美源伯根 (ABC) 2014 Q3 法說會逐字稿

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

(Operator Instructions)

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

I will turn the conference over to Ms Barbara Brungess.

Please go ahead.

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

I am Barbara Brungess, Vice President of Corporate and Investor Relations.

Joining me today are Steve Collis, AmerisourceBergen, President & CEO, and Tim Guttman, Senior Vice President & 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 filing, including our 10K 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 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 outstanding operational and financial performance in our third quarter of fiscal 2014.

In what has been one of the most dynamic and exciting years in AmerisourceBergen history, we have seized upon unique opportunities to grow our core business.

We've made substantial investments in our infrastructure, and important advancements in our long term strategic goals.

And we have prudently managed our capital structure in order to ensure we can both continue to invest in our future growth and return funds to shareholders.

Significantly, during the current quarter, we will not only celebrate the 13th anniversary of the creation of AmerisourceBergen, but we will also pass the $100 billion mark in revenues for the first time in our history.

In certain cultures, turning 13 signifies the package into adulthood, and one could conclude that ABC is coming of age by exceeding an important milestone.

While there is still work to be done to complete our fiscal year, as we enter our fourth quarter, I feel we are very well positioned to either meet or exceed the financial, operational and strategic objectives we communicated to our investors and our Board at the beginning of our fiscal year.

Tim will provide the details on our financial performance, but I just want to highlight a few things.

Revenues were up 38.5% to a record $30.3 billion, driven primarily by the continuing onboarding of the Walgreens business, and good performance in the rest of our business.

Adjusted operating income dollars were up 26%, and as expected, our operating margin is now decreasing at a slower rate.

Our adjusted diluted earnings per share from continuing operations in the June quarter increased almost 30% to $1.01 per share.

We have carefully managed through a challenging working capital transition over the course of fiscal 2014, and our balance sheet is tracking to get back to the levels we were at before the transformational implementation of the Walgreen contract.

In addition, we successfully refinanced $500 million in long term debt at the best rates we have ever had access to, and we have implemented a special repurchase authorization funded by three-year debt in order to further offset the potential dilution that may result from the exercise of warrants issued to Walgreens and alliance foods.

Separately, we've made very good progress on our normal share repurchase program, under which we've repurchased $432 million through June 30.

I am very proud of these results, as they are driven by organic growth in our business and by the creative, strategic thinking of our associates.

The strategic position we occupy in the changing health care landscape continues to allow us to capitalize on both important fundamental trends in the pharmaceutical market, as well as on evolutionary dynamics.

Our reach across product life cycles, our partnership philosophy and expanding knowledge of global pharmaceutical markets sets us apart as we focus on driving success for our manufacturer and provider customers.

At our first book of business, unique insight into manufacture requirements and expertise in navigating active regulatory environments, combined with the near and long term investments we have made, position us well for growth through preserving and extending our influential place in this attractive industry.

One of those investments, the acquisition of a minority interest Profarma in Brazil closed during the June quarter.

A few years ago we identified Brazil as an attractive market for long term growth with a particular focus on specialty.

After many years of exploring the market we identified Profarma as our preferred partner.

Their extensive experience in the Brazilian market, combined with our expertise in specialty distribution and global manufacturer relationships make Profarma an ideal investment platform for us.

We believe the demographics and industry characteristics of the Brazilian market will be an exciting market for us to participate in while we capitalize on the health care markets expansion and improving access to pharmaceuticals that is part of this emerging economy.

In our assessment, we also believe we evaluated the cultural fit and division of the Profarma team and the [standard bearer] marker and we share a common vision for the future of pharmaceutical care and our role in shaping it.

The specialty joint venture is well under way.

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

Our global and national strategies, of course, driven in part by the long term strategic relationship with Walgreens and Alliance Boots.

The onboarding of Walgreens business is proceeding very well and we are very pleased with the progress that the Swiss joint venture has made in negotiations with generic manufacturers.

The JV has good momentum and we are pleased that we have recognized some benefits earlier than we originally expected.

As we have indicated before, contributions from the JV will be an important driver of our future growth goals and will position us well to deliver long term value to all of our stakeholders.

We have also utilized our partners experience in markets they have strong offerings in to share base practices and import various cross-cultural or franchise opportunities back to our broader customer base.

We are fortunate to be an integral part of a vibrant and growing industry and one that is a vital link between manufacturers of life saving products and healthcare practitioners who provide patient care.

As imperatives of healthcare reform and other cost containment efforts increasingly pressure providers of care, I believe that our partnership philosophy sets us apart as we strive for collaborative long term solutions to pharmaceutical care's biggest challenges.

Let's now turn to the performance of our business segments in the quarter.

Our pharmaceutical distribution segment delivered excellent performance.

AmerisourceBergen Drug Corporation revenues were up 45%, 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's revenues were up 9%.

The rollout of the distribution of generics to Walgreens stores is progressing very well and ahead of our original schedule.

We expect to complete the transition by the end of our fiscal year.

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

By the end of the September quarter, we expect we will complete the implementation of the strategic distribution contract we announced last March, and as we enter our fiscal 2015, we will be servicing the over 8,000 US Walgreens stores with all of the pharmaceuticals they dispense.

Our Drug Company also saw strong performance in other customer segments as well.

Hospital, alternate site, and independent retailer customers all performed well in the quarter and generic sales were strong across the board.

I am very proud that not only did ABDC do an incredible job onboarding Walgreens, but as we committed, service labels to all of our customers never slipped during one of the most operationally challenging years our Company has ever experienced.

In addition to the Walgreens business, the key drivers of growth in our distribution business include overall market growth trends, new brand product introductions and pharmaceutical price inflation.

Price inflation on brand products continues to be quite strong and generic inflation was better than expected in the quarter.

Generic and price inflation remains extremely difficult to forecast, but given what we experienced in the June quarter, we now expect fiscal 2014 generic inflation to be slightly higher than fiscal 2013.

Much of generic inflation continues to be driven by less than 20% of our portfolio of generic products.

There is no doubt that there are discernible and dynamic trends reshaping the generic industry, including consolidation of customers and manufacturers, globalization, and increasing quality and regulatory challenges.

In this environment, AmerisourceBergen is able to leverage our global contracting relationship with Walgreens and Alliance Boots, and our strong manufacturer relationships to achieve high service levels for our PROGeneric customers.

New customer interest in our PROGenerics portfolio is greater than ever before.

As with generics, the value proposition we bring to specialty products also continues to be an important driver of growth for all of our customer, including community pharmacy.

We are focused on helping our customers have the ability to meet all of their patient needs, which increasingly includes sophisticated specialty therapies.

By working with manufacturers, we ensure our customers have access to new product launches, and that they are adequately reimbursed for the specialty services they provide.

Having a broad range of customers, including community pharmacies who are qualified and clinically suited to dispense these life changing therapies is an increasingly important trend in healthcare, and our demonstrated expertise in this area leads us to believe we are the best partner to help our customers participate in this important area.

Next week we will host our independent retailer customers at our ThoughtSpot trade show in Las Vegas.

We expect a strong turnout and a lot of energy around exploring the next generation of programs and services from AmerisourceBergen.

We will tell our customers how we can help them meet the challenges and opportunities of running an independent pharmacy today, star ratings, medication therapy management, merchandising, 3rd party group pricing through our provider network, PROGen formularies, all of these compelling services are integral offerings of what makes our GMP a leading independent franchise offering today.

As we reported over the course of the fiscal year, the growth we have experienced across our Drug Company has driven the need for significant capital investments in our infrastructure.

We've made outstanding progress in this area with the new Orlando distribution center currently in the testing phase, and the national distribution center in Columbus, scheduled to open early next fiscal year.

AmerisourceBergen's Specialty Group also had a good quarter with revenues up 13%, driven by strong performance in ASD and Besse, which offset slightly lower performance in our Community Oncology business.

I am more convinced than ever that our oncology franchise is the key differentiator for AmerisourceBergen, and we just have to ensure we continue to develop additional programs and services to spread those co-capabilities over broader venues of care.

As intense change is driven by technology, healthcare reform and market shifts towards a more consumer-oriented model, there is no question that health systems are in the vanguard of healthcare reform, and the franchise we have with health systems is a valuable asset for ABC that we intend making more collaborative and value-added.

The impetus of reform has made our customers very interested and open to forming a closer relationship with ABC as they try and drive greater efficiencies and tighter operating metrics for their own businesses.

Fundamentally, we believe our unique expertise and collaborative approach helps us deliver tremendous value to providers across the healthcare spectrum.

From independents to the premier drug chain store, to some of the most prestigious hospitals and health systems in the US, our ability to help all of our customers succeed based on the unique business requirements is a principle driver of our future growth and value equation.

Turning now to our manufacturer services business, both World Courier and our consulting business performed well in the quarter.

World Courier continues to grow in its existing markets and we remain excited about the opportunities to utilize this platform to further expand both our specialty and manufacturer service offerings into other markets.

The unique combination of the service offerings that comprise our consulting business continue to be an important value driver for AmerisourceBergen, as well as for our manufacture and provider customers.

Moreover, the knowledge in the regulatory compliance area that we can access from the leadership of our ABCS businesses is of great benefit to us as we look at the enhanced skillset we need to deal with regulators and legislators on complex and complicated reimbursement and technical areas such as pedigree, Medicare and Medicaid reform, inpatient and outpatient reimbursement, etc.

As we look ahead to the last quarter of our fiscal 2014, we are well positioned to meet or exceed 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 $3.89 to $3.94, an increase of 21% to 23% over last fiscal year, and importantly, driven primarily by strong growth in operating income.

Our near term priorities include completing the onboarding of the Walgreens generic business, completing with Swiss JV negotiations, completing the remaining capital projects, and completing our business plan for 2015.

Longer term, we will also work collaboratively with our business partners to leverage existing platforms and to explore new opportunities.

We will continue to invest in our core business to provide our partners with a streamlined and differentiated way to conduct business with us on a global scale.

Our interest in potential acquisitions and other investments, particularly in the specialty and manufacturer services area, remain strong and has a global reach.

Of course, we will deploy capital wisely, and with a view to both growing our business and returning funds to shareholders.

Along the way, we will help shape healthcare delivery by providing exceptional service and through meeting customer needs amidst the rapidly changing regulatory and operating environments.

It is too early to give explicit guidance for fiscal 2015, but we can outline some of the key drivers we are considering.

Growing our operating margins is a top priority, as is generating free cash.

There are many moving parts in the market, including the timing of generic launches, the rate of brand and generic inflation, the normal course of business contract renewals, and the extent to which healthcare reform efforts translate into pharmaceutical sales and volume growth.

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 outstanding performance we delivered in the first three quarters of our fiscal year.

Our associates have risen to every challenge, and I have great confidence they will continue to enable us to meet our objectives by meeting the needs of the marketplace and, thus, ensure a successful future for AmerisourceBergen and all our stakeholders.

Now, here is Tim.

Thank you, Steve.

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

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 highlighted the specific item that we excluded.

I will cover a few of these excluded items as I work through recapping our June results.

Please note that all financial comparisons are for the third quarter ended June 2014 compared to the same period of the prior fiscal year, unless others noted.

Before I start my detailed review, let me cover a few, high level comments.

With three quarters completed and heading into the home stretch of our fiscal year, we are very pleased with the progress we have made.

During the June quarter, operationally, we onboarded a significant amount of Walgreens volume while maintaining high service levels to all of our other customers, and we are also on track to complete a number of capital projects that support our operations.

Financially, we have worked through the complexity related to the phase-in of this distribution agreement and the Swiss procurement join venture to deliver impressive June quarter results.

Additionally, we refinanced debt and took steps to offset the potential dilution from the warrants issued to both Walgreens and Alliance Boots.

With that let's start the detailed June quarter review, beginning with the top line.

Revenues were $30.3 billion, up 38.5%.

Our pharmaceutical distribution segment was responsible for the strong overall revenue growth consistent with the last two quarters.

As Steve mentioned, we increased our generic drug distribution to the Walgreens store system.

We converted about 70% of their stores at the end of June.

Excluding the Walgreens growth, our consolidated revenues would have increased about 10%, more than half of this revenue increase was related to two brand drugs recently launched used for treating hepatitis C. The June quarter's adjusted gross profit was $823 million, up 21%.

Again, mostly due to the performance in our pharmaceutical distribution segment, driven primarily by significantly higher revenue growth, both brand and generics.

Operating expenses.

This quarter, total adjusted operating expenses were $429 million, up 17%.

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

Operating income.

Our adjusted operating income was $393 million, up 26%.

And this growth was significantly better than the percentage growth we had in either of our first two quarters.

Our adjusted operating margin was 1.30%, down 13 basis points due to the large amount of Walgreens brand drug business.

Overall, we are pleased with our margin progression at this point in the fiscal year.

Moving below the operating income line.

Interest expense was about $20 million, up about 10% due to the new 10-year debt that we issued in May.

As a reminder, we successfully refinanced our September 2015 bonds with new 10-year bonds due in May 2024 at the lowest interest rate we have ever had for 10-year debt, 3.40%.

The make-whole payment resulting from the early retirement of the debt, about $20 million net of tax has been excluded from our adjusted results.

Additionally in May, we also issued three-year bonds specifically to fund the repurchase of shares to offset potential warrant dilution.

The interest associated with these three-year bonds will be excluded from adjusted earnings going forward.

Income taxes.

Our adjusted effective income tax rate was 38% for the current quarter, and we also expect this to be our full-year adjusted tax rate.

Our adjusted diluted EPS from continuing operations increased nearly 30%, to $1.01, driven by exceptionally strong, organic operating income growth.

Our adjusted diluted share count was 230.7 million shares, down about 2%.

It is important to note that our adjusted share count excludes the impact from all shares repurchased under our special share authorization, which the Board approved in May for the purpose of further offsetting the possible warrant dilution.

Let's move forward and discuss our segment results for the current June quarter, starting with pharmaceutical distribution.

Total segment revenues were $29.8 billion, up 39%.

As mentioned earlier by Steve, Drug Company led the way, driving the majority of the increase, due again to the implementation of the Walgreens contract.

Our revenues from this business have been better than expected.

Also, we continue to see considerable growth in our alternate site customer segment, up by about 20%, driven primarily by the sales of the hepatitis C drugs mentioned before.

And for the second quarter in a row, we had very good growth in our PROGenerics program, with revenues as a percentage growing about 20%, helped by a generic drug that launched back in December.

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

Our specialty business group had a revenue increase of about 13%, led by ASD, Besse Medical and also ICS, our third-party logistics business.

Our oncology supply business was down just slightly versus last year, primarily due to the impact of brand and generic conversions and also pricing on maturing generics decreasing over time.

The sale's 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 $691 million, up $139 million, or about 25%.

Drug Company was the driver or the majority of the segment gross profit increase as a result of the high revenue growth, especially in generics.

And during the quarter, the procurement joint venture, continued to execute contracts, which enabled us to recognize additional fee income at a faster rate than previously expected.

Any remaining supplier contracts should be executed by the procurement JV this September quarter.

Finally, during the June quarter, better than expected generic price appreciation helped drive some of the improvement in our performance.

Operating expenses were $332 million, and were up 21%.

Similar to recent prior quarters, the expense increase is primarily due to supporting the segment's significant volume growth.

We are in the last stages of adding headcount and delivery capabilities as we push to have all the Walgreens stores converted for generic distribution by September 30.

Adjusted segment operating income was $360 million, and up 29%.

Driven by the outstanding performance of our Drug Company.

We can now move to the other segment which includes consulting services and World Courier.

In the June quarter, segment revenues increased 13% to $620 million, driven by the consulting business and specifically the TheraCom distribution business we have within consulting.

From an operating income standpoint, this segment had operating income of $34 million, or essentially flat.

Our World Courier business had a solid increase in operating income which helped offset consulting being down somewhat, due to the start of a new key program shifting to the September quarter and also slightly higher expenses.

This completes our segment review.

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

Warrants; the fair value of the warrants increased significantly to approximately $950 million, driven primarily by the increase in our share price for March 31, compared to the closing price on June 30.

Because of the change on fair value, the related inception to date expenses adjusted.

Consequently, our warrant expense was $145 million with roughly half of this total related to this adjustment.

LIFO; this quarter we revised our LIFO model based on current and expected drug pricing trends and our forecasted inventory mix at September 30.

We now expect a full-year LIFO expense of about $400 million.

Consequently, for the June quarter, we recorded a GAAP expense of about $133 million which brings our cumulative expense through nine months to $294 million.

Forecasted brand and generic inflation rates are both key assumptions in our LIFO calculation.

We expect brand drug inflation to continue to be strong, and this quarter we revised our overall expected generic deflation rate for the fiscal year due to the level of generic price increases we had in the June quarter.

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

We continue to make very good progress in the working capital area.

Our June 30 cash balance was about $1.3 billion.

Our free cash flow through nine months now stands at $430 million.

We are in a very good position to be on the high-end of our full-year free cash flow guidance previously guided at $500 million to $700 million.

As a reminder, our fiscal year ends on a Tuesday, which is a low cash collection day, so expect to have a lower cash balance at September 30.

During the June quarter we also made very good progress with share repurchases.

Under our regular share repurchase program, we purchased about $180 million of stock.

We now stand at $432 million purchased through June 30.

We are also well positioned against this guidance target which was $500 million for the full fiscal year.

Under the special share repurchase program, which is to be used separately to offset expected warrant dilution, we've repurchased $142 million through June 30, a pretty good start given that we began fairly late in the quarter with this initiative.

Now, let's turn to fiscal 2014 guidance.

With one quarter remaining in the fiscal year, and better visibility over the next couple of months, we believe it is appropriate to increase and narrow our adjusted EPS guidance.

We now expect adjusted EPS for fiscal 2014 to be in the range of $3.89 to $3.94, which reflects outstanding growth of about 22% over the prior fiscal year.

Part of this growth is due to realizing benefits from the procurement JV earlier than originally expected, and also completing the rollout of the Walgreens generic business earlier than calendar year-end.

This means we will anniversary these benefits in fiscal 2015 earlier than originally contemplated.

A couple of additional points about our fourth quarter.

Our revenue growth will slow a bit as we anniversary the Walgreens brand drug business in September.

We also expect the contributions from generic drug price increases will moderate somewhat in the September quarter, both on the sequential and year-over-year basis.

So far for July, generic price increases have been modest.

One final point about full year 2014.

We now expect that our gross profit contribution from generic price increases will be slightly better than what we realized in fiscal 2013 driven by the activity in the June quarter, specifically the number of price increases and the percentage increases applied to our higher generic inventory balance, resulting from higher generic sale this year.

Looking beyond 2014, and thinking about the generic pricing environment, I may be stating the obvious, but there are three possibilities with regard to the gross profit contribution we realize from generic price increases.

The contribution can increase, stay flat or decrease.

Two of the three possible outcomes potentially create a headwind in our growth going forward.

When we provide fiscal 2015 guidance during our fourth quarter conference call, we will provide our directional expectation.

In summary, we are extremely pleased with our progress after three quarters.

We feel very good about the remaining quarter, and we believe we will successfully complete key projects and initiatives and be in a good position entering fiscal 2015.

Before I turn it over to Barbara for Q&A, let me give a quick call out to Steve who recently celebrated his 20th anniversary at ABC.

Steve, congratulations from all the ABC employees.

Now, here is Barbara to start our Q&A.

Thank you, Tim.

We will now open the call to questions and we ask that you limit yourself to one question and a brief follow-up so we can accommodate as many callers as possible.

Please go ahead, John.

Robert Jones, Goldman Sachs.

Great.

Thank you for the questions.

It seems like there were several factor that drove the better than expected 3Q and what seems to be a better implied 4Q.

I wanted to ask specifically on the Walgreens prime vendor contract and then the benefits you mentioned you are recognizing from the JV, can you guys maybe give us a sense as far as the upside you are realizing here on the back half of the fiscal year?

How much of that is driven from timing of those two contributors, versus those contributors just being overall bigger than what you originally expected?

Yes, Bob.

This is Tim.

Thank you for the call.

I think, let me answer the question in this way.

When we think about it, we are having a terrific 2014.

We've raised our guidance.

We are above where we thought we would be, and I would say -- I would look at that better contribution, really half from our Walgreens and AB relationship, meaning better revenues than we expected, earlier generic distribution being implemented.

Also, the earlier JV contribution.

I would say the other half is from just core, solid business, higher revenues, revenues seem to be picking up, especially with the hep C products.

Generic inflation, our World Courier business is doing well, so that is how I would look at where that upside versus our original guidance came from for the year.

For the fourth quarter -- for the second half of the year I would say is consistent with how we view the full year.

That makes sense and it is helpful.

I guess I was trying to understand specifically the Walgreens prime vendor and JV are some pretty big factors for you guys this year and next year.

I guess I was just wondering at this point whether it seemed like they were bigger than what you originally estimated or is it more of a timing factor?

I think we have been pretty consistent.

Originally when we gave guidance way back when, we always said that we thought the procurement JV benefit could come in Q4, so it definitely is coming in earlier.

I would say the rates on the economics are probably what we expected and modeled, so that is good news, just coming earlier.

Generics are coming earlier than what we thought.

We always thought we would finish by calendar year-end, but I would say that the revenues are slightly higher than what we expected.

That is great.

A follow-up on that, Tim, would be around the revenue guidance raise.

It seem like it is probably coming from -- at least the biggest factors being Walgreens, and it sounds like the hep C, both of which are presumably lower margin contributors, yet your EPS raise implies, at least the way I'm looking at this, some margin improvement.

So, could you help us understand the drivers of the better margins that you are realizing or expecting now and through the end of the year?

Yes.

You are right, Bob.

I mean we have had some really good sales growth from the hep C drugs.

They are good dollars, but lower margin items.

But I would say the margin improvement is come from good, solid generics.

Generic sales.

And also the second half of the year we had the benefit of generic Cymbalta strong through the year.

Now we are seeing generic Diovan finally launched, but again, having that -- I called out in my script, 20% growth in PRO, especially, is helping that margin.

Bob, just a quick comment talking in support of what Tim said, we've substantially completed the implementation of the Walgreens contract, but we've also completed with SAP implementation a couple years ago, and we really started to see some benefits in terms of managing our product mix, our contracts with customers, and this just started operating performance across many, many segments.

I was particularly pleased to see a 9% rise in revenue, excluding Walgreens, because we really are seeing a lift in our overall business, more inventory, better transportation lines and better systems.

There is really just a virtuous cycle going on in our core drug wholesale business that we are just extremely pleased with and proud of.

I appreciate all that and, Steve, congratulations on the milestone.

Thank you.

Thank you, Bob.

John, can we go to the next question, please?

Glen Santangelo, Credit Suisse.

Thank you and good morning.

Tim and Steve, I just wanted to follow-up on some of the comments you made on the Walgreens onboarding and the joint venture.

It sounds like both of those benefits have come earlier than expected, so when we look to your fiscal fourth quarter, should we assume we are seeing the full benefits of both that Walgreens contract and the joint venture in that quarter.

I am asking the question because as I start to think about my year-over-year growth, should we just be looking at normal comps for the back half of fiscal 2015 at this point?

Well, we still have significantly over 20% on the generic implementation, but we are hoping, and again we had no timetable and it really was a collaborative approach given the strong relationship we have with Walgreens on the generic implementation, we really had contractually, essentially, the calendar year to complete this, but we wanted to complete in our fiscal year for none other reason than it makes the comps easier.

But we expected to complete --and honestly, one of the gaining factors was Orlando distribution center, so that was very important to us.

They have a big market presence in Orlando.

There is some seasonality there as you know.

So it was important to us to get the Orlando DC up and running.

And as usual, ABC is performing ahead of expectations there.

This is going to be our biggest distribution center in the United States so there was an important gaining factor that looks like all things being equal we are pretty confident we are going to complete the generic implementation.

As far as the run rate, I think we want to make sure we're letting Walgreens and the Swiss contracting arm also consistently comment on that, but essentially the major contracts have been negotiated.

There still are some B&C market share manufacturers that we are completing things with, but they have done a great job for all three of the partners in this alliance.

Also, we made, in my comments, I will point back to the reference we made that the interest in PROGen and the generic global capabilities we have has never been stronger.

We are really pleased with where we are with the Swiss JV and the opportunities we have.

I will let Tim talk about the timing differences.

Steve, you hit it correctly.

I mean, we still will be ramping up generics for WAG during the fourth quarter.

We still have a couple key markets to roll out.

We are in pretty good shape on the WBAD procurement joint venture there.

But we do have timing factors in Q4.

I called out that key contract that is kind of starting up, shifted in consulting, and again, some generic launches with Diovan, but we are in a pretty good position for fourth quarter, kind of jumping off to 2015.

Tim, maybe if I could just follow up then.

I understand you don't want do give any fiscal 2015 guidance on this call, but last quarter you clearly took the opportunity to remind investors as to the headwinds that are coming in potential fiscal 2015.

Now it seems like the fiscal 2014 numbers are clearly much stronger than expected as things are coming a little bit earlier, which I guess would suppress that growth rate in fiscal 2015 even more.

As we think about the headwinds, you called out the Department of Defense contract potentially, maybe generic inflation is flat or even moderates some, how should we think about the headwinds and tailwinds as we approach fiscal 2015 and start to at least think about growth rates in our model?

Should it be a more normalized growth rate year now that fiscal 2014 seems to be at a more stable run rate?

Glen, great question.

Again, you are right.

I don't want to give explicit guidance about percentages, but you are absolutely correct.

I mean, we are still consistent with the headwinds and tailwinds we called out.

The headwinds, we have contract renewals.

The DOD is still out there.

Community oncology is still a little bit under pressure from a revenue standpoint.

We have some one-time expenses, track and trace, we called out.

Just let me spend a minute on the tailwinds.

The point is an important one.

We talked about having a full-year benefit of brand and generics.

We talked about a full-year benefit of SwissCo, but, essentially, you can say that part of our outperformance this year, we have pulled forward some of that contribution.

We called it out.

We said we would anniversary faster.

Again, some of that tailwind -- I mean, we will still have a tailwind into 2015, but that tailwind will be lower or smaller.

2015 will still be a good generic launch year.

We keep hearing that generic NEXIUM is on track, and we expect good organic growth with economy and ACA, but clearly I want to make the point that we did essentially pull forward some of that contribution from the generics and the Swiss JV into this year to help us.

Okay.

Thank you, and congratulations.

Thank you, Glen.

Ricky Goldwasser, Morgan Stanley.

Yes, good morning and congratulations on the quarter.

Can you -- given that generic price inflation is such a big factor in how you think about fiscal year 2015, can you just quantify for us what was the contribution, the bottom line contribution in the quarter?

I know in the past, you said last year, I think it was like $0.03 to $0.05 in any given quarter.

So if you can give us the context for the current quarter?

Ricky, this is Tim.

That is just one thing we are not going to quantify.

It is a driver of our gross profit.

I am kind of glad you asked the question because I talked -- Glen's previous question at the end was about generic price appreciation, so maybe I can handle that and your question this way.

When we think about generic price appreciation, this is the second year in a row where we have had really good growth in generic price appreciation.

If you remember, our fiscal 2013 was quite a bit higher than 2012.

Now 2014 is going to be higher than 2013.

Generic price appreciation is not in our control.

It is primarily event driven.

It's somewhat situational.

In terms of when there are mature generics with limited suppliers, you see some price increases.

My point here is we are not sure the growth is sustainable.

This is a key consideration when we build our 2015 plan.

Most likely it is going to be a headwind, which is what I called out at the end of my script.

Even if that growth slows a bit, it's going to be a headwind or it could be flat or down.

What we are saying is we need more time.

We need to finish 2014 and we will report out on our year-end call.

Just a couple of additional points.

When talking to our global sourcing people, a couple of things that they would point out is that the price increases we've seen, we are doing much more volume of generics.

Not only in PROGen but our other generic sector, so we do more volume so you would expect we would have greater participation and price increases.

The other thing they would have us share is that there is a greater amount of products that are participating in generic price increases.

So last year we had some very significant increases in, really, small products but huge increases, hundreds of percent.

This time it is more widespread, but still probably less than 1/5 of the SKUs are subject to generic price increases.

So hopefully that's some helpful data to you, but obviously it is something we are managing in our guidance and our results, so thank you very much.

And I think I cut you off.

Were you asking something else, Ricky?

Yes.

Just one followup on this one.

When you think about your joint venture partners, Walgreens talked about generic inflation as being a headwind for them.

So from a joint venture perspective, are they in effect trying to mitigate some of it by going back to the manufacturer and either getting greater discounts?

Well, it is definitely a good question.

Look, having our manufacturer partners in generics doing well is important to everyone in all parts of the industry.

There has been consolidation among the manufacturers.

There is increasing quality in regulatory globalization, and consolidation amongst the buying side, as you well know.

I think we want to make sure we have healthy partners and I believe a lot of our manufacturer partners are also committed to our joint mutual success.

So, there is definitely a headwind from generic price increases for all of our customers until third-party tables adjust, which is really just a timing lag, but it can create significant increase.

Now, if it is widespread as it has been more, it is probably, I would guess, more manageable.

It is when you have very significant increases in a few product, a couple of hundreds percent, that has caused real consternation in our customers from time to time until those tables adjust, but it is really a timing issue and eventually we should see an improvement in the system to adjust price increases in a more efficient manner.

I think that would solve a lot of the provider angst about price increases.

Okay.

Thank you.

Robert Willoughby, Bank of America/Merrill Lynch.

I think Ricky just asked the question, but I guess the generic inflation turning higher than you thought, how does that jive with the procurement expectations -- savings you are expecting not only from your consortion, but others that are popping up?

It just seems to be inconsistent with the industry's efforts to bring savings back to that customer to see inflation moving higher?

Not necessarily, Bob.

We told you we believed there was an opportunity to work together with Walgreens to get our pricing equalized, so that is a lot of work we have been doing.

It is really, again, a relatively narrow number of products that we are seeing price increases on.

The generic business remains a very competitive business from a supply perspective and the new entrance from emerging economies like India and potentially China and other countries.

So, it is a very dynamic marketplace.

I'll tell you, now having spent the majority of the 20 years with AmerisourceBergen, which Tim, thank you for pointing out, on the specialty side, I really -- the generic side is extremely interesting dynamic and I am proud of the services we offer.

The partnership with Walgreens has been a great benefit to all of our customers and our shareholders.

I think we are well positioned.

Tim, anything you would add on Bob's question?

No, I think you hit it, Steve.

It is isolated and a narrow list of products.

It is not that many when you look at our portfolio of generics and how many actually -- most still have decreases or flat pricing.

Again, it is a relatively small percent are going up or having a price increase.

Well, do you expect -- I mean you referenced consolidation of the manufacturers out there perhaps as one response to some of these purchasing coalitions that have been formed.

Wouldn't some of those activities continue and continue to create that inflation opportunity for them?

It is hard for us to gauge who may or may not merge.

That is definitely something.

But that is why we have a range of expectations and I think overall we manage our performance very well.

Tim, do you want to add a comment?

I agree, Steve.

There is still capacity and a lot of good generic suppliers out there.

It is really hard to -- again, we said it is not in our control and it is very hard to forecast and predict.

As we said, less than 20% of the products had price increases throughout the year and a couple of percent less than 20%, so, again, generally there are some price pressures.

There are just certain products due to consolidation and unique circumstance that manufacturers are able to enjoy some price increases on.

Okay.

Thank you.

Garen Sarafian, Citigroup.

Good morning, guys.

Thank you for taking the question.

First on the operating margins for 2015, Steve, you mentioned that that is the top priority.

You guys have mentioned it before.

I am wondering besides the procurement portion of the JV, what do you guys see as the top areas that are within your control that you are planning to improve on the margin front next year?

Definite growing with the right customer segments, making sure that we get all the generic purchases from our customers that we are entitled to, so compliance, and that goes to having a very robust and volume-based portfolio that is very important.

We also -- sure we want to improve operating margin because last year was the first year we decreased our operating margin, but it has been interesting to us, some of the innovative new therapies and having our customers broadly access them.

We are not going to grow operating margin that way, but we are going to grow operating income.

We are going to increase our influence and these are healthy drivers for our customers.

So it is complex.

We are both focused on operating margin, but we also need to remember that operating income dollars are important to our shareholders and what's to drive increased participation by our customers.

So, we are always managing everything in a mix.

We spend a lot of time worrying about return on investment capital, cash flow, balance sheet, certainty.

I think ABC manages all those areas very, very well and we believe there is upside in managing our business very actively, from a project mix, from a customer mix perspective, making sure we are maintaining the right customers as we are winning new business at healthy margins.

All of that goes into the performance you have seen this quarter.

When everything comes together like it did this quarter, it is really a dynamic contribution from so many areas of ABC.

Sales, operations, procurements, back-buy, human resources, legal and regulatory -- so, it really is everything coming together very, very well at ABC.

Got it.

So it sounds like there is no one particular area that you think is the spotlight?

I think it really is a mix of everything.

The sourcing is important, the sale's management, the contract management, again, the data we are getting out of the SAP system is extremely important to us.

Our specialty presence.

For example, the growth in World Courier this year has been above expectations.

ASD and Besse continue to outperform.

Our oncology business is managing through a very difficult transition in the community segment.

But again, we are using oncology more and more in other segments.

Specialty pharmacy has a big oncology component.

By some measurements nearly 40% of the health system distribution that we distribute is oncology products.

Oncology remains a very important driver for all of ABC.

One of the areas that Profarma was interested in is our oncology knowledge, for example, so it is an important international driver for us.

When you look at the top of products at [Lash and extender] that ABCS businesses are managing, those are disproportionately oncology, as well.

So, oncology is an extremely important area for AmerisourceBergen and we shouldn't really only think of it in terms of our oncology supply distribution business.

We believe it has a lot of up size in terms of division services and contracting potentially beyond just community oncology.

So those are all important drivers for us.

Got it.

Great.

Thank you very much.

Thanks, Garen.

Operator, given we are getting near the noon hour, I think we will take one more question.

And that will be from Lisa Gill, JPMorgan.

Thank you and thank you for letting me under the wire here.

Steve, you mentioned that you saw 9% increase in sales excluding Walgreens.

Can you just give us an indication as to what you are seeing out in the marketplace?

Was any of this driven by ACA volumes at all in the quarter?

No, not really.

It is hard to ascertain, ascribe it to ACA or just general script growth is positive.

Again, those who two new hep C drugs have been very impactful to our business.

Of course, ABC has a very big specialty pharmacy business in our Drug Company where we are servicing specialty dispensers direct to patients, so we have lots of customers there.

Our alternate care business was very strong.

Some of the new chain business we brought on, excluding Walgreens, has been very strong.

So just an overall very robust growth which we're delighted with.

Having a market that is increasing is very important to us.

I think there has been a lot of discussion about the pricing of some of these drugs, but the patient benefits have been enormous.

The societal benefits.

Again, we think that pharmaceutical care is one of the best and most efficient forms of healthcare.

I think you see some of the efficiency of these drugs is pretty remarkable and we are proud to be part of it.

So, those drugs are coming through your core drug distribution business, but also your specialty business is also strong in the quarter versus our expectations?

Is there anything specific to call out there, so if hep C is coming through drug distribution there's clearly some other factors that are driving overall specialty, I think you called out the fact that oncology continues to be on the weaker side.

So, is it new drugs that are coming through on the specialty side?

Brazil?

What are we seeing that is really driving the improvement there?

Lisa, nothing from Brazil yet.

We just closed it a couple of quarters before the end of June, but we expect it will.

Our ASD business really manages specialized distribution programs into hospitals, where they have unique data requirements.

They started off in the plasma distribution business which is quite robust.

And then, it is very interesting.

We bought Besse in 1998.

It was doing about $40 million, and it just continues to expand into other therapies.

The therapies are very robust in ophthalmology, rheumatology, etc.

These are great areas, and despite the challenges of Medicare Part B, they remain an important part of patient care and we continue to do very well.

And I think maybe the pay mix is not quite as high as it is in community oncology, the Medicare pay mix, so we are doing very well at Besse as well.

Our ICS business continues to do well.

The specialty group has just got some terrific portfolio companies.

At times we have had oncology outperform, now when we have some weakness in community oncology, it is great to see other companies really keep their growth rate going.

Okay.

Thank you.

Thank you, Lisa.

Do you have some closing comments?

Yes, of course, it is always wonderful when we can report such a strong quarter to our shareholders and our friends on the sell side.

Just to reiterate, as CEO I could not be more proud of how all of our associates came together and worked together to deliver such outstanding performance.

When you look at the accomplishments, whether it is in sale, operations, procurements, and the support functions that drive all those performers, it really was just a great performance, including the treasury department which did such a great job on refinancing our debt and managing the potential warrant dilution, etc.

Thank you for your time and we will continue to work collaboratively and intelligently to carry on delivering results such as we just produced today.

Thank you.

Thank you, Steve.

Just before we go, I would like to quickly highlight that in September we will be attending the Morgan Stanley Healthcare Conference in New York, and then also the Bank of America Conference in London, as well, so please check our websites for updates on specific presentation dates and times.

Thank you for joining us today.

With that, I will turn it back to John, the operator.

Thank you.

Ladies and gentlemen, that does conclude your conference for today.

Thank you for your participation.

You may now disconnect.