美源伯根 (ABC) 2014 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the AmerisourceBergen second quarter earnings conference call.

(Operator Instructions)

Also as a reminder, today's teleconference is being recorded.

And at this time, I will turn the conference call over to your host, Ms. Barbara Brungess.

Please go ahead.

Thanks, Tony.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our second 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 filings for fiscal 2014.

Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and cannot -- 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, everyone, for joining us this morning.

I am very pleased to report strong performance in our second quarter of fiscal 2014, reflecting excellent progress in what is an important transition year for our Company, as well as continued execution against our strategic long-term objectives.

AmerisourceBergen associates have driven outstanding operational performance, and have carefully managed through challenging working capital dynamics in the first half of our fiscal year.

I feel several positive themes came together for us this quarter, as we really started to recognize some of the benefits of our strategic imperatives during the quarter.

Specifically, we continue to make excellent progress around our groundbreaking long-term strategic relationship with Walgreens and Alliance Boots.

We continue to see the scale enhancements we expected from effectively doubling the number of lives we will service in our core drug wholesale business.

This benefits our entire book of business.

Lastly, we are pleased with the progress the Swiss JV has made in negotiations with generic partners.

As we have indicated before, contributions from the JV will be an important driver of our future growth goals.

This momentum is driving a lot of creativity and energy at AmerisourceBergen, and is positioning us exceptionally well to deliver long-term value to all of our stakeholders.

Also notably, our portfolio approach to our business is clearly working, as all of our business groups achieved or exceeded their operating plans this quarter.

As imperatives of healthcare reform become a reality to payers, patients and stakeholders, we are fortunate to be an integral part of a vibrant and growing industry, that is a vital link between the manufacturers of Iife-saving products and healthcare practitioners who provide patient care.

So the strategic position we occupy is allowing us to capitalize on some important healthcare fundamentals, as the pharmaceutical industry evolves, and specialty and generic medicines play an ever-expanding role in pharmaceutical care.

Our diverse book of business, unique insight into manufacturer requirements and how to work in a dynamic regulatory environment, combined with investments we have made, and the partnerships we have developed position us well to continue to thrive by preserving and extending our influential place in this attractive industry.

Moreover, our reputation, partnership philosophy and expanding knowledge of global pharmaceutical markets is setting us apart, as a preferred partner to assist in developing specialty and manufacturer programs in emerging pharma markets.

In the March quarter, our total revenues were up 39% to $28.5 billion, driven in large part by the substantial new business with Walgreens, as well as strong performance across the rest of our business.

Our adjusted earnings per share were $1.06, up a strong 19% over the prior year.

In addition, we had tremendous free cash flow in the quarter of $1 billion.

We purchased $230 million of our shares in the March quarter, and announced a definitive agreement to make $100 million minority investment in Profarma in Brazil.

This performance demonstrates both disciplined execution of our financial and operational goals, as well as significant steps towards meeting our strategic objective of expanding our businesses internationally.

I am very pleased with the progress we have made on both fronts.

As we continue to expand our global sourcing and distribution services capabilities, I believe that our partnership philosophy sets us apart as we strive for collaborative long-term solutions to pharmaceutical care's biggest challenges.

As we have said in the past, when you look at where manufacturer R&D dollars are being focused, and you look at the well-demonstrated capabilities AmerisourceBergen has, our specialty knowledge and experience makes us an extremely attractive partner, to help our stakeholders enhance the efficiency and coverages with which patients access pharmaceutical care throughout the product lifecycle.

Our tremendous reach across all sites of care, and our experience in improving patient access to pharmaceuticals gives us a unique advantage, as we intentionally focus on expanding our breadth and depth in our chosen.

market segments.

As we continue to increase our global reach through product sourcing, specialty and niche distribution, and other manufacturer services, we will open up new opportunities for AmerisourceBergen, as well as for our customers and manufacturer partners.

Our new relationship with Profarma is a great example of this strategy.

With its long-term macroeconomic growth outlook, favorable demographics, and increasing access to healthcare services and specialty pharmaceuticals, the Brazilian market provides an exciting opportunity to expand our international offerings.

Profarma one of the top three wholesalers in Brazil, serving the core distribution and specialty markets, and chain and independent retail.

Their experience, combined with our expertise in specialty distribution and manufacturer services, provides a compelling opportunity to shape the delivery of healthcare in a new market for ABC.

A publicly-traded company, Profarma has a solid track record of operational execution and financial growth, and we expect that our minority investment along with our interest in the specialty JV, will yield important benefits for both companies for many years to come.

We look forward to working in partnership with Profarma, and expect the transaction to close in our June quarter.

Turning now to the performance of our business segments in the quarter.

Our pharmaceutical distribution segment had particularly strong performance.

AmerisourceBergen drug corporation revenues were up 46%, driven primarily by the continued onboarding of the new business from Walgreens, and strong sales of certain new branded specialty products, largely distributed to specialty pharmacies.

Excluding the new Walgreens business, drug company revenues were up 7%.

In addition to serving Walgreens pharmacies with all of the brand pharmaceuticals they dispense, we have begun to service them with the generic drugs as well.

The rollout of the distribution of generics to Walgreens is progressing well and on schedule.

We expect to complete the process by the end of our fiscal year, assuming we complete our new distribution facility in Orlando late this summer.

In addition, the Walgreens and Alliance Boots JV has made progress in negotiating with generic suppliers, and late in the March quarter, we did begin to recognize some benefit from the joint venture as a result of progress they have made.

There is still much work to be done on both the physical distribution of generic products and with the joint venture, but we are pleased with the progress we have made with this important long-term strategic relationship with Walgreens and Alliance Boots.

Importantly, our hospital, health system and alternate site customers all performed well in the quarter, and generic sales were strong in all segments.

We don't often discuss our hospital business.

But it has been growing at above market, and is an increasingly important part of our portfolio.

Two key drivers in our business with health systems includes our expanding PRO Generics sales, two hospital customers, and also our hospital unit dose program which runs through American Health Packaging.

In addition, our oncology service line is gaining traction as sites of cancer care shift.

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

Price inflation on brand products continues to be quite strong, and while we expect that a handful of generic products will experience significant price increases, as previously discussed this usually only impacts a few dozen items a year out of a large catalog of products.

We also now forecast that two key generic launches we have previously planned for in our fiscal 2014 will be delayed.

Overall, like specialty -- like specialty brand of products, our generic portfolio contributes significantly to our growth, and to the value proposition we bring to the market.

The growth we have experienced across our drug company has driven the need for expanded capital investments in our infrastructure.

I am pleased to report that many of the smaller projects are complete, and the two largest projects, the new distribution center in Orlando and the new national distribution center in Columbus, are both progressing on schedule and on budget.

AmerisourceBergen specialty group also had a good quarter with revenues up 10%, driven by strong performance in ASD and Besse, which offset flat performance in our community oncology business.

The community practice we serve continued to face the challenge of inadequate reimbursement for the care they provide.

While we continue to support oncologist's efforts to achieve better reimbursement, there is no short-term relief on the horizon.

While our community oncology business did meet expectations for the quarter, and overall is responding well to the challenging environment, we have continued to see some shift in the site of care, which is driving significant growth in the hospital outpatient sales of oncology products.

Our differentiated expertise in specialty products, and our 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 in our core drug business.

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

Overall, our specialty business is what sets ABC apart, and will continue to be a key part of our future value equation.

Turning now to our manufacturer services business.

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

World Courier has achieved growth in its existing markets, and we continue to be very excited about the opportunities to utilize this platform to further expand both our specialty and manufacturer services offerings into other markets.

An added benefit of World Courier has been that it has really enhanced our global capabilities, as we essentially learned to operate in 52 new countries.

This has added experience and knowledge, not only into our business operations, but importantly, into our corporate capabilities.

For example, in areas such as treasury, tax, HR and legal/regulatory.

As we evaluate Profarma and other international expansion opportunities, these capabilities will set us apart as we look to create an expanded global presence.

So as we come up to almost two years that we have owned World Courier, we are so pleased to have added this highly-skilled company and its associates to our portfolio.

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

The unique combination of the service offerings continues to be an important value driver for AmerisourceBergen, and continue to be a key driver of our future growth.

As we look ahead to the second half of our fiscal 2014, we are well-positioned to meet our objectives for the full year.

We now expect our adjusted earnings per share guidance for the full year to be in the range of $3.64 to $3.74, an increase of 13% to 17% over last fiscal year, and driven primarily by strong growth in income.

Tim will further detail our financial results and expectations.

And before I hand it over to him, I just want to highlight a few key items.

While I am very pleased with the progress we have made thus far, there is much yet work to be done in our fiscal 2014.

We will continue onboarding all of the Walgreens distribution business, and to partner with the Swiss JV on global generic sourcing.

We will also work collaboratively with Walgreens and Alliance Boots to find innovative ways to leverage our existing platforms, for the benefit of our current and future suppliers and customers.

Our work in developing the next-generation of services for independent retail pharmacies is well underway, and we remain driven to help all of our customers realize the benefits of participating in specialty products and services.

As we begin to work with a new partner in Brazil, we will look to expand our specialty third-party logistics and other manufacturer services businesses, by further penetrating the existing markets, and by exploring other opportunities in international markets.

Of course, we will be continuing to invest in our core business, which is necessary to improve our ability to operate more efficiently, and also to provide manufacturer customers with a stream-lined and differentiated ways to conduct business with us on a global scale.

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

As our cash flow normalizes over the remainder of the year, 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.

Looking further ahead, growing operating margin will be a top priority.

While we expect to be able to accomplish that, business mix will continue be a factor that weighs on our margins.

Maximizing the value of our Walgreens and Alliance Boots strategic relationship will also be a high priority.

There are many moving parts, including the timing of generic launches in future years, the normal course of business customer renewals including some of our larger customers, and the extent to which healthcare reform efforts translate into pharmaceutical sales and volume growth.

While it is too early to give specific guidance for fiscal 2015, Tim will provide some color on potential headwinds and tailwinds, and we will provide detailed guidance for fiscal 2015 at our year end earnings call in the fall.

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

Our associates have performed admirably so far this year.

And I have great confidence they will continue to meet the challenges of the marketplace, help us meet our objectives, and thus ensure a successful future for AmerisourceBergen and all of our stakeholders.

Now here is Tim.

Thanks, Steve.

Good morning, everyone, and thank you for joining us today.

As we have discussed with investors in the past, we have many moving parts to this fiscal year, such as onboarding our new significant partnership account, Walgreens, participating in the Swiss procurement JV, and importantly managing through a challenging working capital period.

We are now at the halfway point of our fiscal year, and I am pleased to report that we continue to make excellent progress in these three key areas.

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

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

I will cover two of the excluded items, warrants and LIFO, after I recap our adjusted results.

We can begin our Q2 review.

Starting with the top line, revenues were $28.5 billion, up about 39% compared to last year.

Of the 39% growth, the pharmaceutical distribution segment accounted for virtually all of the overall revenue increase.

As Steve mentioned, this was our second full quarter of distributing brand drugs under our Walgreens contract, and this quarter we also started to distribute generic drugs direct to their stores.

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

The December quarter's adjusted gross profit was $832 million, up nearly 17% compared to last year.

About 90% of the dollar increase was due to the performance in our pharmaceutical distribution segment, primarily driven by significantly higher unit volumes and associated revenues.

Operating expenses, this quarter total adjusted operating expenses were $415 million, up about $58 million or about 16%.

Consistent with last quarter, the pharmaceutical distribution segment and corporate IT accounted for the majority of the overall dollar expense increase, due in large part to the continued onboarding of the Walgreens business.

Operating income, our adjusted operating income was $416 million, up 17% and significantly better than the growth we had back in our first quarter.

Our adjusted operating margin was 1.46%, down 27 basis points compared to last year.

We continue to experience high brand drug revenue growth, including the relatively new launch of a brand drug for a chronic disease.

These lower margin drugs continue to put some downward pressure on our operating margin.

But overall, we are pleased with our margin progression being slightly better than we expected at this point in our fiscal year.

Moving below the operating income line, other income, we did have income related to the sale of a small minority interest in a B2B technology company that we have held for several years.

The gain was about $3 million.

Interest expense was slightly higher compared to last year, due to borrowings on our credit facilities primarily to support the significant Walgreens working capital build we had in late Q4 last year and early Q1 this year.

We are very pleased that we have cycled through the heavy use of our credit facilities in the current March 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 Q2 tax rate.

Our adjusted diluted EPS from continuing operations in the current March quarter was $1.06, an increase of 19% driven primarily by the increase in our operating income.

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

We have been very effective at offsetting the dilutive impact from employee stock option exercises.

Our share repurchases were slightly greater than the $4.5 million of share exercises we have had during the last four quarters.

And, in terms of outstanding shares, we had 227.5 million shares outstanding at March 31.

Let's spend a few minutes discussing our segment results for the current March quarter, starting with pharmaceutical distribution.

Total segment revenues were about $28 billion, up nearly 40% versus last year.

As mentioned earlier by Steve, drug company led the way with revenues up 46%, due again to the rollout of the Walgreens contract.

However, we also had considerable growth in our alternate site customer segment, up by about 8%, and we saw very good growth in our PRO Generic revenues as a percentage, in the mid teens on a comparable basis.

As a reminder, the Walgreens generic business does not run through our PRO business line.

Our PRO growth was across all customer segments.

Our specialty business group had a revenue increase of about 10% in the current quarter.

Consistent with the last several quarters, we benefited by having a portfolio of companies within our specialty group, ASD and Besse Medical led the way in terms of revenue growth.

Certain drugs they distribute continue to gain market share and they have had the benefit of new drugs that have launched.

Our oncology supply business, which is now about 30% of total specialty revenue, was essentially flat versus last year.

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 $695 million, up $108 million or 18%.

Drug company was the driver of the majority of the segment gross profit increase, as a result to the positive revenue impacts, especially generics, that I called out previously.

And, late in the March quarter, we did start to recognize some benefit in gross profit from the procurement joint venture, as a result of contracting progress they have made.

The specialty group had solid gross profit growth, due primarily to their 10% revenue increase.

Additionally, specialty benefited from brand price appreciation in the quarter, some of which was expected in the second half of the year.

Also good news, oncology supply's gross profit was flat for the quarter, as performance stabilized post the sequestration impact.

This business continued to benefit from two generic oncology drugs introduced in the last year.

Segment operating expenses were $322 million, and up 21% from last year.

Similar to last quarter, the expense increase is primarily due to supporting the segment's significant volume growth.

These infrastructure costs are primarily related to added head count, delivery costs, and depreciation expense at our distribution centers.

I think it is important to note that our distribution center service levels are benefiting from this greater scale and infrastructure investment.

In fact, we ended March at a record level of customer order fulfillment.

Adjusted segment operating income was about $373 million, and up 16% versus last year.

Again a large part of the dollar increase was from the drug company.

Our specialty group, even with oncology supply flat, had a strong quarter with operating income growth as a percentage in the low teens.

Moving to our other segment.

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

In the current quarter, segment revenues increased 11% to $573 million.

Our World Courier business exceeded our revenue expectations, primarily from expanded relationships with existing customers.

This incremental business helped offset seasonality that World Courier has historically experienced in the March quarter.

We also continue to see a very good growth rate in our traditional consulting business as a percentage in the high single-digits, excluding the positive impact from TheraCom, the distribution business within consulting.

From an operating income standpoint, this segment had growth of about $8.7 million or 25% led by World Courier.

We continue to leverage the World Courier business platform, and this translates to very meaningful margin growth.

That is all I have for our segment review.

Let me switch gears, and cover our two large GAAP items, warrants and LIFO.

Warrants, the fair value of the warrants decreased about 20% to approximately $700 million, driven primarily by the decrease in our share price from December 31, compared to the closing price on March 31.

Because of this change in fair value, the related inception-to-date expense is adjusted.

This resulted in a very low pre-tax expense for the current March quarter of just under $6 million.

LIFO, this quarter we have now revised our LIFO model, based on a key assumption.

Because of this, we now expect a higher full year LIFO expense, as compared to our prior fiscal year.

Consequently, we recognized a non-cash GAAP expense of approximately $103 million in the current March quarter.

We now expect that our overall generic deflation will be less, as we will have fewer meaningful generics that are losing their exclusivity this year.

Let's move to our balance sheet and cash flows.

We are very pleased with the progress we made in the working capital area, and the positive impact on cash.

Our March 31 cash balance was about $700 million, much improved from December 31.

Our free cash flow was about $1 billion during the quarter, and for the six months, we are now essentially flat.

Our strong cash flow was primarily the result of three items, and all are about equal weighting, in terms of impact.

One, the March quarter ended on a Monday, which is a very high cash collection day.

Two, we sold through incremental brand inventory which is typical to this March quarter, after our seasonal build in the December quarter.

And three, we benefited by onboarding a significant level of generic inventory, as we ramped for Walgreens distribution, combined with increased generic revenues.

As we have communicated in the past, generics have better working capital metrics.

Because cash was better than expected, coupled with some volatility in the stock market in the March quarter, we repurchased about $232 million of our shares.

We ended the quarter with approximately $840 million available on our share repurchase authorizations.

Now let's turn to fiscal 2014 guidance.

Since we are at the halfway point of our fiscal year, let me provide some commentary on two key guidance metrics.

The first metric, as Steve mentioned, we are revising our adjusted EPS guidance to $3.64 to $3.74.

We are optimistic about our second half, while considering two headwinds and a tailwind.

The headwinds, one, brand inflation that positively impacted our specialty business will most likely not repeat in the second half.

And as mentioned, we pulled some of this forward to the first half.

And two, based on new information, the launch of generic Diovan will shift out a quarter, meaning it is now expected to launch in our September quarter.

Additionally, generic Nexium, a significant generic launch will shift to early fiscal 2015.

The tailwind, or the positive item we have, we will realize earlier than expected benefits from the procurement JV in the second half of the fiscal year.

As a reminder, we previously guided that these benefits would start and ramp, beginning at our September quarter.

To summarize, the revised incremental JV benefit is not enough to offset the two headwinds that I called out.

The second guidance metric is free cash flow.

We don't expect to realize the same level of increase in our free cash flow in the second half of the year, as we did specifically in our March quarter.

We are still guiding to free cash flow of $500 million to $700 million for the full year.

Let me provide a quick comment on fiscal 2015.

It is too early to provide explicit guidance at this point, as we don't have all the information we need.

But we thought it would be helpful to frame out fiscal 2015.

I can start with a few key tailwinds.

Our core drug business will realize full year benefits from our Walgreens partnership, which means we expect to be fully ramped for the full 12 months in terms of generic drug distribution.

We will also have benefits from the procurement joint venture for the entire year.

Fiscal 2015 looks to be a good generic launch year, especially now with the generic Nexium shifting.

And we that expect organic revenue growth will be good, as the economy continues to improve and healthcare reform ramps.

Let me switch and cover a few headwinds.

In the ordinary course of business, we have contract renewals each year.

In fiscal 2015, we have a few key contracts up for renewal, one of which is the Department of Defense.

This contract expires at the end of March 2015, and at this point -- and at that point, the contract will be 10 years old.

If we are successful with the renewal, we would expect the pricing to be at a significantly lower market-based rate.

We also expect that compliance with the new track and trace legislation will continue to ramp and negatively impact expenses.

And finally, community oncology may continue to be under pressure, as practices and patients migrate to the hospital setting due to continued reimbursement pressures.

And this may limit the businesses' ability to offset revenue and margin decline on maturing generic oncology drugs.

As Steve mentioned, we will provide fiscal 2015 guidance on our year end conference call.

We remain optimistic about our growth prospects, as we look out to fiscal 2015 and beyond.

That is all I have for prepared comments.

In summary, we are very pleased with our progress at the halfway point of our fiscal year, but we recognize we still have plenty of work ahead of us to finish the year.

As always, we greatly appreciate your 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.

Tony, please go ahead.

(Operator Instructions)

Our first question will come from Ricky Goldwasser with Morgan Stanley.

Please go ahead.

Yes, hello, good morning, and thank you very much for all the color.

I have a few follow-up questions.

One, on the benefit that you have signed from the JV, obviously you are seeing it early on.

Can you help maybe quantify for us kind of what the magnitude that you are seeing, and whether you that expect the benefit in the second half of the year to be of similar magnitude?

Or should we see an increase, as you are more kind of like aligning what your generic volumes of those of the JV?

Hello, Ricky, this is Tim, and I will start, and Steve can certainly jump in.

I mean, we have been very careful about giving that number, and we will continue to do so.

It is sensitive information.

I think the point we were trying to make on our call, and in our scripts is really to shows that we are making progress.

The JV continues -- is making progress.

That is the important thing here.

But we are not at a point where we are going to size that.

Again, it is competitively sensitive information.

But should we see a sequential improvement in the second half of the year from the benefit from the JV?

Yes, again, Ricky, I --we do not want to give any color.

We have always said in the past that over time that the benefit will ramp.

So that -- I think that is -- we will stay consistent with what we said in the past.

Okay.

And one other follow up, you mentioned two things.

One, Steve, in your prepared remarks you talk about generic inflation, and you mentioned that you did see a benefit on some select products.

Can you just give us the context of how that compares to the trends that you saw last year?

Then on the DoD contract, if you can give us any sense of, what it is in terms of contribution to the top line?

Thank you.

Yes.

So firstly, on the generic price [streams], we had a very strong the second half of last year on generic price increases.

I think we guided that this was somewhat exceptional because it was so disproportionate to a few items, where these weren't increases of 20% to 30%.

They were a couple of hundred percent in some items.

And those are really driven again, by typically manufacturing problems or consolidations or unique circumstances.

Sometimes the price of these products simply gets too low.

And we also not only about, our low costs for our customers and passing those benefits on, as well as achieving portfolio benefits from our generic offering.

We are also about quality supply and consistency and assuredness of supply.

So a lot of our customers clearly, regard that as a key priority for us.

And we saw the distortions of injectable shortages for the last few years, which thankfully has been leveling off, but still remains an issue.

So those are the circumstances where we see a big price increases.

We also saw a big price increases in controlled substances, where there is substantial regulatory burden for monitoring those.

So and I, as you step back and don't comment on one particular price increase, the trend make sense to us, I would say.

Tim, do you have anything to add?

Yes, and I would just say that, Ricky, generic price appreciation was in line with what we had last year.

It wasn't a driver of our Q2 outperformance, and in fact, it was probably down sequentially from Q1.

Again, we gave guidance earlier in the area that it would moderate, and that is kind of where we stand through Q2.

So our outperformance this quarter is really driven by good solid top line revenue, generics PRO, PRO revenue, good performance across all of our businesses, especially World Courier, good expense management.

So I just want to make sure I added that.

It wasn't a result of the brand price appreciation or generic price appreciation brand, on the oral solids.

And then your comment, you had a second question about DOD.

I mean, we did say that as of next year, that contract will be 10 years old.

We felt that was important to highlight.

And in terms of revenue, it is probably in the neighborhood of $1.5 billion for ABC drug.

Okay.

Thanks, Ricky.

Operator, next question, please?

Thank you.

That will come from Glen Santangelo with Credit Suisse.

Please go ahead.

Thanks, and good morning.

Steve, could you maybe give us an update -- I know you are in the process of onboarding the generic drugs distribution to Walgreens.

How quickly do think you can complete that?

I don't know if you mentioned that in your prepared remarks, I apologize if I missed that.

So we initially had said that we would finish it in this calendar year.

We have now moved that up a bit, to talk about it being done in all probability in our fiscal year.

That would be very helpful I think for comp purposes and other reasons.

But we don't, again, we don't have this platform issue burning, platform issue because we are doing this very collaboratively with Walgreens.

It wasn't like the brand drugs where we had the Y2K type, September 1, we had to really move that significant amount of volume over to ABC.

So again, as we take these generics over, Walgreens is shutting down some internal distribution capabilities.

So we are working in concert, and we really -- we are reasonably confident or highly confident that we will finish this year.

And we have got three quarters to do that, and it is pretty much tracking to a sequential mathematical type of change as you would expect.

And Tim, maybe if I could just follow up on Ricky's question regarding the purchasing JV.

I think what we are try to assess with respect to the margins, is it kind of seems as we look out over the next, let's call it two quarters, it seems like we are going to get an incremental contribution from the generics.

And it sounds like the benefits from the JV seem somewhat gradual in terms of the way they are sort of ramping on.

And so, taking out the seasonality that we saw in this traditionally strong quarter, should we think about the gross margins, again excluding that seasonality, sort of ramping over the next couple of quarters?

Yes, I guess, Glen, let me answer it this way.

I mean, you are right.

I mean, there is seasonality in our business.

This Q2, because of January and brand price appreciation, this is typically our strongest quarter.

We see really good margins.

What we have communicated in the past, is that we do expect margins to improve in Q3 and Q4, really off of Q1.

So they will drop a bit off of Q2, and increased in Q2, and 3 and 4, just driven by continued onboarding of that generic business, and those are -- that is really the driver.

Okay.

Steve, maybe if I could squeeze one last one in.

You made comments, clearly the margin benefited from some of the brand inflation on the specialty side.

But you seem to suggest that was going to moderate in the back half of the year.

And I am kind of curious as to why that would be?

And related to that, are you purchasing contracts on the specialty side, are they different from the fee for service agreements that you have on the traditional oral solids side?

And so, is this something that we should think about over the next couple of years, as a specialty becomes a bigger piece of the total, that brand inflation can really be a sustainable tailwind to the margin?

And I will stop there.

Well, brand inflation is certainly in the range of our expectations.

Specialty again, they -- in a typical drug distribution center will handle 30,000 to 40,000 SKUs.

In specialty, it is a much narrower, and really have disproportionate impact from certain products.

So we had one manufacturer in particular, that had price increases on their products.

That is a semi-exclusive relationship we have in our ASD business units.

So it was a very identifiable benefit, which we had expected to be in the second half of the year which really came early.

So that is what is going on there.

A little bit, if I can give some internal credit here.

With really looking at the business and globally under Peyton Howell's leadership on the supply chain agreements, we really are doing a global specialty and drug fee for service agreements.

And that has been a positive development, so we are looking at that as one ABC, and I think that has been very helpful.

So there is a lot of commonality in the agreements, while recognizing that sometimes their requirements are different.

So our relationships with the manufacturers are very complex, increasingly complex because of the M&A work that is going on.

And we really like how complex those relationships are, and we are able to benefit from those.

Thank you.

Thanks, Glen.

Next caller, please?

Thank you.

That will come from the line of Robert Jones with Goldman Sachs.

Please go ahead.

Great.

Thanks for the questions.

Tim, wanted to go back to some of the comments you made around 2015 in the end of your prepared remarks, thinking about a number of the headwinds and tailwinds that you laid out, and obviously appreciate, you letting this out gives us something to work on.

But I guess, just at a high level, as you look out today understanding these things can shift between now and the end of the fiscal year, do you in fact see more headwinds than tailwinds?

Or do you see more tailwinds than head winds on a year-over-year basis, as it stands today as you look out to 2015?

Yes, I mean, Bob, we wanted to -- it is a fair question.

But I mean, we felt like we needed to frame up 2015, and talk about certain ones that face us.

I mean, I think sometimes investors tend to focus on the incremental positive items.

I mean, our purpose today was really to level set, and talk about things that happen every day in the ordinary course of business, renewals.

And to make sure that there is just a better balance, right, between the headwinds and the tailwinds.

And we called out some of the bigger ones, it is still too early to get real specific.

And again, we wrapped up, I wrapped up my comments saying, we are still really optimistic about the growth in 2015.

But we wanted to level set everybody, that there are some pluses to go along.

There are a couple of minuses that go along with the pluses.

But again, overall we expect 2015 to be a good solid growth year.

Got it.

Okay.

And then, Steve, just on the hospital setting.

I know PRO Gen program sounded like it grew at the hospital level, so obviously that sounds like a positive trend.

But you also mentioned again seeing the shift of oncology therapies from the community sites to the hospital setting.

On the shift there, I was wondering if maybe you could touch on how different the profitability profile is to the company, comparing those two channels?

And then, it feels like this is more of a secular shift at this point.

I was wondering if maybe you could share with us your thoughts on where we are today, versus where you think this shift between those two sites of care ultimately ends up?

Yes, we have seen all sorts of different models.

I mean, sometimes a practice of ours gets acquired by a health system.

They really just change their name, and it is really a billing type issue, the practice personnel are all still there.

We were also seeing practices get really totally integrated into a larger health system.

So I wouldn't say all the models are different enough, or are the same.

But what is encouraging at AmerisourceBergen is, almost all the large health systems and hospital GPOs we met with said, you got a lot of expertise in this area.

We are bringing more oncologists into our health systems.

We want you to carry on, giving them the same level of services.

And our manufacturer partners have said, we recognize this trend.

We want to carry on getting some of the services that we were receiving from organizations within AmerisourceBergen like [Ion] and Lash, so how can you help us?

So there is a very robust discussion that takes place.

And I think if you even see some of the former areas of consolidation that were announced this week, oncology is just a key focus.

So this expertise we have is extraordinarily important, and I think that we are looking at all of the channels.

The other important channel is specialty pharmacy for oral oncology, and our oncology products.

And some of our key partners like Walgreens, are really focused on this area.

So how can we do more specialty care at the retail level?

How do we look at MTM benefits?

So again, a very robust area, and a good illustration of how innovation and knowledge of the market is driving value for us and our customers.

Okay, great.

Thanks so much.

Thanks.

Tony, can we have the next question, please?

Thank you.

That will come from Lisa Gill with JPMorgan.

Please go ahead.

Thanks very much.

Steve, earlier you commented that excluding Walgreens, the drug company grew -- I think you said 7%.

That is clearly ahead of what we are seeing in the overall market.

Can you maybe talk about what you are seeing in your book of business?

Are you taking market share, or do you have a specific customer segment, that is growing particularly faster than the market today?

Yes, it was very wide.

But again, AmerisourceBergen has a really strong presence in those alternate site markets, which is a very big segment.

We have I think,16 different subcategories within that segment.

And it includes specialty pharmacy, and we have very strong, including our -- even excluding our PBM relationship, we are with many fast-growing customers there.

And I think that specialty expertise, we talk about it really permeating and creating value throughout all of our businesses.

And this is clearly a trend.

And in fact, when our sales teams and the drug companies are out, so many times they are taking specialty executives in with them, because that knowledge is a true differentiator.

And we have just a lot of market share in that alternate site segment, which is very much being driven by specialty sales, branded sales, new therapies.

Some of new therapies, we have always pointed to as a potential indicator of growth, and we have seen some very clinically differentiated products that are having an impact on top line growth as well.

Tim, anything to add?

And then -- I'm sorry, go ahead.

(Multiple Speakers).

I think, I mean, it is a benefit having a diverse customer base, and some of our larger customers are growing faster.

And we called out some of these, a new launch in particular helped us.

So is just a combination -- a combination of things, that are really driving at above market performance.

So you would say at this point, you are not really seeing any benefit at all from the Affordable Care Act in that number?

No, not yet at all.

No.

Okay.

And then, I guess, my second question just would be, Tim, you gave some color around the updated 2014 guidance, and some incremental color around headwinds and tailwinds.

If I look at this first quarter versus the Street's expectations, clearly, you beat the first quarter.

But when I look at the individual metrics, you are keeping them pretty much the same.

So should the assumption be that, that the new raised guidance is around the fact that you bought stock in the first quarter?

And that some of these headwinds and tailwinds are going to play out, as we go through the next couple of quarters?

Lisa, I think we feel good about where we are at the second half.

I mean, clearly, we are little disappointed on the generics -- I called out generic Diovan and Nexium, two big ones, important meaningful ones for ABC.

But again, I guess my point on the -- even though we have been ahead in the first two quarters, we still have a long way to go, lots of moving parts.

And at this point, we felt like it was prudent to move it up some, the guidance, and we will just monitor as we move along during the year.

I guess, I am just trying to connect those two dots though.

Because you moved the EPS up, but didn't really change the other metric.

So that was what I was just trying to figure out, was what was different.

Is it -- ?

Yes.

No, I think it is maybe a little bit better performance on revenue, again kind of within -- I would say on the revenue, we didn't change our revenue metric, our guidance.

But we will probably be on that high-end, and that is going to benefit us, and maybe a little bit on the share repurchases coming earlier.

Okay, great.

Thank you.

Thanks, Lisa.

Next question, please?

Thank you.

That will come from Garen Sarafian with Citigroup.

Please go ahead.

Good morning.

Thanks for taking the questions.

And forgive me if you addressed this is on Tim's portion of the prepared remarks.

We somehow got dropped off.

But on the contracts that you are renegotiating now, there was some talk to some of them have been renegotiated.

But I am just trying to figure out, how far along are you just at least directionally?

I don't know if you want to take a baseball analogy with what inning you are in, or whatever else?

And how much of that matters, if there could be retroactive pricing?

So does it matter if it is September versus June, for example, if it is retroactive to an earlier time period?

We assume you are talking about the generic contract increases, the generic from the Swiss JV?

Is that what you are referring to -- ?

Exactly, exactly.

Oh, okay.

Yes, I would say Garen, we -- you got cut off.

But again, we are going to be consistent.

I mean, we wanted to demonstrate that procurement joint venture is making progress, they are.

But we are really, we are not going to get into any specifics about dollars, retro, when they take effect, how many.

We are, again, we view that as competitively sensitive information.

Is that, at least a -- I mean, is that a linear progression?

Or is that too much to ask?

Yes.

No, we are just not going to --

Got it.

Okay.

We are not going to answer that.

Again, I am not trying to be difficult, but again we have always said, that over time these ramp.

Got it.

Okay.

And then, the other question is just a little bit more tactical.

For this quarter, weather has been an issue on some of the -- I have heard from other companies, where it has impacted utilization.

But obviously, you are above expectations.

So I am just wondering, could you comment a bit, as to what you are seeing in same-store utilization trends?

And did you even see an impact, and what the underlying metric was, if you strip that out?

Again, I said $28.5 billion in revenue.

And so, we really -- when we do our planning, we really look at growth per customer.

We don't really look at script trends, but the economy is definitely healthier.

I think general acknowledgment that pharmaceutical care is a very efficient form of healthcare treatment, and so only mid teens level of overall healthcare spending.

But also just some incredibly impactful new brand drugs, that really impacted us late in the quarter, but are significant.

So, and a fairly stable price increase environment, which is a good driver.

And the more we go across the world, it is a moderate driver in other countries.

It is again, one of the themes, why the US market is such a productive market for our industry.

Thanks, again.

Thanks, Garen.

I think, given the time, we will have time for one more question, operator?

Thank you.

That question will come from Robert Willoughby with Bank of America.

Please go ahead.

Steve, depending upon what you read, there seems to be some question as to who will be running the combined Walgreens Alliance Boots, where will be based, and assorted balance sheet and income statement dynamics.

Yet your conviction in the joint venture is just unwavering.

I mean, what -- where is the confidence coming from?

So Bob, I thought you were going to compliment us on the cash flow.

(Laughter).

I thought that, it was the least that I was going to get from you.

But we were really pleased with how that came out, but --

It was respectable, yes.

(Laughter).

It was respectable.

Okay.

I will take it as a big compliment.

So, I am not quite sure what to say to your question on who is running -- no, I have great confidence.

I speak substantively to Greg.

He is a very bus guy, and Wade is -- and Tim, we speak a lot -- and that all levels.

I recently, just this week for example, we had our first big human resource exchange, and they -- [went] it well.

And then, Stefan and [Onela] came.

They were guests at our management meeting.

Peyton interacts regularly with Jeff Berkowitz and John Donovan in Bern, who are just so important to our future, as they negotiate those generic contracts.

So I do remain confident that we have the best partners.

In fact, the ease of which we have got on with each partners has been extraordinary.

It has been -- I am sincere.

I think everyone knows me, that it has gone -- it has been very positive.

So that is all I want to say.

Okay.

So that is it.

So, I, Barb, do you want me to -- you want me to conclude here quickly?

Yes.

Why don't you give a couple closing remarks?

Okay.

So again, I think we talked last time about our tag line, AmerisourceBergen, being we are knowledge, reach, and partnership, shape healthcare delivery.

I am very proud that you very much saw those themes, coming through in this quarter.

A lot of the financial benefits that we talked about in the past and in Investor Day, are already coming through at the pace that we expected, and we are very proud of this quarter.

And thank you very much for your time and attention on a busy day.

Thanks, Steve.

And before we go, I would just like to highlight a couple of our upcoming events.

We will be attending the Deutsche Bank Healthcare Conference in Boston on May 8, the Bank of America Healthcare conference in Las Vegas on May 13, the UBS Healthcare conference in New York on May 20, and the Goldman Sachs Healthcare conference in Rancho Palos Verdes on June 11.

Finally, we expect to report our third quarter results in late July.

So thank you everyone for joining us today.

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

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