美源伯根 (ABC) 2015 Q4 法說會逐字稿

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

(Operator Instructions)

As a reminder, this conference is being recorded.

At this time I would like to turn the call over to our first speaker, Barbara Brungess, please go ahead.

Thank you, Colin.

Good morning, everyone, and thank you for joining us on this conference call to discuss AmerisourceBergen's September quarter and FY15 results.

I am Barbara Brungess, Vice President, Corporate and Investor Relations for AmerisourceBergen, and joining me today are Steve Collis, President and CEO of AmerisourceBergen; and Tim Guttman, Executive Vice President and CFO of AmerisourceBergen.

During the conference call today, we will make some forward-looking statements about our business prospects and financial expectations, including, without limitation, revenue, operating margin, and taxes, as well as the pending acquisition of PharMEDium.

Forward-looking statements are based on Management's current expectations, and are subject to uncertainty and change in circumstances.

We remind you that there are many uncertainties and risks that could cause our actual results to differ materially from our current expectations.

For a discussion of some key risk factors and other cautionary statements, we refer you to our SEC filings, including our form 10-K for FY14, as well as our quarterly and other filings with the SEC, and the press release and form 8-K filed on October 7, in connection with the pending PharMEDium acquisition.

We will be discussing non-GAAP financial measures, which we use to assess the underlying performance of our business.

The GAAP to non-GAAP reconciliations are provided in today's press release, as well as on our website.

AmerisourceBergen assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates and this call cannot be re-broadcast without the express permission of the Company.

Those connected by phone 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.

We've actually changed locations within our headquarters here so the train should not be very prominent today.

I am sure you all appreciate that.

I am just tremendously proud of the results that we are presenting today and I commend our highly engaged associates for the outstanding financial and operational performance we achieved this year.

Our success is being driven by the approach we take to market, we constantly seek to examine our industry with fresh eyes, we boldly take the steps necessary to avail ourselves of the opportunities that we see unfolding, and we work collaboratively and creatively to address challenges we see in front of us, and our partners in the pharmaceutical supply channel.

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.

Our results are a testament of precision and proficiency with which we run our business and the value we deliver to all of our stakeholders.

In financial terms we exceeded all of our expectations for FY15.

Our revenues for the full year were up 14% to $136 billion and adjusted earnings per share from continued operations -- from continued operations were up 25% to $4.96.

Free cash flow was exceptionally strong this year coming in at a record $3.7 billion.

The strength of our financial position enabled us to make important, strategic investments including the acquisition of MWI Veterinary Supply, and most recently the pending acquisition of PharMEDium.

The addition of these two high-quality acquisitions to the AmerisourceBergen portfolio, demonstrates our commitment to the pharmaceutical supply channel and the opportunities we see inherent in it.

It also highlights our ability to extend our existing capability into new markets and to continuously enhance the services we are able to provide to our existing customers.

We could not have made these two significant investments in the same calendar year if we did not have tremendous confidence in our ability to manage complex, diverse businesses and enhance the level of range and services that we provide to the market.

Moreover, in addition to making these investments, we also have made substantial progress in offsetting the expected impact of warrant exercises we anticipate in FY16 and FY17.

At this stage we've essentially completely offset the impact of the warrants and are very proud that we have so adroitly been able to fulfill a commitment which we made to our shareholders when we first entered into the long-term, strategic relationship with Walgreens Boots Alliance.

This relationship, which will be coming up to our three-year anniversary, has thus far been a tremendous success and we look forward to many more benefits in the years ahead.

We selected WBA as our long-term partner, not only for cultural presence, but also because we believe they were the best long-term partner for us in the retail chain space.

And certainly their performance is our largest customer and sourcing partner has been a very significant contributor to our performance over the last few years.

Our operational execution was also very strong this year.

All our customers have benefited from enhancements we've made to our infrastructure, and we have certainly been realizing the benefits of the increasing scale of our business where we have more than doubled the number of [lines] we manage over the last 25 months.

We also continue to execute on our advanced programs and services for our manufacture customers, including those provided by AmerisourceBergen Switzerland.

While we have substantially strengthened our core business over the last two years we always feel that we can and should do better.

Our customers are being challenged and they want and should expect that we will stand up in new and innovative ways as well.

But this is what excites and motivates our team.

We also continue to work on an associate experience part of our business and I feel we are not only attracting and importantly retaining exceptional talent, but we are being recognized for our culture in the marketplace.

Just this week we were named one of the coolest places to work in Philadelphia by Philadelphia Magazine.

Not that you can put this in our EPS guidance, but it is still recognition that we are proud of.

For many, many years wholesalers have proven to be one of the most resilient and reliable components of the pharmacy core channel.

Over the last two years our entire industry has successfully transformed itself in order to better embrace the changing and consolidating needs of the healthcare landscape.

Wholesalers have proven to be adept at providing value that goes well beyond the essential services of aggregating demand and the logistics of getting products from one point to another safely and securely.

We help enable efficient pharmaceutical care and the widest possible access to products, which allows our customers to focus on expertly caring for their patients.

It remains an exciting time to be in the pharmaceutical services industry.

Organic growth rates in the US pharmaceutical market are solid, health reform initiatives continue to improve access to care, and new and innovative products are coming to market.

In recent years we've seen new products come to market that dramatically improve the lives of patients and often in cost-effective ways.

The R&D pipeline remains full of promising new products and the combination of advanced therapies, and improving access to care not only drives growth opportunities but most importantly, meaningfully improves patients' lives.

The high percentage of generic scripts in the market also helped pharmaceutical care be in a big greater driver of efficient healthcare for many of the therapies that we deliver.

AmerisouceBergen is uniquely positioned to help ensure products get to market as efficiently as possible and that patients have access to both traditional and complex new therapy across all sites of care.

Please turn to the performance of AmerisourceBergen in the September quarter.

Tim will provide the financial details but I want to call out some highlights from our business units.

AmerisourceBergen Drug Corporation had a good quarter with revenues up 8% even as we continue to fully anniversary the on boarding of the Walgreens business.

Our growth was driven in large part by solid, organic volume growth.

While generic drug inflation has slowed meaningfully over the course of the year, generic sales are strong across all of ABDC's customer segments.

We are very pleased that our Good Neighbor Pharmacy chain helps us (inaudible) customers all performed well in the quarter.

Last quarter I spoke about enhancements we had made to our programs for our independent pharmacy customers.

The opportunities that exist for ABC to partner with pharmacists, the impact of delivery of healthcare in the US will be an important contributor to our growth going forward.

For many years we've been proud advocates for community pharmacies that increasingly provide some of the most important touch points to ensure patients have access to medications and to other aspects of care.

We also remain very active with regulators and legislators, both independently and through our trade associations, to expertly advise and inform those important constituents on pertinent issues for our industry and our customers, especially with respect to issues regarding the safety and security of the pharmaceutical supply channel.

With the close of the September quarter, we have now fully anniversaried the on boarding of the Walgreens distribution business.

Since the implementation of this historic distribution contract, Walgreens has exceeded our internal growth estimate as a customer this quarter, this year and last year.

As our retail business is growing substantially over the last two fiscal years, we've also had strong performance in our health systems and [ultimate side] segments.

In early October we were very pleased to announce a definitive agreement to acquire PharMEDium, the premier national provider of outsourced compounded sterile preparations to acute-care hospitals in the US.

This acquisition represents an important investment in our ability to provide market-leading services and solutions to health system customers.

A customer segment that is playing an increasingly important role in the provision of healthcare in the US.

PharMEDium's proven ability to consistently deliver high quality CSPs in key therapeutic areas, combined with the impressive track record of growth, made them a compelling addition to ABDC.

Because we expect PharMEDium to make a significant contribution to our FY16 and we expect the transaction to close during the first quarter, we have included anticipated contribution from PharMEDium in the guidance we're giving for FY16 today.

AmerisourceBergen Specialty Group again had impressive results in the quarter with a number of different factors driving strong sales.

Setting aside the impact of some previously reported manufacturing impose changes on certain oncology products, which moved some revenue from Drug Company to Specialty, ABSG revenues were up an impressive 15%.

Our position distribution businesses, ASD and our community oncology business all performed very well in the quarter.

We continue to be very confident and proud of our Specialty franchise.

Our market leadership in this area is rooted in customer intimacy and deep experience.

This informed knowledge has been the inspiration for the investments we've made in this business and the portfolio of services we have developed over many years.

Our capability to extend well beyond sophisticated logistics and into the distinct requirements with specific disease states and unique [facets] of products.

The combination of services and expertise we offer helps both manufacturers and healthcare providers manage the opportunities and challenges of this most dynamic segment of the market.

I believe the true differentiator of our Specialty business is our collaborative approach to bringing innovative solutions to both our physician and manufacturing customers.

Working in concert with our business partners is the best way to both discover and deliver value in the long run, especially in a marketplace that is increasingly focused on the cost of care.

During the year, our GSMR, Global Supply & Manufacturer Relations, business unit, based principally out of Bern, Switzerland, also known as AmerisouceBergen Switzerland, has made important inroads on the Brand, Specialty, Generic, and Consumer areas to establish an even greater level of professionalism and coordination between suppliers and our customers.

This also includes an almost 24/7 communication rhythm with our Partners at (inaudible).

Let's turn now to the other segments.

We had a full quarter of MWI in our results and we are very pleased with their performance.

We have made excellent progress on the integration.

We've met with most of the large animal help manufacturers and made good progress on identification of synergies.

One area where we see a lot of opportunity is in sharing and enhancing technology, not just in our warehouses and distribution centers, but also in the systems and proven methodologies with which we interact with customers and suppliers.

We've made a few tech and acquisitions in this area specifically over the last several months, and while they are small relative to the size of our total business, they are very important to the future of animal health platform.

The companion animal business was especially strong in the September quarter with growth in the low teens.

I have to say that they were just seven [companies amassed] under our belts we are delighted by how the MWI integration into ABC has gone.

Moreover, we feel very confident that MWI will continue to deliver excellent performance in FY16 and will make important differentiated contributions to the value we provide to the pharmaceutical supply channel as this complex new segment to our business.

MWI's willingness to embrace and implement new ideas and the ongoing commitment to our standing execution and customer service gives us great confidence in the future of their business and the role they will play as part of ABC.

Our Manufactured Services business also had a solid September quarter.

Our expertise in developing patient access and adherence programs and the experience we bring to the regulatory compliance and policy areas are clear differentiators today.

Our increasingly global reach and our manufactured services and clinical trial logistics businesses further expand our value proposition to manufacturers as we look to expand our ability to offer complex solutions for high-value pharmaceutical products launched in most of the developed world.

As I've said many times before, it's a great time to be in the pharmaceutical services industry in both the human and animal health segments.

Better economic conditions, health performance initiative, successful launches of new brand products, and population demographics drive organic growth rates in the US pharmaceutical market.

Advances in veterinary medicine improve the quality of life in companion animals and give pet owners far more choices in maintaining their health.

In addition increasing global demand for [protein] drives the production side of the market and creates opportunities to extend the expertise MWI has garnered in the US into developing global markets.

As we look ahead to FY16, and as I mentioned last quarter, there are a few headwinds and tailwinds that we ask you to bear in mind as you think about our growth rates for next year.

Tim will cover the specifics of our expectations but I want to highlight a few areas.

First the tailwinds.

Continued, solid organic revenue growth driven primarily by customer and product mix.

Better generic launch outlooks and [five months] incremental benefit from MWI.

The headwinds are significant impact from DOD contract repricing in the first half of this recently past fiscal year.

Other customer contract renewal anticipated in FY16, notably Kaiser, whose contract expires late in the fiscal year, and as we have shared before, that contract will be about seven years from when we first entered into this generation of the contracts.

Third, declining dollar contribution from generic inflation.

No one-time benefits from some of the cash flow drivers we experienced in FY15.

There are a few additional assumptions to contemplate as you think about FY16.

We assume no dilution from warrant exercises because we have the 2016 warrant 100% hedged.

$0.22 to $0.26 of net contribution from PharMEDium and no meaningful contribution from biosimilars in 2016.

We remain confident that biosimilars are an exciting opportunity for ABC and the market.

As discussed before we believe we would have a particularly strong role, especially in the position administered by similar products.

The challenges remain on the legal and regulatory side which prevent us from being too bullish on what biosimilars could contributor to ABC in the short- to medium-term.

Before I turn it over to Tim, I want to take a moment to thank our associates for delivering excellent performance in FY15.

Of value creation is a result of flawless execution, creative thinking, and the courage to implement all the ideas.

And our associates are the firm foundation upon which our performance is built

They share my conviction that doing things efficiently and being part -- and being an expanding and dynamic channel partner with a view to the future will be what sets ABC apart.

The always improvement quality of our offerings, our seamless execution, and our thoughtful capital management will help us grow our business in ways that help ensure we will generate long-term value for our manufacturer and healthcare provider customers, our shareholders and our other stakeholders for many years to come.

Now, here is Tim.

Thanks, Steve.

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

As Steve mentioned, we completed another excellent year at ABC.

Let me spend a minute to quickly recap a few highlights.

Our Drug Company executed extremely well this year; they finished the fiscal year setting internal records for both product service levels and order accuracy for all of its customers.

Our Specialty group continues to grow and execute as well.

They had their best revenue growth year in the last eight years, with all the businesses in the portfolio contributing.

We added MWI and are in process of closing PharMEDium.

Both are respected leaders with high market shares, and both have excellent, long-term business prospects.

Finally, we exit the fiscal year with a strong balance sheet while virtually eliminating the expected impacts of the dilution for the future exercise of the Walgreens warrants.

I have four main topics 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 topic I will briefly cover our warrant hedging progress to date, and the fourth and final topic, I will wrap up covering our FY16 expectations.

So let's begin our Q4 review.

The financial results that I provide this morning will all be on an adjusted basis, unless I specifically call them out as being GAAP.

Also, please note that all financial comparisons are for the fourth quarter ended September 2015 compared to the same period of the prior fiscal year unless otherwise noted.

For Q4 2015 our revenues increased roughly $4 billion to $35.5 billion, up an outstanding 12%.

Our growth on a comparable basis, so excluding MWI, was just under 10%.

The quarter's gross profit increased $135 million, 15% to about $1.1 billion.

Almost all the dollar growth came from our other segment primarily as a result of adding MWI.

Our pharmaceutical segment was challenged this quarter with a tough comparison which we anticipated and called out previously.

The repricing of the Department of Defense contract and the especially strong contribution from generic price depreciation back in the September 2014 quarter.

Operating expenses, our total OpEx increased about $103 million or 20% to $606 million, consistent with the change in gross profit dollars that I just covered.

The other segment drove virtually all of the dollar growth, again, due to the addition of MWI.

Operating income was $456 million, up $32 million or 8%.

Our adjusted operating margin was 1.29%, down about five basis points, driven by the pharmaceutical distribution segment being down 11 basis points this quarter.

Moving below the operating income line, interest expense net was about $27 million, 40% of this expense, or all of the increase, is related to our MWI acquisition financing.

Income taxes, our tax rate was 37% for the current quarter, down some from the prior year.

I should highlight that our tax expense and associated tax rates are higher this quarter because of a one-time, $10 million reserve of a deferred tax asset originating from state net operating losses that we will not likely be able to utilize.

This negatively impacted our adjusted EPS by $0.04.

For the quarter our adjusted diluted EPS increased 6% to $1.17, driven primarily by the addition of MWI.

Our adjusted diluted share count was 230 million shares, essentially flat to last year.

Let's move forward and discuss our segment results starting with pharmaceutical distribution.

Total segment revenues were up $34 billion, up 9.5%.

As mentioned earlier by Steve, Drug Company had solid revenue growth of 8%, driven by two items.

The first item we benefited by solid volume growth and to a lesser extent a strong brand pricing environment, and the second item we benefited from the final ramp of the Walgreens business.

This key customer accounted for about 60% of the increase in revenue dollars.

Beginning in Q1 2016, we anniversaried the full ramp of the Walgreens business and we look forward to growing with this customer in the years ahead.

Our Specialty Business Group had an overall revenue increase of about 24%, similar to the last three quarters, adjusting for the shift in certain oncology revenues, from our Drug Company to our Specialty business.

Our Specialty business grew an impressive 15% from higher volumes, a continued good pricing environment, and new drug introductions.

Specialty's growth came primarily from sales in oncology and ophthalmology drugs.

The sales growth percentages for the Drug Company and Specialty are before interest segment elimination, consistent with how we have reported these growth rates in the past.

Moving to gross profit, the segment's gross profit was $794 million, essentially flat.

We saw solid gross profit growth in our Specialty business due to their higher revenue growth.

Our Drug Company, even with strong revenue growth and a solid contribution from generic Abilify, was still behind last year's gross profit due to the two sizable headwinds that I called out previously.

Importantly, let me highlight that these two headwinds will continue to be a challenge for the segment and our first quarter 2016.

So as you think about our quarterly progression, please remember that these will carry over to the first quarter.

The segment's gross profit margin decreased 11 basis points primarily because of these two items.

Operating expenses were slightly over $400 million and were flat year over year.

Adjusted segment operating income was $388 million and again essentially flat.

Solid performance by our Specialty group was offset by the expected lower contribution from the Drug Company.

We can now move to our other segments which includes Consulting Services, World Courier and MWI.

In the quarter, total segment revenues were $1.6 billion, up significantly due to the addition of MWI on a comparable basis, so excluding MWI, segment revenue growth would have been as a percentage in the low teens.

MWI continues to have solid revenue performance as a result of their companion animal business.

Excluding the IDEXX impact, companion would've had a growth rate as a percentage in the low teens.

From an operating income standpoint we had a significant increase of about $30 million to a total operating income of $68 million.

The segment benefited mostly from having MWI included in the quarterly results, but our Consulting business also made a very good contribution this quarter.

MWI did incur a onetime bad debt expense of about $4 million in the quarter, related to a UK customer that negatively impacted their results.

For those that have followed MWI in the past, you know it is highly unusual for the Business to have a bad debt at this dollar level.

Let me switch gears and cover a large GAAP item that occurred in the quarter.

We determined that we have a permanent write-down of $31 million in our equity investment in Profarma, a Brazilian pharmaceutical wholesaler.

Right now it's due to the significant supply of Profarma stock price from our initial investment date to the date of our impairment testing.

We concluded that the decline in the stock price is other than temporary since the stock price declined significantly over one year ago and has not recovered cents.

Let me point out our investment in the Specialty joint venture where we are 50/50 owners with Profarma continues to ramp and is tracking to forecast.

Because of this, there is no impairment of our Specialty joint venture asset.

This completes our review of the September quarter.

I would now like to cover just a few key FY15 financial metrics.

Overall, as Steve mentioned, we did very well meeting or exceeding our increased guidance targets.

Revenue on a full-year basis, our growth was nearly 14% excluding the impact from MWI for approximately seven months.

Our revenue growth would have been 12%.

Our largest customer, Walgreens, represented roughly 30% of our total ABC revenues in FY15 and finished slightly ahead of our expectations.

Our Specialty Business finished the year at $24.4 billion with revenue growth of about 24%, both are records.

Again, excluding the impact of the oncology drug revenue that shifted, ABSG's revenues on comparable year-over-year basis was an impressive 15%.

Our adjusted operating income increased 22% to $1.9 billion.

Our adjusted operating margin finished at 1.40%, an increase of 10 basis points.

MWI, a higher margin business, drove about half of our 10 basis point improvement.

EPS, our full-year adjusted diluted EPS, was $4.96, up 25%, mostly due to our strong, organic operating income growth, the addition of MWI, and the benefits from a lower, consolidated tax rate.

Cash flow, we are extremely pleased, completing the fiscal year with free cash flow of $3.7 billion.

We had a positive impact from higher, total generic revenues, up more than 30% full-year 2015 versus full-year 2014, aided by the one-time ramp of the Walgreens generics business.

With better working capital metrics, this significant increase in generic volume was an important driver of our extraordinary cash flow this year.

Let me also point out that we did have timing differences, which had a positive impact of about $550 million to our free cash flow.

Duplicate inventory of $150 million, that was a negative in FY14, reversed and helped us in early FY15.

We also had about $400 million of timing here recently in September.

With four business days before Labor Day, we were able to order and receive some brand inventory, sell through, and collect most of the AR by September 30, while the AP was not due until October.

This pulled the working capital benefit forward from FY16.

That's all I have for comments covering our full year 2015.

Next, I will recap our warrants hedging progress.

As Steve highlighted, we were 100% hedged against the 2016 warrants exercise, meaning we will not have an increase to our adjusted diluted share count with warrants as exercised by Walgreens most likely in March 2016.

This quarter we also made significant progress against the 2017 warrant.

We now believe we are 94% covered, based on the September 30 ABC share price.

This means the uncovered portion, the 6%, translates to about 1.4 million shares shortfall at September 30, 2015.

As a reminder, the PharMEDium acquisition will help cover through its income growth any remaining EPS dilution from the anticipated share shortfall once the 2017 warrant is exercised.

I asked people to refer to the new table we added in our press release that highlights our caps call option coverage at various ABC share prices which you should find helpful.

Now, let's turn to our FY16 expectations.

The guidance that I provide will include our plans for PharMEDium acquisition.

Our working assumption is that we will report the Business in our FY16 results for about ten months.

Revenues we expect consolidated ABC revenue growth in the 8% to 10% range.

Let me provide some overarching comments about revenue growth.

Approximately 1% of our expected consolidated revenue growth will be due to having MWI for an incremental five months in FY16.

PharMEDium will add less than one half of 1% to our consolidated revenue growth and as a reminder this business will become part of ABDC and will be included in our pharmaceutical distribution segment.

In terms of segments, we expect pharmaceutical distribution to grow revenues in the high single digits.

Within the segment our Specialty business is expected to grow as a percentage in the low teens.

We expect our other segment revenues to grow about 30%, which is aided by having MWI for the full fiscal year.

Gross profit, we don't provide specific guidance on gross profit, but here are a few key assumptions.

Generic price inflation, consistent with what we communicated in the past.

We expect to see some moderation in the dollar contribution amount in FY16 compared to FY15.

Consequently this represents a headwind for us, especially in quarter one.

Brand drug inflation we expect to see some moderation in the inflation rates.

Generic drug launches we expect a better year in terms of dollar contribution.

Contract renewal as we have previously stated, ABDC will have a headwind for the first two quarters from the Department of Defense renewal, and in the last quarter we will have the impact from the Kaiser contract, which we are working hard to renew.

Next, operating expenses, we expect a fairly high percentage growth rate in this area, due to adding the incremental five months of MWI and to a lesser degree PharMEDium.

About 60% of the consolidated expense increase will be related to these two new businesses.

A portion of the remaining increase is related to additional IT and DT infrastructure costs related to our large CapEx project.

Examples of the costs include -- duplicate costs to run parallel IT systems, additional labor, and start up costs that can't be capitalized.

Operating income, we expect operating income dollars to grow between 16% and 18%, driven primarily by ABDC and the addition of PharMEDium.

Also we had the benefit of having MWI for the complete fiscal year.

Switching to operating margin, we expect our margin and basis points to be up 8 to 12 basis points, due primarily to the addition of higher margin businesses.

Interest expense, our interest expense is expected to increase significantly 35% to 40%, due to having a full year of financing relating to MWI and the new financing for PharMEDium.

Tax rate, our guidance assumes a full-year adjusted tax rate of approximately 35.5% which may vary from quarter to quarter.

Share repurchases, our guidance assumes that our adjusted share count will increase by about 1% in FY16.

This is due to curtailing our regular share repurchases until we make progress on our credit metrics getting them back to target levels.

As we make progress against our obligations during the year, we will be thoughtful as always with our capital deployment.

Adjusted EPS, we expect our FY16 adjusted EPS to be in the range of $5.73 to $5.90, an increase of 15% to 19% over our FY15 adjusted EPS of $4.96.

This range includes the benefit of the PharMEDium acquisition that we highlighted previously, a net contribution of $0.22 to $0.26 for ABC.

Relative to the two large headwinds I called out previously, the DOD contract renewal and moderation in generic price appreciation, it's important again to cover our expected EPS quarterly progression.

We expect Q1 to have growth in the mid-to high single-digit range.

By the time we get to Q4, we expect EPS growth to be in the low 20% range.

Switching to our cash flow, CapEx is expected to be approximately $400 million.

Given our cash outlook, we believe this is the right time to invest in our core drug business and specifically our distribution center network.

We plan to spend about 25% of our CapEx to build one new distribution center and also replace or upgrade core existing DCs.

We also expect to spend an incremental $100 million on IT infrastructure projects including two large multi-year projects, a data center consolidation, and a new business operating system for our Consulting business.

Free cash flow, we expect to return to a more normalized free cash flow this fiscal year as we anniversary the benefit of a significant increase in our generics business.

Consequently we expect free cash flow to be in the range of $2.3 billion to $2.7 billion.

In summary, I know that my comments today were longer than usual due to covering several topics, including guidance, so thank you for your attention.

Like Steve, I would like to personally thank all the ABC associates for the efforts made this year delivering these outstanding financial results.

We excited about starting the new fiscal year and we believe the Company continues on the right course to deliver long-term growth.

We appreciate your interest in ABC.

Now here's Barbara to start our Q&A.

Thank you, Tim.

We will now open the call to questions.

We ask that you please limit yourself to one question and a brief follow-up so we can accommodate as many callers as possible.

Colin, please go ahead with Q&A.

Thank you.

(Operator Instructions)

Bob Willoughby, Bank of America.

Thanks.

Steve, did you say the coolest company in Philadelphia?

Is that like an air-conditioning reference?

I'm not sure I'm seeing that otherwise.

(Laughter) Yes we've had a lot of cracks about it, but I am told by predecessors it's not your grandfather's AmerisourceBergen.

I think it's just we have focused a lot on the [social experience].

We've done a lot of great things for our associates, including having open area working bike racks, different sort of development opportunities which they appreciate.

There are actually some of things that MWI appreciated about joining ABC is a lot of the development programs we have.

I think the culture is something that truly is setting us one more part with enthusiasm and passion people have for the Business.

For example I was at our World Courier office in London on Monday, and I tell you it's very infectious the passion that group has.

Essentially it's the same people that were there when we acquired the Company, and that was the last time I was there was actually just a little bit after we completed the acquisition.

The same is true wherever we go.

I was in Ireland with our BluePoint folks Friday, so just more importantly from a scale perspective, the US Business is also very true of that whether it's Frisco, the Specialty Group, Charlotte, the Consulting Services, and Philadelphia and all our drug Company regions.

So just pointing out that our culture is really a strong driver of our performance and the confidence that Tim and I have that we can pull up two fairly complex deals like this and the $5 billion in acquisitions in one year is definitely a sign that we have a lot of confidence in our ability to execute.

I'd say you're not paying Larry Marsh enough.

But I guess as my follow-up can you give us a quick update on PharMEDium and just some of the FDA issues they have?

Where does that stand?

It's interesting because I think if you go back to the pedigree legislation we were so focused on it and got slightly irked two years ago that it was being held up by compounding parts of that bill, the drug safety and quality.

Now it's turned out to be what we think is probably one of the key drivers for an investment decision here.

The quality requirements that are going to come that are already resident in that business, and we think it will only improve, increase the vigilance that will be required from these pharmacies and the scale is only going to increase.

We were just so impressed with the competitive differentiation and the commitment to quality.

The acquisition idea has been very well received by Health Systems customers.

One of our biggest customers said did you guys take your (inaudible) -- that was on of the comments they gave us back.

We had a quick, [diligent] -- not of the overall footprint to say even a smaller acquisition like World Courier with four very large compounding pharmacies of which we managed to visit all of them during our diligence.

We're excited and we think that there will be a very iterative dialog always with the FDA and other regulators, but we expect that we will continue to set the bar for quality in this area and we think that this service will be -- it's not a commodity service at all it's a high quality service, it's complex and like I said when we announced it, if my family was getting (inaudible) I'd like it to come from PharMEDium.

I can't believe there are hospitals on its own can create the center of excellence that a company like PharMEDium can for these sterile preparations.

We're expecting to close sometime in the next two to three weeks.

We haven't heard back yet from the FCC but we're well-positioned close, and we're excited to bring them on board.

We do expect that we'll close fairly shortly because Tim wouldn't have included it in guidance if we hadn't had that strong expectation.

Tim, anything else to add?

I would just say, the other thing to remind people from the conference call, we did a fair amount of diligence.

We were aware of all the outstanding items, and we're committed to investing and resolving and we think the regulatory can be a competitive [vote], if we do it really well it will protect our market share.

Okay, thank you.

Garen Sarafian, Citi Research.

Good morning, Steve and Tim.

So I guess first right off the bat given yesterday's announcement how are you skilled currently to take on a large new retail client across branded and retail?

I know that in Tim's remarks there was an investment in a new DC.

I'm wondering sort if that is sort of related to just potential growth?

Just overall what type of investments you would need to make and how quickly you can get there?

It's really early because obviously we weren't [under the tent].

We anticipated that WBA would be a consolidator, that's one of the reasons why we entered into this very comprehensive relationship with them.

And so far that piece has proved to be very, very intact.

We were irrespective of any consolidation, we were expanding our network.

Some of our [standards] definitely have been around 30 years.

I remember when I joined Bergen in1994, like Houston was the standard in Mansfield.

Those are some of the ones that are now older, they were the standard most modern DCs in our network.

It's definitely time that we needed to expand the network.

I think it's a good example of us investing in our core business, and being ready for new development, new growth.

We are with the customers that are growing the fastest, many of them.

That is something that is always evident in our thinking when we select who we are going to try and retain, and who we are going to go after in a competitive RFP type situation.

And our exposure to Specialty is a benefit to us not only in growth but also in any changes in price increases because Specialty drugs, because of ASD in particular, have a lower exposure to price increases historically than other brand drugs -- and more the oral [solids] type brand drugs and established therapies.

Even a self-administered ones -- with MS and rheumatoid arthritis, for example, typically that's positioned [administered] to have the lower exposure to price increases.

So another good thing about our business.

We were very well prepared.

We've announced four new DCs, one that will be completed this year.

And we're looking more like the Orlando models for these new larger DCs where we have 300,000 to 40,000 square feet.

That's pretty impressive.

And we use the same footprint, it's very efficient, we've retained a lot of the people that worked on the AmerisourceBergen integration, we've retained a very good engineering and distribution science department that continues to perform excellently for us.

We've used it to consult with customers on different projects as well so they are a great resource for us and probably something we don't talk about enough.

Tim, anything to add?

Say guess you guys are very well prepared but I guess is it sort of months increments or something that will take longer than that to prep up for?

As far as your initial question on Rite Aid, we point to a very long regulatory process -- I just go with what Stefano said yesterday.

We shouldn't really comment on what the existing distribution obligations are, it wouldn't be appropriate for us to comment.

Got it and on Walgreens overall you've been pretty consistent categorizing the work you've done and the three buckets and the branded and then the generics and then the overarching third other bucket so I'm just wondering what are you building into this year from the other bucket that I really hadn't heard yet much about?

And of course given the recent announcements, how does this impact the plans you have for this year in this other bucket?

I think the [recent announcement] would probably be mostly in bucket one and bucket two but again it's not current.

If bucket three continues to be discussions around Specialty is there a benefit to doing more on the consumer HBA OTC side?

Some benefits from Good Neighbor Pharmacy from some of the competencies that WBA has well established.

Clinics is one that we priced some models on, but also network, co-development so those are the areas.

I think having Ornella on our Board, who has been a champion of independent pharmacies in Europe, and having both Stefano and Ornella, and a lot of the former Alliance Boots people having more exposure to the US market but the wonderful heritage that they have in wholesale I think is going to really bode well for us also.

So we continue to have great discussions about bucket three.

I will tell you bucket two which is re-sourcing has been terrific.

We still think we're the most global, we have overall still the largest sourcing contracting ability and I think you've seen Stefano's really strong inclination to growth both organic acquisition and Alex having a strong focus on the customer experience in the stores, so we're very pleased with where we are.

And (inaudible) international Specialty.

I think that with the [loss] we're working on -- just with the type of size they are, even AmerisourceBergen is as well, it's hard for them to show up directly in any of the results from quarter to quarter, but you will see a long trend, I believe, towards more collaboration and joint innovation, co-investments we're looking at in a few markets, et cetera.

I would just remind everybody we said bucket three will be three to five years, we're kind of at that point, we're still having top to top meetings and talking to our Partners.

They've been busy and we've been busy, but clearly we still have discussions and we think we can do some things commercially together as we go forward.

Thanks.

Robert Jones, Goldman Sachs.

Yes, thanks for the questions.

I guess just a couple questions on the guidance assumptions.

So it sounds like you're expecting declining dollar contribution from generic inflation.

Just to be clear you are still assuming an inflationary environment, you're not thinking about deflation next year?

And then this seems to be a bit of a moving target where inflation has been and where it's going.

I guess how much visibility do you guys have or do you feel you have around this important driver?

I guess I'll jump in and start, Bob.

We are assuming a positive contribution.

We're modeling 2016 after -- to get some goal posts here, we're modeling 2016 after the second half of our fiscal year, so our June quarter, September quarter.

We've taken that to quarter and period and said that's probably the run rate so that's how we're thinking about 2016 positive contribution to GP.

In terms of inflation, deflation we have a large portfolio of generics.

That basket can still be somewhat deflationary and still provide positive contribution to your P&L.

We really haven't commented on where we think that portfolio would be but again I would assume as we've been in the past slightly positive with that portfolio it's going to be slightly negative in 2016.

A guess on the other side on the branded inflation assumption, it sounds like you're expecting branded pricing to moderate.

That sounds like a little bit of an incremental update.

How impactful will that be on the outlook?

And then is the expectation for some moderation in branded pricing is that something that you're observing currently in the marketplace?

And that's why you're baking it into the outlook?

Well we had, say, the highest inflation I can ever remember this year at 15% so I think there's been a lot of publicity about that and it's not driven as much by the smaller products that you will often see in hospital anesthesia -- some of the bigger products as well which has been well recorded.

I don't expect that -- we probably seen more of a resumption to the lower teens or even high single digits, that's the range we would see.

Again ABC, our portfolio is very geared toward Specialty which as I said a little while ago because of ASP on the physician side you don't see the big increases there that you've seen in (inaudible).

We think that pharmaceutical is still of course provide excellent healthcare efficiency especially when they administer it in the correct settings with the right sort of adherence programs.

It's the biggest driver -- one of the biggest drivers of value.

I think manufacturers -- I think you just have a lot of therapies that provide excellent value, and then they look at new therapies being introduced and the efficacy of those drugs and I think there's been a propensity to increase that.

I think the change generally gets overestimated and things take a lot longer than you expect and a good example I can give you is the pedigree rule.

Everyone knew that it had to be made -- passed and made since it was going to cause a lot of inefficiency in the system for the states to start passing down pedigree rules.

But it's very, very hard to get legislation, as you know, although we -- we know this week, but notwithstanding that it is -- it always does seem to get very hard to get legislation passed.

I would just remember that you make any assumptions on how things will change especially from legislation.

Bob, I would just say to the level with everyone here, remember with brand we probably have 95% of our brand volumes tied up with fee for service agreements and we're probably in the third, fourth evolution of contracts so again a change in brand inflation is not a big driver to our P&L.

It's a sweetener, perhaps, but it's not going to impact us and I would like to just, for 30 seconds go back to generic price appreciation.

We talk a lot about it, but just to remind everybody the bottom line is generic volume in capturing the wallet, and not having leakage, the rebates and incentives you get from your manufacturer partners launches, those are the things that really drive your P&L more so and what we focus on -- and something that is not in our control is generic price appreciation.

Again it's an enhancer but the other categories are really significant to our P&L.

Understood.

Thank you.

Lisa Gill, JPMorgan.

Thanks very much.

There's always a lot of talk about global procurement and your deal that you put together a couple years ago with Walgreens, but Steve, we don't generally hear you make announcements about customers that come onto that platform.

Can you maybe just give us an update as to where you are on that?

And what are some of the offerings that you have in the marketplace for your existing customers?

(Inaudible) Thanks for the question.

The best way and the most practical way for an ABC customer to exit the WBAD benefits is through our ProGen [formulary].

We're focused every day on making that the best overall value basket.

It doesn't -- it's not really the headline used but it's one of -- You know we do these monthly business reviews and the first I think on page 8 or 9 we start getting to ProGen volume and when I get the deck I know it's the first thing I look at how we are doing on ProGen because it's so important to us and it's a key driver.

ABC I think with the SAP implementation with Bob Marsh coming on as President and his strong analytical background, analytics gets stronger and stronger all the time.

It's very complex because there's 2000 important generic products and a lot of our customers are in the market.

But outside of our usual peers there's also some other companies get into to our telemarketing, and some are even operated by our peer companies so it's a very dynamic marketplace and we focus everyday on making sure our customers understand it.

Recently I've been really impressed with some of the dashboard tools we have so that our sales reps can do incredible deals, have great access to very powerful and up-to-date tools to show customers exactly what the true net pricing is taking into account full rebates, et cetera.

So we're doing a good job, I think we will carry on getting even better.

Again, the large heritage, I think people really understand how we need to compete against short line wholesalers, et cetera.

There's a lot of strong commonality we have, and then Peyton's group being based in Bern I think is also very hopeful.

So that might be one way -- I know we are coming close to, we're actually over our time.

GNP with [Dave] being fully focused on that we announced that we have our strongest new level of service offering, we call it the next generation of services.

A lot of that is around adherence, a lot of it is around new network programs, a lot of that is really encouraging at the highest level of compliance from our customers so that's all going well.

We had over 800 customers sign up the first month to go on our Elevate platform.

We'll give you further updates on that, we just had a lot to talk about on this call but we're very bullish about where it's going.

Is there a way with that 800 customers can you talk about how that's grown over time or what that compares to the total number of customers that you have so we can just get an idea, Steve, of the incremental opportunities around this?

Yes we will do that on the next call.

The 800 was just the people who immediately signed up to switch from our GNP provider to Elevate literally in the first couple of days and that was just based on the strong trade show we had in Las Vegas.

But we will, Barbara will give you an update because we are very excited about the GNP platform and how it's proceeding and we want to make sure that we stay in a leadership position.

We did win the JD Powers brand satisfaction survey this year again so we note that we're very pleased about that.

Great, thank you.

Operator I think we will take one more question.

Eric Percher, Barclays.

Thank you.

So a question on revenue and margin and as you do your forward plan for this year I imagine you're also thinking --.

Eric?

Operator?

Can you hear me?

Mr. Percher, please continue.

Were you able to hear the first part?

I can hear you now but why don't you start over, Eric.

Okay.

So a question on revenue and margin and looking at 8% to 10% growth less of course a little bit of acquisition.

These are high numbers relative to recent history, it sounds like you're taking a prudent amount of brand inflation perhaps returning to the mean a bit from this high-growth year.

As you look at 8% to 10% or maybe it's 6.5% to 8% once you pull in acquisitions, do you think that's the sustainable growth rate going forward?

And then as you look to your margin, on the growth that you're getting here obviously we don't have generic conversion in the same way, in fact we had generic inflation working against us, how do you think about the margin profile in your ability to drive margins, understanding that you have a couple of factors working against you this year?

Hello, Eric, This is Tim, I'll start.

We have a very strong portfolio of businesses, customers I should say, and they're large and they're fast growers so we think we're advantaged that way to grow faster than the market.

I think we've proven that the last few years.

That's why -- we do have inflation baked in there.

We do sell a large mix of brand drugs.

But at the end of the day large customers, like a Walgreens and like a Kaiser and others, the GPOs grow faster, and that helps us and let's not forget we also have Specialty of strong franchise that we called out to grow in the low teens for 2016.

So we're pretty optimistic about our top line revenue growth.

In terms of margin, margin will be flattish.

I called out that we're going to be up 10 basis points in 2016 with most of that coming from the new businesses, so that's MWI and PharMEDium.

We're really focused on growing operating dollars, that's what we do and that's first and foremost and sometimes the margin is challenged because of these large customers and the pricing they get.

So it puts a little margin pressure on the P&L but again we focus our growing dollars to drive the EPS growth.

I don't know, Steve, do you have any comments?

One thing we try to do -- I would love to make this comment, because it's what I am exceptionally proud of.

If you set aside the $3.7 billion we had in cash loan in FY15 and go to the more normalized rates we predicted, but you'll note it's almost double our EPS growth rate a little bit less than that.

Of course when you look at it it's about [six day sales].

However, we've done a great job of taking that cash flow managing through the warrant hedging, which has been significant over $2 billion about, and then two acquisitions with our strong balance sheet that will differentiate us both in services and margins.

NWI was I think was well understood that PharMEDium if you look at their financial performance it's been absolutely for a large business one of the most impressive growth rates I've seen since the [equity days of] Specialty.

The financial performance is what really, really attracted our attention and our ability that we can carry on driving significant numbers.

If you look at the job ABC is doing, we are investing in our core businesses with differentiated complex higher margin services that cash flow is what gives us the ability to.

We've always said our first prize is great internal projects.

For example, when I was at Heathrow this week there's a $300,000 testing machine that they are going to buy which will save us $300,000 a year in testing expenses.

Not anything we'd normally talk about but that's a great example of why internal investments work the best for us.

Our National [Distribution] Center has been an absolute home run, particularly now as we bring it into FY16.

SAP costs us a lot more than we expected but we couldn't have done the things we do without it, so that's prize number one.

Prize number two is World Courier, PharMEDium and MWI, and PharMEDium is still too early to call, but MWI I think, and World Courier, we feel terrific about the way we being able to bring in the people, the customers, the suppliers so I think we're all doing the job that you're all paying us to do very, very well.

I just wouldn't look -- underestimate the importance of that cash flow and how it's -- (inaudible) carrying on managing our margins and our growth rates, and (inaudible) internal and external projects so I did want to make that point as we wrapped up.

So thank you, Eric, and Barb, I'll just conclude by saying how proud we are of our performance this year.

It really has been a great couple of years, we're excited about developments in the marketplace.

No one can accuse our sector of being boring at all and this is an incredibly dynamic time to be in this industry.

I'm just very proud of the way ABC is positioned, the way we are approaching customers, the way we are approaching associates, actually the relationship I have with our Board I say is another great element of our success.

So hopefully this call will demonstrate both the value we're providing as well as the confidence we have in the future.

Thanks for your time today.

Barb are you going to close?

Thanks Steve, and for those who are still on the line, I know we left a lot of people in the queue so we'll try to get you as soon as we can.

But before we sign off I just want to highlight that we'll be at a couple upcoming events.

On November 4 we will be attending th Citi Healthcare conference in New York.

On December 10 we'll be attending the Bank of America Chicago Healthcare one-on-one conference, and in January we'll be attending the JPMorgan Healthcare conference in San Francisco.

With that I'll turn it back over to the Operator.

Thank you.

(Operator Instructions)

That does conclude our teleconference call for this morning.

Thank you very much for your participation and do you have any closing remarks?

You may now disconnect.