美源伯根 (ABC) 2014 Q1 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to the ABC first quarter earnings call.

For the conference all the participant lines are in a listen-only mode.

There will be an opportunity for your questions; instructions will be given at that time.

(Operator Instructions).

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

I will turn the conference now over to Ms. Barbara Brungess, Vice President Corporate and Investor Relations.

Please go ahead.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our first quarter of fiscal 2014.

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 2013, as well as our quarterly filing 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 very pleased to report solid performance in our first quarter of fiscal 2014 and good progress against our goals in what is an important transition year for our Company.

We performed very well operationally and carefully managed through significant changes in the working capital dynamics of our business.

We continue to onboard substantial new business and to make investments to strengthen our business for the long-term.

We are off to a good start for fiscal 2014 and I'm very pleased about ABC's market position and the opportunities we have in front of us to continue to deliver growth as we shape healthcare delivery.

As we continue to expand our global sourcing and distribution services capabilities, our efforts are focused on delivering solutions for pharmacies, providers and manufacturers.

By improving product access and increasing supply chain efficiency we can help our provider and manufacturer customers enhance patient care while creating mutual efficiency.

In addition, our commercialization and patient access programs help maximize product success at every stage of the drug lifecycle.

Our extensive knowledge and expertise combined with tremendous reach across all sites of care gives us a unique advantage in a complex and rapidly changing healthcare environment.

In addition, I believe that our partnership philosophy sets us farther apart as we strive for collaborative long-term solutions to pharmaceutical care's biggest challenges.

As we discussed at our Investor Day in December, we are making significant investments in our business to support our growth.

Our ultimate goal is to increase the efficiency and effectiveness of the global supply chain, which will make it easier to bring products to market and ensure patients have access to the products they need.

As we increase our global reach, resourcing, niche distribution and other manufactured services we will open up new opportunities for AmerisourceBergen as well as for our customers and manufacturer partners.

Turning now to our financial results, Tim will cover the details as always, but I want to cover some highlights from the quarter and reiterate our priorities and expectations for the full year.

Our revenue was up a very strong 39% in the September quarter to $29.2 billion with the sharp increase due primarily to the on boarding of the Walgreens brand distribution business.

As expected operating margin declined, but operating income was up 9%, which drove adjusted earnings per share growth of 10% to $0.80 in the quarter.

The significant increase in revenue in ABDC, good performance in generics and strong performance in World Courier and our consulting businesses contributed to our growth in the quarter which was offset in part higher expenses.

Price inflation on brand products continues to be strong.

And while we continue to expect that a handful of generic products will experience significant price increases, as previously discussed, this usually only impacts a few dozen products a year out of a large catalog of products.

The Pharma Distribution segment overall had a strong solid growth in the quarter with a 46% revenue increase in the Drug Company and in 8% increase at ABSG.

The successful rollout of the Walgreens brand business is a testament to the talent and dedication of our Drug Company associates who have worked collaboratively with this large customer while continuing to exceed the expectations of our other customers.

This week we have begun to onboard the distribution of generics to Walgreen stores with a phased approach.

The Walgreens generic business represents an even more significant increase in the volume of products that our distribution centers will handle on a daily basis.

And our associates are well prepared to handle the increased volume.

Over the course of the full implementation of this contract our Drug Company is essentially doubling the number of lines we ship per night.

This is an incredibly significant operational accomplishment and I am pleased by the way our best in class associates have implemented this alongside our other new contracts generating exceptional metrics for all our customers.

Importantly, the Drug Company's other customer categories also continued to perform well in the quarter.

Sales to independent drugstores increased over the prior year and we are making progress on new enhancements to our Good Neighbor Pharmacy program as well as other services for independents.

Our hospital, health system and alternate site customers all performed well in the quarter, though our margins were pressured somewhat by the faster growth rate among the very largest customers.

Just over half of our Drug Company revenues in this quarter came from high-volume brand only sales which pressured our gross margins mix.

This pressure should ease over the rest of the fiscal year as we ramp our generic distribution business with Walgreens.

ABSG's revenues in the quarter were up 8% as strong performance in Besse and ASD offset a modest decline in the oncology supply business.

Other specialty distribution businesses continue to perform very well while community oncology practices faced a challenge of inadequate reimbursements for the care they provide.

Assuming that Congress does not repeal the sequestration cuts which have negatively impacted community oncology physicians, we continue to expect that our community oncology business will be down year over year until it anniversaries the impact of sequestration in April.

It is important to note that our community oncology business did meet expectations for the quarter and is exacting well to the challenging environment.

As reimbursement challenges have driven some shift in the side of care, we are experiencing significant growth in the hospital outpatient sales of oncology products.

Our expertise in specialty products and our differentiated understanding of manufacturer and patient requirements for these products will continue to help strengthen AmerisourceBergen's overall oncology offering, whether it is in our specialty business specifically, ABCS or our core drug business.

Our unique expertise and our collaborative approach have helped us deliver tremendous value to providers across the healthcare spectrum from independents to the premier chain drugstores to some of the most prestigious hospitals and health systems in the US.

Overall our specialty business is an essential differentiator for AmerisourceBergen and will certainly be a key part of our future value equation.

Turning now to our manufactured services businesses.

Both World Courier and our consulting businesses had very strong performance in the quarter.

We are pleased with the growth World Courier has achieved in its existing markets and we are very excited about the opportunities to utilize its platform to further expand both our specialty and manufactured services offerings into other markets.

Our consulting businesses continue to perform well and to win new business.

The unique combination of these service offerings continues to be an important differentiator for AmerisourceBergen and will be a key driver of our future growth.

For the remainder of fiscal 2014 we will continue to execute against the key priorities I cited at our Investor Day in December, including continuing to onboard all of the Walgreens distribution business and partnering with a Swiss joint venture and negotiating global generic sourcing agreements.

We will all continue to work with Walgreens and Alliance Boots to find innovative ways to leverage our existing platforms.

Our respective management teams are devoting considerable time to the development of our partnerships and we are very pleased as to how this groundbreaking deal continues to create opportunities throughout our business.

Specifically we believe AmerisourceBergen will continue to strengthen our independent retail and other customer support programs and expand our specialty offerings across all our entire business.

We are calling the next generation of Good Neighbor Pharmacy services, Transpharmation, spelled P-H-A-R-M-N, A-R-M in the middle.

And this name really says it all.

Our aspiration is that the new community pharmacy offerings we co-developed with our partnerships will positively impact the independent pharmacy customers and help them prepare for the post Affordable Care Act community pharmacy model.

We are also making progress and expanding our specialty third-party logistics and other manufacturer services businesses by further penetrating existing markets and by exploring opportunities in international markets.

In terms of our guidance, we continue to expect fiscal 2014 adjusted diluted EPS to be in the range of $3.60 to $3.73, an increase of 12% to 16% over fiscal year 2013.

We expect exceptional revenue growth in the range of 30% to 34% as a result of on boarding the Walgreens business, which will also drive strong operating income growth.

As we've previously stated, our operating margins will be negatively impacted by the mix shift to lower margin business.

But our belief is we will be able to expand our full-year operating margins beginning in fiscal year 2015.

Over the course of the fiscal year we will continue to make important investments in our business that will support new business and provide additional benefits and opportunities for future growth.

It is essential that we not only continue to improve our ability to operate efficiently, but also begin to provide manufacturer customers with a streamlined and differentiated way to conduct business with us on a global scale.

We shape healthcare delivery by leading in customer care both through exceptional service and through meeting customer needs amidst the changing regulatory and operating environments.

While we add a substantial use of cash in our December quarter, most notably of course from the Walgreens contract implementation, completing the equity hedge and related investments we are making, we forecast that we will continue to generate cash over the remainder of the year as we work through the timing of the on boarding of the Walgreens business.

We continue to exercise financial discipline and as our cash flow normalizes we will deploy capital wisely and with a view to both growing our business and returning funds to shareholders.

Our interest in potential acquisitions and other investments, particularly in the specialty and manufacturer services area continues, and extends to opportunities on the international front as well.

Finally, we expect to resume meaningful share repurchases during the year.

In conclusion, I am pleased with both performance we delivered in our first fiscal quarter and the progress we have made against our priorities for fiscal 2014.

This quarter with a solid start to a successful year and I have great confidence that our knowledgeable associates will continue to rise to the occasion, help us meet our objectives and thus ensure a bright future for AmerisourceBergen and all of our stakeholders.

Now here is Tim.

Thanks, Steve, good morning, everyone.

And thank you for joining us today.

I am pleased that we reported a solid first quarter.

We knew that this would be a transition year as we on board the Walgreens direct to store distribution business.

We knew that we would have to build infrastructure including hiring employees, upgrading information technology and investing in our core distribution facilities.

We also are investing significant capital in establishing appropriate inventory levels.

With all of these moving parts we are pleased with our progress after one quarter and we are tracking to our full-year expectations.

My initial remarks will focus on our adjusted results from continuing operations.

In our press release that we issued this morning we included a reconciling table between GAAP and adjusted results and we highlight the specific items that we excluded.

The items are consistent with what we communicated at our December investor day.

I will cover two of the large GAAP items, warrants and LIFO, later in my discussion.

Let's begin our review of ABC's first quarter 2014 financial results, starting with the top-line.

Revenues were $29.2 billion, up 38.5% compared to last year's quarter.

The increase was due to strong revenue growth in both of our segments, but especially pharmaceutical distribution.

Our drug Company distributed brand drugs under the Walgreens contract for our first full quarter of business, this drove about 80% of our overall ABC increase.

Excluding the Walgreens revenue change our consolidated revenues would have grown as a percentage in the high single-digits.

The December quarter's adjusted gross profit was $725 million, up nearly 12% compared to last year's quarter.

The increase was primarily due to the revenue increase within the Pharmaceutical Distribution segment.

Operating expenses, this quarter total adjusted operating expenses were $402 million, up about $49 million or about 14%.

About 80% of the expense increase was specifically tied to our businesses and supports revenue growth.

The remaining 20% is related to corporate support costs, mostly IT, which are required given the increased operating complexity of our business.

Our corporate costs are fully allocated to our businesses each quarter.

Operating income -- our adjusted operating income was $323 million, up 9%.

Our adjusted operating margin was 1.11%, down 30 basis points compared to last December quarter.

In our Pharmaceutical Distribution segment we had a significant increase in lower margin brand drug business and, to a much lesser degree, added support costs.

This negatively impacted the segment margin and the overall ABC consolidated margin.

This margin change is consistent with what we have previously discussed including at our December Investor Day.

We expect our Q1 operating margin to be the lowest of our four quarters in fiscal 2014.

Moving below the operating income line, interest expense was relatively flat to last year.

Borrowings on our credit facilities to support the working capital build were made near the end of December which limited our incremental interest expense in the current quarter.

Income taxes -- our adjusted effective income tax rate was 38.2% for the current quarter.

We expect our full-year adjusted tax rate to be fairly consistent with our current Q1 tax rate.

Our adjusted diluted EPS from continuing operations in the current December quarter was $0.80, an increase of about 10%.

Our adjusted diluted share count was relatively flat to last year's quarter.

At December 31, we had approximately 230 million shares outstanding.

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

Starting with Pharmaceutical Distribution.

Total segment revenues were $28.6 billion, up 39% versus the same quarter last year.

As mentioned earlier, Drug Company led the way with revenues up over 40% due primarily to new brand drug revenues under our Walgreens contract.

However, we also had considerable growth with our large PBM customer, up slightly over 10% primarily from additional lines shipped previously from the brand manufacturer direct to the PBM now being purchased and warehoused by the Drug Company and shipped to the PBM.

This shift started the second half of last fiscal year.

As a reminder, for the current quarter sales to Walgreens and our PBM customer were virtually all brand drugs at a lower margin.

Finally, our Drug Company's alternate site segment had high revenue growth as a percentage in the mid-teens.

Customers in this segment have a product mix that is weighted towards higher-priced branded specialty drugs and the large customers of course have a modest margin.

Specialty group revenues increased a solid 8%.

Consistent with last year our ASD and Besse Medical businesses led the way with revenue growth significantly above the market, percentage growth in the high teens.

Both of these businesses combined account for slightly less than half of our overall specialty revenue.

Our oncology supply business was down slightly versus last year, as expected, due to Medicare reimbursement challenges.

The sales growth percentages for the drug Company and specialty are before interest segment eliminations.

Consistent with how we have reported these growth rates in the past.

Moving to gross profit -- the segment's gross profit was up by about $66 million or 12.5%.

Drug Company was the driver of the majority of the segment gross profit increase as a result of their strong revenues.

Drug benefited from contributions from the new Walgreens contract and to a lesser degree contributions from generics.

From higher revenues, some price appreciation and slightly better than expected benefits from the mid-December launch of a new generic drug.

As a reminder, this is the last quarter that the Drug Company will have a meaningful headwind from the Topco contract loss which negatively impacted gross profit due to the sizable generic sales to this customer.

Our drug Company did benefit in the current December quarter from a few early price increases from brand manufacturers.

We expected to see these early in the March quarter, the traditional time period, which is where we had them in our plan.

The specialty group had solid gross profit growth due to the strong revenues that I highlighted earlier from ASD and Besse Medical.

These contributions offset oncology supply being down somewhat year over year due to lower revenues and also lower contributions from key generic drugs.

Even though generic Vidaza did launch in the current quarter, it wasn't enough to offset lower contributions from mature generic oncology drugs.

Operating expenses -- as expected, this segment had a sizable increase in operating expenses and most of the increase was from the Drug Company.

We are making investments in our core drug business to support substantial volume growth and maintain high service levels.

In the current quarter labor, delivery and IT were the main drivers of the expense increase.

Adjusted segment operating income was about $287 million and up by about 7.5% versus the prior year quarter.

Again, most of the increase was from the drug Company.

Our specialty group, excluding oncology supply with their headwind, had a strong quarter with operating income growth as a percentage and the high single-digits.

Moving to our other reporting segment.

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

In the current quarter segment revenues increased about 20% to $604 million.

Our World Courier business had solid revenue growth especially in their US and Europe regions driven by strong customer demand.

In fact, in the six quarters that we've owned World Courier, this marks their best revenue quarter to date.

Our TheraCom distribution business, which is part of our consulting business, also had high revenue growth due primarily to two new products that launched in the middle of last fiscal year.

TheraCom counted for most of the other segment's revenue dollar growth.

From an operating income standpoint we had growth of about $6 million or nearly 21% led by World Courier.

Due to the nature of the World Courier business with a cost platform that is primarily fixed, as revenues grow they benefit from expense leverage.

As a reminder, World Courier has some revenue seasonality in January and February which will negatively impact the profitability of the business.

Consequently we expect the other segment will have a lower profitability in the March quarter.

Let me switch gears and cover two other items, warrants and LIFO.

Both of these items are excluded from our adjusted earnings.

Given the high gas expense amounts I will provide brief commentary on these non-cash items.

Warrants -- At December 31 the fair value of the warrants increased significantly to $895 million driven primarily by the increase in our share price during the December quarter.

Under accounting rules we are required to catch up the amortization expense as if the fair value of the warrant had been $895 million back on day one.

As a result the GAAP warrant expense this quarter was significantly more than the prior quarter ended September 13.

Said another way, if our ABC share price remains at the same price at March 31 as it was on December 31, and all other assumptions being equal, we would expect warrant amortization expense to be in the $65 million range in the March 14 quarter.

Related to the warrants -- at December 31, we were about 98% complete with our hedging program.

In early January we successfully finished the program.

In total we spent just under $370 million.

We now have cap call options to buy 27.2 million shares at an average price of $52.

The warrants when exercised in 2016 and 2017 represent about 45.4 million shares.

As we have stated in the past, our long-term financial objective is to grow our EPS as a percentage in the mid teens.

Given this and our historical price/earnings ratio, we expect to have a very positive return on the capital invested with this hedging program.

Just to cover LIFO briefly.

We recognized a gap expense of approximately $58 million which represents about 25% of our full-year estimate.

Our full-year LIFO expense, which has a high degree of variability, was calculated using several assumptions including a brand inflation rate, a generic portfolio deflation rate and our forecasted Drug Company branded generic inventory mix at year end.

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

As we communicated at our December Investor Day, we paid a large number of August supplier invoices related to our Walgreens brand inventory build in October.

Also during this quarter we brought in and paid for additional Walgreens inventory and funded our hedge program.

Because of these items our cash balance is low by historical standards at December 31.

And we also had borrowings outstanding under our credit facilities.

Our cash position was fully expected and that is why we increased our borrowing capabilities last fiscal year.

Beginning in January, because of our investment grade rating when needed, we have been able to issue commercial paper at very attractive interest rates.

Our use of cash from operations was about $1 billion in the current quarter, a significant increase compared to the use of cash of $242 million in last year's quarter.

We typically see a seasonal inventory build in the December quarter.

Because of our new scale the inventory requirements were even more significant.

We also added inventory to support the growth in our revenues and support high service levels.

Both of these items impacted and increased our use of cash in the current quarter.

We fully expect our cash flow to improve beginning in the March quarter as our seasonal inventory levels decrease, offset in part by an increase in Walgreens related generic inventory.

As we phase in this generics business our cash flow improves.

As invoice payment terms from generic suppliers tend to be more favorable than those from brand suppliers.

In summary, our strong financial standing, including significant flexibility under our credit facilities, will enable us to successfully navigate through the timing of these swings in working capital and cash.

During the December quarter our share buybacks were $20 million.

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

Now let's turn to fiscal 2014 guidance.

Since we have only finished our first quarter of our fiscal year, our EPS guidance remains unchanged at $3.60 to $3.73.

As highlighted earlier, our current December quarter EPS did benefit slightly from the earlier than expected brand price increases at the expense of the March quarter.

Our operating income dollar growth guidance, 12% to 16%, also remains unchanged.

And guidance around free cash flow, CapEx and share repurchases remains unchanged too.

Two targets that we have updated relate to our revenue and operating margin guidance.

Due to higher growth rates projected by our large customers, mostly brand drug business in our Drug Company, we now believe our revenue growth for fiscal 2014 will be 30% to 34%.

We have also updated our operating margin guidance.

We previously guided to a decrease in basis points in the high teens.

Based on the better-than-expected revenues we now believe our consolidated operating margin will decrease between 20 and 23 basis points for the full fiscal year.

As I wrap up my comments, let me finish by reiterating -- we are pleased with our results for the first quarter and at this point in the year our results are where we expected them to be.

Thank you for your time today and 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.

John, please go ahead.

(Operator Instructions).

Tom Gallucci, FBR Capital Markets.

Good morning, thanks for all the details.

I guess I was just curious, you picked up some business from Express on the branded side last year, you have got the improving purchasing power over time with Walgreens and Alliance Boots relationships.

I am wondering if your conversations with the customers have changed to the extent there are other customers that may be looking to use you more than they have in the past for their distribution needs.

Or if you are seeing any changes in RFP language from customers that are outside your core base that there may be a bias toward using distributors in general a little bit more than they have in the past.

Yes, hi, Tom, thanks.

Very good question.

I made the comment that I think definitely the prominence of ABC increased and I think we even used in the prepared text the word groundbreaking.

And I still believe our deal has just tremendous finesse and thought to it and we work very hard on it.

And what's probably more important is with the go forward situation we are working very hard on the collaboration aspect and continue to get along really well and share a common view of the markets and a desire to help each other advance our respective positions.

So just practically speaking, I meet with my counterparts face-to-face literally every month.

In terms of the customer environment, I think everyone is much more interested in talking to us, people that we didn't necessarily interact with.

Definitely from the supplier perspective a lot of intrigue, a lot of discussions about what does this mean.

I think we have had to go to clearly a vastly different and more differentiated complex structure.

On the independent side we still believe that, as we said last quarter, that there is no -- any particular customer we've lost.

Our relationships with our buying groups are very strong.

And we are not seeing any real changes in RFP language.

ABC remains very focused on compliance with our customers and we think we have potentially even a better mousetrap to make them even more interested in compliance and our belief that ABC is the best partner for them as generics are an even more important part of their future care delivery.

Okay, and maybe just a quick follow-up.

Just on that last point you just made regarding independents.

You mentioned I think in your prepared remarks expanded offerings in the Good Neighbor Pharmacy program.

Can you offer any more color in that regard?

Thank you.

Yes, so I was with Dave Nau and the team last July at our independent pharmacy conference and we had a lot of questions.

I think it is probably the best attended my session has ever been there.

And I had a lot of just one-on-one discussions with key customers.

They really are looking for us -- for a greater role.

They understand that not only ABC but the wholesale industry has over time been a very good friend to them and really enables them to offer a lot of the chain like services.

Then you look at what we're doing with Walgreens and I think it also extends to our other key customers.

And they say help us navigate these changes, help us look at third-party networks, help us participate in preferred networks, in performance networks.

Help us look at some of the regulatory changes that are coming.

Let's do more on the front store.

Let's do more on the store layout and marketing.

And all these things are -- we are hard at work on them.

And definitely the new capabilities that we have access to, whether it is in third-party network negotiations, whether it is in medication therapy management, are starting to come more into shape and we're expected to deliver these and that is a key priority for the team.

So we are excited about the future, we are excited about what the partnership with (multiple speakers) the Good Neighbor Pharmacy.

And I think that message is resonating with our customer base -- and our supplier base.

Thank you, Tom.

Operator, next question, please.

Ricky Goldwasser, Morgan Stanley.

Steve, it sounds like that you are getting more business from Walgreens than you initially anticipated.

So when we model for the remaining of the year should we still assume the $0.20 contribution -- net contribution from Walgreens for the year or is there some upside to that number?

Yes, they did an acquisition -- they did an acquisition that probably is fairly significant.

But I think we may have been somewhat conservative.

But it is still early.

We are starting to do the generics this week, which we believe we will execute flawlessly against.

And, Tim, maybe you could talk more specifically about the guidance for the rest of the year on revenue.

Yes.

No, I would say, Ricky, that we are still tracking to that number that we gave before, the $0.20 that we've talked about.

It's early, a lot of moving parts, complexity of rolling out the generic business.

So we are not ready to change that income number.

We did change, we upped the top-line revenue number just from some of the trends that we have seen with our larger customers growing a little bit faster with their brand business.

Okay.

And then just to follow-up on the generic and branded environment.

I know I think, Tim, you mentioned that branded inflation, there was some early price increases in the December quarter ahead of March.

But when we kind of backtrack the data, it seems that that brand inflation year to date in January seems to come in very strong.

Obviously, the Cymbalta launch has some interesting dynamics.

So if you can, in fact, think about what you're seeing year to date in January compared to your earlier expectations, how are you tracking?

And then also on generic inflation, I know the September quarter was very strong.

I think you quantified it at $0.03 to $0.04.

When we think about this generic inflation in December quarter, was it stronger or weaker than what you saw in the previous quarter?

All right, let me jump in and handle brand first.

I mean, I did mention in my prepared comments we saw some price increases early, and we think maybe it is just because the way the holidays fell this year.

But we probably saw maybe a couple pennies benefit in this quarter.

And traditionally, again, those manufacturers were in that January, February, March timeframe.

But I would say overall, brand inflation has been pretty strong, consistent with where we saw last year and last year was a record year.

And what we've seen so far in January for the March quarter, it still seems pretty strong, consistent with what we have seen.

So it does appear that it is not slowing down.

In terms of generics, I think you are right, Ricky, our September quarter was a record quarter for generic inflation.

We had quite a few price increases, a larger front in that summertime period, and a few of those carried over with our inventory and the way we saw them through into this quarter.

But overall, this quarter did moderate a bit.

We saw very limited new increases in Q1, which we kind of expected.

So I would say for this quarter, the current quarter December, it is kind of in line where we thought and it is definitely down sequentially from last quarter.

But it's kind of tracking to what we thought and what we planned.

Okay, thank you.

Thanks, Ricky.

Operator, next question, please.

Robert Willoughby, Bank of America Merrill Lynch.

Tim, you may have mentioned it and I might've missed it.

Just the spike sequentially in the other revenues, what happened at World Courier or TheraCom that was such a pop here?

What was new this quarter versus the last quarter?

Yes, thanks, Bob.

No, we definitely saw a nice increase in that other segment.

And again, a big part of that other segment, that top-line is TheraCom, which has both consulting and distribution.

And that distribution business is doing pretty well, they added a couple of products late last fiscal year.

So we're still kind of getting that benefit this year.

They drive most of that revenue increase.

So -- but unfortunately they are a little bit more of a traditional lower margin distribution business.

And so, TheraCom is driving the top-line, World Courier is definitely driving that operating income.

And their revenues were very solid, better than what we expected.

But a nice -- a better than expected contribution in terms of op income.

Okay.

And just the AR days continue to tick higher.

Is that just a product of the specialty business growing quicker?

Where do you see that leveling off?

Yes, we saw a little bit of an increase I think again.

Because of our new contract with Walgreens we are up a little bit.

And again that will probably tick up a little bit more as we onboard that.

But -- so I think we will see that tick up a little bit.

But from a cash conversion -- viewing the cash conversion, we should definitely see a tick up in our AP also when we onboard the generics.

Okay, thank you.

Thank you, Bob.

Next question please.

Lisa Gill, JPMorgan.

Tim, can you just maybe talk about the margin impact to bringing on generics for Walgreens?

You were talking about more margin degradation with more revenue.

But is there a difference in the margin that you will see on generics?

Is this a typical generic type of relationship or is it a different relationship that you will have with Walgreens?

Yes.

No, we expect that our margin will improve as we move through the quarters here, that is what we have guided to.

Again, we have talked about Q2 being our best margin quarter and then Q3 and Q4 certainly being stronger than Q1.

So we benefit from that generics business with Walgreens.

And we also benefit at the end of the year with our contributions from the procurement JV.

So again, the margin will get better and then also as we lap and get into next full fiscal year 2015 the margins will get better.

Okay, great.

And then secondly any thoughts, Steve, around early read on the Affordable Care Act and any impact that your clients are seeing on the volume side?

Yes, you know -- thanks, Lisa.

We don't really look at prescription trends as we do at volume.

I mean when we do our plan we do it bottoms up.

We talk to a lot of the big customers.

Obviously the revenue was a bit stronger than we expected; some of those larger customers are growing faster than we expected.

But no real trend yet that we could point to on the Affordable Care Act.

I think if anything we probably had expected a greater patient census increase this year than we now would be expecting -- just in line with the general uptake on the website, etc.

But nothing specific.

Okay, great.

Thank you.

Thanks, Lisa.

Next question, please.

Robert Jones, Goldman Sachs.

Just wanted to go back to generic pricing.

I think in your original guidance the assumption was that generic price inflation would moderate this fiscal year.

You've touched on how it has been playing out.

Just maybe a more specific update of what you saw in the quarter.

And then I guess more specifically, if the trend continues should we view that as upside to your current outlook?

Yes, Bob, my comments before when I answered the question for Ricky, I mean the inflation so far for Q1 is down versus Q4 but it is where we expected.

And remember our guidance was that it would moderate this year some.

So it is pretty much tracking to where we thought.

And I would say that in terms of upsides for the year, clearly if there was a stronger pricing environment that would help us.

But at this point, we have always said that generic price appreciation, it is very limited, it is typically tied to some type of supply chain disruption and it is very hard to predict when and if it will come.

Got it.

And then just on the next generation Good Neighbor program that you mentioned, Steve, it sounds like you see some opportunities to enhance the offering given your relationship with Walgreens and Boots.

Any specifics you can share on how this offering differs from what you had before?

And then I guess probably more importantly, how is your offering around your generic program going to differ or compare to your competitors?

Have you seen any changes on their generic offerings to independents?

Well, we were very proud that again we got named by J.D. Power as having a very high quality program and our Good Neighbor Pharmacy brand continues to be well recognized.

And that is voted on by the customers, so we were rated number one community pharmacy group and I think there is more we can do.

It is definitely one of the biggest upsides that we have that independent customer base, their purchases approaching are so important to ABC and our financial position.

So it makes a lot of sense to carry on investing in that segment.

And I talked a lot about front store, about business coaching programs, about clinical systems, about performance networks.

And we are looking at all these things.

We also have access to some interesting capabilities that we hadn't even realized with Walgreens.

I will give you one example.

We think that local compounding is going to become much more important and a lot of our stores are interested in doing that and there's just tremendous capabilities within Walgreens to help some of the community pharmacies get into that business more deeply, be it for the veterinary business or be it for any of the local patient needs, pediatric needs.

So that could be an important differentiator.

I mean the more that -- we both have a common belief.

The more we can do at the retail level with patients that that is going to be a big driver of performance in those pharmacies.

So we have a shared vision there.

Got it, thanks.

Thank you, Bob.

Next question, please.

John Ransom, Raymond James.

I recall the generic was going to start a little bit later.

Is this sooner than you thought or am I just not remembering that correctly?

No, John, this is pretty much where we thought it would start.

We really did plan to start in January.

Initially we planned to do it to consistently with our regions, but we now are really doing it very much hand in hand with Walgreens where they are able to really get out of some distribution business and really create that efficiency with us.

So we are doing that very collaboratively.

We would very much expect to finish this during calendar 2014, but hopefully could even bring that forward a bit.

But there is no hard finisher like there was with the brand conversion.

Hard start, I should stay, where we really had to do the conversion by September 1 and that was probably the biggest pressure that we felt within our supply chain network.

Here it is more collaborative.

But I think, as you would come to expect from ABC and our distribution logistics businesses, we expect that we're going to be able to do very well there and hopefully finish it maybe this fiscal year.

But potentially into the start of our next fiscal year.

And secondly, as you work the JV and negotiate with your key suppliers, when do you expect those negotiations to be wrapped up?

And you will have some idea of what the contribution from the JV might look like to earnings?

Yes, well, we came into an existing joint venture between Alliance Boots and Walgreens and I think we determined with substantial diligence that that was a really exceptional partnership for us to belong to.

Certainly we gave a lot of consideration to that because we tied that directly to the warrants as well as the third backer we talk about which is really the future collaboration and we talked about transformation as one example of that.

But we -- sorry, I'm just -- what was the --?

When do you expect to have the negotiations --.

(Multiple speakers) the filing of the (inaudible).

So we have talked about it impacting our fourth quarter.

We are deep in those negotiations now, we'll have a much better idea probably in the next quarter.

But definitely we expect to see some benefit in the fourth quarter.

And so to be done by then or substantially completed by the fourth quarter?

No, when you look at our calendar 2015 you should see the full run rate of those contracts, but not before then.

It is complex, we're doing really unique things, so --.

And remember, John, you are dealing with -- you are negotiating with over 100 generic suppliers, so it takes time and it is complicated and it takes a long time to get to the finish line with an executed contract.

So we will -- they will be phased in between this year and next year.

Okay, thank you.

Thanks, John.

Next question, please.

Glen Santangelo, Credit Suisse.

Thanks, this is Jeff Bailin in for Glen.

Maybe to continue on the generic sourcing.

Obviously probably early days, but in light and some of the actions by other members in the pharma supply channel on their own sourcing initiatives, can you characterize maybe how there might be any change in the attitude or discussions with the generic manufacturers and suppliers?

Well, we have been in Switzerland, we have been with the (inaudible) folks, we are with them fairly often and we understand the messaging that they are having back to manufacturers.

And I can't really comment on our competitor except to say that we expect that this transaction that we entered into would have consequences for our competitors, our customers, that definitely that it was a landscape changer.

So just to reiterate what we think are some of the real value drivers of our partnership, we provide value for both AmerisourceBergen and Walgreens as well as for the manufacturer.

We have taken a very long-term approach.

We are coordinating, we are actually creating efficiencies in the US by moving from really 52 centers between Walgreens and ourselves to 26 essentially.

Really all the Walgreens stores will be getting all their pharmaceutical products from us and we think that that crates a lot of efficiency.

Just think about fewer invoices, fewer charge backs, more consolidated purchasing.

So just a lot of efficiencies being created.

And then the more that we have come to live with this partnership and it is almost a year now we really do believe it is a win-win agreement for our suppliers and for both companies, including Alliance Boots.

So it is a long-term contract, it is -- clearly the equity position creates a lot of shared incentives.

And we really do just believe that it is the most innovative and elegant approach to global sourcing and a long-term supply chain contract agreement.

Great, thank you.

Maybe just to shift to the specialty group for a moment.

As you hear from pharmacy benefit managers looking to maybe more aggressively manage specialty drugs covered previously under the medical benefit.

Are you seeing any derivative impact for your community oncologist customers or your overall specialty business?

Thanks.

Well, we often draw the distinction between a true Specialty Pharmacy business that is really shipping specialty medications to patients sometimes under different Part D type benefits in many cases or self-administered products.

You think about areas like rheumatoid arthritis, multiple sclerosis, those are big areas for specialty pharmacies.

Our specialty business is characterized largely by physician and institutionally administered products.

We have tremendous market share there, not only in oncology but also in areas like ophthalmology, dermatology, through our Besse business.

We also have a lot of restricted distribution programs through our ASD business.

Two, in fact, specialty pharmacies and hospital outpatient centers, etc.

So that is a lot how we think about our business.

So there has been a lot of talk about managing the overall pharmaceutical benefit.

Of course we've commented a lot on the shift from clinic to hospital outpatient and that is driven in fact by accountable care organizations and also by healthcare reform and we notice all those trends certainly.

We are there for whatever form pharmaceutical care takes.

So we will be a leader and whatever site of care is administering these products.

So our business has shifted a lot and we will continue to adapt.

But no real clear trend on the specific question you asked yet.

Great, thanks a lot.

Thank you.

Operator, next question, please.

Charles Rhyee, Cowen and Company.

Maybe just one other question.

I know we're probably just piling on here onto sourcing, but -- the JV here.

As you are in these discussions, you guys talked pretty positively about it at the Investor Day.

At this point in time do you think you are moving at the pace you expected or is it going maybe faster or slower than you might have anticipated at this point?

Hey, Charles, it is Tim.

I would say it is as expected.

We are pleased, we are on target, we have had our -- we have integrated into the procurement JV our AmerisourceBergen people.

And so, I mean I think we are real pleased with where the discussions are going.

We're still very optimistic on the economics.

And the value proposition as Steve laid out.

So a lot of work to do but we like where we are at.

Okay, great.

And then just a follow-up.

Obviously the step up in cost as you are obviously bringing these clients -- bringing on the Walgreens business.

Can you give a sense on sort of how we should think about those expenses?

As we go through the rest of the year?

Should they level off?

I might have missed it if you mentioned that.

No, we did.

It's a good question.

We didn't talk about it in great detail.

But clearly as we move through the year the next three quarters we should see our operating expenses increase is what we're forecasting, bringing on the generics business, which is a lot of lines and it's -- so again, operating expenses over the remainder of the year will bump up, specifically in the Pharmaceutical Distribution segment in the Drug Company.

And then as we move out into next year -- as soon as we sort of anniversary it should we see that level off then and sort of back to normal?

Yes, I would say -- yes, I would say definitely because this year we are making investments in further automation equipment and we're also building a new Florida DC in Orlando.

So it is that investment period this year -- and we're also getting by using more labor.

So we might be -- I would say we might be a little bit inefficient this year ramping up that business.

So we would definitely expect to see some improvements next year.

Okay, great.

Thanks a lot, guys.

Thank you, Charles.

Operator, we have time for one more question, please.

George Hill, Deutsche Bank.

Most of my questions have been answered, I will kind of go with two small ones.

Tim, you were just talking to Charles about the level of inefficiency on the SG&A side.

I guess any chance you would give us a level of severity or how we should think about how inefficient?

So if we think about the administrative costs or the contribution to COGS from the inefficiency in calendar -- in fiscal 2014, how should we think about like what the step down could be in fiscal 2015?

Yes, we -- George, at this point we haven't really given specific guidance for 2015, so I mean it will be better in 2015, we'll be optimized in 2015 from a distribution center standpoint.

But I really don't want to give anything specific at this point.

Okay, I appreciate that.

And I guess, Steve, two quick ones for you.

Number one, on the M&A side you talked about international, I guess could you just update us on the thoughts of international?

And number two, confidence seems incredibly strong; what keeps you worried, what do you worry about?

Boy, we squeezed you in and then you ask two --.

I cheated, you know.

On the M&A side we are -- we have done very well in Canada on our specialty business and what's particularly encouraging is the amount of joint programs we are doing between Canada and the US on the manufactured services side.

So that business is currently being managed within our ABCS business.

And it has been a really good grower for us.

We have got a lot of proprietary programs.

I think we are far the leader up in Canada.

So there just is a belief that a lot of the services businesses that we developed here are very relevant and applicable to international markets.

When I go like to IFPW conferences or anything like that AmerisourceBergen's expertise in specialty is very intriguing.

And then we have to define what does specialty mean, and of course the companies outside the US are much more vertically integrated than we are here.

You're just really seeing the first parts of that here in the US.

And then our knowledge of how to run franchises and Good Neighbor Pharmacy is also very intriguing.

Some of the efficiency that we created in the distribution, our global sourcing.

So we get lots of questions about these.

I think AmerisourceBergen has been very open to meeting with other companies from all sorts of different countries.

And we think now with Alliance Boots in particular with their international expertise that there are lots of partnering opportunities for us.

So we are spending more time on this than we have at any time in our history.

We have got, particularly in our specialty group, James Frary and the team are looking at different places where we think they would be relevant.

So we are excited about that.

The second part of your question, what keeps me up at night?

Well, a lot less than used to three years ago when I became CEO.

It is just -- we have got a great team in place, I think we've got a very good customer segment.

The SAP conversion has gone so well for us.

And I think I've got a lot of confidence that AmerisourceBergen will carry on performing very well whatever the future may bring.

So I am mindful of what is going on in Washington, I think the sequestration is a good example of what poor legislation can do to us.

But I've got a lot of confidence that AmerisourceBergen will continue to prosper whatever we face.

So thanks very much.

We will conclude now, Barbara.

Yes.

So, just again, there are a lot of moving parts this quarter and I think we executed particularly well.

Clearly very strong revenue growth and lots of opportunities for us to do more with our largest customers that are growing at above market rates.

But I would like to leave you with one thought as we did at Investor Day when we talked about our strong presence, really what we call our knowledge, reach and partnership.

And really have you think about AmerisourceBergen as the place which will shape the future of healthcare and specifically pharmaceutical care delivery.

Thank you very much.

Thanks, operator, with that just a few items on our calendar.

We will be attending the Citi healthcare conference in New York on February 26.

We will also be attending the Raymond James Institutional Investors conference in Florida on March 4, and the Barclays healthcare conference on or about March 12 also in Florida.

Finally, we expect to report our second-quarter results in late April.

Thank you all for joining us today.

That concludes our comments.

And with that I will turn it back to the operator.

Thank you.

And, ladies and gentlemen, this conference is available for replay it starts today at 1 PM Eastern time, will last until February 6 at midnight.

You may access the replay at any time by dialing 320-365-3844, the access code is 313-989.

That does conclude your conference for today.

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