美源伯根 (ABC) 2016 Q4 法說會逐字稿

Welcome to the AmerisourceBergen earnings call. (Operator Instructions). As a reminder today's conference call is being recorded. At this time we will turn the conference over to our first speaker, Barbara Brungess. Please go ahead.

Thank you, Nick. Good morning, everyone, and thank you for joining us on this conference call to discuss AmerisourceBergen's 2016 fourth-quarter and fiscal year end results. I am Barbara Brungess, Vice President Corporate and Investor Relations for AmerisourceBergen. And joining me today are Steve Collis, Chairman, 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 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 rebroadcast without the express permission of the Company.

Those connected by phone will have an opportunity to ask questions after our opening remarks. We have a lot of material to cover this morning so we might be slightly longer than normal, but we will leave ample time for questions. Now here is Steve Collis.

Thanks, Barbara, and good morning, everyone. Before I begin my comments on AmerisourceBergen's performance, I would like to start by directly addressing some of the recent comments regarding competition in the Pharmaceutical Distribution market.

It is true that customers and manufacturers are acquiring more value today than ever before, but that is to be expected in a healthcare landscape where both healthcare providers and pharmaceutical manufacturers are facing increasing cost pressures and constant demand to demonstrate the value of the products and services we provide.

Our manufacturer and provider customers expect exceptional service levels and innovative solutions and have the good fortune of being able to choose between three extremely competent and high-quality wholesalers.

While we each differentiate ourselves in specific ways, we are all very tied to our core supply chain businesses with our own unique mixes of services, segment orientations and key customers, all of which will invariably lead to some differences in growth rates in spite of our sharing a common macro environment.

While it is true that we have said we expect our revenue growth to exceed the overall market growth rate, that growth is driven by our outstanding mix of customers, many of who are expected to grow faster than the market, and by our footprint in specialty which also grows faster than the overall market.

These two elements provide the organic growth that is the primary driver of our business. We take the selection and development of our customers very seriously as we believe those relationships are the foundation upon which our business is [risked].

In addition, the collaborative relationships we have built, and the long-term contracts we have signed with our key provider customers, give us real confidence that we will be able to continue to deliver value to all of our stakeholders for many years to come.

I do believe our relationship with Walgreens Boots Alliance is truly unique. No other wholesaler serves all the prescription needs and partners so comprehensively on supply chain as we do with WBA and WBAD.

This year our relationship continue to flourish and we all believe there is more important, meaningful and profitable work left to accomplish. We look forward to facing the future with WBA as a strong and aligned partner.

I think it is also important to clarify our view of the independent pharmacy market specifically. This has always been an important franchise for AmerisourceBergen and we have spent a lot of time communicating in our past releases and investor conference discussions that investments we are making in Good Neighbor Pharmacy, business coaching, PRO generics and our third-party network Elevate.

Like all investments that we make, we expect that these investments should provide us a return. Specifically with independents, we are striving for improved compliance and share of wallet for our contracted customer base. We have deliberately chosen to work more with our established and proven relationships than to go and win new relationships that are not profitable or strategically relevant to our offering.

An example of the deeper more enduring relationships we have with independent customers is the 9-year exclusive relationship we signed this fiscal year with CPA, our largest independent buying group. This important customer is an innovator in their own right and has partnered with us for the long term because they share our vision for the future of community pharmacies.

It is also important to remember that we have now anniversaried the last of the independent buying group customers we called out in September 2015. Since that time we have worked hard to keep or win back some of the stores that were part of that buying group by rolling out significant enhancements to our key programs and services for our independent customers.

As we have said, it took longer for those activities to gain traction than we would have liked, but we are pleased with the progress we have made. In addition to those activities, we have made a deliberate effort to protect our market share with existing customers and to increase our rates of penetration with those customers primarily by reducing leakage especially on generic products.

As the sheer number of generic products has increased over the last several years, the sourcing opportunities that customers have had to acquire generic products also increased. As a result we have had to work very diligently not only to grow our share of wallet with each of our customers, but also to protect that share against the lure of short-term opportunities.

Some of those opportunities invariably arise outside of a formal RFP process or from nontraditional competitors like telemarketing companies. Our philosophy has always been to protect and enhance the prime vendor relationships we have with our customers, which is a unique cornerstone of that US distribution industry, especially when compared to other international models.

Our customers have responded favorably to these initiatives because they see the value inherent in sourcing all their products from ABC at a fair price. I commend our leadership and our drug company associates for the challenging work that they have done in these areas.

Specifically I feel ABC has been very transparent with not only our customers but our suppliers and our investors about the need to look at different pricing strategies for specialty products in the retail, outpatient and alternate care markets serviced by core drug wholesale business.

As we have said before, due to the cadence of different sell side contract expirations, these changes do not happen overnight. This philosophy is reflected in all the significant new long-term contracts we signed this fiscal year.

Moving on to our results. I am pleased to now discuss, as I had originally planned to do at the outset of this call, the successful conclusion to our fiscal year 2016. Today we are reporting solid performance in our September quarter. We met the goals and objectives we laid out for our business in early May; revenues were up 6% and adjusted EPS was up 12%.

We have made significant progress in addressing the challenging environment our core business faces and certain other areas of our business continue to perform very well, including our most recent acquisitions, MWI Veterinary Supply and PharMEDium. Our Specialty Group has also continued its strong performance through the September quarter.

In fiscal year 2016 we grew our revenues 8% to nearly $147 billion, grew our adjusted diluted EPS 14% to $5.62, and generated free cash flow of $2.7 billion. Over the course of the year we improved our balance sheet, repurchased over $700 million of stock under our regular program, and successfully mitigated the dilutive impact of an exercise of the two tranches of warrants that were issued to Walgreens Boots Alliance in connection with our strategic long-term relationship.

Our solid operational performance and strong cash flow generation in fiscal 2016 have provided us with significant financial flexibility heading into fiscal 2017. Over the course of my five years as CEO I am very proud that the Company group revenues at a compounded annual rate of 13%, which drove an EPS CAGR of 16% over the same period.

We have grown the business in a variety of different ways including through making internal investments through driving innovative partnerships with market-leading customers like Walgreens Boots Alliance, and by making thoughtful acquisitions to add to the capabilities and services we provide to help ensure we can continue to grow well into the future.

While we are looking ahead to a year that we expect will deliver growth somewhat below our historical rate of performance, I believe we have positioned ourselves well to work through the near-term headwinds and take advantage of longer-term growth opportunities.

The investments we have made and the foundation we have built will serve us well as we navigate the complex and continuously evolving healthcare landscape. While the precise ways in which we generate earnings will change over time, I am very confident that we will continue to drive growth because we provide an essential service to the global healthcare system and ultimately, and most importantly, to patients. And we do so in an incredibly efficient and effective manner.

Let's turn now to the performance in our business units in the quarter. Our drug company had solid revenue growth of 5% and a good performance in all of its customer segments. While our community pharmacy customers certainly face challenges in the rapidly changing environment, I truly believe that this is the time of tremendous opportunity for independent pharmacy.

Patients are benefiting from the accessibility of pharmacy care and the expansion of healthcare offerings that are now being provided in community pharmacies. Tens of thousands of patients still turn to independent community pharmacies for all of their healthcare needs and we are working to continue to expand upon that cornerstone of trusted healthcare.

I believe the programs we are offering at GMP and Elevate, among others, will continue to add value to this important segment and allow our customers to maintain their presence with their patients and the plans they service. This level of character demands a seamless integration of technology and personal service and our latest offerings in these areas continue to gain traction.

We have also made meaningful improvements to our first-to-shelf programs for new generic drug launches and service levels in our PRO Generics program have never been higher.

Having the enhanced ability to fulfill prescriptions for new generics immediately and to reliably meet patient demands for existing products are two of the most essential services community pharmacies provide. Even small improvements in these areas can help ensure that our customers are leaders in their local market and provide meaningful value to the patients they serve.

During the September quarter we made additional progress in our efforts to evolve our customer contract strategies regarding brand and specialty products to better reflect changing market conditions. We are pleased that our customers are receptive to the dialogue about the changing mix towards lower margin and higher-priced brand and specialty products and are open to finding workable solutions.

While we will always have some contract renewals in any given year, most of the heavy lifting on large market-related adjustments required in our customer base is behind us and we can now concentrate on the deeper and more robust collaborative work that comes from a shared partnership and a desire to create respectful balanced relationships.

During our fiscal year 2017 we anticipate and would hope to renew our contract relationship with Express Scripts. There are no other disposable contracts we will be discussing.

Partnering with key customers and developing lasting sustainable relationships has been a primary strategic objective of AmerisourceBergen for the last several years. We knew the world would be changing quickly and, while we could not perceive every conceivable outcome, we believed that if we would partner with the right customers for the long-term we would be much better able to face the market challenges together.

Being able to take a long view drives innovative thinking and is often the catalyst that unlocks the value that is obscured by uncertainty.

In addition to having the right customers we need to make the right investments. A great example of this is PharMEDium which had another strong quarter. We have almost reached the one-year anniversary of the acquisition and we could not be more pleased. The integration of PharMEDium has been seamless and their performance has exceeded our expectations.

Our health systems customers understand the value of the products and services that PharMEDium provides, but it is the quality of their compounded sterile IV preparations that enables them to earn new business. PharMEDium has been an excellent addition to AmerisourceBergen, hitting on all the important criteria we target for successful acquisitions culturally, strategically and financially. And we are very excited about the future potential of this business.

AmerisourceBergen Specialty Group once again had a strong quarter with excellent performance across the board. We are the global leader in the distribution of specialty drugs and have long championed patient access to specialty products.

Economics of specialty products can vary depending on a few key factors: the channel in which the product is administered or dispensed; whether the product is covered by the medical or pharmacy benefit; and the extent to which we can add value for the manufacturers and the provider.

The unique portfolio of services we offer makes us an attractive partner in nearly every aspect of bringing specialty products to market. From supporting clinical trial logistics to consulting on commercialization strategies we are participating in the early lifecycle activities and the development of the markets for both innovative new therapies and for biosimilars.

Our Specialty Group is comprised of market leaders, whether it is our oncology franchise, our plasma, vaccine and physician office distribution businesses or our third-party logistics business. Together the group is the undisputed leader in enabling specialty product success and is an essential partner for manufacturers, for providers and ultimately for the patients they serve.

This portfolio of offerings we have built will only become more important as the focus on value and cost efficiency increases. Just as we are advocates for our community pharmacy customers, we remain committed to our community oncologists and other specialty physicians.

Our network of oncology practices are very well-positioned for quality initiatives like Oncology Medical Home which improve overall value. Additionally, we continue to invest in our market leading franchise of dispensing practices that are leveraging clinical integration and real-time care coordination within and beyond the practice to improve patient adherence and reduce side effects and waste.

As I said last quarter, the costs to administer products and to care for these patients are significant and the risks associated with disruptions in care can be life-threatening. We are hopeful that CMS and others will be extremely thoughtful in considering proposals to change reimbursement rates and make (inaudible) on Part B drugs and will do so in a way that is always patient minded.

While being focused on some key technology deployments our customer -- our patient services and consulting businesses also had a solid September quarter. The expertise we have in developing patient access and adherence programs and the experience we bring to bear in the regulatory, compliance and policy areas are clear differentiators for ABC.

Over the last couple of years we have worked to expand the global reach of these businesses to further enhance our value proposition to manufacturers. As we mentioned previously, our consulting group is undergoing an ERP implementation which is progressing well. The new platform will enable new possibilities for growth by driving innovation and expanding our capability to provide custom tailor programs and services to our manufacturer customers.

Of course the most significant global footprint we have today is in our World Courier business which continues to grow. World Courier has been a very consistent performer for ABC and its team continues to strengthen its position as the undisputed leader in niche premium logistics, particularly in support of clinical trials. World Courier's ERP and logistics platform implementation is also going well and will help ensure they remain the market leader for many years to come.

Turning now to MWI, they had solid results in the quarter and a very good year. Their performance is being driven by the companion side of the business where organic growth, new innovative product introductions and market share gains all contributed. In addition, penetration rates of existing customers are improving.

MWI has been a superb addition to ABC. They have performed exceptionally well from an operational and financial perspective and its management has made significant and ongoing contributions to the whole of ABC. Among the many reasons we are so enthused about the business is the operational synergies ABC has brought to MWI such as their recently implemented WMS system and some of our technologies which enhance patient intimacy in community setting.

Likewise MWI has brought ABC opportunities for more comprehensive discussions with suppliers and an area where we are truly competitively differentiated. We expect to continue to invest in animal health business as it is an area which we have only just begun to realize the full slate of opportunities that lie ahead for this business.

Tim will provide the details, but I wanted to comment on our key expectations heading into next year. In fiscal 2017 we expect to grow revenues in the range of 6.5% to 8% and to grow adjusted diluted earnings per share in a range that is flat to up 5% over the prior year.

Our growth expectations have come down somewhat due to the increased uncertainty around brand drug inflation and the rate of generic deflation. We do expect, however, to return to a more normal growth rate in the second half of our fiscal year as we anniversary the customer contract renewal headwinds and we begin to lap some of the impact of decreases in drug pricing.

It is also worth noting that estimate that Walgreens and Rite Aid receive FTC clearance we anticipate that we will begin to service Rite Aid towards the end of the fiscal year. And we have been making investments to ensure we are well positioned to continue to drive the quality, scale and efficiency that this incremental volume will require of us.

In summary, I have great confidence in AmerisourceBergen's future. Despite unexpected headwinds in the year, the fact is we now just reported a 40% EPS increase year following on the heels of back-to-back 20% plus growth years.

While I am personally disappointed that our projected growth rate for fiscal 2017 is not as strong as our past three years' performance, I believe strongly that the strength of our long-term customer relationships and unique portfolio of integrated services is and always will remain a compelling value proposition to pharmaceutical manufacturers and provider customers.

Our management team shares my passion and drive for producing strong and sustainable growth results while also delivering outstanding customer service. In the years ahead we will continue to serve our industry with the same high level of discipline that we have demonstrated throughout the 15-year history of ABC and our legacy formative companies.

We provide a vital service in the global healthcare system and we do so with the ultimate goal of improving the lives of patients while delivering balanced, long-term value to all of our stakeholders. Now I will turn it over to Tim.

Thanks, Steve; good morning, everyone, and thank you for joining us today. I would ask that you refer to our earnings release for a complete discussion of our GAAP results and reconciliation to our adjusted results. Consistent with past quarters, my remarks will focus only on our non-GAAP adjusted financial results.

As Steve mentioned, it was a challenging year in our industry and for ABC with the changing pharmaceutical pricing dynamics that we continue to work through. Overall we did not finish exactly where we thought we would at the beginning of the year, but we successfully navigated a tough environment. There was a lot to like about our fiscal 2016. Let me spend a minute and cover a few key highlights.

Most noteworthy would be the drug company's successful acquisition and integration of PharMEDium. We are very pleased with the results the business has delivered and we are also pleased with the new talent and skill sets the PharMEDium employees bring to ABC.

The second item, our ABSG specialty business had a very impressive year with revenues passing $28 billion and they achieved record operating income. And finally, we exit the fiscal year with an improved balance sheet and, importantly, we successfully mitigated all of the potential dilution from shares issued to Walgreens as a result of the warrant exercises. It is great to have the warrants officially behind us. This will simplify our reporting going forward.

This morning I will cover three topics. First I will recap fourth-quarter consolidated and segment performance; next I will spend a few minutes on our full-year performance; and I will wrap up covering our fiscal 2017 expectations. Let's begin our Q4 review.

Our revenues increased roughly $2 billion to $37.6 billion, up 6%. Operating income or adjusted operating income was $464 million, up $7 million or 2%. We certainly benefited from our operating expenses being down by 3%. We have made a concerted effort through various cost initiatives to reduce expenses throughout ABC. This offset our gross profit being down in both dollars and percentage.

Moving below the operating income line, income taxes, our adjusted income tax rate was 31.4% for the current quarter, down from the prior year. I should highlight that our quarterly tax expense included a slight year-to-date adjustment to bring our full-year tax rate to 32.5%.

This rate is just below the tax rate we had previously guided to as a result of slightly higher international income and favorable discrete tax adjustments we made closing out our fiscal year.

For the quarter our adjusted diluted EPS increased 12% to $1.30. Let me highlight we finished fiscal year 2016 with 220 million outstanding common shares. Please remember that the 220 million outstanding shares is before the dilutive impact from share-based compensation. When combined this number is used to calculate our diluted earnings per share going forward.

Next let me cover our segment results starting with Pharmaceutical Distribution. Total segment revenues were $36 billion, up 6%. Our drug company had solid revenue growth of 5%. I should highlight that we continue to lap very strong hepatitis C revenues from the prior year and this created a headwind in the current quarter of roughly 1.5%.

ABSG, which is our Specialty business, had revenue growth of just over 15%. The business has now anniversaried the addition of a 3PL customer that had been enhancing revenue growth over the last year. Consistent with past quarters, we continue to see especially strong revenue growth from the sale of oncology drugs growing in the high teens as a percentage.

Lastly, I should highlight that this quarter was another record revenue quarter for our ABSG business.

Moving to gross profit. The segment's gross profit was $785 million, down just about 1%. We saw solid gross profit dollar growth in our Specialty business due to higher revenues. Our drug company's gross profit was down versus last year even with the addition of PharMEDium.

We had the impact from two contract renewals with anchor customers, Kaiser, which took effect on July 1, and also CPA, our largest independent buying group customer. There is strategic importance in signing these large fast-growing customers to longer-term contracts. However, in the 12 months following the re-signing the change in economics to bring the contract to the appropriate market price can be a meaningful headwind.

Also during the current quarter we had a lower contribution from drug price inflation. These were the primary reasons for the decrease in gross profit dollars in our drug company business.

Segment operating expenses were $391 million and were down versus the prior year by 3% or about $14 million. Both the drug company and ABSG continue to closely manage their cost structures to ensure they are spending in the right areas. On a comparable basis to last year, still excluding the impact from PharMEDium, the segment's OpEx would have been down nearly 7%.

Adjusted segment operating income was $394 million, which is up 1%. Solid performance by our Specialty group was offset by the expected lower contribution from the drug company.

We can now move to our other segment which includes MWI, our patient services consulting business, and World Courier. In the quarter total segment revenues were $1.6 billion, up about 5%. Both our Consulting and World Courier businesses had solid revenue growth in the quarter.

Our MWI business with a little lower in terms of revenue growth this quarter due to a combination of two things: an impact from foreign currency from their UK business; and an impact also from some expected seasonality in their US business. Let me point out we continue to be very pleased with the US companion animal side of the business which had growth of nearly 6%.

From an operating income standpoint the segment had operating income of $70 million, up 4%. The growth is after year end compensation incentive true ups in all three businesses. Additionally, our consulting business is deep into their new ERP system implementation. Certain expenses that can't be capitalized negatively impacted the segment. These two items essentially reduced the growth rate by slightly more than half this quarter.

This completes our review of the September quarter. I would like to now cover just a few fiscal year 2016 financial metrics.

Revenue -- our full-year growth was a very good 8%. Our largest customer, Walgreens, represented just under 30% of our total ABC revenues. ABSG, our Specialty business, finished the year at $28.5 billion with revenue growth of 17%. Just an outstanding year for this business.

Our adjusted operating income increased 7% to just over $2 billion. EPS, our full-year adjusted diluted EPS was $5.62, up 14%, due primarily to our operating income growth mostly from our ABSG business and also having MWI for a full fiscal year.

Our drug company had a challenging year with the negative impacts from contract renewals and industry drug pricing headwinds. But the benefit from PharMEDium helped to offset these items.

Free cash flow -- we had a terrific finish to our fiscal year. We ended at $2.7 billion of free cash flow. Our fourth quarter was much better than previously anticipated due to higher revenues and certain one-time working capital benefits at ABSG, as well as a greater than expected positive impact from ending our year on a Friday, which is our best cash receipts day.

Now let's turn to fiscal 2017 expectations. Before I start working through specific guidance items I will make some overarching comments. Importantly, we have not included any impact to our P&L and cash flow from our largest customer, Walgreen, successfully completing their acquisition of Rite Aid.

In light of the current pharmaceutical market dynamics I want to comment on three key working assumptions. First, let's start with brand drug pricing. During fiscal 2016 our brand inflation rate finished right at 10%. We did see some further moderation from the 10% during September and it has continued through October.

So as we think about fiscal 2017 we have reduced our assumption for brand inflation to a range of 7% to 9%. Lowering this range translates to a gross profit headwind to our fiscal 2017 growth targets. The next period where we traditionally see a high level of announcement activity will be during the month of January. Consequently, we have a period of time before we know how we are tracking against this assumption.

Next generic drug pricing. We continue to expect a contribution from a modest level of price increases. But overall our generic drug basket is expected to deflate in the 7% to 9% range during fiscal 2017.

This rate is consistent with what we experienced the second half of fiscal 2016 and, importantly, recent trends in the market indicate that the generic deflation rate has not improved, unfortunately. In fiscal 2017 the generic deflation rate will be a gross profit headwind for the entire fiscal year as opposed to just the partial year in fiscal 2016.

And finally, we expect the contribution from generic drug launches to be relatively flat year-to-year.

We can now transition to our specific guidance metrics for fiscal 2017. Revenues, we expect consolidated ABC revenue growth in the range of 6.5% to 8%. While the decrease in the rate of brand drug inflation will weigh on our drug company's revenue growth, we expect our ABSG Specialty business to grow slightly above 10%. In the Other segment we expect revenues to grow between 7% and 8%.

Consolidated gross profit -- we don't provide specific guidance on gross profit, but to repeat previous commentary, our drug company business will have a significant gross profit headwind from two key customer contract renewals, CPA through the first two quarters of fiscal 2017 and Kaiser through the first three quarters of fiscal 2017.

Consolidated operating expenses -- we expect a growth rate in this area of roughly 6% to 7% in fiscal 2017. On past calls we have noted that we are incurring incremental operating expenses related to strategic systems and technology we are implementing across the organization. Since these systems are all fairly significant in size and scope, most will be implemented while running parallel with existing systems.

Let me also point out that our drug Company is underway with a large capital project that will both upgrade and also expand capacity in their distribution center network due in part to our expectation that eventually we will serve the Rite Aid stores on behalf of Walgreens.

We are currently building seven new distribution centers; two of these are incremental to the network while the remaining five are relocations to larger more modern facilities. As a reference point, the five relocations, so the DCs that are being replaced, average 32 years in service life.

Most of the associated dollar spend will be capitalized; however, this is also the same situation where we expect to incur duplicate expenses as we operate both the new and old distribution centers for a period of time.

These IT systems and infrastructure investments support our growth, improve the customer experience and ultimately increase our operating efficiency. However, there is a negative impact to our fiscal 2017 operating expense growth rate of a couple percentage points.

Consolidated adjusted operating income -- we expect ABC operating income dollars to be in the range of down slightly to up 4%. This is driven by our drug company having EBIT that is flat to down slightly on a year-over-year basis. We do expect good organic growth in our ABSG business but not enough to offset the lower growth in the drug company and the gross profit headwinds I called out previously. We expect the Other segment to grow EBIT in the high-single-digit percentage range.

Switching to operating margin -- we expect consolidated margin to be down 5 to 10 basis points due primarily to mix of business, so large customers growing faster, and the impact from our large contract renewals.

Tax rate -- our guidance assumes a full-year adjusted tax rate in the range of 33%.

Share repurchases -- our guidance assumes modest share buybacks, enough to offset the dilutive impact from equity incentives. We are pleased that we were able to announce this morning in our earnings release our new $1 billion share authorization. We now have capacity of about $1.1 billion. As always we will look to be thoughtful with our capital deployments depending on our cash flow, continued uses of cash and market conditions.

Adjusted EPS -- over the last few months unpredictability around pharmaceutical pricing has increased. Therefore we are lowering our expected fiscal 2017 EPS growth rate and also widening the range until such time that we have more clarity on these pharmaceutical pricing dynamics, both brand inflation and the rate of generic drug deflation.

Consequently we expect our fiscal 2017 adjusted EPS to be in the range of $5.63 to $5.88. The growth rate range is now flat to up 5% over our fiscal year 2016 adjusted EPS of $5.62.

Also please note that we have not included any financial impact from the implementation of Medicare Part B demonstration project in our adjusted EPS guidance. It is quite possible the Part B demo project will be delayed, altered or even litigated.

Let me cover our adjusted EPS quarterly progression given the two large headwinds I called out previously, the two key contract renewals and moderating brand drug price inflation. We expect that our Q1 2017 adjusted EPS will be several cents below our actual results from Q1 2016. We also expect Q2 to be relatively flat to last year's results. We expect to return to growth in the second half of the fiscal year as we cycle through these headwinds and have easier comparables.

Switching to cash flow. First CapEx is expected to be slightly higher in fiscal 2017 when compared to fiscal 2016. It is likely we will reach $500 million due to the heavy capital investment underway funding but the new IT systems and distribution centers.

Debt repayments -- we do have a $600 million note that will mature in May 2017. The proceeds from this note were used to partially fund the repurchases of shares under our special share program. Now that the warrants are completed it is our intent to repay this note at maturity.

Free cash flow -- we now expect our free cash flow in fiscal 2017 to be at or slightly above our adjusted net income. The expected year-over-year decrease in free cash flow is primarily due to the following discrete items: one, the cash timing benefit we received from ending the year on a Friday. This benefit won't repeat. We estimate this impact to be roughly $500 million. Two, the continued investment in working capital with Walgreens. And three, certain one-time working capital improvements at our ABSG business that won't repeat in fiscal 2017.

As I wrap up, I know that both Steve and my comments were especially long this morning due to covering several important topics including guidance. So thank you for your attention.

I would like to personally thank the ABC team for all the efforts made this year delivering solid results in a challenging time for the industry. We are excited about starting the new fiscal year, but the challenging times are still with us.

With our outstanding customer portfolio, our ability to execute and our financial resources we are confident we will be able to continually adapt to working in a dynamic environment and, most importantly, delivering compelling, long-term shareholder value. We appreciate your interest in ABC. Now here is Barbara to start our Q&A.

Thanks, Tim. We will now open the call to questions. This morning we ask that you limit yourself to one question so we can accommodate as many people as possible. Nick, would you please go ahead with the questions.

(Operator Instructions). Robert Willoughby, Credit Suisse.

Do you anticipate any changes in the scope of the Express Scripts contract or will that simply be business as usual? And then quickly, if the Rite Aid deal were to close today how quickly could you layer on those revenues?

Thanks, Bob, for the question. Firstly on Express Scripts, we don't -- we're subject to negotiation. We have always tried to do more. We haven't really been successful. There is a new CEO there who we actually worked with when he was at [Acredo]. So we're always optimistic, but there is not going to be a big headwind from the renewal of this contract because at the moment it is primarily brand.

And we have been very successful in improving the overall scope of relationships in almost all of our contracts renewals. So one would hope that this would be the same. And then the second part of the question?

Rite Aid.

The Rite Aid, go ahead.

No, I would just say I mean I think our drug company is excellent at execution; they are very good at onboarding customers. Certainly -- that is a little premature. I mean certainly Walgreens has to get through FTC. But again, I think we would work hard and diligently to onboard as quickly as possible if they were successful.

Yes. I just would add there -- thanks, Tim -- that WBA needs to honor its existing contract agreements. But it is not like we are not aware of what could occur here and we have been very [planful]. So, thanks for the question, Bob.

Next question, please.

Robert Jones, Goldman Sachs.

Steve, I appreciate your comments on how there are differences between the three wholesalers' mix of customers. But I think many of us have operated under the assumption that the market is very efficient just given the consolidated nature of the wholesale channel.

So just trying to get a little more comfort around how more severe pricing commentary from your peers -- seemingly more severe pricing commentary from your peers wouldn't eventually be a reality for everyone in the industry.

We have got a lot of -- we think the heavy lifting on our contract is behind us. We talk about -- six months ago I think we discussed this and we reflected in guidance, which we took very seriously. Of course since then the inflation rate in brands and deflation rate in generics has changed.

But let me talk about it this way. I mean my comments are I think very appropriate for AmerisourceBergen. I can't talk about the others. But we would say that the market is competitive but rational. It has always been that way. The environment is probably more challenging and I think that is a function of customer consolidation, you have got a lot going on on the M&A side with key provider customers coming together, key manufacturers coming together.

Everyone is facing cost and efficiency challenges. And I would say our customers are more consolidated, more informed and have always been very sophisticated and quite adept at demanding volume from us. And I think our industry has been responsive. And maybe we just haven't had as many tailwinds as we usually have, but I think the environment is essentially the same as it has been from a competitive perspective for many, many years.

And we pointed in my script towards working within our customer base. So I think that is a key point for us and getting more compliance from those relationships. Tim, you want to add anything?

I would just say, Bob, that we feel like we have been very disciplined, responsible. We have met expectations of our customers, the anchor customers, CPA. But I think the important thing is when we do meet a market price we get a long-term contract, we think that is critical.

And typically the new contracts that we are signing have a specialty drug component or flexibility. So that is the exchange, securing the customers to a long-term contract where there is mutual advantages to both, ABC and the customer.

Thanks. Nick, could be go to the next question, please?

Steven Valiquette, Bank of America Merrill Lynch.

So there has been some mixed views on how much the earnings sensitivity may be for drug distributors related to brand inflation. So I guess just with your change in your view from what was 10% to 12% previously to 7% to 9%, is there maybe just any way to give a little more color on how much of a role that plays within your shift in the EPS growth from it looks like about 4% to 6% to 0% to 4% for fiscal 2017? And without getting too granular just wondering is that a big part or a small part? Just any more color would be helpful. Thanks.

I'll let Tim comment, but I just would say most of the growth has come from specialty drugs -- most of the unit growth. But they tend to be very expensive products, of course not that many units. And then there has been a relatively high rate, at least in 2015, of brand price appreciation which was in the mid-teens. But we saw it ramp down very significantly and current trends would indicate even a further step down.

We do think that an overall industry growth rate is very helpful to growing our top line and our bottom line. But we are confident we can grow in this 6% to 9% range that we expect. We said 7% to 9%, but I am just saying within 1% or 2%; if it comes a lot below that we think that that will create some challenges that we will address. But we don't think that that is possible in the next 12 months. But, Tim, would you agree with that? Anything to add?

Yes, Steve, thanks. No, I would just add something very quickly. I would say, Steve, good morning and I would say that most of the change in our guidance is related to that brand pricing change. But there is also a small part related to generic.

The deflation rate, we guided to 7% to 9% deflation rate; we are probably on a little bit over that 9% right now. So as we enter fiscal year 2017 we are starting on the high side, not quite 10%. So that is really the two things, primarily brand and to a lesser extend the generic side.

Thanks, Steve.

Thanks, Nick. Can we go to the next question please?

Garen Sarafian, Citi Research.

I wanted to get back to the competitive landscape that has been such a big part of the conversation lately. First, just to be clear, are you maintaining the same pricing structure and strategy for your independents on a like-for-like basis?

And secondly, you provided some commentary in the beginning, Steve, but you guys have always prided yourselves on having solid pricing data analytic capabilities. So any insights from the analytic work that you have done to sort of help us reconcile what the various distributors are saying? Thank you.

I would say that the consolidation, although they don't acquire them, our independents are largely characterized -- almost all of our independents now belong to buying groups. I came into the drug company in 2009 and that has really been more and more pronounced. And in specialty we often -- the wholesalers usually owned or were very involved in, at least in oncology, with our buying groups and the same is true of say Besse Medical.

So this is a function of the market and for the most part we have very productive relationships with those buying groups, but they are consolidating. I think we have close relationships with key buying groups, that has gotten really dug in, CPA is a very good example.

So as far as your specific question on pricing, generics has probably reached its peak. We saw some contracts where we were getting high teens in our generic compliance. And that is probably just not going to last because the industry has changed. So we have been, as we said, very thoughtful about specialty pricing and how that is going to change over say a nine-year contract that we have with CPA.

You have to be cognizant of that, you have to be thoughtful of that because ABC is always thinking about the long-term and what does that nine-year contract look like. And just because in the last nine years contracts have invariably improved it doesn't mean that the economics are going to change in the same ways.

And that is why we said we have got to make money in different ways, we think biosimilars are going to be very important new therapies. And that is a lot how we are thinking about things.

I will quickly make a comment on your analytics and then it is an important question so I will let Tim also comment. But as the groups consolidate I think they get more sophisticated. There is a lot of generic products out there, we manage thousands and thousands of contracts. But it's an independent practice; we would say that 2,000 are very important, very critical and they are very aware of the pricing.

I think we also have a responsibility here to have balanced pricing to our independent customers. They have a tough time with managed care contracts and making sure that every prescription that they dispense is profitable.

And we are sensitive to those discussions or in terms of being responsive to make sure that they are relevant and competitive in the marketplace as well. So those are the sort of discussions that we think are important, but they are not new, they have been going on for a long time. Any comments?

No, Steve, I think that is well said. We gather intel, we do a lot of data analytics and we just -- we always want to make sure we have the appropriate price to our customer. And we really can't comment on trying to reconcile our situation to the other wholesalers.

I think I Steve mentioned, we have gone through the heavy lifting of contract renewals and we feel like we are getting past that. So I think that it is probably our comment on that question, Garen.

Thanks, Garen. Next question, please.

Ricky Goldwasser, Morgan Stanley.

Thank you for all the comments. I have a quick follow-up here. So first of all just to confirm. Does guidance assume any new share gains from independent groups beyond what you already have gained year to date? That is first.

And then my second question is if you can just give us a little bit more color on the branded inflation. I know in past quarter I think you mentioned that now only 10% of your contracts with manufacturers are tied to or contingent on inflation. Can you maybe give us some more color on what percent of EBIT is tied to these agreements? Thank you.

Our growth rate in independents, when we talked about it, we are talking about really growing by 1% or 2%, which is really just making sure we get our fair share of wallet with our contracted customers. We feel that we have mutual respect with the customers and we have given them we think fair pricing contracts and in return we should get all their generic compliance.

And there has been some you can call it interlopers in the market where they come and maybe even slice off some brand products and that makes the generic compliance look better. We're saying to our independent customers we want all your business, we're contracting with you and that is where we have been focused. And those I think are very legitimate and bilateral discussions that we should have. And I think that is where we have made progress.

As far as the amount of brand contracts that are covered by fee for service, essentially all of our contracts are covered by fee for service. There are some where there is an outcome that could vary depending on the rate of inflation that they experience in their own portfolio. We are moving quickly to close that as the market changes.

So we are in those discussions. We don't think that that reflects the current market or the sort of bilateral mutually respectful agreements that we should have with our large branded manufacturers. So those discussions are ongoing right now, [Peyton Howell] and her team are on it and I think we are making progress there, but still more work to be done there for sure. Tim, anything to add?

Yes, just we will be consistent with what we said in the past. Typically we have said that about 10% of our gross profit dollars are under those contracts that are -- Steve talked about kind of the nontraditional, the type that have an element of price appreciation and Steve mentioned we are working hard to reduce that number. So I think --. Thanks, Ricky, next question.

Eric Percher, Barclays.

Thanks. I will follow the same line but maybe a few items that were implicit let's make explicit. So one item you mentioned that you look to gain share back with the lost buying group in 2015, was that effort limited in scale to [APSI] and at this point has that been successful.

I guess the broader question from that is you said letter to maximize compliance than go after incremental share. Were there any other areas where you became incrementally more aggressive?

And then third, your comment on telemarketers and other competition. Do you see the competition in the marketplace where it has increased from the other large scale distributors or do you think there are more interlopers playing a larger role?

Yes, I will make a quick comment on each of those three. We did lose a buying group customer, it was a customer where a lot of the members were GMP members and a lot of them chose to stay with us. But I don't want to get too much into specifics, it is not that overall material. I think it is always interesting who is a relationship with. And I think it is a shared relationship between a buying group and a wholesaler.

So that is why having long-term contracts is extremely important so that we can work together on what the collaborative approach that I referred to in my script. So I think actually that loss is a pretty good example of that. And it probably wasn't good for the buying group, it wasn't good for ABC. But not -- just one of those things that happened. I wouldn't say that that pointed to some acute level of competition or anything or anything or any of this drama that we have heard about a price war.

So the incremental share that we have had in independents is very -- I think we just are making sure that we are holding ground with those new contracts we signed. And we did work to try to keep some of those former customer -- buying group customers that had switched to a new wholesaler, we did work to keep them with ABC. But kept that in line with overall market because, again, people talk to each other, it is an efficient market. So we want to make sure that anything we do is responsible and balanced.

And then the telemarketers I would say are struggling a bit because I think ourselves and our peer companies are looking at their compliance factor and have better tools to manage that. And there is not the growth that you had from so many new product launches.

And I talked about our first-to-shelf program. So if we had any gap where we weren't getting product out upon a patent expiration fast enough, [we are covering] that. So we [said] to our customers no need for you to order from a telemarketer, we are going to get that product to you first. And that is one of the examples, Eric, of an enhancement we make our business. I think, Tim, I covered everything so we will probably move on to the next question.

Next question please, Nick.

Lisa Gill, JPMorgan.

I just wanted to go back, Steve, to your comment where you talked about different pricing strategy for Specialty and you have new long-term contracts now in place with a number of your customers.

My understanding is that historically it was a branded bucket that specialty was included in and a generic bucket and now trying to break out Specialty. Can you talk about what the new pricing strategy looks like?

And am I correct in thinking that when it was in the branded bucket you were discounting that similar to branded where maybe it is [WAC-3]? And what could the new economics look like in the new separation of Specialty?

Lisa, I mean I would say essentially you are accurate; I won't comment on the WAC-3. But you are essentially accurate. I mean we had such a good surge in generic compliance and generic rates that maybe our industry was not as thoughtful about this as we should. And then we had that really fall off and Specialty products increased so much, which are very expensive.

And there is an argument with the manufacturer; there is a lot of different elements when we look at the fee-for-service contracts, but when the unit prices are so high is a discussion about what the market base fee-for-service is. We happen to think that there actually should be some headroom there because of the value for services that we provide, which in difficult time gets even more we think valuable and even more important to those manufacturers.

So we worked hard, I think we called out this trend and we are working hard and we will continue to work hard to make sure that those Specialty products that are such an important weighting mix within the portfolio of services that we provide, that those products are popular. And then there is a recognition that you are not going to get as high a fee for service, so it should be a differentiated brand markdown to respond directly to your question.

Thanks, Lisa. Next question, please.

Eric Coldwell, Robert W. Baird.

A lot of mine have been covered. But I was hoping we could just get a data point that I think a lot of people have recently scrambled for which is could Amerisource provide an update on the number of independent pharmacies that you work with and maybe where that is today versus the past?

And perhaps provide some definition around how you would include an independent GPO in that count. Just trying to get a sense on where independents are as a percent of your total revenue or number of stores or some additional metrics. Thank you.

We have a very tiered system. We haven't picked up a lot of new customers, it is essentially flat. Sometimes we can't speak for what our buying group customers go to get new members and they sometimes fall in smaller groups. But we are essentially flat. We think our market share might be -- it depends on the different data points you use, but it is maybe stable to up 50 basis points.

So we are not seeing anything really significant except -- the only big thing that happened to us in independents is that we were fairly successful in retaining some of the members of the buying group that we lost last year. And most importantly, we signed a long-term contract with CPA that is our largest buying group customer that we think is a leader in innovation and service. Tim, anything else?

No. I'd just go back to what we have said in the past, that our first focus is to -- we are just big believers in Prime Vendor, that is the foundation. We want to do more with existing customers. That is our focus, to make sure there is no leakage and we get more of that wallet and that is the first focus, get closer and have a win-win for existing customers.

One thing I would talk about is the care within GMP, we try to get a lot of our members into the highest tier where they have a lot of the compliance tools, the integration tools, the tracking tools that we would expect so that we can have that sort of really comprehensive relationship that we would want with them. So that is really our focus is to make those relationships tighter. Thanks for the question, Eric.

Thanks, Eric. Next question, please.

Charles Rhyee, Cowen and Company.

Steve, at the beginning, I apologize, I kind of missed a little bit -- my phone was cutting in and out. But you were talking about these buying groups and then is it that you were saying that you have anniversaried sort of the new pricing that you are seeing in some of these long-term contracts? Or was there still some more as you work with the actual [members] that still has to filter through, just to clarify.

And then in terms of what you were just talking about in terms of your wallet share as a prime vendor. Can you talk about how much that has changed over the last year or so? Like kind of what kind of share of the wallet are you getting currently and how much more room do you think there is for improvement? Thanks.

Well, I go back to our fiscal year 2016 planning process and we looked at a small erosion that we've experienced in the last few years in our GMP share of wallet. And we just said, okay -- I mean Tim and I sort of challenged [Bob Marsh] and our team. We said listen, we are investing in Elevate, we are investing in business coaching, we are investing in first-to-shelf. We have got our highest poll rates in PRO Gen.

We don't believe that our customers should look elsewhere within AmerisourceBergen and that is really what that has been about. So CPA, by the way, is very compliant. We have two quarters that we have left now on the new contracts, so we have another two quarters where we will be anniversarying that contract.

We don't have a lot of big buying group renewals, most of our buying group customers are under long-term contracts that we believe are at market rates. So we don't have a lot of renewals coming up. And, Tim, I see you want to make a comment here.

No, I think, Steve, you said it well. I think we can go to the next question. Thanks, Charles.

Michael Cherny, UBS.

So I think all of the pharma questions have been answered. Maybe a little bit on PharMEDium and some of the performance there. You said you have been thrilled with the integration. Can you just talk a little bit about how you can use that as a potential leading source to drive incremental revenue, incremental customer bases. Has that introduced you to any other new customers that you didn't already know?

We can do better there. In fact, I was talking to one of our health system's VPs just this week. I feel we can do better there. It is about a year and we had some leadership changes there. I think we are very comfortable with the team. The focus at PharMEDium has really been on making sure that we maintain a high regulatory standards that FDA and others expect of us and we are working very hard.

And I think you will see ABC and PharMEDium management team having the right orientation there that is going to be very, very important to continue to lift the standards. So that has been a lot of the focus and we have been through a lot of the integration.

There have been some benefits from some new product launches, their pricing there is definitely a different environment than the rest of the generic environment that we see. Their market share is very, very good. They work with 2000 systems and their biggest opportunity is really to just do more bigger share of wallet with their customers.

But their pricing is so differentiated than our overall health system GPO customers that we haven't really looked at integrated offerings. And probably shouldn't really because it is not -- you are sort of mixing apples and oranges, but we are always mindful of -- absent the whole Wells Fargo mess -- we are always mindful of cross-selling and looking for those synergies with customers. So I appreciate the question on PharMEDium piece, thanks.

Nick, it looks like we have one more person in the queue, so let's take that last question, please.

Greg Bolan, Avondale Partners.

Hopefully I didn't miss this; I was a little late to the call. So it sounds to me that the strategy towards the community pharmacy/independent pharmacy market really hasn't changed a whole lot, it sounds like I mean we know that obviously you guys have been trying to kind of steady your position there, reclaim market share over the past several years. So I just wanted to kind of clarify that and that is actually all I have. Thanks.

No, no, well said. I think we have given there pretty exhaustive comments. I don't ever remember working so carefully on a script just to make sure that you get exactly that message that ABC is being very thoughtful, very responsible, very planful, reacting to an environment that is more challenging and that is really our message for today. So we appreciate the question.

Just, Barbara, I think I will make my closing comments now. That was the last question. So, thank you for your attention today. I know it is a really busy day. I'm shocked at the calendar; I am just saying all the other peer companies that are reporting today, so I know it has been a very long session.

But we wanted to share with you how strongly we feel about the responsibility we have as a leading participant in this segment. And how strongly we feel that we are making the right decisions for all of the stakeholders including our investors and including the patients that we ultimately serve, the customers, the manufacturers we supply.

And I am confident that ABC is going to do very well. We are going to find the right areas to capitalize on the incredible capability that we have. So, thank you for your time and we will speak to you in three months and see a lot of you at upcoming conferences. Much appreciated.

Thanks, Steve. And with that, operator, that concludes our remarks. And if you would give the replay information we would appreciate it. Thank you.

Absolutely. Today's conference call was recorded and will be available for replay beginning at 1 PM today and running through Wednesday, November 9 at midnight. You may access the AT&T replay system by dialing 320-365-3844 and enter the access code of 403504. (Operator Instructions). With that, that does conclude our conference for today. We thank you for your participation and for using AT&T executive teleconference. You may now disconnect.