美源伯根 (ABC) 2014 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder today's call is being recorded. I will turn the conference now over to Ms. Barbara Brungess. Please go ahead.

Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fiscal 2014 fourth quarter and fiscal yearend. I am Barbara Brungess, Vice President, Corporate and Investor Relations. And joining me today are Steve Collis, AmerisourceBergen's President and CEO; 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 this call cannot be rebroadcast without the expressed 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.

Thanks, Barbara, and good morning, everyone. I am very proud of the results that we are presenting today and I commend our exceptional associates for the stellar financial and operational performance we reported this year.

Over the last few years we have examined our industry with fresh eyes and we have taken bold steps to enhance the role of the wholesaler in the marketplace. The unique knowledge and expertise we have developed, our partnership philosophy and our increasingly global reach enable us to influence and shape healthcare delivery by providing innovative solutions for both pharmaceutical manufacturers and healthcare providers.

By working creatively to address the current challenges in healthcare we seek to drive value for all of our stakeholders. And I believe we have accomplished all of that and then some in our fiscal-year 2014.

In financial terms we exceeded all of our objectives. Our revenues for the full year were up 36%. Our adjusted earnings per share were up 24% and we generated free cash flow of $1.2 billion.

We made substantial investments in our infrastructure, acquired a minority stake in Profarma in Brazil, invested in a specialty joint venture with Profarma, successfully refinanced some of our long-term debt and taking both of our share repurchase programs together we bought back almost $800 million of our stock. As a result of our financial stewardship we enter fiscal 2015 with tremendous financial flexibility.

Our execution was equally strong from an operational perspective. We successfully implemented one of the largest and most complex contracts in the history of the industry ahead of schedule. We opened a new state-of-the-art pharmaceutical distribution center in Florida and expanded and augmented several other facilities all while improving service levels to all our customers.

Furthermore, we have enhanced our relationships with suppliers through the introduction of new solutions and through our participation in the Swiss procurement joint venture. Fiscal-year 2014 was a transformational year for AmerisourceBergen. We substantially strengthened our core business and we head into the coming year with excellent momentum.

Over the last year our entire industry has transformed itself in an effort to better address the changing needs of the healthcare landscape. Wholesalers continued to demonstrate that the value we provide to the channel goes well beyond the aggregation of demand and the logistics of getting products from one point to another safely and securely.

We help ensure efficient pharmaceutical care and broad access to products while allowing our customers to focus on caring for their patients. It is an exciting time to be in the pharmaceutical services industry.

Organic growth rate in the US pharmaceutical market are improving driven by a better economic conditions, health reform initiatives and successful launches of new brand products. Some of those new products have the ability to cure previously intractable disease.

The R&D pipeline is full of innovative products that hold the potential to make great strides across many disease states. The combination of an advanced therapeutic medicine and expanding access to healthcare drives growth opportunities and more importantly meaningfully improves patient lives.

AmerisourceBergen is uniquely positioned to help ensure these products get to market as efficiently as possible and to support efforts to ensure patients have access to these complex new therapy across all sorts of care.

Let's turn now to the performance of AmerisourceBergen. Our performance in the September quarter was exceptional in a year that has been quite strong. On a consolidated basis our revenues were up 29% and our adjusted EPS was up 36% driven by strong performance across our businesses and tremendous performance specifically in ABDC.

Our working capital trends improved and we finished the quarter and the year with $1.8 billion of cash on our balance sheet. Tim will provide further details but I want to call out some highlights from our business units.

With each passing year our individual business units become less distinct from one another and instead focus their efforts on collaboratively meeting the needs of suppliers and customers. This is especially true in the specialty area and our oncology service line offering is a good example of the power of Drug Company, specialty group and our manufacture services businesses working together.

The different perspectives and expertise they each bring to the table creates unique opportunities to deliver value in a fast-changing market and our suppliers and customers appreciate the ability to achieve a comprehensive solution with AmerisourceBergen. The strength of our results in fiscal 2014 is no doubt a benefit of that collaborative approach.

AmerisourceBergen Drug Corporation of course had a very strong quarter. Revenues were up over 30% even as we anniversaried one month of the new Walgreens brand business.

Solid organic market growth and a contribution from the sale of the new hepatitis C drugs also contributed to ABDC's revenue growth. We brought our new Orlando distribution center online, launched two new customer service centers and we finished the on-boarding of all of Walgreens generics business.

I commend our ABDC associates for the incredible job they did while implementing the largest contract in our history. It was quite an undertaking and to have done so ahead of schedule and on budget was laudable.

But it was also done in a manner that was not disruptive to our other customers or to the rest of our business. So I truly applaud and appreciate their efforts.

We are also pleased with the progress we have made improving our generic sourcing by working with Walgreens, Alliance Boots and the Swiss JV. These financial benefits were also achieved ahead of schedule and contributed to our September quarter and will continue to ramp as we enter our fiscal 2015.

In addition to the new business that we have brought on, new products launched on our generic private-label program, BluePoint, also contributed to our growth. A few overall market trends contributed to our growth as well.

Brand price inflation remains strong. The new hepatitis C drugs contributed to both revenue and gross profit dollar growth. Generic price inflation is still an important factor but was roughly flat on both a sequential and year-over-year basis for the quarter.

And finally, market growth is improving across the board, which drove strong performance in our independence, health systems and ultimate sought customers. One of the benefits of partnering with AmerisourceBergen is that we work hard to ensure all of our customers have access to the latest life-changing therapies. Whether you are an independent who is qualified to handle sophisticated specialty products, or a hospital on the cutting edge of care, our extensive relationships with biotech and other manufacturers helps ensure our customers and their patients have access to these important products.

2014 was a momentous year for ABDC and the investments we have made in our people and in our infrastructure will help drive both innovative services and greater operational efficiency going forward.

ABSG had solid results in the quarter as strong performance in our plasma and vaccine business offset modest performance in our community oncology business. While reimbursement issues persist for community oncologists, we believe the provider market has stabilized. We believe that oncology care will continue to be provided across various venues and we continue to invest in new technology and services to ensure that our customers remain in the forefront of the evolution of cancer care.

Our manufactured services businesses performed well in the quarter with World Courier coming in especially strong. The unrivaled service offerings in this area are a clear driver of value for both our manufacturer and provider customers. The expertise we bring to bear in the regulatory compliance and policy area along with our experience in developing patient adherence, reimbursement and assistance programs is a clear differentiator.

The knowledge base combined with the immense scale of our distribution businesses and our increasingly global reach make us the ideal partner for those who don't just want to tackle current challenges but see greater opportunities on the horizon. One of the most gratifying things about the performance we had in fiscal 2014 is that we meaningfully expanded our ability to shape healthcare delivery and to positively impact the communities we serve. We have the means not only to continue to make important investments in our business but also to launch and fund the AmerisourceBergen Foundation.

This new foundation will primarily support 501(c)(3) organizations that address the needs of the patients we serve. We will formally launch the foundation over the next few months.

From a business operations perspective we have launched AmerisourceBergen Global Manufacturer Services, GMBS, in Bern, Switzerland, or AmerisourceBergen Switzerland, a new entity that represents an important step to support global manufacturer relations and our commercialization strategy. Peyton Howell, our President of Global Supply Chain and Manufacturer Services, has moved to Bern and she and her team are developing and implementing the next generation of commercialization services for pharmaceutical manufacturers.

With the dramatic changes in the pharmaceutical manufacturer landscape, AmerisourceBergen Switzerland is positioned to function as an intermediary for all types of pharmaceutical manufacturers fostering strategic relationships and focusing on specific new value-added activities. This new business will provide data analytics and market intelligence to assist manufacturers with their supply chain effectiveness and will serve as a platform to manage and grow PRxO Generics, our proprietary generics formulary and other global generic programs.

ABC Swiss-co represents a critical step in the process of expanding our international presence while improving the services we offer our partners. As we have previously disclosed, we are nearing the completion of our national distribution center in Columbus, Ohio and expect it to be fully operational by the end of the calendar year. This new facility will streamline certain random manufacturer contracts by providing a single ship-to point for products for manufacturers who wish to utilize the service.

Through integration with our SAP infrastructure and other advanced warehouse management and materials handling tools, it also enables us to redistribute products within our network more efficiently and support our future growth. Looking ahead to fiscal 2015 and beyond, we are well-positioned to continue to deliver on our long-term goals. We aim to grow revenues with the markets, grow adjusted EPS in the mid-teens, earn a return on invested capital that exceeds our weighted average cost of capital, generate free cash flow that exceeds net income and return a minimum of 30% of our free cash flow to shareholders.

We will continue to be excellent stewards of capital and redeploy it wisely to both grow our business and enhance shareholder returns. We have a strong track record of investing in assets and internal projects that add value to our business and improve our service offering to manufacturers and providers.

We will continue to expand those efforts both in the US markets and internationally. We remain keenly focused on the pharmaceutical services space which we believe has excellent opportunities for growth in the years ahead and ample opportunities for AmerisourceBergen to continue to differentiate itself.

Turning to fiscal 2015 specifically, we expect the strong trends in overall market growth to continue while trends in certain specific areas will moderate. We expect the contribution from generic inflation to be flat year-over-year and for community oncology to be relatively flat for the year.

Operating margins will be pressured as we launch a Swiss-co and the national distribution center and similar to 2014, the fast-growing hepatitis C products will contribute gross profit dollars but at a lower margin. We will of course continue to benefit from having a full year of the generic business from Walgreens and the benefits from the Swiss procurement JV will continue to ramp into fiscal 2015.

Tim will provide greater detail but in summary on a consolidated basis we expect revenue growth in the range of 7% to 8%; we expect adjusted diluted earnings per share from continued operations growth in the range of 10% to 13%; free cash flow generation in the range of $1.4 billion to $1.7 billion; and including both of our share repurchase programs, we expect to purchase $800 million of our shares. Following our stellar performance in fiscal 2014, we enter 2015 with good momentum and we are exceptionally well-positioned to meet our financial and operational objectives going forward.

One final word about fiscal 2014. As I look back over the year I am of course pleased with our outstanding financial and operational performance. I am even more pleased, however, with how we achieved it.

Through bold thinking and unmatched execution we established unprecedented ways to create value for all of our stakeholders. We have great partners in Walgreens and Alliance Boots and our innovative, long-term strategic relationship has driven tremendous value for all three partners with more to come in the years ahead.

Our success in these areas gives me great confidence that we will continue to make vital and differentiated contributions to the marketplace and thereby provide excellent returns to our shareholders while continuing to provide increasing value to our customers. Now here is Tim.

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

As Steve mentioned we wrapped up a historic year at ABC as our organization successfully on-boarded our largest customer, Walgreens. We are very proud of our organization as we outperformed all of our key financial targets we established at the beginning of the year.

We did this while managing through significant change including heavy investing in our infrastructure. Even more important, we did this without negatively impacting our customer service level. Again we want to thank the ABC organization for all of the extra efforts made this year.

Before I start my detailed review let me cover a few high-level comments. 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 items that we excluded.

I will cover two of these excluded items as I work through recapping our September results. Please note that all financial comparisons are for the fourth quarter ended September 2014 compared to the same period of the prior fiscal year unless otherwise noted.

I have three main items to cover this morning. First I will recap fourth-quarter consolidated and segment performance; next I will spend a few minutes on our full-year performance; the third item I will wrap up my prepared comments covering our fiscal 2015 expectations.

With that let's start the detailed September quarter review. Beginning with the top line, revenues were $31.6 billion, up 29%. Our pharmaceutical distribution segment was responsible for the strong overall revenue growth consistent with the prior three quarters.

Excluding the Walgreens growth our consolidated revenues increased nearly 9%. Roughly two-thirds of this revenue growth was the result of the new hepatitis C brand drugs.

The quarter's adjusted gross profit increased 29% to $927 million. The growth was due to strong performance in our pharmaceutical distribution segment driven by better-than-expected revenue growth on both the brand and generic side.

Operating expenses, consistent with previous quarters this fiscal year we had an increase in expense to support the on-boarding of the Walgreens business in our pharmaceutical distribution segment. Additionally, we had an increase in employee incentive compensation due to our outperformance.

We also expensed the initial contribution made to establish an ABC tax-exempt charitable foundation. Because of these specific items and the normal seasonality of the September quarter having higher expenses, our total operating expenses increased 27% to $503 million.

Operating income. Our adjusted operating income was $424 million, up $98 million or a very strong 30%.

This quarter marked the highest growth of the fiscal year. Our adjusted operating margin was 1.34%, up 1 basis point.

Moving below the operating income line, interest expense net was about $15.5 million, down about 17% mostly due to refinancing a portion of our debt that we completed back in May. Income taxes, our adjusted income tax rate was 37.5% for the current quarter. This brought us right in line at 38% for the full year.

For the quarter our adjusted diluted EPS from continuing operations increased 36% to $1.10 driven by exceptionally strong organic operating income growth. Our adjusted diluted share count was 231 million shares, down about 2%.

It is important to highlight that this share count excludes both the impact from shares repurchased under our special share authorization and the dilutive impact of the warrants. I would refer you to our press release where we have included a new reconciling table that highlights the calculation of our adjusted diluted share count.

Let me switch and cover our two large GAAP items, warrants and LIFO. Warrants, the fair value of the warrants increased to approximately $1.1 billion as of September 30. This resulted in a warrants expense in the quarter of $156 million.

Both of these amounts increased as a result of ABC's higher share price at September 30 compared to June 30. LIFO, this quarter we completed our annual LIFO calculation. Consequently we reported LIFO expense of about $54 million to reach a full-year LIFO expense of $348 million, which is higher than last year.

Brand price inflation at just under 12% and inventory mix are typically key drivers of our annual LIFO expense. However, this year we did not have the same level of generic drug deflation we had in the prior fiscal year due to the pricing environment as well as the lack of drugs coming off of exclusivity. These two factors contributed to our year-over-year LIFO expense increase.

Let's move forward and discuss our segment results starting with pharmaceutical distribution. Total segment revenues were about $31 billion, up 29%. As mentioned earlier by Steve, Drug Company led the way with a 33% revenue increase.

In the quarter we anniversaried the start of the Walgreens contract. Consequently we only had two months of incremental brand revenues in addition to the new generics business.

Our revenues in our core drug business continue to be better-than-expected driven primarily by three items: increased sales to our largest customer, the two new hepatitis C brand drugs and the impact from the continued strong manufacturer pricing environment. On the generic side we had solid growth in our PRxO Generics program with revenues growing as a percentage in the low teens and as a reminder the Walgreens generic business does not run through our PRxO Generics business line.

Our specialty business group had an overall revenue increase of about 13%. We continued to see very good revenue growth in oral oncology, plasma and ophthalmology.

ICS, our third-party logistics business, also had very good revenue growth. These sales growth percentages for the Drug Company and for specialty are before intrasegment eliminations, consistent with how we have reported these growth rates in the past.

Moving to gross profit, the segments gross profit was about $790 million, up $185 million or about 31%. Drug Company was the driver of the majority of the segment gross profit increase as a result of their high revenue growth.

During the quarter generic price appreciation was better than we previously expected and also contributed to segment results. Operating expenses were $404 million and were up about 31%. Similar to prior quarters this fiscal year the expense increase was primarily due to supporting the segment's significant volume growth.

Additionally this quarter to finish the Walgreens implementation by September 30, we supplemented our full-time staff with temporary resources in our distribution centers. Also we are operating two distribution centers in Florida which added extra cost in the September quarter. We will transition all of this Florida customer business to our new DC in early fiscal 2015.

Adjusted segment operating income was $386 million and up 31% driven by the outstanding performance of our Drug Company which includes successfully on-boarding the Walgreens business faster than anticipated.

We can now move to our other segment, which includes consulting services and World Courier. In the quarter these segment revenues increased $134 million, or about 26% to $652 million. Our consulting business had revenue growth of about 20%.

Our TheraCom distribution business, which is within consulting, drove most of this growth. A few of the key drugs they distribute continue to gain market share.

Switching to World Courier, their revenue growth was positively impacted from an adjustment where we corrected intracompany revenues last fiscal year in Q4 2013. Excluding this adjustment World Courier's revenue increase this quarter was about 8.5% driven primarily by higher volumes. From an operating income standpoint, this segment had operating income of $37 million with growth of about 25% due primarily to the record performance of World Courier.

This completes our segment review. Let me switch gears and cover a few key fiscal 2014 financial metrics.

Overall we did very well meeting or exceeding our revised guidance targets. Revenue on a full-year basis, our growth was 36%.

Excluding the positive impact from our Walgreens contract our revenues were up 8%. The new hepatitis C brand drugs accounted for roughly half of this revenue growth. Our largest customer, Walgreens, represented just under 28% of our total revenues in fiscal 2014.

Our specialty business finished the year at nearly $20 billion with revenue growth of about 11% led by ASD, Besse Medical and ICS. These three businesses accounted for about 90% of the total dollar increase.

Our oncology supply business was essentially flat for the year as expected due to the community oncology environment and also branded generic conversions. Our adjusted operating income increased a stellar 21% to $1.56 billion.

Our adjusted operating margin finished at 1.30%, a decrease of 17 basis points. This margin was better than what we originally expected and it also included the negative effect of a few basis points from the lower-margin new hepatitis C brand drugs.

EPS, our full-year adjusted diluted EPS was $3.97, up 24% mostly due to our strong organic operating income growth and very little from share repurchases.

Cash flow. We are extremely pleased with the progress we made in this area. We finished well above our revised expectation.

At $1.2 billion for free cash flow the positive impact from a higher generic revenue mix as well as our Drug Company operations group effectively managing inventory levels helped drive outperformance in this area. And finally share repurchases. Under our regulation repurchase program we purchased $538 million of stock which was above our original guidance.

Under our special share repurchase program we continue to make steady progress. This program is used specifically to offset anticipated warrant dilution.

We have repurchased approximately 3.4 million shares, or $252 million through September 30. Combined with our hedging program we have made good progress toward offsetting as much of the expected warrant dilution as is economically feasible.

Now let's turn to fiscal 2015 expectations. Revenues. We expect consolidated revenue growth in the 7% to 8% range.

We expect higher revenue from our largest customer, Walgreens, mostly as a result of generic distribution being ramped at a full run rate for our entire fiscal 2015. Just the incremental generics business will represent about 2% of our growth. This growth is also expected to come from the following categories: new brand drugs like those that treat hepatitis C, overall script and volume growth from an improving US economy and a positive contribution from health care reform, and finally continued growth in our specialty business.

Our revenue growth will be somewhat dampened due to a previously disclosed customer loss and meaningful brand and generic conversions. Gross profit. Our gross profit dollars will clearly be up as we will have a full-year benefit from both Walgreens generics and a procurement joint venture.

We also expect a better generic launch schedule than we saw in fiscal 2014. In terms of key launches, we now expect that generic Nexium will be delayed and will now launch in June 2015. This means we won't have the full six months of exclusivity in this fiscal year.

Our working assumption for generic price inflation is that the dollar contribution will be relatively flat in fiscal 2015. Headwinds in the gross profit area include contract renewals, certain customer losses and lower growth in specialty due to continued reimbursement pressure and maturing generic oncology drugs and no offsetting new oncology generic launches.

Operating expenses. We expect year-over-year dollar growth as a percentage to be in the high single digits. The increase is driven primarily from three key areas.

One, we will be incurring a full-year of direct costs associated with supporting the Walgreens business primarily distribution center labor expense and delivery. Two, we have expenses directly associated with a few key initiatives like the national distribution center in Columbus, Ohio and the start up our Swiss business and continued investment in our IT infrastructure especially around EDI, security and a track and trace system. These IT expenses are required to scale and support our business going forward.

And finally, three, we have normal run-the-business increases such as compensation, incentive and healthcare costs. The expenses that I highlighted in these first two categories, full-year of Walgreens distribution and the new initiatives, account for approximately 60% of the overall dollar operating expense increase.

Operating income for fiscal 2015. We expect our year-over-year dollar growth to be 8% to 10% driven primarily by the Drug Company, our fiscal 2015 growth moderates somewhat by a few items, the phasing in of the national distribution center, expenses coming faster than gross profit, fairly high incremental operating expenses associated with our new Swiss business and lower growth in our specialty business.

Switching to operating margin. We expect our margin and basis points to be relatively flat to up slightly in fiscal 2015.

Our margin will be impacted by the rate of growth of our two largest customers, timing of brand and generic conversions like Nexium and the continued ramp of hepatitis C product revenue. These three items can move our margin up or down by several basis points and can make pegging a margin goal difficult.

Our interest expense is expected to decrease slightly due to a stronger cash position and also refinancing a portion of our debt last year. Tax rate, through our new business initiatives we expect to see our adjusted tax rate decrease to about 37% for the full year.

Share repurchases, our guidance assumes $400 million in regular share repurchases. Importantly, with our anticipated share price and expected level of exercises, we don't expect our adjusted diluted share count to decrease much, just about 1%.

Adjusted EPS, we expect our fiscal 2015 adjusted EPS to be in the range of $4.36 to $4.50, an increase of 10% to 13%. We expect our adjusted EPS to be greater in the second half of the fiscal year compared to the first half due to the phasing of generic price appreciation similar to what we've experienced the last two years and also the generic launch calendar.

An item of note, our first fiscal quarter typically has the lowest level of brand and generic price appreciation of our four quarters.

Switching over to cash flow, CapEx is expected to be approximately $300 million. Given the improved cash outlook for ABC we believe this is the right time to further invest in our core drug business and specifically our distribution center network.

About one-third of our CapEx spend is slated for distribution center capacity and automation improvements. As always we expect a good return on these infrastructure investments.

Free cash flow, we expect to have an excellent year in terms of free cash flow due to higher generic revenues and the fact that generics have beneficial working capital metrics. Free cash flow be in the range of $1.4 billion to $1.7 billion and it also includes the expected benefit from rightsizing our inventory now that we have reached the full rollout of the Walgreens business.

In addition to the regular share repurchases I highlighted before, we also expect to use about $400 million to continue to offset future warrant deletion through our special share repurchase program.

In summary, I know that my comments today were longer than usual due to covering the quarter, yearend and also 2015 guidance, so thank you for your attention. Our commitment, we will continue to make the right investments in our business and allocate our capital thoughtfully to ensure long-term success.

As always we greatly appreciate your interest in ABC. Now here is Barbara to start our Q&A.

Thanks, Tim. We will now open the call to questions. We ask that you please limit yourself to one question and a brief follow-up so we can accommodate as many callers as possible. Please go ahead, John.

Thank you. (Operator Instructions) Glen Santangelo, Credit Suisse.

Yes, thanks. Good morning, Steve.

I just wanted to follow up on some of the comments you made. The Company obviously has been through a lot of positive transition here in the last 18 months and now that you kind of emerged from it as you sit back, you look at the cash flow generation and the strength of the balance sheet, do you feel like you are in a position now where you can start to think more strategically, or do you kind of take a breath and just kind of focus on getting the operations right? How you think about capital deployment from here?

Glen, thanks for the comments. I will start off and then let Tim comment.

Obviously we went through a very significant operational hurdle again as we pointed out, both Tim and I pointed out. I think we came through it very strong not only for our Walgreens customer but for all of our customers.

We have more inventory. In 26 of our -- we have 26 distribution centers, 23 of them had some level of automation improvement, streamlining, new equipment coming in. So we really had significant work to do.

The cash flow came in strong the last couple of quarters. Our balance sheet is strong but again we are doing some $400 million a day in sales, so you need to look at it in terms of that context.

But clearly our first prize has always been to find the right type of acquisitions. We are very encouraged by the success of World Courier. World Courier has also given us a lot of -- I would say organizational muscle as we look at dealing with things like exchange control and FCPA, the treasury issues, the tax issues, so I think we really are in a good position.

We also are very excited about our WBAD in the new AmerisourceBergen Switzerland office. That really gives us a good foray into global operations. So definitely we feel like the team is just getting started and we have got lots of significant opportunities.

Okay. Maybe if I can follow up with a question for Tim. I appreciate all the detail you gave with respect to fiscal 2015 but within your comments I think you mentioned that the benefit from annualizing the Walgreens generics business on your top line would be about a 2% contribution.

And so when I look within the broader context of your 10% to 13% EPS growth in the guidance, is it fair to say that just the annualized benefit of Walgreens probably accounts for about one-third of that? And the other two-thirds being more the organic growth taking into consideration all the other headwinds and tailwinds you mentioned?

We definitely have a benefit next year of ramping up and having the generics at a full run rate. So again I think the other thing, too, that you have to consider is that we are going to have that full run rate from the procurement joint venture next year.

So I think it's a combination of things that drive -- I really don't want to parse out the growth. I think that again it's kind of the big three having generics, having the joint venture and a better generic launch year all kind of drive the margin a little bit up and better operating income.

And I guess if I can I would just like to go back and talk about your first question a little bit too is, clearly it is top of mind. We want to make sure that as our cash improves we have an overhang from the warrants and again we will look opportunistically.

Steve talked about being committed to long-term earnings growth. That's a big consideration for ABC, so having those warrants as we get closer to those expected exercise dates we want to make sure we use our cash thoughtfully to offset that dilution. We are committed to that.

Okay, thanks and congratulations.

See, that's why you need a CEO and a CFO to answer the questions.

Thanks, Glen. Next question, please.

Robert Jones, Goldman Sachs.

Great. Thanks for the questions. Just a follow-up around one of Glen's questions around the procurement platform.

I guess the first one more quantitative see if I can ask this a different way, curious if you could share anything more specific, Tim, on what is factored into guidance from the better purchasing? It has been over a year now and I know this is an important arrangement, big swing factor to numbers.

So I'm curious if you could just give us any more clarity around what the contribution is that is baked in? And I guess on the qualitative side there has been some concern in the marketplace that the original synergy expectations from these larger generic purchasing platforms might not actually be playing out in the marketplace as many of the generic manufacturers aren't really able to meet the demand needed to drive the volume-based savings originally thought of.

Just curious if you guys had any updated perspectives on that as well? Thanks.

Yes, Bob, I will take the first one since you directed it over here.

Quantitative, no I appreciate the question. Again it is very sensitive. We are real pleased with where we are at.

We've had progression each quarter in 2014 in terms of what we have seen from the procurement joint venture. We are at a good jumping off point now going into 2015.

Again, pretty much in line with what we expected way back when would we kind of announced the deal in terms of savings as a percentage. So I don't think we want to get too fine on the dollar contribution because of competitive reasons.

I would just say that if you look at some of the changes that have occurred in the manufacturer generic landscape, with the big trade partners we have there, enormous changes since we announced our transaction. And again we think that the three partners scale up very well to these global multinational companies with increasingly sophisticated supply chain, regulatory requirements, pricing requirements, pressures from austerity programs in different markets, so we focused at first on generics.

There is no reason you look at the caliber of the people that are involved in WBAD and from both Alliance Boots and Walgreens side and the people that we are contributing, Peyton's experience with commercialization. All of these should be assets for the platform, so we are bullish on where this could be in the short, medium and long term.

That's helpful. And I guess just a quick follow-up would be, we've seen the retailers face some pressures both from inflation and reimbursement rate pressure. I'm just curious if there is any impact or any thought around potential changes with your agreement with Walgreens relative to some of the moving pieces in the landscape.

Every customer we are able to look at differently. We model on the overall profitability. Certainly we think that the reimbursement, that price increases is more of a reimbursement issue than a procurement issue.

To get the reimbursement tables adjusted quicker in this day and age is certainly a priority. And we have seen a broader price inflation trend. Obviously we listened to calls in the last day or two and this is a theme that is clearly on top of mind.

We think that it is a there's some very valid drivers as to why price increases are occurring. We are expecting -- we had a very good year with price increases this year, better than we expected and we expect them to at least hold steady for next year. So I would say that is a significant expectation, that price increases will continue.

Thanks.

Thanks, Bob. Next question, please.

Ricky Goldwasser, Morgan Stanley.

Yes, hi. Couple of follow-up questions. First on generic inflation.

So just to clarify Steve, I know Walgreen on their call said that they expect low-single-digit inflation. So how does your comment resonate with theirs? Do you assume similar levels increases?

Again we really manage two big half of generics, our PRxO Gen formulary which we have obviously formulary control of and that is a lot what our independents and other customer segments including health systems tap into. We also then handle our customer generic files and that certainly Walgreens is foremost in that category, very significant contract, generic acquirer.

So we sometimes have different contract terms, etc., within PRxO Gen and within the other generic sector. So I don't think that those two statements are mutually exclusive. Sometimes you have to look at the detail of these statements.

Are we talking about the branded environment, are we talking about the generic environment solely? We do expect that there still is the vast majority of products are subject to price deterioration in the generic market.

But we believe some 70% to 80% of the products will experience some level of deflation, which has been the typical model. So I think you always have to look at where the fiscal years lie.

We are September year, obviously. There is some significant difference depending on where people's fiscal years lie, measurement periods, etc. But Tim I can see you want to answer this question.

I would just add, Ricky, that what we forecast -- Steve, you hit it -- what we forecast is specific to us and manufacturers we use and inventory levels. We're really not trying to forecast the rate in the market.

I think we will stay consistent with what we said last quarter is that for our basket of generics we have seen an increase, a slightly positive inflation this year versus maybe slightly negative kind of the period before. So it is changed. That's all I would add, Steve.

Thank you.

Okay. And then just one follow-up. Obviously the cash flow generation guidance is quite impressive.

You talked about some inventory management. Should we assume going forward that this is going to affect a new level in how we model cash flow generation for ABC for the longer term, or is this just like a one-year phenomena?

Great question, Ricky. I tell you we're really proud of our cash. Our cash conversion cycle, with all the complexity this year and managing through our cash conversion cycle, or kind of our net working capital days only increased only one day between 2014 and 2013, so really really hats off to our Drug Company.

I would say in 2015 there probably are some items positively impacting that won't repeat. Again, kind of bringing on generics, finishing up that Walgreens build and getting to a run rate and also rightsizing our inventory, there is some benefit in there. But I would say that going forward with a healthy generic mix we always expect our free cash flow to be above net income and to increase every year.

Okay, thank you.

Thanks, Ricky. Next question, please.

Robert Willoughby, Bank of America Merrill Lynch.

You just answered it, thank you.

Okay, operator. Let's go to the next caller, please.

Eric Percher, Barclays.

Thank you. Thinking back 18 months ago when you announced the agreement, I know you talked to being able to maintain your long-term growth target. I think 15% over a multiyear period.

And I guess we have seen multiple years now with bringing brand on and generic on from the distribution side and now this year with the ramp of the sourcing benefits. As you look out, is there a further ramp that this agreement continues to drive, is there a significant ramp from sourcing itself? How do you think about continuing to drive the 15%?

We talk about growing revenue with a pretty robust top-line growth. We talk about operating margin leverage and we talk about capital deployment, share buybacks. Obviously the stock multiple has increased.

So some of those have changed but we still are committed to that sort of a growth range in the long term. It's certainly how we think about our compensation plans, our long-term incentive plans.

And we have been proud of our track record. If you look at the compound annual growth rate and EPS since 2001 we have really done a great job in that range, maybe a couple of points higher. I think the early years were driven by fee for service and even higher organic growth rates.

We're trying to do some things internationally where the growth rates are not as high but we are focused on the specialty area where you should see higher organic growth rates. So we have added a lot of complexity to our business but we think that is very consistent with the demands of our stakeholders including manufacturers and providers.

So we are not backing off those hurdles, or those targets, whichever one you want to use.

So it sounds like you have a lot of tools but the piece of this that came from the agreement with WBAD, Walgreens, etc., may be running its course?

Now, if you look at our portfolio I think when I became CEO and before that for two years was President of the Drug Company, we were really missing that big chain segment and we are sincerely proud to have partnered with Walgreens. It has been a great partnership.

We are looking forward to the completion of Walgreens, Boots Alliance next year. We think that it is going to be really increase the opportunities and the focus that the three of us have together.

I guess it will be the two of us have together. And we are looking forward also to other synergies that we can drive on the brand side, on international specialty, working together with World Courier.

These are opportunities we haven't fully explored yet, which we think will be very fruitful in the years ahead. Also Walgreen's organic growth rates have been a nice boost to our revenues, coming in ahead this year of what we expected.

And quickly, you mentioned that generic inflation will be flat in your assumption. If you have flat inflation on your book, that does that mean that the impact to incremental benefits from inflation would be relatively small as compared to when you were going from deflation to inflation?

I guess if the numbers came in higher than we expected there would be a benefit as it did this year, but I will let Tim comment.

We talked about the dollar contribution being essentially flat and if it is better it moves us up in the range. If it is worse -- that's why we have a range. I would just say that we think we're being appropriately right here in terms of our working assumption and it is an area that is always difficult to predict and also to know when it is going to happen. So we think we are kind of going into this into 2015 with the right guidance.

But you have to refill that each year, so if you had 5% you get another 5%, that simply refills what you saw the prior year?

Yes.

Yes.

Yes. Thank you.

Thanks, Eric. Next question, please.

Garen Sarafian, Citi.

Thanks for taking the questions. First, just quickly on guidance. Thank you for all the detail.

Not surprisingly timing of the next few months and the generic price inflation are two of the big swing factors to hit earnings it seems. So excluding those, what are the key variables?

Yes, I would say one of the bigger ones out there that we haven't really talked about, we're still in a holding pattern on is still in active process is the DoD. We talked about that last quarter.

There should be notification the end of the year. That is clearly one.

And I would just say the other swing factors would be just some of the hep C and the uptake and having the new drug out there versus the old drug. Just some of those contributions we made in that area, too, could move us up or down in the range.

What's the assumption on DoD in the current guidance then?

The current guidance is again we have a piece of the contract. We factored in that we retain our piece that we have at a lower margin.

Got it. Okay. Then just switching gears, you mentioned health reform initiatives as a positive contributor a couple of times in the prepared remarks. So could you just elaborate a bit little more as to how you are thinking about health reform and how much weight you are giving it in fiscal 2015?

We note that there is some 8 million to 9 million, maybe as many as 10 million new patients being covered through exchanges and other mechanisms.

That definitely is driving growth. It could be more in Medicaid programs. There is some evidence that our independent customers have disproportionate market share there but it's overall good for the market.

The new data coming out from the most established reporting companies will show you that the market is very robust. We've seen more robust top-line growth than we've seen before. However, one product has been more significant to their growth and probably the patient attrition that we've seen.

So again this is a great industry to be a part of. I was participating last week in the International Wholesaler Federation Meeting and the US market is still the envy of the rest of the world. This is a wonderful market to have most of our business be resident in.

I would just jump in and say that our working assumption is a pretty modest increase. We always, when we talk healthcare reform, we always say the economy too because it is hard to really tell what is driving script growth.

It is definitely up. We are seeing a benefit but it is hard to say what is causing it. But for 2015 in our growth assumption for revenue we probably have 0.5% factored in there, excluding those hepatitis C drugs, we kind of carve those out and do a separate assumption on those.

That is useful. Thanks again.

Thanks, Garen. Operator, given the time we will take one more question.

Lisa Gill, JPMorgan.

Thanks very much. I just had a question, Tim, to start with around the tax rate.

If I do the math it looks like every 100 basis point reduction is about $0.07. And I would assume that based on your commentary some of this is because of moving some of the operations over to Switzerland. Is there incremental opportunity over the next couple of years to continue to bring that tax rate down?

Thanks, Lisa. Yes, let me just comment that we, as Steve mentioned, we are thrilled that Peyton and her family have moved over there to start this business.

There is a benefit in our tax rate from that but also we are seeing a benefit from not only that but BluePoint, our private label is giving us a little bit of an advantage and also World Courier. But to get to the main point, yes I do think it is scenario focused. It is a pretty big expense for ABC and we are being very thoughtful about how to look at our tax rate going forward.

And as we think about BluePoint can you give us any incremental color around BluePoint? Is it being run out of Switzerland?

What are some of the opportunities there? How do you anticipate that that business will grow over the next couple of years? And furthermore, are you actually manufacturing the product, or is this more of a repackaging type of operation?

Well, it's definitely more of a repackaging, relabeling, importation demand aggregation. There is a well-established precedent in the wholesale market in the US and we thought this is a great opportunity for some of the ex-US suppliers to aggregate demand.

It has been well received in the marketplace, good adoption by our customers. We've really had this in the works for a couple of years but launched this year -- our repackaging facility is really done out of Ireland and that was planned before, but certainly having the group in Bern helps coordinate with Peyton.

And we actually had this in the works before we went into the WBAD partnership. So it is definitely a growth driver for us and one that we will carry on focusing on.

Okay, great. Thank you.

Thanks, everyone, for your time. I knew it was an extremely busy day today but let me just conclude our discussions for today by really reiterating that ABC is in terrific shape.

Our teamwork and confidence that maybe I haven't touched on enough today because I am just so proud of where we are as a company, our ability to take on new challenges and opportunities I believe has never been higher. At all levels we thrive on working together as we meet the challenges and opportunities the markets are presenting to us. We really feel that we are just getting started and you can look forward to great things to come from the AmerisourceBergen team.

Thanks, Steve. And with that we will turn it back to the operator.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation. You may now disconnect.