美源伯根 (ABC) 2016 Q1 法說會逐字稿

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

At this time all participants are in a listen-only mode.

Later we will conduct a question-and-answer session; instructions will be given at that time.

(Operator Instructions) As a reminder, this conference is being recorded.

I would now like to turn the conference over to our host, Barbara Brungess.

Please go ahead.

Thank you Lisa.

Good morning everyone and thank you for joining us on this conference call to discuss AmerisourceBergen December quarter fiscal year 2016 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.

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 fiscal 2015 as well as our quarterly and other filings with the SEC.

We will also be discussing non-GAAP financial measures which we used 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 speak as of their respective dates and this call cannot be rebroadcast without the express permission of the Company.

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 pleased with our results in the first quarter of fiscal 2016 and I commend our associates for the tremendous value they provide to the pharmaceutical supply channel.

Day in and day out they are focused on creating value for all of our stakeholders and ultimately for the patients we all serve.

We play a vital role in the provision of healthcare which is grounded in our dedication to operational excellence, our continuous improvement in efficiency and our bold embrace of innovation.

Everything we do is ultimately driven by one objective, enabling high-quality pharmaceutical care for patients.

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 creative solutions to the challenges inherent in today's healthcare marketplace.

The proficiency with which we run our business creates value for all of our stakeholders and enables us to strategically position ourselves to take advantage of opportunities that are unfolding in a rapidly changing landscape.

Tim will provide the details on our financial performance in the quarter but I want to highlight a few items.

Revenues were up 9% in the December quarter to $36.7 billion.

Adjusted earnings per share grew 12% to $1.27, an impressive result considering the strong performance in the prior year.

We are making good progress on our free cash flow objectives for the year, generating $661 million in our first quarter of fiscal 2016.

In addition, we have continued to make strategic investments in our business in order to position ourselves well to meet the changing needs of our customers and take advantage of future growth opportunities.

In November, we closed the acquisition of PharMEDium, the premier national provider of outsourced compounded sterile op operations to acute-care hospitals in the US.

Health systems are playing an increasingly important role in patient care and this acquisition represents a significant advancement in our ability to provide market-leading services and solutions to this key customers segment.

PharMEDium's proven ability to consistently deliver high-quality CSBs in select therapeutic areas combined with the impressive track record of growth make them a compelling addition to ABDC.

We are very pleased at PharMEDium's new state-of-the-art facility in Dayton, New Jersey is now open and providing high-quality sterile IV products to their customers.

This new facility further enhances their capabilities and capacity and will be critical to supporting the future growth we expect in this business.

The integration work with ABDC is going very well and PharMEDium is on track to make a significant contribution to our fiscal 2016 and to our health systems customers for many years to come.

As we have previously discussed, in addition to making investments in our business, we have also kept our commitment to our shareholders and have virtually completely offset the expected impact of exercises of the warrants held by Walgreen Boots Alliance we anticipate in fiscal 2016 and 2017.

While the only share repurchases in the December quarter were under this special program and related to warrant hedging, we did repurchase $100 million under our normal share repurchases program in January.

I am very proud of the financial stewardship we have demonstrated over the years and we remain disciplined in the deployment of capital.

We are fortunate to be part of a unique and very successful industry that has excelled by constantly working to take costs out of the healthcare system while helping to ensure that patients have the widest possible access to the medications their physicians prescribe for them.

The industry is competitive but stable in large part because we enjoy a solid level of organic market growth but also because the participants in this industry are sophisticated enterprises that have made important investments in infrastructure and technology in order to continuously improve the most efficient and secure pharmaceutical supply chain in the world.

Today our expertise extends well beyond demand aggregation and logistics.

We help enable pharmaceutical care, serving manufacturers as they strive to develop new products and get them to market and healthcare providers as they focus on expertly improving patient outcomes while managing the cost of care.

AmerisourceBergen is uniquely positioned within this industry to help support the entire lifecycle of growth and to ensure patients have access to both traditional and complex new therapies across all types of care.

We work with thousands of manufacturers and make daily deliveries to tens of thousands of customers efficiently turning our inventory to maintain an order fill rate of more than 99%.

We work effectively in a highly regulated environment, maintain the flexibility to respond to emergencies on demand and we do so at an exceptionally low cost.

In many cases, patients' lives are at stake and our associates never hesitate to creatively solve problems and meet whatever challenges might be in front of them.

Let's turn now to the performance of AmerisourceBergen in the September quarter.

AmerisourceBergen Drug Corporation had a solid quarter with revenues up 5% driven in large part by solid organic volume growth offset in part by some previously announced lost business.

Our retail chain, mail order and hospital customers all had strong revenue growth in the quarter.

ABDC is however working through some tough comparisons this year and generic inflation in particular is declining more than we had originally anticipated.

As always, we continue to remain focused on driving efficiency in operations without sacrificing the service we are able to provide our customers.

We also are committed to making investments in our business that will position us well to take advantage of future opportunities.

These activities are critical to securing future growth.

Just this week we began servicing over 900 public stores with brand specialty products and some of the generics that they dispense in their food and drug combination stores.

This is a great example of how we continue to support access to specialty products across all types of care.

One of the unique aspects of this distribution agreement is that Publix will utilize our RFID-enabled special Cubex specialty drug inventory cabinets as they further deliver, develop their specialty pharmacy offerings.

In addition, Publix will have access to the full breadth of our knowledge and expertise in this area and we look forward to a long-term collaborative relationship with this key growing food and drug retailer.

In January, we signed an early renewal and a nine-year contract extension with our largest independent pharmacy group purchasing organization customer, Compliant Pharmacy Alliance or CPA.

CPA is one of the most innovative groups of independent pharmacy owners and has become an important anchor customer in our independent retail segment with 1225 member stores.

Since we first began our relationship back in 2009, they have nearly doubled the number of member stores.

The impressive growth, the high-quality leadership they provide in independent pharmacy and the value they place upon our good neighbor pharmacy programs made them an exceptional long-term partner.

Both the CPA contract and the Publix contract further strengthen our high-quality retail customer base and provide opportunity for future growth.

We are also pleased with the performance in our health systems customers this quarter.

Our acute-care customers increasingly provide some of the most important touch points for patient care.

These customers now represent one of the fastest-growing segments we serve in ABDC and investments we have made in targeted programs and services for this channel is paying off.

For example, both our Pro Generics programs and our private label generic programs, Bluepoint, today serve hospitals as well as retailers.

And of course as I mentioned earlier we closed the PharMEDium acquisition during the quarter we have made excellent progress on the integration of this business.

I am very excited by what our health systems customers bring to ABC and we continue to explore ways to bring innovative new solutions to help address the challenges they face in a rapidly changing market.

AmerisourceBergen Specialty Group again that impressive results in the quarter with a number of different factors driving revenues up 15%.

Our community oncology business in particular had a strong quarter and our physician distribution businesses also had a good quarter.

Our market dealership in specialty is rooted in the intimate knowledge of our customers and long and deep experience in the marketplace.

The expertise we have in this area and the portfolio of services we have developed over many years extends well beyond specialty logistics.

We help manufacturers and healthcare providers manage the distinct requirements for specific disease states and unique classes of products.

Our collaborative approach in this area has been the foundation upon which we have established ourselves as a preferred partner for specialty products and services and gives us a firm footing in this most vibrant and dynamic area of the marketplace.

In a market that is increasingly focused on the cost of care, the best way to discover and deliver value in the long run is to work in concert with our business partners.

One of the ways we accomplish this is through our global supply and manufacture relations business unit based in Bern, Switzerland also known as AmerisourceBergen, Switzerland.

We have made important progress in the brand, specialty, generic and consumer areas to establish an even greater level of sophistication and coordination between manufacturers and our customers.

In October, the Switzerland teams launched Certio, a new portal that provides business insights and customized reporting for our generics manufacturer partners.

Certio offers real-time access to AmerisourceBergen sales data as well as inventory management and sales forecasting tools.

The Swiss-based [data] also offers the flexibility to schedule and receive customized reports based on the manufacturer's business needs.

Certio's value is evidenced by its rapid adoption and usage with virtually all of our generic manufacturer partners accessing the system.

Looking ahead we continue to review the possibilities to expand the (inaudible) report and data for manufacturers helping them make more informed decisions and supporting their efforts to improve supply chain efficiency for their products.

Let's turn now to the Other segment.

This segment continues to benefit from the inclusion of MWI in our results and we are very pleased with their performance.

We have made excellent progress on the integration and a few investments to help them continue to meet their long-term objectives.

The companion animal business was especially strong in the December quarter as MWI benefited from strong organic growth, new product introductions, a healthy pricing environment and some new business wins.

We are very confident that MWI will continue to deliver excellent performance in fiscal 2016 and will make important differentiated contributions to the value we provide to pharmaceutical supply channel as we continue to grow our presence in the complex animal health segment.

Just this week I attended the MWI National Sales Conference in Orlando and I was reminded again of the strong culture at MWI, the excellent fit with ABC and the significant industry presence that MWI has in animal health which is exemplified by their demand generating salesforce.

Our manufactured services business also had a solid December quarter with Lash Group in particular performing very well as they grew their business with key manufacture customers.

Our expertise in developing patient access and adherence programs and the experience we bring to bear in the regulatory compliance and quality areas are clear differentiators for ABC.

Our increasingly global reach in this area further expands our value proposition to manufacturers.

We continuously seek out ways to expand our ability to offer complex solutions for high-value pharmaceutical products whether through world career in the clinical trial phase or through our consulting business in the commercialization phases.

When we combine these unique capabilities with the other programs and services ABC offers, we are increasingly able to effectively support products launched in most of the developed world.

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

We are well-positioned in all of our customer segments and we are proud to service flagship customers like Walgreen Boots Alliance with the pharmaceuticals they need to meet the needs of their patients on a daily basis.

While we face headwinds and tailwinds in any given year, we are well-positioned to deliver 50% to 80% adjusted earnings per share growth in the year following two consecutive years in which we delivered growth over 20%.

Tim will provide the details on our revised guidance and while I am disappointed that we no longer believe we can achieve the high end of our original EPS guidance range for fiscal 2016, we remain on track to deliver strong revenue growth and substantial free cash flow over the course of the year.

We will of course remain laser focused on being as efficient as we can possibly be while providing the level of services our customers expect.

Before I turn it over to Tim, I want to reiterate that our value creation is the result of flawless execution, creative thinking and the courage to implement bold new ideas and our associates are the firm foundation upon which our performance is built.

While fiscal 2016 has been somewhat more challenging than we first expected, I have confidence because our associates share my conviction that doing things efficiently and being a dynamic channel partner with a view to the future is what sets ABC apart.

Our dedication to continuous improvement in the quality of our offerings, our seamless execution and our thoughtful capital management all help us grow our business in ways that will help ensure we generate long-term value for all of our stakeholders for many years to come.

Now here is Tim.

Thanks, Steve, and good morning, everyone.

Consistent with past quarters my remarks this morning will focus on our adjusted results.

Please note that all financial comparisons are for the first quarter ended December 2015 compared to the same period of the prior fiscal year unless otherwise noted.

As a reminder, Steve highlighted that we closed PharMEDium in early November and the results are now included in our pharmaceutical distribution segment.

I have two main topics to cover this morning.

First, I will recap our fiscal Q1 consolidated segment performance and second, I will cover our revised fiscal 2016 expectations.

With that, we can begin our Q1 review.

Revenues were $36.7 billion, up just over 9%.

Our Pharmaceutical Distribution segment continues to account for the majority of our revenue growth due to our diverse customer mix on a comparable basis the last year which means excluding MWI which is in our Other segment, our ABC consolidated growth rate would have been just under 7%.

The quarter's adjusted gross profit increased 18% to $1.054 billion.

The majority of the dollar growth was due to the two acquisitions that we made, most notably MWI.

Our pharmaceutical distribution segment was challenged this quarter with a difficult comparison, last year in the December 2014 quarter, we had an especially strong contribution from generic price appreciation and we are still cycling through the repricing of the Department of Defense contract renewal.

We anticipated these headwinds and we previously called them out.

Operating expenses, our total adjusted OpEx increased 26% to $579 million.

Roughly 75% of the increase is related to our two acquisitions, MWI and PharMEDium.

Excluding the incremental OpEx impact from these two companies, our comparable OpEx growth rate would have been in the mid-single digits.

Operating income, our adjusted operating income was $475 million, up about $40 million or 9%.

Our adjusted operating margin was 1.29%, down 1 basis point from the prior year driven mostly by the Pharmaceutical Distribution segment being down 10 basis points this quarter.

Moving below the operating income line, interest expense net was about $29 million, up significantly from last year due entirely to the financing cost for MWI and PharMEDium.

Income taxes, our adjusted income tax rate was 34.6% for the current quarter, down from the prior year.

We continue to realize the higher percentage of our income from our international businesses which include World Courier, our Ireland Bluepoint private label company and our ABC Switzerland Company.

As Steve mentioned, we continue to expand our service offerings to manufacturers from Switzerland including the very successful launch of Certio, a market-leading data portal.

Looking ahead as we continue to expand our international service offerings and formally implement an ongoing R&D tax credit program, we now expect our full-year tax rate to be approximately 33.5%.

For the quarter, our adjusted diluted EPS increased 12% to $1.27 driven mostly from the contributions of our acquisitions.

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

This finishes our review of ABC consolidated results.

Let's move forward and discuss our segment results starting with Pharmaceutical Distribution.

Total segment revenues were $35.2 billion, up nearly 7% and as mentioned earlier by Steve, our Drug Company had a growth rate of over 5% with solid growth across key customer segments including independent, chain and alternate sites.

Contributors to this growth include overall market growth, the launch of new innovative drugs like the hepatitis C drugs and a continued good brand pricing environment.

I should point out that the Drug Company did have a slight revenue headwind this quarter of about 1.5% due to two previously announced customer losses.

Our Specialty Business Group had an overall revenue increase of 15% driven primarily by unit of volume growth.

This is the seventh consecutive quarter that our Specialty Group has grown topline revenues at 10% or above.

Looking at it from a disease state standpoint, we had meaningful revenue growth in oncology across a few of our specialty businesses and also ophthalmology.

Overall we are very pleased with the continued performance of this key business group that helps to differentiate ABC.

Moving to gross profit, the segment's gross profit was $772 million, up about $20 million or about 3%.

The growth in gross profit dollars was about evenly split between our two businesses, Drug Company and the Specialty Group.

Drug Company excluding the benefit from PharMEDium was behind last year's gross profit due to the two large headwinds I called out previously, the tough comparison on generic price inflation and the Department of Defense contract repricing.

Segment operating income was $380 million and was down 3%.

Our Specialty business continued with our high level of performance offset by lower performance by our Drug Company due to the gross profit items I just called out.

Wrapping up, even though it was a partial quarter for PharMEDium, this business is growing revenues and contributing operating income right in line with what we expected so a very positive start.

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

In the December quarter, segment revenues were about $1.6 billion, up significantly due to adding MWI on a comparable basis so excluding MWI, revenue growth would have been as a percentage in the high single digits.

Let me cover our Lash Consulting business first.

They had a very good quarter as a result of new and expanded support services, two existing manufacturer customers.

MWI continues to perform exceptionally well.

This is our third full quarter of owning MWI and we are extremely pleased with the integration of progress made to date.

The management team is laser focused on servicing their customers and growing the business.

On a comparable basis, MWI grew its companion revenues as a percentage in the midteens.

We continue to see an expanding US animal health market driven by organic growth, new innovative products and a healthy drug pricing environment.

From an operating income standpoint this segment had operating income of nearly $96 million.

MWI contributed the majority of the increase since we haven't anniversaried the acquisition yet, so consulting also help to drive the exceptional results in this segment.

Let me point out that the operating margin is down some in the segment as MWI has a lower overall margin compared to our two businesses, our two other businesses so overall, mix is causing compression in the margin percentage.

This completes our segment review and let me switch and quickly cover our two large GAAP items, warrants and LIFO.

Warrants is highlighted in the 8-K that we filed on November 23.

We received a favorable IRS private letter ruling on the deductibility of the fair market value of the warrants upon exercise.

Our GAAP tax rate and this quarter's financial results now reflects the applicable accounting as a result of the ruling.

Switching to our past deduction, our deduction will be the fair market value or the intrinsic value of the respective warrants at the time of exercise.

Our cash tax benefit is essentially our effective tax rate multiplied by the tax deduction amounts.

It may take several quarters to actually monetize the deduction because we will have to change our quarterly estimated tax payments and also potentially file for refunds.

LIFO, this quarter we recorded an expense of just over $100 million which represents about 25% of our full-year estimate.

Our full-year fiscal 2016 expense is expected to be less than the prior year due primarily to a slightly lower projected brand inflation rate.

This wraps up our P&L review.

I would like to cover key working capital and cash flow items.

In the December quarter, we had solid free cash flow of $661 million.

We continue to manage our working capital metrics closely.

DSOs, number of days and inventory both remain relatively unchanged even with our large topline growth.

We ended the quarter with about $1 billion in cash on our balance sheet with a relatively small percentage of this amount offshore.

The next area I would like to cover is share buybacks and also our warrant hedging coverage.

In October, we purchased 1.3 million shares for $119 million under our special share authorization to complete our previously announced March 2015 call option hedging strategy.

These were the only shares purchased in the quarter.

We highlighted on our year-end call that we limited our regular share repurchases as a result of the additional borrowings to partially fund the PharMEDium acquisition.

As noted in our press release table and as we have said in the past, we are 100% hedged against the 2016 warrant exercise based on the ABC closing share price at December 31, 2015.

This means we will not have an increase to our adjusted diluted share count when the warrant is exercised by Walgreens most likely in March 2016.

Now let's turn to our revised fiscal 2016 expectations.

I will provide guidance comments in a few key areas.

Revenues, we continue to guide to ABC consolidated revenue growth in the 8% to 10% range for the full-year which included the new Publix account.

Operating income, let me cover three items that are now impacting our full-year operating income and margin.

First, generic inflation trends; previously our fiscal 2016 guidance factored in the moderating generic price appreciation and consequently for ABC this translated to a lower dollar level of contribution versus fiscal 2015.

Now that we are starting our fifth month of our current fiscal year, we have had a longer period to evaluate generic pricing trends.

We thought that we'd see some increased activity in January like we did last year but it has still been especially slow.

Based on this, our assumption around generic price appreciation has been updated.

We now believe that generic inflation will be quite modest during the remaining three quarters of our fiscal year.

The second item, we are also forecasting that contributions from new generic drugs will be less than expected.

This includes a lock fee and a fused oncology drug that we previously expected to convert to generic.

However based on a recent court ruling, the generic launch has now been delayed a couple of years.

The third item as highlighted by Steve, we recently signed a new strategic long-term contract with CPA, an anchor customer to our independent retail segment.

We made a proactive decision to renew roughly one year early so that we can start enhanced programs and initiatives with them to drive incremental business over the long-term.

To summarize, due to the items that I covered above, our full-year fiscal 2016 operating income growth has slowed.

As a result, we now expect that our operating margin will increase 3 to 5 basis points, down from the previous guidance of an increase of 8 to 12 basis points.

Adjusted EPS, we now expect our fiscal 2016 adjusted EPS to be in a range of $5.73 to $5.83, which still reflects strong growth of 15% to 18% from last year's adjusted EPS.

Free cash flow, our guidance that we previously provided, $2.3 billion to $2.7 billion remains unchanged since we are still early in our fiscal year.

As I wrap up, I would like to add that we did purchase approximately $100 million of stock under our regular share repurchase program in January.

But a continued top priority for ABC is to reduce a portion of the debt associated with our recent acquisitions.

However as always, this is subject to reviewing our cash flow, market conditions and other competing capital needs.

So in summary, a solid quarter and start to the year.

However, we will be working through the impact of two incremental headwinds this fiscal year that weren't previously expected along with renewing an anchor customer to a unique nine-year contract.

As always, we continue to drive efficiencies in our business while delivering value to all of our customers.

We remain committed to growing our adjusted EPS in a meaningful way in fiscal 2016 by focusing on what we do best, servicing our customers, deploying capital appropriately and making the right decisions to grow our business for the long run.

As always, we greatly appreciate your interest in ABC.

Now here is 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.

Please go ahead, Lisa.

(Operator Instructions).

Robert Jones, Goldman Sachs.

Despite all of the comments and focus, I think there is still a good amount of confusion in the marketplace related to generic pricing and the impact on wholesaler economics.

I guess just two-part question.

One would be how comfortable are you today that what you are factoring in now contemplates a true downside scenario for generic pricing?

I guess the second part would be I think it would be helpful to just level set for everyone why if we are in fact returning to a more normalized deflationary environment how does that not create a more significant drag on profitability?

Bob, thanks for the question.

You know, I think we have of course at recent conferences, we have discussed this a lot.

I would say that ABC's approach as we've been saying, we always knew we didn't have perfect information about generic price increases and we did factor it in.

Of course we like to strive for performance so it was something that we had to take into account.

But we knew always said it was somewhat unpredictable.

we don't have perfect information.

So I would just say that ABC in our industry has proved to be very resilient, scrappy.

We have gone through change from fee to service, had huge patent expirations that we have experienced in the past few years.

We have had some specific events in specialty like oxaliplatin and we have prospered in both inflationary and deflationary parts.

So our manufacture contracts would take us on the downside for deflation.

And the key to us is always increasing volume and to have the right scale and that is where I think the (inaudible) line is so powerful.

We exited to that before we started experiencing significant inflation because we felt like being global, we felt like really going into partnership with the largest retailer was the right way to make sure that we always had competitive pricing on generics and a profitable environment whatever we saw in the market.

So I think we have made a lot of smart moves and I would just say that we are confident we can make money in a deflationary environment and we have historically as well.

Let me just add to Steve in terms of the first part of your question was -- we are very comfortable with our range now, we have taken the risk out.

I mentioned in my prepared comments that we think generic inflation will be quite modest.

So we definitely took the risk out of the range and we think it is quite achievable.

If it turns against us for the balance of the year then we still feel confident we will stay in the range.

Got it.

And I guess just a second question related to that but maybe taking a step back.

If we look at the core growth for the Drug Company, if we back out a couple of months for PharMEDium, it looks like EBIT margins were down maybe in the 15 basis point range.

If we are in a more normalized maybe deflationary generic environment, you mentioned maybe fewer generic launches, how should we think about the growth profile, the profit growth profile for that business going forward?

You know, we always talk about the Drug Company as the engine and I would point to the fact that we have got a couple of outstanding customers, notable WBA.

I think the CPA contract renewal was a really key win for us with a nine-year contract.

That is a tremendous expression of confidence in not only ABC but in our offerings around independent pharmacy.

So we think that we have got a great business with the Drug Company.

It definitely is mature and a lot of our customers are mature and we will be helped a lot by new drug innovations.

We saw Sovaldi was a real great -- all the hep C class was great for us.

We have got the new (inaudible) classes.

So there is a lot of new opportunities and we expect at some stage we are going to start doing our 2017 plan.

We haven't started yet but I can tell you that when Tim and I meet with Bob Mauch, the President of The Drug Company's team, we are going to be expecting good growth next year on operating margin.

So maybe that is the best way I can answer.

Tim, do you have anything to add?

No, I would just add that we want to pick relationships in our customers carefully.

We want customers that grow faster than market.

That is why we did the long-term contract with CPA so it is all about growing, it is all about growing your generic volume base and controlling, making sure you capture the entire wallet from that customer.

I think we have done a good job at aligning ourselves with these types of customers and also including in all of our segments.

So we feel very bullish on The Drug Company and it comes down to generic revenues and like I said making sure that you capture all of their purchases.

Great, that is helpful.

Thank you.

Steven Valiquette, UBS.

Thanks.

Good morning, Steve and Tim.

I guess just kind of looking at the rest of fiscal 2016, thinking about the magnitude of the impact of the three variables you were calling out.

Obviously you have taxes as the good guy but on the other side you have the generic pricing changes, the customer contract renewal pricing.

And then you also mentioned the lower profits from the new generics.

Is there any way just to rank order the magnitude of those just to give us a little more color for which ones are more critical versus less critical?

I am sure we have a sense but just any additional color would be helpful.

Thanks.

I will jump in, Steve, and I would say that we thought they were all significant to call out.

Looking at each one individually along with the tax benefits, they weren't probably significant to drop our range but collectively all three together was why we had to drop the range.

I think that is the best way to answer the question.

Okay.

The other real quick one just on the quarterly chronology, I'm not sure how granular you want to get on this.

But it does seem like the March quarter in particular could be a pretty tough comp on the generic pricing but then it does seem to get a little bit easier after that based on our data.

So I am curious if you guys share that view or is it may be too early to draw that conclusion at this stage?

I would say looking out for the balance of the year, the next three quarters, the second half June and September probably do get a little bit better for us.

We do have an easier comp the second half for two reasons.

One, that generic inflation is a better comp and also we start to lap DOD.

So those two items will make The Drug Company a stronger second half along with a good launch of one of the generics this year in the second half that we talked about previously.

That is still on schedule to launch.

Okay, got it.

Thanks.

Garen Sarafian, Citigroup.

Good morning, Steve and Tim.

On moderating generic inflation, could you give us a sense of how conservative your current assumptions are now versus before?

So I guess if things continue to deteriorate further, how much more room is there to fall before getting to zero contribution to earnings for the year?

Or I guess is it contemplated in the current guidance?

I will go back to that comment, obviously we are very considerate of that comment.

We just don't have perfect information.

I mean we were surprised in a couple of quarters at the strength of generic inflation and we have been surprised at how quickly we didn't see inflation in the last couple of months and you see various comments on it.

So yes, you could make an argument that we have been conservative for the next couple of quarters through the end of fiscal 2016.

But again, we don't have perfect information and we are calling it like we see it right now.

And if there was to be a resumption and there are a lot of industry factors for example, the big acquisition activity that is going on.

So things could change and we will be back but we made a commitment at one of your competitor conferences that as soon as we understood all the trends in January and we collated all of our data that we would be as transparent as we can be and I think we have lived up to that commitment very well.

Okay, great.

Fair enough.

And then Tim, I think you touched on this in your prepared remarks but in terms of your renewal with CPA, could you elaborate a little bit more as to what drove it to be renewed early?

I think as Steve had mentioned that the competitive landscape remains stable so wondering how these types of deals get renewed?

The competitive landscape remains -- it is competitive but I think those big customers really do like to stay with us.

What was important to us for CPA, right as I became President of The Drug Company, we took over this accounts and we've had a relationship with them where we have seen them experience tremendous growth.

We have obviously seen a tightening of networks, etc., an independent pharmacy and we have seen a real desire on ABC's account to expand the level of services, what we call the next generation of good neighbor pharmacy services.

So when you look at over 1200 independent members that CPA has and you looked at our need for anchor customers which we had that theme throughout ABC, we have it for example with Florida Cancer, we have it with of course WBA, we have it in dialysis with (inaudible).

So we have a lot of these just tremendous accounts.

So we wanted to really get CPA to unpack their bags to commit to us for the long-term so we could work on the planning that is so vital to the strength and collaboration that we have with many key customers.

So that is what this is about and we think that we made the right long-term move for our customers and you will find ABC unapologetically always being focused on driving the long-term value for our customers, and this nine-year contract is emblematic of that.

Got it.

Thank you very much.

Ricky Goldwasser, Morgan Stanley.

Hi, good morning.

So, Steve, if we just think about all the different moving parts and assuming the generic inflation is just going to be more normalized longer-term and the generic productline is what it is and the mix of the product generics being a little bit more complex, which might mean that we are not going to see the direct correlation of patent expirations and generic launches that we've seen in the past.

So when you step back and you think about kind of like the future, what do you think is kind of like the sustainable growth profile for kind of like the core drug distribution business from kind of topline and EBIT perspective?

We first always thought with an industry that is growing and we could go off script data but we have always just gone off aggregate IMS data and you look at a pretty good picture with brand introductions and also the customer profile that we have, those anchor customers that I talked about and many other customers that are so important to our overall growth.

And then you also look at our specialty presence and our specialty market share.

So we feel excited about the future.

We have a lot of other levers that we continue to pull around operating excellence, more analysis, better long-term contracting with more information.

We have expense efficiency that we continue to be very thoughtful about and then of course that thoughtful capital deployment which I think almost everyone would give us high marks on whether it is the right dividend policy or the right share repurchases, the right internal investments which we've made, many of which are so critical to our growth.

We talked about our AmerisourceBergen in Switzerland but there's lots of examples of those early strategic internal investments we have made which are probably among the best ROIC that we get on any investment.

So I tell you I am excited about the future.

I think we have got good prospects and I would remind you that again we are talking about in 2016 15% to 18% growth after two years of 20% plus.

So how many companies that have a revenue growth rate of approximately $150 billion are doing that?

So again, this is a great industry and I think the outlook for us really highlights that.

So two thoughts on this.

I mean for the top line I think distribution grew at about 7% this quarter on an organic basis.

Do you think that is a reasonable growth rate for us to think about going forward?

And if so, kind of like a 7% topline growth and assuming the opportunities for further efficiencies, should we think about EBIT growth at the 9% level so that is one thought?

The second one, you highlighted capital deployment and obviously the cash flows are above industry standard and continue to be very strong.

So can you just kind of walk us through just the sustainability of that longer-term to continue to generate these cash flows when you think about customer mix and the product dynamics?

Ricky, it is Tim.

I will take the first one which is I think your revenue.

I will echo what Steve said.

We have a very strong portfolio of customers and I would say that our revenue should grow above market, that is our working thesis.

We have selected fast growers so whatever IMS is, whatever the market is growing we should be above that.

And when you add in specialty, that is also -- I don't want to call it an enhancer to our revenue growth.

So again, tied to above market growth.

EBIT, I think it is too early.

We are not really ready to comment on EBIT.

We will provide more color as we move through the year and talk about that as we go.

And the cash flow, I think ABC is always targeting to have a higher cash flow than our net earnings, and you will note that we are working on some things with our changing tax rate.

So it is still our goal.

Absent any big changes in customer, significant customer or supply terms, there is no reason why we shouldn't be able to carry on generating that sort of capital efficiency that we have got for 2016.

I wouldn't go off 2015; I would go more off 2016.

That is a better range for you to base any models on in the 2015, which had some one-time benefits for us.

Thank you.

Lisa Gill, JPMorgan.

Thanks very much for taking the question.

Just to follow up on a few things.

First off, Tim, I think you talked about the IRS ruling around the warrants as impacting your tax rate going forward.

So how do we think about that?

You offset or excluded all the other warrant kind of expenses, but we will see the benefit in the actual income statement that you are reporting on a GAAP basis, as well as at a reported basis?

Good question, Lisa, and just to clarify.

So we did see a tax rate change benefit on our GAAP tax rate this quarter and our GAAP financial, but we have always excluded that from our adjusted.

So there is really no change on the adjusted tax rate, only on a GAAP standpoint.

I think that should answer your question.

Okay.

No, that helps.

But will it be accounted the same way going forward, as you talked about some of the rulings that are going to impact tax rate on a go-forward basis?

There won't be a difference going forward in terms of our GAAP and our adjusted rate.

Now we are synchronized because of that.

The benefit really from the ruling is we will get a cash tax benefit upon exercise that will take several quarters to monetize.

Okay.

And then, Steve, I just wanted to go back to your most recent comment that 2015 is somewhat of a difficult comparison.

But if I look at the revenue growth, for example, on this quarter 9.3%, and adjusted EBIT growing 9.1%, I think what people are trying to get at or trying to understand is the leverage to the business model.

And keeping in mind that there were some unusual opportunities around generic price inflation and some other things that have gone on as you talked about in fiscal 2015.

But can you maybe just help us to think about this business model in general, and what are some of the drivers to the leverage of a model off of that revenue number?

And then secondly just to understand some of the acquisitions that you have made recently for example like PharMEDium and the impact they can have, because as we just think about their revision to the EBIT growth or the margin expansion, I think we are just trying to work through the different impacts, how much that potentially is generic drug price inflation versus repricing and the benefit of some of these higher-margin businesses that you bought?

So any incremental color around that I think would just be really helpful.

I think first of all, PharMEDium is very new and so you have a good idea if you go back to what we said at the time.

It is performing very well as is MWI.

MWI of course is in a similar sort of industry from a competitive perspective as we are, we have some very strong competitors that we compete against.

But I think we are well-positioned.

I was at their sales meeting as I said on the call, so they are already performing at expectations, and particularly have done well because of some economic circumstances, the companion animals business has actually done especially well and again we keep on adding new services there.

PharMEDium, just really two months that we reported in closing in early November.

We are happy, we have made a few changes.

We haven't had surprises.

We of course are very mindful of the regulatory environment and trying to go where the pack is going, make sure that we are ahead of regulators.

But it is a business that we are thrilled to own.

The response from customers has been good but I would say it is going to take long for there to be really any synergy on the business development side with PharMEDium and our whole systems business.

But it adds to the overall discussion level, it adds to our strategic relevance so we like the acquisition.

I will tell you that the growth profile on this business especially the way that they can just do more business with the current customers, we are almost fully penetrated.

We do all the needs for our health system customers on the prescription side so this is a whole new way for them to grow as they keep on adding new therapies to their offerings as the customers get to like that service.

So we are really pleased about that.

Getting back to your questions as far as the growth rate, you will see we have had a lot of investment because of WBA and the number of SKUs that we are distributing through our business has really increased significantly.

And we have really caught up with that investment now.

We would hope to continue investing in the network making sure it is the most updated efficient and we do expect our core customers to carry on growing.

So the model is very leveragable.

And I think you can look at the long history we have had of creating efficiencies so I would say it is leveragable and we have just had some occurrences here with not having a strong generic launch period in this quarter and probably the March quarter.

And also the inflation that we have talked about as well as some tough comps on the DOD and the renewal on CPA which I can tell you we have done for all the right reasons.

So, Tim has something to add.

I will just that, Lisa, that PharMEDium probably added a few basis points to the segment this quarter because again as Steve mentioned, two months and they are certainly a higher margin profile company.

And second, I just want to go back to your tax question just to confirm.

When we gave new guidance on our revised tax rate, that is clearly not related to the IRS private letter ruling.

The change in our tax rate is related to international mix being very planful and thoughtful about growing international business, seeing the tax rate come down because of that and also we are implementing a formal R&D tax credit program related to technology.

So those are the drivers of the adjusted tax rate, not the IRS private letter ruling.

I just wanted to confirm that.

Thank you.

That is very helpful.

Charles Rhyee, Cowen.

You know, just want to touch on this concept when we are talking about generic inflation and obviously that is moderating.

But when we talk about deflation for generic drugs, my assumption has always been that deflation occurs either when the drug goes from brand to generics, you have a big step downs in pricing and then when more manufacturers come into a market, more generic manufacturers come into the market and the pricing falls further after sort of an exclusivity period.

Are there situations though when let's say there are a constant number of manufacturers for a generic drug where prices would then again start falling?

I don't think you are talking about rapid decreases.

I think you are talking about a contract renewal process or market conditions or as you said, a new entrant into the market.

But this is something we have experienced for a long time.

It is a robust market.

There are new entrants from India and China that come into the market but I think again most of the generic manufacturers that we work with are multinational companies that are beholden to shareholders and have got commitments to shareholders and are going to be responsible about the long-term positioning.

So we don't see anything that is really in a historical context irrational or truly surprising.

Again, we don't have perfect information and we did talk about especially the third and fourth quarter last year as well as the first quarter we had some really strong comps.

So sorry, we started to see moderating in the third and fourth quarter, the first two quarters last year we saw very strong price inflation which surprised us.

And we pointed that out on all of our calls.

Tim, any more detail?

I would just say that the last few years we always talk about our generic basket to portfolio drugs that have been on the market for over a year.

When we saw inflation, the inflation was in the low single digits.

Now that we are seeing some deflation, that basket is probably deflating in the low single digits.

So we are not talking like extreme movements either way.

Okay, that is helpful.

And just a follow-up.

Obviously we had the renewal of CP here, I think another contract you had talked about in the past with Kaiser which I think comes up at some point.

Any thoughts on where we are with this one and is that more of a fiscal 2017 issue that we should think about or is that something that we could be renewing soon?

Yes, we expect the contract expires in our fourth quarter of this fiscal year and we certainly had thought about early renewal but each large contract renewal and that is very large customer is a little different and we haven't had the opportunity to renew it early.

But that is not impossible but we still expect that our guidance would hold true even if we do renew Kaiser early or we announce a contract renewal with them which should really be much more as you pointed out a fiscal year 2017 event.

So of course that is an ongoing process so we can't comment too much about it.

Thank you.

George Hill, Deutsche Bank.

Good morning or maybe good afternoon, it just turned noon on my clock.

Thanks for taking the questions, I guess just a couple of quick ones.

If we think about the GPL renewal, how early was it?

When was it originally scheduled to be renewed?

And I'm just trying to get a sense for whether or not it was contemplated in the guidance?

That was not contemplated in the guidance, it was contemplated, we would have contemplated it in fiscal year 2017.

But as I said, we haven't really started doing our detailed planning for that.

So it was not contemplated but we had an opportunity and I had a great meeting with their Board along with our senior drug and independent pharmacy and I was really encouraged by their willingness to commit to us and when you think up out nine years from now to think about signing a contract for all of the members and one of their Board members was very emotional, talked about the responsibility they have to their patients, to their employees, to the different members.

And this is kind of a group voluntary group, they get together for various reasons and the fact that they were willing to commit to ABC, we took is a good sign.

So we went ahead and there wasn't a formal RFP process.

That is actually how a lot of our industry works.

Our customers like staying with their current wholesaler in most cases and absent some change in ownership, a lot of the customers do tend to stay with us even though it is a very competitive environment.

We are also excited with the new Elevate program that Dave Neu is working hard on on adding different elements to that.

Our PSA own network and the new contracting that we have with many networks.

To get CPA really embedded in that is very important to our whole Good Neighbor pharmacy offering including to the other Good Neighbor pharmacy members, the strength of their program with having a robust membership and a very high level of services and a high level of efficiency on the purchasing side.

So that was part of that decision there.

That is great color, Steve.

Congrats.

I guess I would ask everybody is obviously focused on the generic drug price issue.

Do your contracts with generic manufacturers typically allow you to retain minimum economics or earnings in the face of a deflationary environment or any color you can provide us around how those contracts work?

And how should we think about how those contracts are similar or are different to the IMAs on the brand side where you guys capture a certain amount of value?

It almost looks like kind of fee for service and a certain amount of value that is tied to spread.

And I guess is that something that you guys moving back to a deflationary environment will think about as we move into the next round of negotiations?

Thanks.

One of the things that is really important to our customers is protection on the downside as these products do decline.

I think that one of the best ways I can answer is to refer back to my comments on WBAD and the global scale and sourcing that we have and the fact that we did this in 2013 and is one of the key drivers for our [Forest] agreement and the equity and the warrants and the Board seats that we gave to WBA.

And at that stage, it was two separate companies.

Of course now they have come together.

So that was a key driver.

And the contracting process, it is not necessary that you have seen one and you have seen them all.

We try to have a fairly wide sourcing philosophy and that is true relative to ABC and WBAD.

And so we think we are very well-positioned and that puts our customers in a good position and it puts our relationship with the suppliers in a good position.

So we feel like we can be successful in any generic environment and the agreements with generic manufacturers are more market share-based.

They are more performance-based as opposed to the IMAs on the branded side I would just characterize it as that.

Okay.

I appreciate the color.

Thanks, guys.

Thanks, George.

Given we are past noon, let's take one more question, please.

Eric Coldwell, Baird.

Thanks very much for squeezing me in.

First, two topics, both have already been briefly touch on.

The first one is on the tax rate, understand the drivers of this year, curious what your thoughts are next year and beyond?

Should we for now just be using something around 33.5 and holding that or is there a reason to expect a big delta two years out?

It is Tim.

I would say kind of early to talk about next year.

We feel that the 33.5% is durable.

We are committed to always looking at the tax rate and trying to do what we can but I would model it off the 33.5% for now.

That is what we think.

Second one is I think Charles hit on this one.

You talked about meeting with the [ABDC] leadership in the near-term and that you are going to be expecting some strong operating margin improvement in fiscal 2017 in that group.

But today we are bringing the core outlook down a little bit on the CPA renewal and if I am not mistaken I think you have at least Humana, Kaiser and Express Scripts all renewing over the next several months.

So I guess Steve, my question is do your comments on the fiscal 2017 operating margin expansion, does that really contemplate what could happen with somewhere the tens of billions of revenue renewing over the next six to seven months?

Just curious on how that plays into your earlier comments?

Humana is not in fiscal 2017 and I'm not quite sure what it is.

We can follow-up with you on that.

Certainly Kaiser and Express are renewing.

Kaiser is a long-term contract and of course, we do expect that we will renew at a market rate that has changed, a lot has changed.

That was a seven-year contract I believe that is now due and so we expect that.

So my comments on meeting with the Drug Company team was around what sort of growth can we expect going forward.

And I will tell you that the Drug Company has a lot of levers so it is not specifically our margin because it is too early but it is really around what growth rates do we expect for the Drug Company?

And those gross profit dollars are very important to us as well as they are to our shareholders and of course no business is more working capital efficient than our Drug Company.

So that is another key value driver that we look for from the Drug Company.

So my comment was really around when we do meet with Bob Mauch and his team, we expect them to be generating growth next year.

So on Humana, I hate to clarify but in 2011, February of 2011, you announced a the five-year agreement taking effect May 1 of 2011.

So would that not lead to a renewal in May of 2016?

Yes, I believe there have been subsequent negotiations.

Barbara?

Yes, we have had an interim agreement with them, Eric.

Can't really give the details given that they are in a transaction though.

Got it.

Okay, fair enough.

Thanks for the clarification on that.

Appreciate the comments.

With that, Steve, do you have -- ?

Yes, thanks for the questions and we have had a robust discussion today which Tim and Barbara and I and everyone at our ABC team has enjoyed.

And we hope that you can see that we have tried to be as transparent and thoughtful about the information we provided you.

I will just end by saying that I feel really good about where AmerisourceBergen is positioned, the customer relationships we enjoy, the supply relationships we enjoy and the way that we thoughtfully deploy capital to create long-term shareholder value.

So thank you for your attention today.

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

Before we go, I just want to highlight that we will be attending the following conferences, the Leerink Partners Global Healthcare conference on February 11 in New York; the RBC Healthcare conference on February 22, also in New York; the Raymond James Institutional & Investor conference in Orlando on March 8; and the Barclays Healthcare Conference in Miami on March 16.

In addition, we will be holding our annual meeting of stockholders in Philadelphia on March 3 and proxy materials relating to that meeting are available on our website.

With that this concludes our call today and I will now turn it back to the operator.

Thank you.

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