3.21.

Gross profit was $2.76 billion and the gross margin was 3.14%.

The operating income and margin for fiscal 2013 was $1.29 billion and 1.47%, respectively.

On this basis, our expectations for fiscal 2014 are as follows.

EPS, we expect fiscal 2014 adjusted EPS to be in the range of $3.60 to $3.73.

Again, we consider $3.21 as our base fiscal 2013 EPS number.

Revenues, we expect revenue growth to be in the 28% to 31% range, driven primarily by our new Walgreens contract, with 11 months of incremental brand drug revenue and the phasing in of generics.

Included in our revenue forecast is a modest increase from the implementation of the Affordable Care Act.

Finally, we expect our Specialty business to grow between 7% and 10%, with our Oncology Supply business just up slightly.

Gross profit.

Our gross profit dollars will be up in fiscal 2014, but our gross profit margin will be down substantially due to the Walgreens business and because we continue to expect the benefit from the procurement joint venture to come later in our fiscal year.

Also, our Specialty Group's mix of business also negatively impacts our gross profit margin, as certain of their lower-margin businesses are growing faster.

Although we had a strong fiscal year in terms of brand and generic price appreciation, our working assumption for fiscal 2014 is that price appreciation will moderate and return to more normal levels.

In terms of operating expenses, we expect year-over-year dollar growth as a percentage to be in the low teens.

The increase is driven primarily from three key areas.

One, onboarding the Walgreens business and direct costs, such as payroll and delivery.

Two, an increase in overall corporate support costs, most notably IT.

It is important to point out that our continued investment in IT, while tied to the Walgreens contract implementation, will benefit all of our current customers and importantly allow for future growth.

And three, certain noncapitalizable expenses associated with building a replacement Florida DC, expanding our Columbus facility to also serve as a national distribution center and implementing a track-and-trace system.

Finally, our operating expenses are somewhat dependent upon how quickly and efficiently we onboard the Walgreens generic business.

You can count on ABC to manage operating expenses responsibly.

For fiscal 2014, we expect our operating income year-over-year dollar growth to be in the range of 12% to 16%, primarily driven by the Drug Company.

Additionally, we expect our operating margin to decrease in basis points in the high teens.

For Specialty, we expect operating income to be relatively flat as the income contribution from the three fast-growing businesses will offset the lower contribution from our Oncology Supply business.

Interest expense.

Our interest expense is expected to increase year over year as a percentage in the low teens.

This is due to an anticipated short-term borrowing in the first half of the fiscal year.

We funded higher accounts payable in October from the Walgreens brand inventory build.

We will need to fund additional working capital needs as we continue to phase in the Walgreens business.

And around the end of December, we have our usual seasonality where we add inventory in our Drug business.

Tax rate.

We expect our adjusted tax rate to be in the low 38% range.

Share repurchases.

Our guidance assumes $500 million in share repurchases.

Importantly, we'd expect a majority of these share repurchases to be in the second half of the fiscal year when our working capital improves.

Switching over to our cash flow.

Capital expenditures are estimated to be approximately $300 million in fiscal 2014.

Since announcing our new strategic relationship last March, we have recognized that we need additional investment in several areas.

I previously discussed the replacement DC in Florida, the national distribution center in Columbus, Ohio and the track-and-trace system.

Additionally, from an IT standpoint, we plan to invest CapEx dollars to ensure that we have properly scaled SAP and EDI systems in our Drug Company, with appropriate capabilities to handle the projected doubling of order volume and to support future growth.

We are also scheduled to install an upgrade to our core SAP system and implement SAP in our World Courier business this year.

The CapEx spend for the six initiatives is about 60% of the total CapEx spend, and will mostly be completed late in the fiscal year.

As Steve highlighted, these CapEx projects position us better for the long-term.

Finally, free cash flow.

We expect that our free cash flow will be in the $500 million to $700 million range.

Free cash flow is impacted by the additional CapEx spend, additional brand inventory build needed for Walgreens and a slightly higher level of invoices paid in October related to the Q4 brand inventory build.

A critical positive driver of free cash flow is the phase-in of the Walgreens generic business, which we continue to assume will be slow and steady over calendar 2014.

We can have a material change in our free cash flow based on how this generic business actually gets implemented.

I know that my comments today were longer than usual due to all the moving parts, so thank you for your attention.

Let me finish by reiterating we are pleased with our results for the quarter and the full year.

For fiscal 2014, we expect solid organic growth.

We are doing this while investing in a number of internal initiatives to strengthen our business long-term.

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.

Please go ahead, Brad.

(Operator Instructions).

Ricky Goldwasser, Morgan Stanley.

Hi.

Thank you for taking my question.

You know, obviously last week, McKesson announced the acquisition of Celesio.

So can you just talk about how do you think that partnership will impact -- potentially impact JV negotiations with manufacturers?

Or do you think that you have a first mover advantage there?

Well, Ricky, we weren't surprised by the announcement, but we're really very confident in our position.

First of all, we believe we have best-in-category partners here.

The scale of this relationship is unique.

And we also -- we have the benefit of not only did we go through a couple of months of negotiation, but we have now proactively worked on market solutions for over seven months.

And it is going very well.

So you get into acquisitions, there are still regulatory hurdles to be faced.

So we don't think there is any impact on our business.

Again, we think that this relationship is being positively received by the manufacturers.

I think it gives them some really unique global access that no one else can offer.

And the other thing is AmerisourceBergen was the third party in this relationship, and there was already a well-established and well-thought-out integration plan between Alliance Boots and Walgreens, and in a way we benefited from fitting into that.

So we think we are ahead here, we like how we are positioned and, as you can see, we have got great confidence.

I mean, 12% to 16% operating growth for fiscal 2014.

And when we think about 2014 guidance -- and maybe I have missed it -- but is there any assumed benefit from improved sourcing?

And also is there any update to your thoughts of high-single-digit basis point market expansion in fiscal year 2015, given what you know to date?

Yes, we gave Tim a bit of a break and we will let him answer the hard parts of your question.

But you know, we expect the sourcing benefits to accrue later in the year, and there is of course tremendous interest in this, but we really are in this for the long-term.

We signed a 10-year distribution agreement with Walgreens, and we have entered into this agreement really on the generic sourcing with the Bern JV with really the belief that this is going to be permanent.

So we really are being very thoughtful about it.

We think we are providing a lot of growth to our shareholders, and we really want to manage the market for the long-term.

So you will see full benefits -- better benefits from them in 2015.

Tim?

Hi, Ricky.

Yes I would just say before I get into the question, I would just like to echo 2014 guidance, strong organic growth.

We expect what we said before is still consistent.

For 2015, we expect that margin to improve.

We said at least high single digits.

That is still our answer of what we are committed to.

It's early, a lot of moving parts.

We have got to navigate through 2014 first, a lot of complexity.

But we certainly need a longer runway underneath us here before we really get into details on 2015.

Okay, thank you.

Thanks, Ricky.

Next question, please.

Glen Santangelo, Credit Suisse.

Yes, thanks and good morning.

Steve, now that you are seven months into the transition with Walgreens, could you maybe give some reactions to maybe what some of your independent customers domestically may be saying?

Are you seeing any pushback or any disruption in that regard?

Obviously, when we made this announcement on March 19, I think there was a lot of market attention to this.

And what has happened since then in many cases -- again, I was at our tradeshow in July -- I met a couple of customers that have been with us in the Good Neighbor Pharmacy program for 29 years.

So we have a long-established relationship with customers.

Many of them trust us.

We highly -- many of them trust us implicitly.

I think they're just with us for the long-term.

And so they understood -- I mean, when I gave my remarks, the opening keynote speech at this conference, there was I think tremendous interest in that.

We had a lot of attendance.

But there is a lot of confidence that AmerisourceBergen is going to do the right thing for them.

And they know that generics in the PRO Gen program are very important to the future of the Swiss JV and very important to us, and of course it is a key area of profitability for them.

So I think it is up to us.

We intend to execute against some of the non-generic sourcing priorities of this agreement.

So there is areas in the front store, there is areas in network development, technology and clinical enhancements that we can offer.

I have given some pretty rudimentary examples of little things that we can do around script translation that gives us the capabilities and the scale to do it, even in areas of patient-specific compounding.

So I think there are lots of areas for us to help with innovation.

They trust us.

So we haven't seen any significant loss or any loss at all really from the independent customer base.

So things are really going well.

That is good to hear.

Tim, maybe if I could just sort of follow up on one question with respect to the purchasing JV.

When you guys originally gave your accretion estimates for the combined transaction, it seemed at the time that you were sort of conveying that the benefits from the purchasing joint venture may actually be bigger than the prime vend agreement itself.

And if that is the case, we are not going to see the benefits from the prime vendor agreement towards the latter half of fiscal 2014.

Might the accretion benefits in fiscal 2015 be ultimately bigger than what we have seen in 2014, based on that original premise?

Yes, hey, Glenn.

Clearly, we said that.

We still believe it.

We still believe that the procurement JV is ultimately going to be better; it is just a matter of how quickly we can ramp up.

It is complicated.

You have to contract and go through that process.

So again, we always said a little bit in 2014, mostly in 2015.

But ultimately, it is going to have a contribution greater than the core distribution agreement.

Am I ready to really comment about 2015 in terms of accretion?

Again, I think I -- with Ricky, I think I answered a lot of moving parts, complicated, we are not really ready to put a stake in the ground in terms of accretion for 2015.

We are still committed -- but nothing has changed.

We are still committed to solid mid-teens EPS growth over the long-term.

Okay, thank you very much.

Sure.

Thanks, Glen.

Thanks, Glen.

Next question please.

Robert Willoughby, Bank of America.

Hey, Steve or Tim, is there an argument for perhaps including the warrant dynamics in your income statement to reflect the 20% of the upside here to the numbers that you are basically giving away now?

And are there any scenarios that do enable you to revisit the terms or conditions around the warrants?

You know, Bob, I will take the question first, and Steve can jump in.

But again, I would say we are down the road on the relationship.

It is contracted.

It has been a pleasant surprise; I mean, we are benefiting from a great relationship partnership.

And again, it is tied to that procurement JV, which, again, with Glen, we said we still believe is ultimately going to be very promising.

So at this point, no, I would say it is remote and not likely that we would ever renegotiate.

And really the upside of the warrant valuation wouldn't flow through the P&L.

Yes, I think if I called Greg and Stefano and said I want to renegotiate the warrant price, they might think it is not Halloween but April 1. So I don't think that is a possibility.

So thanks.

It is a good thought, but obviously when we negotiated this contract, it was really a year ago.

Our stock was $43 to $45, and so it reflected some modest premium over that price at the time.

But markets are unpredictable.

Thank you.

Thanks, Bob.

Next question, please.

Robert Jones, Goldman Sachs.

Thanks for the questions.

Just to follow up on the potential savings from the JV, Steve, at this point, how much visibility do you have into those potential savings?

Are the savings more tied to timing at this point or are there still several unknowns that would need to be worked through to realize those savings?

Well, we are very involved in the JV.

I was in Switzerland last month.

We have people there if not every week, at least a couple of times a month.

So we have been very participatory in the discussions.

Because the complexity of the end market pricing in the US really affects us across a broad range of customers, from other regional chains that we have to the independent pharmacies to long-term care, institutional pharmacies, skilled nursing facilities.

So I think that is one of the key learnings we have had.

So we have been very involved.

The participation by AmerisourceBergen generic sourcing and business development focus has been extremely welcome.

And we are involved.

So we have a lot of visibility, but we're right in the thick of things.

So we expect that we will give you further guidance as the year continues.

But honestly, nothing has changed.

In fact, our expectations are probably more positive than ever about the opportunities that our manufacturers are seeing from this global relationship.

Got it.

And then I guess just on generic pricing in general, Steve, you flagged that inflation has been extraordinary, but that you don't expect that to continue at these same high rates.

Is the assumption in guidance for flat generic pricing?

And I guess if it is, what are some of the factors that could make this inflation better or worse than your expectations?

So you know, I think the key word that we used -- if we didn't use, we should have -- is concentration.

It was just a couple of products on both brand and generic that really had outsized contributions to higher than expected inflation rate.

And if those circumstances persist, it could happen again.

But I think we heard comments from both our peer companies that are very consistent with us, that you had some unique circumstances here, and it is difficult for us to predict if they will continue.

It is part of why we have a range of earnings.

But Tim, any comments?

Yes, I would say it is a good question.

2013 was clearly better than 2012 in terms of generic price appreciation.

But as Steve mentioned, it is isolated, concentrated.

We are not ready to call it the new norm at this point.

So that is -- we factor that into our guidance.

That is why we have a range.

And I guess, Bob, the other thing I would like to point out too on that range for next year is we have two big generic launches, and they are both tied to one supplier.

So again, that is part of why you have a range in terms of generic price appreciation and generic launches.

Things can change and move and develop.

Got it.

Thanks so much.

Sure.

Thanks, Bob.

Next question, please.

Tom Gallucci, FBR.

Good morning.

Thanks for all the detail.

I guess first of all, in your comments you mentioned maybe a little bit of benefit in your expectations from healthcare reform.

You recognized I think that may be a little bit slower ramp.

But could you give us a little better understanding of the calculations and how you are thinking about reform?

Well, Tom, congratulations on the new position, and we look forward to working with you of course.

You know, we really do work more on the IMS guidance.

I mean, I don't want you to take anything away from that that we are not sophisticated and don't look at different customers and their growth rates, because we really do.

And in the last few years, we've -- tremendous attention on that, and we have got of course some very large customers that we can consult with, and also down to the GNP stores.

So we spend a lot of time on that.

But we don't particularly look at what the impact could be.

Now, when we have seen like TennCare expand and we have a very strong independent patient -- independent pharmacy population and customer base there, we have seen some very good growth.

And so our assumption has been that Medicaid and Affordable Care Act expansion will be good for us.

But we never thought about it in more than about a 2% increase in revs at the absolute most, and now we have moderated that.

But, you know, we have got 28% to 31% revenue growth next year.

So we probably aren't obsessing about every percentage of revenue growth, really focusing on that bottom line and operational implementation.

And frankly, the very big capital investment that we are making next year, which will be a record for AmerisourceBergen.

Okay, that's fair.

And I think, Steve, boy you definitely hit it.

I mean, I think -- again, I said modest.

And we are still bullish, we still think it is going to be a good ramp and could be real positive for 2015, but very modest for 2014.

And ultimately, it should be good for our retail, for chain and our independents.

But again, not a big factor for 2014.

Okay, that's helpful.

Thanks for the kind wishes there, Steve.

One more.

I guess just the prime vendor agreement and the purchasing organization clearly are the big issues relative to the Walgreens-Alliance Boots relationship.

But in the past, you have also talked a bit maybe about it being a platform along with World Courier to expand your Specialty operations internationally.

Anything there that you might want to offer?

Yes, so you know, Alliance Boots has got just tremendous assets, and we are talking to them more and more frequently as we have got through the implementation of the [WAG] contract; that was our first priority.

And I say got through the brand -- we still have the generics to do.

But for example, we are looking at what the synergies could be with Alphega and Good Neighbor Pharmacy.

We are looking at the different third-party logistics businesses that Alliance Boots has and their interest in being more involved in Specialty and institutional business.

So we have a lot of meetings and it just takes some time.

We have talked to a couple of emerging bio and specialty manufacturers about their interest in doing a global contract between the three companies.

And we are confident that we are going to get some good case studies here.

It is just going to take some time.

But this is one of the long-term upsides for this relationship, and nothing that we have seen really defers our optimism that this can be accomplished.

Thank you.

Thanks.

Next question, please.

David Larsen, Leerink.

Hi.

Tim, can you just touch on the distribution selling and administrative expenses?

There was a sequential pop there.

Any thoughts on sort of the run rate going through 2014, please?

Yes, Dave, well, good morning.

Again, I would say that in my comments I talked about the expenses being up in Pharmaceutical Distribution in Q4, again, primarily related to the Drug Company.

And again, in terms of the run rate, I would say that that run rate -- one quarter this year, as we ramped up for September, in terms of -- we gave you some guidance for next year in terms of the increase.

So we will have three incremental quarters next year.

Part of what is driving that increase for OpEx for next year, we are not that -- we are probably 40% or 50% done in terms of hiring staffing in our DCs.

We still have a lot of volume to go, bringing on the generics business.

And there is going to be some duplicate costs.

So again, that is part of what is driving that increase in our guidance for OpEx for 2014.

Hopefully, that is helpful.

Yes, that helps.

Thanks very much.

Thanks, David.

Lisa Gill, JPMorgan.

Hi, thanks very much.

Steve, I just had a question around the generic purchasing in Bern.

Is there going to be any type of tax benefit to Amerisource by some of the business that you are doing there?

We have really focused on getting the generic contract implemented, so we are hoping to do our first Walgreens generic fulfillment distribution business next year.

And then that ties in sequentially over the next couple of quarters to the contract launches.

So that has really been our focus.

It's definitely something that we will contemplate in the long-term, but no attribution for that next year at all yet.

Okay, great.

And then secondly, you called out both independent increase in sales sequentially, as well is your large PBM customer buying incremental products from you.

Can you maybe just give us some idea of is this that you're deepening your relationship around generics?

Is it your -- those customers are buying what type or more products from you?

Is it something specific in the reason why you called them each out?

With the large PBM customer, I think they hopefully enjoy ordering from AmerisourceBergen and found us to be a great partner and easy to do business with.

So more and more brand lines have been added to the distribution contract.

With generics, where we are seeing a lot of success is frankly also in the health systems area.

As there is more generic penetration there, I think we have had some real strong enhancements in the contracting we have with hospital GPOs.

So that is where we are seeing a lot of benefit.

And also just a stronger hospital environment.

We have always had -- probably a not as well understood hospital practice that we have some of the leading hospital systems in the country as customers, and definitely some of the winners in the Affordable Care Act implementation and Accountable care organizations.

So we definitely are benefiting from some of the trends there.

Okay, great.

Thank you.

Thanks, Lisa.

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

Eric Coldwell, Baird.

Thanks, and good morning.

I think you addressed this in your comments, but the other segment revenue missed my target by about $30 million.

I think you have said there was a true-up of $30 million.

I was hoping you could clarify that.

More importantly, when we think about the outlook for that segment going into next year, I didn't catch your targeted growth rates and margin in that segment.

I think you made references to ABSG and ABDC, but maybe not so much to the other segments.

I was hoping we could get some outlook on that.

Yes, thanks, Eric.

It's Tim.

I will take this one.

In my prepared comments, I mean, we had a change in leadership there in finance.

With the new person coming on board, we realized that some cross-divisional revenues were not properly eliminated.

And again, we needed to do that.

And that was a year-to-date adjustment in August, about $30 million.

If you kind of back out what was related to previous quarters, the growth, the sales growth, would have been I think about 9% for that other segment.

Again, pretty strong.

No impact on operating income.

Essentially they kind of grossed up their revenue.

You are right -- we were actually going to wait until Investor Day and give some more specific guidance on that other segment, so we didn't give it today.

But I would expect revenue growth to be in the high single digits, pretty consistent with what we have said.

A little bit of margin expansion, mid to high single digits, pretty consistent.

Both doing pretty well.

And remember that other segment -- in that other segment, a big chunk of that other segment is distribution business associated with Consulting.

So it is a large dollar business at a low margin.

So again, it distorts that overall other segment a bit.

Hopefully, that helps.

Yes, it does.

Thank you very much.

You are welcome.

Thanks, Eric.

With that, we will turn it over to Steve to make some closing remarks.

Thank you.

I was actually hoping for a question on Oncology, and may we just say that we're very proud of our Oncology business and we have been a leader there for over 10 years.

So although we are seeing some shifts, we do have a very strong Oncology business and we believe we are maintaining our market share.

And also, we have terrific associates who are so knowledgeable and dedicated in our Oncology business and we are really proud of the job that they are doing every day.

If you think about it, we have almost 20% of the market captive within one account that we have no chance to win.

So when you retain over 50% market share, it is very, very difficult.

So we think our future looks good.

We think that there have been some pipeline issues.

And so no one asked me the question, so I am just going to say that.

And I know our remarks have been long and you have all had a very busy day.

So I just hope that Tim and I have effectively communicated the pride we have in all that AmerisourceBergen has completed in fiscal 2013.

If you think about the divestitures and the business expansions we have had, it's a year that I just couldn't be more proud of.

And then you look at how we are positioned for 2014, and the 13% to 16% -- sorry -- 12% to 16% operating income growth that we projected, that is pretty remarkable.

So we feel great about AmerisourceBergen.

We hope that we have communicated that to you, and we wish you a very Happy Halloween.

Thanks, Steve.

And before we go, I just want to highlight a few of our upcoming events.

We will be hosting our annual Investor Day in New York on December 12.

We will be attending the Goldman Sachs CEOs Unplugged Conference in Boston on January 7. And we will be attending the JPMorgan Healthcare Conference in San Francisco on or about January 14.

Finally, we expect to report our first-quarter results of 2014 in late January.

Thank you for joining us today, and with that, I will turn it back to the operator.

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