美源伯根 (ABC) 2017 Q3 法說會逐字稿

Ladies and gentlemen, thank you for standing by, and welcome to the ABC Earnings Conference Call.

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

Now I'd like to turn the conference over to our host, Ms. Keri Mattox, Vice President of Corporate and Investor Relations.

Thank you.

Good morning, and thank you all for joining us for this conference call to discuss the AmerisourceBergen's fiscal 2017 third quarter financial Results.

I'm Keri Mattox, Vice President, Corporate and Investor Relations for AmerisourceBergen.

And joining me today are Steve Collis, Chairman, President and CEO; and Tim Guttman, Executive Vice President and CFO.

On today's call, we also will be discussing non-GAAP financial measures, which we use to assess the underlying performance of our business.

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

During this conference call, we will also make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including, but not limited to, EPS, operating margin and income taxes.

Forward-looking statements are based on management's current expectations and are subject to uncertainty and change.

AmerisourceBergen assumes no obligation to update any forward-looking statements or information, and this call cannot be rebroadcast without express permission of the company.

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

For a discussion of key risk factors and other cautionary statements and assumptions, we refer you to our SEC filings including our most recent Form 10-K and to today's press release.

I would also like to remind you that we have posted a slide presentation to accompany this morning's press release.

You can find it at the Investors page of our website, www.amerisourcebergen.com.

(Operator Instructions)

With that, I'll turn the call over to Steve.

Steve?

Thank you, Keri, and good morning, everyone.

I'm pleased to discuss our third quarter results and AmerisourceBergen's continued execution.

Revenues were up 5% to $38.7 billion and our adjusted diluted EPS was $1.43, an increase of 4% compared to the previous fiscal year period, prior that the health care market remains challenging and our operating income was down 5% as product pricing continues to impact market performance.

As a result of our third quarter performance, we have outstanding aspects of our fiscal year 2017 financial guidance, including cutting adjusted diluted EPS range as we feel confident moving into the last quarter of the fiscal year.

As we think about AmerisourceBergen moving forward, I want to take a moment to bring my comments on today's call.

This morning, my focus will be on the structure of our business, the strategic drivers of our recently announced corporate organization and how we feel we are best positioning AmerisourceBergen for long-term growth and value creation.

As we've discussed on recent quarterly calls, we believe AmerisourceBergen has a solid differentiated foundation, one that sets us apart from others in the industry, enables us to execute in a challenging health care environment, helps us support and accelerate growth for our customers and ultimately enhances patient access to quality health care.

We are building on that foundation and evolving AmerisourceBergen.

Our corporate reorganization announcement in June marked the most transformative change for our company since the 2001 merger that created AmerisourceBergen.

Simply put, we are now one AmerisourceBergen.

You might ask what does this reorganization really mean, how does it change AmerisourceBergen?

The answer is this.

As part of our focus on being innovative in the services and solutions we provide our customers, both upstream and downstream, we are aligning our businesses to most effectively serve them in a changing health care environment.

We are optimizing AmerisourceBergen for new opportunities.

The updated structure continues to mirror our existing financial reporting structure and creates 2 new primary groups to enable more seamless customer engagement and supports growth for our organization.

The first group is pharmaceutical distribution and strategic global sourcing, which combines our industry-leading distribution services and their shared leadership structure, creating a more cohesive experience for our customers and expanding on our operational excellence.

This group is by far our largest at AmerisourceBergen with approximately $145 million in annual revenue.

Based on its current run rate and it's headed up by Bob Mauch, Bob has done an excellent job leading our drug company, and we're excited for him to be in this new expanded role.

Another long-time key contributor to AmerisourceBergen's success, Peyton Howell, is working with Bob to head up health systems, physician practices and strategic health solutions within the segment.

You may note that ABSG will no longer be its own separate operating segment.

This was a strategic choice, but in no way diminishes the importance of this business.

On the contrary, given the critical role of specialty in the health care landscape, our strong leadership in this space and its compelling drug profile, we believe specialty is core to what we do across all of AmerisourceBergen.

As a result, we are taking a comprehensive full spectrum approach to maintaining and growing our strong leadership in the specialty distribution and services of specialty pharmaceuticals.

This broader, more strategic and customer-basing approach to pharmaceutical distribution and strategic global sourcing positions AmerisourceBergen to capture market opportunities more effectively.

For example, we see a compelling future opportunity for growth in biosimilars, and we anticipate that we'll continue to drive strong growth in specialty.

IMS is projecting both of these areas to outpace the growth of the overall U.S. pharma market over the next 5 years, and we look forward to expanding our leadership position in that space.

The second group created by corporate reorganization is global commercialization services and animal health led by Jim Cleary, who has done a wonderful job leading MWI Animal Health.

This group extends the impact of our commercialization solutions and demand creation capabilities to create a more integrated offering for our pharmaceutical manufactured plants.

This part of our business includes MWI, World Courier and our consulting businesses, all fast-growing, high-value and high-margin business units.

Our consistent leadership has grown the group to now contributing 20% of our operating income despite totaling only 4% of our overall revenues.

This continues to be a strong growth driver and area of opportunity for AmerisourceBergen.

Additionally, this is an area of strategic IP and systems investments as we work to optimize our customer integration opportunities, and it's also a top priority area for expansion through tuck-in acquisitions and positions us for continued strong execution in high-growth markets.

I think it's important to note that Bob, Peyton and Jim have all come to us by strategic acquisitions and have thrived in AmerisourceBergen.

I believe it is no coincidence that our corporate culture embraces an entrepreneurial customer-focused and keen-oriented leadership style.

I am proud that AmerisourceBergen is the home where these world-class executives have chosen to build their careers.

It's been about a month since we introduced this reorganization, and the response from our customers and associates have been very positive.

There is a great deal of excitement around the opportunity to transform our business, and we are driving forward with planning and integration now.

The process will take several months, and we will continue to provide you with updates as job progressed.

We are confident that the outcomes will include an important evolution of our business, significant benefits for our customers and enhanced health care access for the patients we serve.

This internal reorganization is also about positioning AmerisourceBergen externally to most strategically, dynamically and successfully address health care market forces.

Despite today's challenging health care environment, AmerisourceBergen has a strong track record of execution.

We also have a clearly defined strategic focus on the U.S. pharmaceutical market, where we continue to see growth, strong patient demographics, increasing efficiency and value placed on outcomes-based treatments.

Additionally, as I just discussed, our corporate reorganization shows that customer accessibility and integration are critical drivers of our success.

We also know that this is a time of ever-changing health care market dynamics, and that AmerisourceBergen is well positioned to navigate them.

We have the best customer base in the industry and how those customers do business is evolving.

Our services and solution's integrated to our customers businesses to drive and accelerate growth.

For example, I just returned from ThoughtSpot, our annual conference and trade show, hosted by Good Neighbor Pharmacy in Las Vegas.

This 4-day event for independent community pharmacies brought 5,000 attendees, providing them with practical tools and clinical education sessions to enable them to diversify their revenue stream and optimize their core business.

The meeting is an interactive venue for independent pharmacists to connect with ABC associates, PRO Generics manufacturers, Latest players, industry experts and their peers.

It also help involves a better business, find growth opportunities and maintain its status as a preferred health care destination in their community.

Despite formidable challenges, the independent pharmacists at ThoughtsSpot were confident in their role as crucial health care providers for patients and continue to be truly resilient entrepreneurs.

The event not only allowed us to engage with our customers, but also gather honest feedback on what we are doing well and where we can do better.

What we heard is that customers view AmerisourceBergen as a trusted adviser and their voice and ears outside the pharmacy as they look to us to keep them informed and empowered and work on their behalf as latest set of actions develop as we have done for decades.

Our goals are aligned with these key customers, and we are committed to helping them serve their patients while expanding, evolving and growing their businesses, continuing that customers put it to be problem solvers for them.

When our customers are successful, AmerisourceBergen is successful.

At ThoughtSpot, we also fully unveiled and showcased ABC Orders -- ABC Order and how this intuitive platform, which was creating -- which was created by pharmacist for pharmacist in increasing the efficiency of their dated ordering process.

Our Good Neighbor Pharmacy customers are telling us that this allowed them to spend more time with their patients and is improving their overall business.

Full rollout of the streamlined and enhanced ordering platform is now underway, and feedback has been overwhelmingly and strongly positive.

The Elevate Provider Network was also highlighted at ThoughtSpot.

2 years after the full launch of our bolstered program, Elevate is helping independent pharmacies, increase profitability through enhanced patient care and adherence, improve business practices and leverage centralized data to support reimbursement discussions with payers.

Another example of how we are working hand in hand with our customers is in our commercialization services group.

There, we provide an ever-growing range of offerings around pharmaceutical product to launch services.

We believe that AmerisourceBergen is the leader and partner of choice for the commercial launch of new products.

We provide the broadest spectrum of manufacturing services and are always building on our long legacy of support and success in this area.

In fact, in 2017, we've held our manufacture customers successfully launch many new products across several indications in the immuno-oncology space.

Through integrated approach, we've been able to ensure exit to these large-saving medications with outcomes-based solutions, demonstrating value propositions for payer coverage, distribution service across all sorts of care and reimbursement and clinical solutions to support patient access and benefits.

In addition to our innovative solutions and diverse customer base, we are also strategically positioned in our marketplace.

AmerisourceBergen continues to invest in our business to expand our leading-edge capabilities.

We are extremely efficient.

As of today's call, 4 of our 7 new distribution centers are online, enabling AmerisourceBergen to serve our customers with greater levels of automation than ever.

Overall, our pharma distribution network provides critical high-value services, delivering to more than 50,000 sites by the next morning with greater than 99.98% order accuracy.

Additionally, we have developed the ability to operate in a highly regulated market.

AmerisourceBergen drives on the complexity of health care.

We grow by finding new more efficient ways to help our customers navigate that complexity successfully, and we do it while earning extremely [pay] composition -- compensation for the value we provide, and we are always working with our customers on the frontline of delivering health care services.

The relationships we brought with our customers that they -- and that they turn gold with patients are key.

The quality of a patient's care and health outcome is dependent upon that relationship.

We, along with our customers, are a critical part of that health care continuum.

Finally, against the backdrop of the ever-changing health care market dynamics, AmerisourceBergen is well positioned to realize new opportunities from our strategic partnership with Walgreens, now in the near term and still over the longer term.

In the near term, we could benefit from the proposed acquisition of a portion of the Rite Aid retail pharmacies for our partner Walgreens.

This growth of strategic anchor customer positions AmerisourceBergen for continued expansion of our business in our U.S. pharmaceutical footprint.

And as you know, Express Scripts joined the WBAD's sourcing consortium earlier this spring.

As a member of the WBAD joint venture and collaborate partner to both Walgreens and Express Scripts, we believe that the greater size, scale and sourcing efficiency should result from Express joining our JV will ultimately benefit us over the longer term.

Additionally, we continue to explore new commercial opportunities and ways to work closely and collaboratively with Walgreens, as we do with all of our large anchor customers.

Our goal is to optimize our strong strategic partnerships to drive further growth.

As I've outlined today, these market dynamics and the challenging health care space are hallmarks of our current environments, but we believe there are also opportunities for AmerisourceBergen and that we've shaped and evolved our business to best seize them as we move forward.

I do want to take a moment to thank the now more than 20,000 AmerisourceBergen associates who made all of this possible.

Every day, our key performance reminds me that we have the strongest team, the broadest experience base and the deepest expertise in the industry.

With our reorganization, we are even better equipped to capitalize on new market opportunities and work seamlessly across our broad customer base.

It is our amazing team who grows, evolves and works together to enable AmerisourceBergen to be the company that it is and that it will become.

All of us are living our corporate focus every day, thank you.

So what does all this mean as we move forward into fiscal year 2018?

We believe it means that AmerisourceBergen can continue to advance our strategy, invest in our business, seize opportunities and importantly, execute and successfully navigate the challenging health care space.

In summary, AmerisourceBergen is strong.

We are evolving and we are united in our responsibility to create healthier futures.

At AmerisourceBergen, we think, plan and act strategically to accomplish our goals, drive patient access and build long-term sustainable shareholder value.

Now let me turn the call over to Tim for a more in-depth look at our quarterly financial results, our updated financial guidance and some color on fiscal 2018.

Tim?

Thanks, Steve, and good morning, everyone.

We are now in the home stretch of our fiscal year 2017.

And considering the health care environment that we operate in, we are pleased with our results after 9 months.

This morning, I'll provide a detailed review of our third quarter financial results and update on our full year '17 outlook and then make some high-level comments around our thoughts for fiscal '18.

We finished slightly better than expected in the third quarter with adjusted diluted EPS at $1.43, an increase of 4%.

Despite some challenges in operating income in our Pharmaceutical Distribution Services segment, we are able to overcome these headwinds and still grow our adjusted EPS.

I will review the segments a little later.

Let's begin with our consolidated results.

ABC revenues were $38.7 billion, up 5%, helped by solid unit volume growth across several of our businesses.

As discussed in prior quarters, we again experienced a decline in year-over-year hepatitis C revenues of about 20%, causing a drag on our quarterly growth rate of about 120 basis points.

The quarter's adjusted gross profit was down by about 1% to just under $1.1 billion.

Our Other segment, which consists of global commercialization services and animal health, continued with its excellent growth.

But this segment currently offsets the gross profit decline in our Pharmaceutical Distribution segment.

Operating expenses.

We continue to be laser-focused on spending in the right areas and leveraging our infrastructure.

Overall, our OpEx was up about 2%.

On a year-to-date basis, our positive expense trends have in part better related to effectively managing the opening dates of several new distribution centers.

As Steve mentioned, it was impractical to delay the openings any longer and we've now opened 4 state-of-the-art DC this year.

The uptick in our third quarter operating expenses, including depreciation, is primarily the result of these openings.

We will open one more DC in Q4, and the last 2 new DC will open in early fiscal '18.

Operating income.

Our adjusted operating income was $471 million, down about 5%, with operating margin down 12 basis points due to the decrease in gross profit in our Pharmaceutical Distribution segment.

Moving below the operating income line, Income taxes.

Our adjusted income tax rate was 27%, down significantly from the prior year due to 2 primary drivers.

The first tax item, as discussed on prior calls, we again recognize the benefit to income taxes related to the accounting rule change and share-based compensation.

This benefit impacted our quarterly tax rate by roughly 2%.

In the second and third quarters, our share price has been higher, which has resulted in the large number of employees' exercises.

Given the nature of the tax benefit, it is very difficult to forecast the timing of exercises and the ultimate impact to our tax rate and financials.

The second tax item, in conjunction with our filing of our fiscal '16 federal tax return, we finished our combined R&D credit and Section 199 tax projects with excellent first time results.

We mentioned this work on our call last quarter.

These tax projects contributed a tax benefit to the current quarter.

However, about $10 million of the tax benefit was related to prior fiscal years and it's a discrete onetime item.

Consequently, we had a nonrecurring 2% tax rate benefit in the quarter or a positive $0.05 benefit to our adjusted EPS.

Our adjusted net income was up roughly 2% to $318 million.

We continue to find ways to grow despite headwinds and an evolving health care market.

Our adjusted diluted share count decreased nearly 7 million shares or 3% year-over-year to 222 million shares.

We did not repurchase shares during the June quarter as we repaid our $600 million senior notes upon maturity in May.

We have about $890 million remaining on our board authorized share repurchase program.

Wrapping up our consolidated results.

In the June quarter, we had negative free cash flow of $354 million, which was lower than anticipated due to its lower wind-down of extra inventory related to holiday timing and to a lesser degree, the working capital impact from the new prime JV business, which had a heavy brand drug inventory and sales mix.

Our year-to-date fiscal '17 free cash flow was a negative $248 million.

Let me highlight, we continue to expect meaningful positive free cash flow in our Q4, similar to the cash flow performance we've had in Q4 our last 2 fiscal years.

We ended the quarter with roughly $1.3 billion in total cash, a little lower than normal due primarily to repaying the May senior notes and the inventory timing I just mentioned.

Our total cash amount we held -- of the total cash amount, we held about $800 million offshore.

This finishes our review of ABC consolidated results.

Now let's turn to segment results, starting with Pharmaceutical Distribution Services.

So segment revenues were $37 billion, up a solid 5%.

Our independent customer segment had very good organic growth at nearly 7%.

We continue to see the benefits of working with our customer-buying groups to improve overall compliance rates, which has translated into a reduced leakage.

We have been able to demonstrate value to our pharmacy customers when they source a higher percentage of their generics from us.

Because of these efforts, the business had another solid quarter of generic volume growth.

Our ABSG specialty business, which primarily focuses on physician-administered drugs, had another strong revenue quarter with growth of just over 10%, driven mostly by increased volumes.

This is the 14th consecutive quarter of 10% or better revenue growth.

We continue to see excellent revenue growth, primarily in oncology, but also in several other therapeutic classes.

Let me highlight one more time that the distribution segment had a revenue headwind of about 120 basis points due to lower hepatitis C sales in the quarter.

The good news, our hepatitis C revenues on a sequential basis, so between our March and June quarters, were flat.

This is the first time in the last 8 quarters that sequential hep c revenues did not decline.

Segment operating income was $377 million, down about 9%.

This segment benefited from the continued growth in our businesses that primarily service physician practices with specialty drugs, with income up just over 10%.

The segment also benefited from overall brand and generic volume growth.

However, the overall decline in the segment operating income was caused by 3 meaningful headwinds.

First, on the drug pricing side, the 2016 June quarter was the last quarter we had instances of impactful generic drug price increases.

We had a nominal contribution in the current June '17 quarter.

To a lesser degree, we also had a headwind from lower brand inflation in the current quarter.

Second, we renewed a key contract with Kaiser last year, the 3 pricing was a gross profit headwind in the June '17 quarter.

As we enter the September quarter, this contract renewal headwind is now anniversary-ing.

And the third item, we continue to experience lower throughput or shipments at our PharMEDium business.

The business team is working diligently to complete the QC process.

In addition to enhancing compliance, this will also lead to a superior quality offering and provide a further competitive advantage in the market.

So in summary, the segment continues to make progress in several key areas.

The positive contributions weren't enough to offset the headwinds this quarter.

We can now move to the Other segment.

This segment includes World Courier, AmerisourceBergen Consulting and MWI, businesses that focus on global commercialization services and animal health.

In the June quarter, revenues reached a record $1.7 billion, up 11%.

Our MWI and consulting businesses have revenue growth just over 10%.

Our World Courier business had a record number of shipments in the quarter.

And on a comparable basis, revenue growth in U.S. dollars was 7% or 10% in local currency.

To provide a little more color on MWI, we had a strong revenue quarter with comparable U.S. companion animal revenue growth of 11%, primarily from sales of new innovative drugs, organic growth with existing customers and the addition of new customers.

From an operating income standpoint, this segment had an excellent quarter with operating income of $95 million and a growth rate of 15%.

We are especially pleased with the results this quarter of World Courier and our Lash and extended consulting businesses.

This completes our segment review.

Let's move to our full year fiscal '17 expectations.

With 1 quarter to go, we are updating our guidance.

Revenues.

We are revising the full year growth rate to a range of approximately 5%.

At this part of the year, we have a better understanding of market and customer dynamics, related manufactured drug pricing trends and script growth rates.

Let me highlight, it's a bit of an unusual year that we will have 2 less business days in fiscal '17 versus the prior year.

Moving to operating expenses.

We continue to expect an overall increase of 2% to 3% in full year OpEx.

Next, operating income.

We now expect operating income dollar growth to be relatively flat versus fiscal '16, primarily due to lower revenue growth, a slightly lower contribution in Q4 for brand drug price increases and a slightly lower contribution from PharMEDium.

Income taxes.

Based on favorable year-to-date tax benefits and initiatives, we now expect that our full year tax rate will be approximately 31%.

Adjusted EPS.

We are now revising our full year guidance to a new range of $5.82 to $5.92, which reflects growth of 4% to 5% versus fiscal 2016.

And we currently expect to end the year in the mid to upper half of that range.

Free cash flow.

We now expect to finish the year between $750 million and $1 billion in free cash flow.

The $260 million litigation reserve that we've highlighted in our press release and 8-K this morning is likely to be paid by September 30.

Additionally, and to a lesser degree, we expect our cash flow to be negatively impacted by the investments related to on-boarding the Prime JV business and lower overall revenues.

That concludes our discussion on our full year fiscal '17 financial guidance.

Looking ahead, while we have a strong handle on our business, our corporate process moving forward will be to provide comprehensive financial guidance at the end of the fiscal year.

Our guidance needs to be informed by and reflective of the formal output of our completed business planning process.

As Steve discussed, we are also working through our new ABC organizational structure.

Consequently, we are still in the early stages of our fiscal '18 business plan process.

However, we are in a position to share some select commentary on headwinds and tailwinds.

Starting with the headwind.

First, pricing.

For brand inflation based on the actual pricing activity to date, it's likely that the inflation rate we model for fiscal '18 will be at the low end or slightly below our fiscal year '17 range.

For generic deflation, it's important to remember that deflation is a headwind that we have to work to offset, primarily achieved by increasing volumes.

We have yet to see generic deflation ease from its current high single digits.

We're expensed for about 3 quarters now.

We are still evaluating the probability of this continuing into fiscal '18 as part of our planning process.

Next, operating expenses.

As mentioned previously, we decelerated the opening of our new DC, minimizing the fiscal '17 OpEx impact.

This strategic phasing means that the fiscal '18 related DC OpEx will be considerably higher.

It's likely there'll be a mismatch of new DC OpEx with any associated incremental revenues.

Also, in relation to our reorganization, we are currently evaluating possible investments in IT systems.

These investments may yield organizational benefits and efficiencies over time, but will be a short-term headwind.

Overall, we will be diligent in our strong management of OpEx, but we do anticipate a higher OpEx growth rate in fiscal '18.

The last headwind to call out at this point is taxes.

We will gain an increase in our overall tax rate as we expect the favorable benefit from employee option exercises to slow.

Additionally, we have to lapse certain onetime discrete tax benefit recognized to date in fiscal '17.

And finally, as a reminder, the addition of any significant new U.S. business, like Walgreens' pending acquisition of Rite Aid pharmacies, will change the mix of our pretax income and increase our overall tax rate.

Let's close the fiscal '18 discussion with tailwinds.

First, revenues.

Our customer base, which includes our strategic partner relationship, has us well positioned to continue to grow in today's health care environment.

This, combined with our leadership and specialty, differentiates us and will enable strong top line revenue growth.

The next tailwind, compliance rates for our independent customers.

We have made steady progress during the last 12 months reducing leakage and improving our market share.

We expect to make further progress in fiscal '18, but likely at a slower pace.

Let me point out once compliance rates reach higher levels, it becomes increasingly difficult to capture incremental volumes, especially since we aren't willing to sacrifice fair compensation.

And the last tailwind, PharMEDium.

As I mentioned, we anticipate that we will complete the quality initiatives this fiscal year.

Customers are already seeing the value in our superior quality standards.

We expect sales volumes and growth rates to ramp during fiscal '18.

Wrapping up my comments this morning.

At this point, we expect the health care environment will be similar in fiscal '18 to this year.

We have shown our ability to execute within the current market.

Therefore, we are uniquely positioned and we remain confident in our ability to grow our business in the coming year.

As always, we continue to focus on achieving our core objectives, delivering outstanding service, solutions and value to our customers and also delivering long-term value to our shareholders.

Thank you, and here's Keri to start our Q&A.

Thanks, Tim.

Let's move to Q&A.

(Operator Instructions) Operator, can we go to the first question, please?

(Operator Instructions) Our first question will come from the line of Robert Jones with Goldman Sachs.

Yes.

So it looks like you guys are continuing to operate under the assumption that generic deflation will stay in the negative 7%, negative 9% range this year and into next year.

But there seems to be some disconnect with what you and your peers are seeing compared to what the manufacturers are communicating currently.

And even this morning, the largest generic manufacturer in the world was talking about worsening environment with accelerated price erosion and increase in generic approvals.

So kind of a long question, but I was just hoping maybe you could help us square the differences in what you and your peers are seeing versus maybe what your suppliers are currently communicating.

Well, we -- I haven't looked at the results in detail, Bob, but thanks for the question.

But I don't think it was materially different.

And our competitor that released earnings this week talked about a mixture of sell and buy side, and we really just talked about buy side.

But it's -- we're hoping that [Dr.

Godley] will start having an impact that will focus on -- where there's only 2 or 3 manufacturers that products have been approved, not where there's 8 to 12.

And then also, we'd see some momentum in areas like biosimilars and new product approvals that -- from the FDA.

So that's how we look at it, but we still are seeing 7% to 9% range, so -- but definitely towards the high end of that range.

Tim, anything to add?

Yes, I would just add, Bob, quickly, I think it's important to remember, our deflation basket is unique to ABC.

We may look at it differently than others, how do we exclude launches, launches that lose exclusivity.

And after a certain period, we exclude those.

So I again, everybody looks at us slightly differently.

We have more than 15,000 SKUs broad-based.

But as Steve mentioned, we're on the high end.

And I think it's important that, for us, as we talk about fiscal '18, it's still an open item.

It's clearly one of the macro items that we're evaluating and is critical in terms of our plan assumption in '18.

So we are watching it and monitoring it.

Will go next to the line of Garen Sarafian with Citi Research.

Maybe taking the comments on fiscal '18 and approaching it a little bit differently.

So realized that last year could have been an exception.

But last year, at this point, you had offered 4% to 6% adjusted EPS growth for the following fiscal year with various headwinds at that time, and we appreciate the headwinds and tailwinds now.

But some of those headwinds from last year seems to have abated.

So this year, the Street is expecting about 8% earnings growth for next year, ahead of your release this morning.

So is that something that you're comfortable with?

Or any sort of -- just any additional color that you could share?

Yes, I'll -- Garen, I'll start and Steve can jump in.

I mean, we think it's really important to have our planning process complete and make sure that we're transparent and it's very comprehensive.

We're just not in a position yet to do that.

We have to finish our planning process.

There are just a lot of moving parts.

So at this point, we felt it was appropriate to call out headwinds, items that we think -- headwinds and tailwinds, items that we think that we're monitoring, that are impactful.

We're contemplating that we need to work through.

That's really the best we can do at this point.

But I would say also, we're also working through the new organizational structure.

So I think in a lot of ways, there are just several moving parts right now.

And hopefully, we'll have better clarity on our top line revenue.

I mean, just one more thing I'll say quickly is that revenue drives the P&L.

It drives the cash flow.

We need to spend more time looking at our top customers' revenue forecast.

It could be organic or inorganic product mix.

Pricing, that's critically important.

So we still have a fair bit of work to do.

And when we're prepared, which is at the end of the year, we'll provide full complete guidance.

And next to its line of Lisa Gill with JPMorgan.

I just want to follow up on your comments around revenue.

As we think about the shift and your expectations on revenue, was it that you initially had maybe some other customers coming on board?

Are you seeing a change in utilization, a change in pull-through from your independent customers?

How do we think about that?

And then you're translating that into your comments around '18 that you expect '18 revenue growth to be strong.

Is that the anticipation that Walgreens will be able to close this transaction with Rite Aid?

Is this one of those 2 things as we think about revenue?

Yes, I'll start.

We haven't really -- it's one of the reasons why we're delaying any guidance into '18 because we'd like to get a couple more weeks into seeing how the approval process goes on Rite Aid.

So we think that that's a key trend, but we do see a continued trend of mix shift in our benefit, which is the specialty business.

We are -- definitely one of the things we're most proud of this year is our strong growth in independents.

And I was at our ThoughtSpot trade show 2 weeks ago, and I just say full of admiration for that customer segment.

It's really remarkable how they manage in our limited networks with really declining reimbursements, with the DRRP that some continue to have these very strong businesses.

And also the business that we're doing very well there, the new service that we're offering and we're doing very well there is the transition services business.

So really requires when somebody want to retire, offering those businesses to other independent pharmacies, which is a great start strength show -- sign of the strength of our business.

So I think the other key trends going on, the hepatitis C has been a very big change in our business.

Walgreens' generic utilization sometimes has been much more accelerated than we thought.

And overall, I just would tell you that even doing very well with unit sales in generics this year, the deflation is a big headwind.

And unfortunately, it repeats itself again next year.

So those are some of the revenue trends.

Utilization, these are -- it's a good question.

We don't really see anything.

I've heard a lot of questions about hospital inpatients utilization.

We're a little bit behind there.

But we really do track more on aggregated IMS number, but we continue to evolve our forecasting.

And there's one other question that will look more at utilization trends on scripts with some of the deflation and inflationary trends we've seen.

Tim?

Yes.

Just quickly, so we can move along.

I think, Lisa, for '17, one of the bigger impacts on revenue will just be in brand inflation.

We do a large percentage in brand business.

And having that inflation move to the lower end of the range at just the sheer amount of dollars that we do is a big headwind, and that was a little bit of a moving target this year on where brand inflation would end.

As we look forward to '18, I mean, I think our largest customer, strategic partner, Walgreens, I mean they're ramping up certain aspects, certain commercial business activities.

And just like Prime, we'll have that commercial business for a whole year next year in '18.

So we'll have that benefit.

But as we contemplate fiscal year '18 and good solid revenue growth, we're not factoring in acquisitions or inorganic growth.

It's just the full year impact of the organic growth.

We'll go next to the line of Steven Valiquette with Bank of America.

So just quickly as it relates to Rite Aid . You guys did mention previously that the Rite Aid volume could onboard at ABC, roughly 6 months after potential acquisition of rev by Walgreens, I guess, under the new revised smaller rev asset purchase.

Is that 6-month timing still a good assumption for when ABC could take over as distributor for rev if that smaller asset purchase is consummated by Walgreens?

I think, Steve, we -- it's funny, we already tried to give you guidance in 3 months' time.

We don't think it's for us to comment on what the purported integration plans are.

And it's complex, but we just don't think it's our position to comment.

But we did say 6 months, and that does seem like a reasonable period after a close in general, I would say.

Okay, that's fair.

Very quickly, on the bright side in the Other segment, you guys have done a great job posting operating profit well in the double digits in the last 3 quarters above the full year guides of high single-digit growth.

Is there any more color on really what's driving that upside in particular?

And then how much of that could carry over into FY '18 as well?

Yes, we're all very proud.

And I think one of the things that we accomplished in this reorganization is putting these higher demand-generating businesses together under Jim Cleary's leadership, and I'm looking forward to seeing the results that Jim will drive.

He's dug right in.

He's -- since he relocated to Philadelphia, he's spending a lot of time in Charlotte where we have a lot of big technology investments.

Animal Health business is very strong.

We're seeing pickup in some of the production animal trends.

We had a very strong 2016 as well, so they're lapping very strong performance.

World Courier, we're doing well.

We also got some big systems investments there, and they -- we should see a similar sort of year next year.

They have -- their market's not growing in double digits, but it's -- they are our strong performer and they participate well in the competitive positioning.

And that's just been a very strong performer for several years now.

We have a huge technology investments there.

Overall, as these things go, it's going pretty well.

On the big project, Fusion, we're on track and on budget.

And we should have some customers going live in the next couple of months, which we're confident it should go well.

But those are the sort of the key drivers.

Health care reform is we're going to think, not going to be any negative.

It could be a positive impact to Lash in the long term.

So -- and the animal health market, the demographics there are may be even better than humans because pets are living so much longer and they're just more and more of them, and I think people are more in love with them.

With the companion side, we're confident there.

And I think, again, if there's any area where we have more interesting M&A opportunity, it's really in those services businesses because they're not affected by a single payer-type market, et cetera.

And so we are very interested in M&A in that sector as well.

And that will come from the line of Michael Cherny from UBS.

So just thinking about next year and again, I don't want to get too far ahead of ourselves.

Maybe in terms of thinking about the headwind from tailwinds.

Can you give us a sense of how that should shake out relative to some of the cash flow dynamics of the business?

Particularly, I know you talked about your levels of disappointment the cash flow generated so far year-to-date.

And so as we jump into next year, as we think about some of those headwinds, tailwinds, anything specifically we can call out that could be impacting next year's performance?

Yes, I mean, I would say, certainly, we're behind a little bit in terms of where we are for the year, where we thought we'd be for our third quarter, but most of that is timing and will reverse in Q4.

We still expect a pretty solid free cash flow for fiscal year '17.

I think it's important to really stress that.

Just from a foundational standpoint, nothing's changed.

We are a little bit lower in free cash flow this year in '17 than we expected originally, but the core cash flow metrics are still all in place.

So I mean, in terms of next year, I wouldn't say to call anything out.

We expect we're still committed to our target.

I think that's really important.

We're still committed to our target of free cash flow add to about approximately 125% of adjusted net income given the mix and how we expect to grow generics.

So I mean, I think that's a real positive point to make to everybody.

Kevin Caliendo of Needham & Company.

Steve, you commented that OpEx spending will be considerably higher next year.

It looks like it's going to be up around 2% this year.

Just want to try to quantify what considerably means or if we can quantify what a DC might cost or what the variable cost would be if you decided to make that investment in the IT systems.

Any color around that would be really helpful.

I'll just make one quick comment, and then let Tim get -- serve the guidance.

I -- we didn't mention in the script, but I was at Indianapolis opening 2 weeks ago exactly, and boy, I wish you guys could see this new 350,000 or so square foot distribution centers.

We have the technology, the organization there that really allowed us to scale.

I mean, just for example, this facility is not even a month old, and they did 56,000 lines and not before we got there and just running so well.

So we've got these down and we're proud of the investment, and we believe it's a great -- AmerisourceBergen is the most reliant on automation in our distribution systems, and we are sincerely proud of those investments we made.

We have 2 more that we'll do next year as we talked about, but we had a year of very low OpEx growth despite some big capital expenditures.

We monitor those expenditures and make sure that we get the yields out of them that we expect.

But we have over 20,000 associates that we're proud of that deserve to be fairly compensated.

So you start off with benefit and about a 4% wage assumption, so that drives a lot of it.

And then we're opening 2 new centers, and that's really -- I think Tim is going to give you more specific points, but that's really what's driving it for each, nothing more specific than that.

Yes.

Thanks, Kevin.

Again, my comments that -- from earlier were definitely that we would see OpEx growth, I mean we're going to be very mindful and do what we can, but we're going to have the full year impact of the DCs open.

Some will still have the new DC and the old DC.

We mentioned ABC Order, Steve mentioned Fusion.

I mean, these are fairly large systems that, again, as you think about it, we bring on the new system and we still have the expense of the old system.

In many ways next year, we have some duplication and we don't have the full year benefit of gross profit or savings or revenues.

So there is -- I call that a little bit of a mismatch.

I don't think we're ready to tell you specifically, but we just know that we've done a terrific job this year and we're going to be up 2% to 3%, which is just outstanding for the company.

We're just telling our investors in the sell side, as you think about '18 in your model, just make sure you contemplate that it's going up because of these items.

Will go next to the line of Erin Wright with Crédit Suisse.

On the lower cash flow guide and the higher receivables trend, was that all attributable to the Walgreens Prime or the Prime relationship?

And can you remind us kind of how those relationships are influencing dynamics from a working capital perspective?

Yes, let me just jump in here.

The change in our cash flow guidance, free cash flow guidance for '17 is strictly due to, one, the litigation reserve which we highlighted this morning, $260 million that we fully expect to pay and fund by the end of the year.

And then almost equally is really the investment in the Prime business, which is heavy brand and the cash conversion cycle just isn't as optimized as generics.

So that's really the change of why we had to drop the free cash flow guidance for full year fiscal '17.

Will go to the line of Brian Tanquilut with Jefferies.

Just a question on Express Scripts joining WBAD.

I mean, how should we be thinking about your views on how that accrues to you guys next year in terms of improved buying power.

And then do you think that will be enough or close enough to offset some of the things you were talking about in terms of the pressures that you will get on generic pricing?

I think the interesting thing is that WBAD continues to grow in terms of the members we are attracting.

If you look even at it right now, it's been about, for America, that's another really classic trade segment that, presumably, and I'm not predicting, but presumably, if it closes, it will come into WBAD as well.

And Express Scripts is certainly a different type of a dispenser than a retailer or a wholesaler than AmerisourceBergen.

So it just continues to grow the robustness of our collective portfolio and the strength of the individual partnerships within WBAD.

So it's a good time for the partnership.

I think we're also looking at other areas where WBAD could invest.

I think I've made a comment in the past that if anything aggravates Mr. Pessina's, the notion at WBAD is a static model.

So we continue to look for new ways to invest.

So we are thrilled that WBAD was the first purchasing consortium that's achieved a lot of our objectives, and we're ready for the next generation of memberships, which is really starting next year, potentially with 2 new members and then also potentially new product category.

So we're thrilled about WBAD.

Specific financial benefits from it that affect '18, certainly one of the things we're looking at, but probably really won't know until we enter the contracting period in actual calendar '18.

And we'll go next to the line of Ricky Goldwasser, Morgan Stanley.

Just a couple of follow-up question.

First, Steve, you talked about the next generation of memberships that's associated with WBAD.

So can you just help us better understand how that benefits you?

If there are new members that are added, does that mean that you can garner additional savings?

And then if we could get also just a little bit more detail on the operating expenses.

I mean, obviously, you're going to have some duplicate facilities next year.

It sounds like you had some duplicate facilities this year as well.

You opened 4 of them throughout the year, planning to open 4. So how should we think about the on-boarding and off-boarding?

So should we see duplicate costs for a quarter or for more?

It's just going to really help us as we think about the modeling.

Yes, go ahead, Tim.

I'll take -- Steve, I'll jump in and take the last one just on OpEx.

Again, Ricky, I just can't be real specific at this point.

It's -- we're still working through all that.

But I mean, year-to-date, we were -- through March, through 6 months, we're relatively flat on OpEx.

This quarter, we were up 2%.

In Q4, it's certainly going to be higher in order to glide into the 2% to 3% that we said for the year.

So I mean -- and again, a lot of the duplication from '17 is coming in the second half or even late in the year.

So I just -- the point is you need to -- as we communicate out externally and in your new model, you just -- you need to just to be thoughtful like we're being in terms of next year is going to be on a little bit higher, certainly, as you think about our OpEx trend.

Yes, and then on the WBAD, I don't think there's too much more to say.

I think we said what we can't say.

Obviously, more members coming into our particular consortium, anything that makes our relationship with the Express Scripts more sticky, more integrated, and we've talked about this.

It's a big positive.

So -- and I think, obviously, a strong partner like Express Scripts had a choice of buying consortiums.

So again, it's strong validation of the strength of WBAD that we've joined -- that Express Scripts chose to join us.

We'll go to the line of Ross Muken with Evercore ISI.

I'm trying to understand you also sort of talked about some potential changes at FDA, obviously the inflation environment's been a bit uncertain at least on the generics side.

How are you thinking about sort of ABC returning to sort of more of the traditional growth rates?

You've sort of aspired to be in -- particularly in the earnings line.

And how much -- whether you can get there with sort of the existing organic business versus how much you need to bring in inorganically, because the balance sheet's getting to a pretty good state where you could sort of do M&A again.

How are you sort of thinking about that external versus internal mix?

And obviously, again, I'm not asking for '18 guidance, but more the path there forward back to a more steady-state rate, maybe in the double digits.

Yes, yes, we -- that's definitely an aspirational goal for us, and we like growing in the double digits more.

Certainly, the general market is -- was over 10%, 12% 13%, 14%.

So that's a help because we expect to grow with the market.

And then we're not probably 1% or 2% higher because of the customer partnerships we have and the specialty exposure we have.

Again, closer to that mix, it's a little bit harder for us and the larger customers tending to grow faster than the -- the smaller customers, although I will note, we had a very strong U.S. independents this year and a strong year in our specialty business as well.

So market conditions, the political uncertainty is something on top of our mind at the moment.

It could be in the action on pricing.

There are a lot of unknowns.

And then you'll see us emphasize that the service and commercialization, the demand creation businesses, Animal Health business, these are areas where we hope to grow.

And on capital deployment, first of all, we've kind of liked buying larger companies.

Tim always says, there's much work to buy a small company than the large company.

And yes, so all things being equal, we're comfortable in that.

$500 million to $3 billion range is a good range for us, and we're very picky.

We've chosen the market leaders.

We like that.

We've retained most of the management team at PharMEDium, particularly the people that we are very keen to retain that were more core business people as opposed to brought in by the firm.

And then in MWI, we've retained with shortly financial people.

We've retained and promoted and grown the talent there very remarkably, I think.

So we think we do M&A very well, and we're just very selective.

And I think that's what invest that the company expects from us.

Yes, and I also jump in and say, Ross, I mean Steve mentioned that the capital deployment's critically important to us.

It's certainly part of the equation to get back to that aspirational mid-teens.

We -- our balance sheet, we're in a terrific position with our balance sheet.

We worked hard to do that.

And we talked about earlier on the call, we expect to get back to a very solid free cash flow in '18 and beyond.

So we're going to be positioned very well to deploy capital to grow our business long term.

And that will be from Charles Rhyee of Cowen and Company.

Maybe on the -- just quickly on the headwinds for next year.

If you were to sort of rank them, which ones would you say are probably more impactful as you think about your planning?

And then just one question on deflation side.

You've talked about you're still seeing a trend pretty negatively at least in the same way as last year.

But when you look at, there's a couple of big generics that went multisource last year, and we're going to start lapping that.

Do you not expect to see any kind of at least easier comparisons as you go into the back half of the year?

Yes, Charles, thanks.

We listed out the headwinds.

We didn't necessarily put them in any type of rank order.

There are items that we're looking at and evaluating.

So I'd prefer probably not to evaluate them.

Again, we -- being transparent, we let you know what we're thinking about.

In terms of generic deflation, certainly there's a top 10 list that has higher deflation.

The deflation that we see in our basket is maybe a little bit more broad-based.

So again, I think we -- in our comments, I think we expect it not to ease.

At least where we're at right now, we don't think anything will change.

We're still saying it's going to be in that 7% to 9% and not easing and not getting worse.

So that's positive and stable, but still in that 7% to 9%.

We'll go next to the line of David Larsen with Leerink Partners.

Can you talk a little bit about sort of the sell side dynamics that you're seeing?

So I understand there's still significant deflation on the buy side, but what about the pricing you're charging to your customers?

And any sort of like market activity that you can describe?

Would you say there's a period, I think last year, where some folks are getting very aggressive about trying to take some independent share.

Can you talk a bit about sort of the sell side dynamics?

Has that stabilized or not?

And why can't you drive a higher margin if the pricing you're buying these generics for is actually declining?

Yes, I mean, we -- I think on just the very last part of that, I think we're always mindful of what the reimbursement is for our customers and making sure that they can remain in networks and dispense profitably.

So that's definitely one of the metrics we look at.

We're very encouraged by the way we work with our buying groups, and we put out our compliance rate up to a level where we think they -- where we're getting our fair share of wallet.

That's -- if any of our sales people are listening, that's not an invitation for you to relax.

That's an invitation for you to keep up the hard work and try to get even another 1% or 2%.

But there is a certain natural feeling on which we can do that.

We haven't had a big contract for a while, so we're doing the more enjoyable work of working hard with partnering and collaborating and looking at new opportunities with our customers.

Having said that, there's markets where, of course, we always have competition.

We don't talk about the customers that are under $1 billion, and there's community oncology customers, there's competition, there's independent pharmacies that are deciding which buying group they are going to belong to So there's always something going on.

We could have been a little bit ahead of the contract renewal cycle within our industry.

So we might have been on the front end of renewing some contracts with Kaiser and GPA are particularly 2 that come to mind, the new investment we make with WBA.

So we've got through a lot of that, and we don't have a lot of big contracts.

And also, to the best of my knowledge, we did not, any significant contract that's out of market.

So we feel on the sell side in very good shape.

So next question, please?

And the last question will come from the line of Evan Stover with Robert W. Baird.

I wanted to kind of ask the flip side of Charles question, which is on the buy side trends.

You guys have historically, I think, talked about less than 8% of your brand gross profit contingent on inflation.

Your peers are talking about making a lot of progress to get down to your very low levels there.

I'm just wondering if there's more work to do there if that number goes lower and what the impacts of that would be on both your near-term and your long-term trends from lessening the contingencies of brand price increases?

Yes, I think you said the brand inflation rates are about 7% to 9%, similar to the actual generic deflation rate.

And it's been a little bit slower.

It's more towards the 7%.

The increases we saw last cycle were a little bit more subdued than we might have expected.

But 90% of our contracts, and we've talked about this for a while, we don't earn any gross profit from inflation.

So we feel we're very well protected that out of 10%, we've talked a lot about this, that we try to eliminate that.

I've been in some of those negotiations myself, and we continue to make progress, and I would see it go higher than 90% as we get through the next generation of people service contract.

So thanks for the question.

And that does conclude our Q&A session.

I will turn it back to Ms. Mattox.

Operator, I'm sorry, we just have one more comment from Tim.

No, Steve, I just thought it's important to -- I think, Evan, maybe you're asking just about a headwind or impacts, and we wouldn't expect -- as we convert those over, we wouldn't expect to have a headwind and convert those -- convert the economics over the fee-for-service.

We provide substantial value to manufacturers, and we believe we should be fairly compensated for that.

And that's where we're always working to do.

Yes, so let me just wrap up, Keri, by saying that I'll take some of my favorite themes from our script.

Our restructuring really has positioned us very well and focused us on what I believe are the most important things for our long-term future, which is, I'll add these words, customer accessibility and integration.

Again, we're strategically focused on the U.S. pharmaceutical market in both animal and human health and there's strong demand for the products, and we've made all the right investments.

I've talked about the warehouses we've invested in.

Tim talked a lot about the systems, the Fusion and the World Courier system that we're doing, the crude projects.

So we are very, very excited about our business.

We're excited about our performance this year and look forward to completing out the fiscal year and give you our guidance for '18 in about 3 months.

Thank you for your time today.

Thank you.

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