美源伯根 (ABC) 2017 Q4 法說會逐字稿

Ladies and gentlemen, thank you for standing by.

Welcome to AmerisourceBergen third (sic) [fourth] quarter earnings conference call.

(Operator Instructions) And as a reminder, today's conference call is being recorded.

I would now like to turn the conference call over to your host, Vice President, Corporate and Investor Relations, Keri Mattox.

Please go ahead.

Thank you.

Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen Fiscal 2017 fourth quarter and full year financial results.

I'm Keri Mattox, Vice President, Corporate 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 the 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'd 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, amerisourcebergen.com.

(Operator Instructions)

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

Steve?

Thank you, Keri, and good morning, everyone.

I am pleased to discuss our fourth quarter and full fiscal year results as well as AmerisourceBergen's continued execution.

Revenues were up 4% to $39 billion for the quarter and 4% to $153 billion for the full year.

And our adjusted diluted EPS was $1.33 for the fourth quarter and $5.88 for the full year, an increase of 2% and 5%, respectively, compared to the previous fiscal year periods.

We are proud of this execution and performance, especially against the backdrop of on ever-evolving health care landscape.

Along those lines, I want to take a moment to again thank our amazing team of 20,000 associates for their dedication, execution and performance this year.

Specifically, I'm so proud of the way our entire team worked very seamlessly, collaboratively and tirelessly through some of the worst hurricanes in recent history.

I was just recently in Houston to meet with our associates there.

I saw firsthand how our preparedness and rapid action in Houston as well as in Florida, Puerto Rico and elsewhere ensured that our associates and their families were safe and that we were able to continue to operate to deliver products and services and to ensure access to critical, sometimes life-saving treatments for patients.

Due to the preventative steps and comprehensive preparations of our operations team, I'm also happy to report that none of our AmerisourceBergen facilities sustained material damage.

It is our associates who continue to go above and beyond everyday for AmerisourceBergen, for our customers and, importantly, for the patients who need their medical treatments.

Our associates help shape our culture, power our corporate transformation and are driving our growth.

So sincere thank you.

Before I continue my commentary this morning, I do want to take a few moments to discuss something that is critically important to AmerisourceBergen and that affects all of us: opioid and the rising levels of their abuse.

AmerisourceBergen understands and appreciates the enormity of this challenge, both for the health care industry and for the country more broadly, and we are mobilized to address it.

We are working diligently at ABC collaboratively across our industry with other distributors and HDA and very closely with legislators, policymakers and regulatory agencies to monitor and stop suspicious orders and minimize and deter diversion.

In addition to reporting and stopping orders deemed to serve us to be suspicious, we also provide data reports about the quantity, type and receiving pharmacy of every single order of controlled substances we distribute to regulatory and enforcement professionals.

Additionally, along with our partner, Walgreens, we have expanded the safe medication disposal kiosks take-back program and our Good Neighbor Pharmacy's safe drug disposal program in conjunction with the National DEA Prescription Drug Take-Back Day.

AmerisourceBergen Foundation is also actively working to support a broader range of educational programs.

AmerisourceBergen takes very seriously our own supply chain and our responsibility to patients.

Getting FDA-approved drugs from pharmaceutical companies that manufacture them through DEA-registered pharmacy that dispense them based on prescriptions written by licensed health care providers.

We will continue to work diligently and collaboratively to address this challenge.

Now as we enter our fiscal year 2018, we believe that our consistent ability to execute and to achieve more, even in an evolving health care market, will continue to drive growth.

We expect to increase our revenues, grow our operating income and improve our EPS.

Tim will talk more about our fiscal year 2018 expectations and full financial guidance in a few minutes.

My comments today will be focused on our corporate transformation, how we are utilizing our scale and expertise to maximize our portfolio and how AmerisourceBergen will drive value to fiscal year 2018 and beyond.

Let me start with a bit of context and background.

First and very importantly, we continue to believe that AmerisourceBergen has a solid, differentiated platform, one that sets us apart from others in the industry.

We have a fast-growing base of strategic anchor customers.

We offer the most innovative services and solutions.

We are the undeniable leader in specialty product distribution and services, and we have a proven track record of successful financial stewardship.

AmerisourceBergen's strong platform supports growth for our customers and ultimately enhances patient access to quality health care.

AmerisourceBergen platform also enables us to execute in an ever-changing health care environment.

We all know we have challenges in health care today, but we also see significant opportunities.

Health care is a critical, integral and growing part of the U.S. economy, and AmerisourceBergen has strategically focused its business on the U.S. pharmaceutical market.

IMS expects a greater than 5% annual growth rate over the next 5 years for the U.S. pharmaceutical market, and AmerisourceBergen expects to outpace that growth due to our strong customer base and leadership in specialty.

An aging U.S. patient population continues to demand the support of pharmaceutical intervention, which can ultimately help control overall health care costs.

The pipeline of innovative, new specialty drugs is robust and growing, especially in oncology and a fine opportunity to highlight.

We believe that patient access to health care coverage will continue, especially with the healthy economy and higher employment numbers as a driving factor.

So how is AmerisourceBergen positioned to seize these opportunities?

How will we drive value and growth in fiscal year 2018 and beyond?

Most importantly, our corporate transformation is key, and we have made substantial progress on these efforts since we first unveiled them in June.

In fact, many of the new leaders coming into key positions as we transform the business are coming from within AmerisourceBergen.

It is a source of pride and very gratifying to me to see the realization of our succession planning efforts as strong internal candidates are successfully promoted to new management roles.

These new managers are being so well received internally and externally by associates, our customers and suppliers.

To me, this is a great validation that our talent development pipeline is proving very effective.

The focus on developing our team and our transformation overall shows that we are customer-focused.

We are evolving our business to provide both our upstream manufacturer customers and our downstream provider customers with a seamless, integrated experience that makes it easier for them to not only do business with AmerisourceBergen but to run their business day-to-day.

We are continuing to reshape our business units for maximum efficiency in a streamlined approach.

We have organized into 2 primary segments: first, Pharmaceutical Distribution and strategic local sourcing; and second, Global Commercialization Services & Animal Health that are integrated, collaborative and optimized.

Just last month, we gathered more than 500 AmerisourceBergen associates in Dallas for our OneFuture transformation meeting.

And I can tell you enthusiasm, support and energy was impressive.

This group as well as countless other working groups and associates across all of AmerisourceBergen is dedicated to being part of the solution and actively participating in our corporate transformation.

It's a hands-on process.

And importantly, that's our corporate strategy that is driving the changes to our structure.

We're excited to keep moving our transformation forward and to provide you with ongoing updates.

In short, we are one AmerisourceBergen, and we are positioned to strategically, dynamically and successfully address today's health care market forces and work seamlessly with our customers to capitalize on its opportunities.

And now on to answer the second question I posed a few months ago: How will we drive value and growth in fiscal year 2018 and beyond?

First, we will leverage scale with our corporate transformation and evolved business model.

AmerisourceBergen has a differentiated go-to-market strategy, one that is illustrated by our fast-growing customer base and strategic sourcing initiatives.

We are proud of our focus on creating a seamless, integrated experience that supports our customers and accelerate their growth as well as ours.

And we are more integrated across our portfolio of businesses than ever before.

We're making huge strides in our integrated business development efforts, bridging best practices -- best business practices in human and animal health and leveraging our full breadth of experience and expertise to establish AmerisourceBergen as the leader in new areas of innovation.

For example, we're really at the forefront of the commercialization and successful launch of groundbreaking cell and gene therapies as we see this as a compelling future growth opportunity.

Next, we will enhance access as we deliver on our responsibility to create healthier futures.

We continue to be the undisputed leader in specialty, where we offer one of the industry's broadest ranges of clinical trial support, consulting and commercialization services, data analytics and specialty product distribution.

We are successfully growing our customer share of wallet, driving increased compliance and rebalancing customer contracts to better reflect today's product mix.

We are deepening our relationship with manufacturers and evolving how we work with them.

At our recent ThinkLive manufacturer summit in October, we heard from manufacturers that our services, data and analytics are invaluable, and they want to expand how they work with us.

We're supporting their growth and ultimately enhancing patient access to critical medical treatments.

And we are building on our own internal expertise and experience.

Success at AmerisourceBergen is not just that our businesses do well, it's that our businesses work together to collectively achieve so much more than they could separately.

It's our Pharmaceutical Distribution group working with MWI Animal Health to optimize warehouse management systems and increase overnight distribution efficiency to about 20,000 distribution veterinary practices.

MWI also working with our IT team to launch the next generation of its innovative e-commerce platform, which is growing at 2x the business's organic growth rate.

Third, we will drive performance and execute with our powerful corporate culture.

AmerisourceBergen continues to deliver increased efficiency and effectiveness.

Our automated distribution center network now includes 5 of the 7 state-of-the-art DCs, and we expect to bring the last 2 online in the next few months.

And our near-term technology investments and new innovative systems are reshaping our business and how customers interact with ABC while best positioning us to deliver value over the long term.

The ABC Order platform has been launched and is being held as a quantum leap forward in the inventory management and ease of holding for independent community pharmacy customers.

We are rolling out Fusion at Lash Group, which is dramatically changing the way and, importantly, the speed at which we facilitate patient prior authorization and reimbursement approvals for our manufacturer customers.

We also have key systems implementations underway for World Courier (inaudible) and, as I mentioned, are launching the next-generation e-commerce platform for MWI Animal Health.

Of course, key to driving performance and execution is the key.

As I mentioned earlier, I truly believe that we have the best associates in the industry.

The talent, dedication and the expertise of our people are our greatest assets and one of the very best things about working at AmerisourceBergen.

And fourth, we will continue to build advantage to drive growth and deliver value to shareholders.

We have a long history of successful financial stewardship at AmerisourceBergen holding on our proven ability to deliver value is a key corporate goal.

We have forged some of the most strategic and long-standing customer partnerships in the industry.

Our strong customer base provides a substantial foundation.

We also have platform for growth as we capture new volume and business, like Walgreens Prime and Rite Aid.

Finally, we have built advantage through strategic M&A and will continue to evaluate compelling opportunities in the future as we are open to making best-in-class, first-in-class, value-driving acquisitions that will expand our strategic footprint.

In summary, AmerisourceBergen is strong.

We are evolving.

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

Our associates often many times volunteer organizations of their choice.

Our team is working in our local communities and our foundation is growing in size and supporting a broader range of critical programs.

At AmerisourceBergen, we think, plan and act strategically to accomplish our corporate goals, serve patients and build long-term, sustainable shareholder value.

Now let me turn the call over to Tim for a more in-depth review on our quarterly and full year financial results as well as our financial guidance for fiscal year 2018.

Tim?

Thanks, Steve.

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

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 and growth rates and comparisons that are made are against the prior year quarter, unless otherwise noted.

As Steve noted, we're very pleased with the progress we made this fiscal year, especially in several key areas such as improving generic compliance levels; re-signing key customers, like Express Scripts; and importantly, continuing to grow our specialty distribution and services businesses.

Our continued execution has allowed us to successfully navigate in what has remained a challenging health care environment.

We are confident that our overall strategy, combined with our ability to consistently execute, will enable us to drive sustainable growth.

This morning, I will provide commentary in 3 main areas.

First, I will highlight our fourth quarter consolidated and segment performance.

Next, I'll spend a few minutes on our fiscal '17 full year performance.

And the third area, I will cover our fiscal '18 expectations.

Let's begin with our Q4 '17 results.

We finished the quarter with adjusted diluted EPS at $1.33, an increase of 2% and in line with our expectations.

As Steve highlighted, we're extremely pleased with our operations team's comprehensive preparations and rapid coordinated response to the recent hurricanes.

These efforts resulted in the safety of our associates and no major issues for our facilities.

I should mention our revenues were slightly impacted from these events, including shipments from our PharMEDium facility in Sugar Land, Texas.

Overall, our EPS was impacted, we estimate, by about $0.01.

Our consolidated revenues were $39 billion, up 4%, while having one less business day in the quarter compared to last year.

We also continued unfortunately to experience a headwind from lower hepatitis C revenues this quarter, consistent with the overall U.S. market trends.

As an illustration, excluding this headwind from hep C and also adjusting for the one less business day, our revenue growth would have been 7%.

Operating income.

Our adjusted operating income was $471 million, up $7 million or 1.5% with our operating margin down 4 basis points.

As expected, we had higher operating expenses in the fourth quarter.

The expected cost associated with bringing our 5 new distribution centers online dampened our operating income growth, accounting for slightly more than 1/3 of the OpEx increase.

Moving below the operating income line, income taxes.

Our adjusted income tax rate was 32.5% for the current quarter, up some from last year.

Unlike previous quarters, this fiscal year, the current September quarter had an insignificant benefit from the accounting rule change regarding share-based compensation.

I should also highlight that last year's September quarter had a favorable true-up adjustment for our 2016 tax expense.

This caused the headwind in the current quarter of about 110 basis points on the tax rate.

Our adjusted net income decreased about 1% to $293 million, primarily as a result of the items I just covered, including the tax headwind.

Our adjusted diluted share count decreased about 6.5 million shares or 3% year-over-year to 221 million shares.

In the September quarter, we repurchased about $100 million worth of shares, and we ended the year with $790 million remaining on our current board share repurchase authorization.

Moving over to cash flow.

We are extremely pleased with our Q4 free cash flow of nearly $1.3 billion, a record quarter.

This was much better than we anticipated as a result of our revenue mix and also a heightened focus on our inventory levels and churns.

This finishes the review of our consolidated results.

Next, let me switch and cover our segment results.

Before I start, let me highlight that in conjunction with our transformation efforts and as highlighted in our press release this morning, we combine the legacy drug company and legacy specialty operating segments into a single operating segment effective September 30, 2017.

This conference call will be the last time we'll make any reference to the specific drug and specialty businesses.

Additionally, we moved 2 of our businesses between our reportable segments.

One of the businesses that moved, TheraCom distribution, a high revenue business with low margins within our consulting group in the Other segment, was moved to our Pharmaceutical Distribution Services segment.

As a result of these changes, we have restated the segment results for all prior reported periods.

These changes had an immaterial impact on segment operating results and will be fully highlighted in our 10-K.

With that, we can begin our review with Pharmaceutical Distribution.

Total segment revenues were $37.7 billion, up 4%.

Legacy drug company had solid revenue growth, up 4%.

Not only did this business have to lap lower hepatitis C revenues, as mentioned earlier, but the business continued to be disproportionately impacted from greater generic conversions by certain large customers.

As an example, the segment lost 140 basis points of revenue growth year-over-year from lower revenues associated with just the top 3 brand drugs that previously converted and had been holding share.

In the past, brand inflation provided a partial revenue offset to conversions.

But inflation has been less impactful this year.

And I should point out with certain large customers upon conversion to the generic drug, we do not always retain the prescription volume.

Our legacy specialty business, which primarily distributes specialty drugs to physician practices, continued with market-leading revenue growth of just over 10%, notably the 15th consecutive quarter of this level of performance.

Growth was driven by increased volumes, especially in oncology, and to a lesser degree in MS, ophthalmology and plasma.

We continue to see strong volume and revenue growth for oncology drugs due to expanded indications and overall market growth.

Segment operating income was $399 million and essentially flat.

Our legacy specialty group led the way with excellent growth, which was offset by the expected lower contribution from the drug company.

Two items negatively impacted our drug company business.

The first item.

Last quarter, we specifically highlighted that Q4 will have higher OpEx due primarily to the go-live date of 5 distribution centers.

The original go-live date of the DCs had been spring 2017 in order to coincide with the anticipated timing of the new Walgreens Rite Aid business.

Despite the deceleration of opening these DCs, the drug company had to eventually bring the DCs online and was therefore burdened with some incremental OpEx ahead of onboarding the new business.

And the second item, our PharMEDium business experienced an increase in sequential shipping volumes in Q4.

So we are pleased with their progress at increasing throughput while having best-in-class QC procedures.

However, the business was still down in terms of year-over-year performance.

Some of these headwinds is timing related to lower demand at PharMEDium's Texas facility as a result of the Houston hurricane.

Overall, we are making progress in the Pharmaceutical Distribution Services segment despite macro industry challenges.

We continue to see growth in order line shipped, including PRO Generics order lines.

We have an efficient, modernized distribution network, and we've made key technology investments, most of which centered around redefining the customer experience and enabling our customers to more effectively operate their businesses.

We can now move to the Other segment.

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

In the quarter, total revenues were a record at just under $1.5 billion, up about 12%.

All 3 businesses contributed meaningfully to the revenue growth.

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

MWI had strong volume and revenue growth, especially in companion animal and to a lesser degree in production animal.

From an operating income standpoint, this group had operating income of $72 million, up 8%.

As a reminder, there is some seasonality in the MWI business, the Q4 typically being their lowest profit quarter.

Overall, we continue to be very pleased with the core fundamentals of the 3 businesses and Other.

All remained the undisputed market leaders in their respective sectors.

I'd like to now cover just a few fiscal '17 full year consolidated financial items.

Revenue.

Our full year growth was a solid 4%, and this includes the negative 130 basis points impact due to lower hepatitis C revenues.

Additionally, the current fiscal year had 2 less business days than the prior year making for an unusual comparison.

Adjusting for these 2 items, our overall revenue growth would have been 6.5%.

As a note, in fiscal '18, we will stay flat in terms of business days.

Our largest customer, Walgreens, represented just under 30% of our total ABC revenues.

ABSG, our legacy specialty business, finished the year at $31.5 billion with revenue growth of just over 10%, another outstanding year for this business.

Our adjusted operating income was almost flat for the year, ending about 1% down at a total of roughly $2 billion.

Our adjusted operating margin finished at 1.32%, a decrease of 6 basis points.

While navigating a tough health care environment this year, we executed extremely well, especially in a priority area.

We grew our PRO Generics business with order lines up over 10% and made significant improvement in customer compliance rates.

Unfortunately, this wasn't enough to fully offset gross profit headwinds from changes in manufacturer pricing practices and key customer renewals carryforward from fiscal '16.

EPS.

Our full year adjusted diluted EPS was $5.88, up about 5% due to operational execution and our ability to maintain our operating income level despite the current market environment.

And our EPS benefited from a lower tax rate and reduced share count.

Free cash flow.

As highlighted earlier, we had an exceptionally strong finish, and this resulted in fiscal '17 free cash flow of just over $1 billion.

This free cash flow number is net of the $260 million litigation payment we made at the end of September.

Excluding the litigation payment, our free cash flow was about 100% of our adjusted net income.

We ended the year with roughly $2.4 billion in total cash, of which $1 billion was held offshore.

We enter fiscal '18 with great financial flexibly and a strong balance sheet.

Our adjusted debt leverage is well under 2x, and we are well positioned to continue to invest in our business and be opportunistic if strategic opportunities present themselves.

Now let's turn to fiscal '18 expectations.

Before I start working through the specific guidance items, I will comment on 3 key working assumptions.

First, let's start with brand manufactured drug pricing.

During fiscal '17, our brand inflation finished right at 7%, and this includes fewer price increases and at lower rates in our fourth quarter.

Based on these trends, as we think about fiscal '18, we have reduced our assumptions for brand inflation to 6% to 7%.

Next, generic manufactured drug pricing.

Current trends indicate that the generic buy-side deflation rate has not worsened, which is a positive.

Our deflation rate, which is calculated specifically for our business, remained stable in the high single-digit percentage range.

This elevated level presents a continued headwind that we need to work to offset primarily achieved through increasing volumes and, over the long term, optimizing our margins for brands, specialty and generic drugs.

For fiscal '18, we are forecasting that the generic buy-side deflation range will remain at negative 7% to negative 9%.

And finally, the third key working assumption.

We expect the contribution from generic drug launches to be relatively flat year-over-year.

We can now transition to our specific guidance metrics for fiscal '18.

Revenues.

We expect consolidated revenue growth in the 7% to 9% range.

This growth include the onboarding of the Walgreens Rite Aid stores, which will happen over an extended time period and finish near the end of our third fiscal quarter.

From a segment standpoint, both Pharmaceutical Distribution Services and Other are expected to grow in the same 7% to 9% range.

Consolidated gross profit.

We don't provide specific guidance on gross profit, but to repeat previous commentary, our priorities continue to be, one, grow our overall PRO Generics volumes.

However, we expect that fiscal '18 will be at a slower pace than fiscal '17.

Two, continue to source generic drugs cost effectively.

Three, successfully and efficiently onboard the new Rite Aid business.

And four, price appropriately to receive fair compensation.

As always, this it's our objective that these items will help offset assumed manufacturer pricing pressures.

Consolidated operating expenses.

As mentioned last quarter, in fiscal '18, we will have a mismatch of certain operating expenses, such as the new DC cost and duplicate IT cost before we are fully optimized with either additional run rate revenues or expected savings from technology efficiencies.

Consequently, we expect OpEx growth in the range of 4% to 6% in fiscal '18.

As always, we remain diligent in managing our OpEx and continually look for ways to streamline and gain efficiencies, which is an imperative in a rapidly evolving U.S. health care market.

Consolidated adjusted operating income.

We expect to grow operating income between 3% and 5%.

Our operating margin will be down 2 to 7 basis points, primarily due to mix, meaning higher growth rates within our largest customers.

Importantly, from a segment standpoint, we expect the following: Pharmaceutical Distribution Services.

We remain in the midst of our efforts to transition customer contracts to more balanced pricing to help offset lower contributions from generics.

As a result, we expect the segment's operating income growth to be also between 3% and 5%.

The segment will benefit from the new Walgreens Rite Aid business.

However, given the anticipated onboarding schedule, it's likely that only the fourth fiscal quarter will have the full benefit of all of the new pharmacies.

Commercialization services and animal health.

This group is a key differentiator for ABC, and it will remain so going forward.

We're projecting continued strong growth for MWI and World Courier.

However, for fiscal '18, we do expect the group's overall growth will slow to 3% to 6% due to the timing of and the expected operating expenses associated with our full Fusion implementation.

Fusion is our new technology system and our Lash consulting business.

The nature of any consulting business, including one like Lash consulting is that it requires new contract wins each year to maintain the normal course of running and ultimately growing the business.

As we forecast the year, we are building in the impact the new platform will have on our customer capacity, including converting existing customers.

We are projecting a more limited business ramp for Lash during this Fusion transition period.

Our Fusion system is a game changer.

It is a best-in-class patient support system that will provide a significant competitive advantage for Lash be highly valued by our manufacturer partners and also enable a better patient experience.

And because of this, we are confident that our consulting business group will ramp at the end of fiscal '18 and return to its normal level of growth in fiscal '19 and beyond.

Moving below the operating income line.

Tax rate.

Our guidance assumes a full year adjusted tax rate of about 32% to 33%.

This is a slightly higher tax rate versus fiscal '17 due to onetime benefits from R&D tax credit that won't repeat in fiscal '18, a higher mix of U.S. income, somewhat offset by continued tax initiatives.

Share repurchases.

Our guidance assumes modest share buybacks, generally enough to offset the dilutive impact from employee exercises.

As always, we will look to be thoughtful with our capital deployment depending on our cash flow, continuing uses of cash and market conditions.

Adjusted EPS.

We expect our fiscal '18 adjusted EPS to be in the range of $5.90 to $6.15.

Let me cover our adjusted EPS quarterly progression.

We expect our second half of fiscal '18 EPS growth to be much better than our first half EPS growth, due primarily to the benefit of the gradual onboarding of the Walgreens Rite Aid stores, as previously discussed.

Switching to our cash flow.

First, CapEx is expected to be about $325 million.

Roughly 60% of this CapEx spend relates to key projects that are being carried over from fiscal '17 and, for the most part, will be completed during fiscal '18.

The project includes the completion of 2 remaining distribution centers and strategic technology system investments, like ABC Order, our new customer order entry system; Fusion, which we just discussed; and NOVA, our new logistics system, which is the backbone of our World Courier business.

Free cash flow.

We expect our free cash flow excluding nonrecurring items for fiscal '18 to be $1.2 billion to $1.5 billion.

Revenue growth and mix between brand and generic sales, each of which have distinct cash conversion metrics, are the drivers that can move us within the range.

In closing, let me reiterate that we are actively investing in and advancing our business to address the evolving health care market.

We want to be the most important partner to our customers and a critical driver of their growth.

Our people, services and systems are innovative and differentiate ABC, enabling us to deliver for our customers and, importantly, for our shareholders.

We at AmerisourceBergen are proud of our accomplishments in fiscal '17, and we are looking forward to continuing to deliver in fiscal '18.

We appreciate your interest in ABC.

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

Thanks, Tim.

Operator, can we have the first question, please?

(Operator Instructions) Our first question will be from the line of Eric Coldwell with Baird.

(inaudible) our model.

And I don't think 100% conversion at the midpoint is a bad thing.

But I mean hearing some...

Sorry.

Can you start again?

We didn't get the beginning, sorry.

Yes.

Can you hear me now, Steve?

We can.

Yes, yes.

We can.

Yes.

Sorry, don't know what's happening.

Your free cash flow guidance bracketed us.

I don't think 100% conversion is a bad thing.

But some folks came off the last update thinking you formally guided to 125% conversion.

And therefore, this guidance would be a couple $100 million plus light.

Are you happy with this guidance?

Did something change to influence your cash flow guidance versus maybe your earlier intentions or goals?

And then what are the major puts and takes this year that might prevent 125% conversion, which I know is your long-term target?

Eric, it's Tim.

Yes, our -- we've been very consistent.

Our free cash flow (inaudible) has been adjusted free cash flow 125% of adjusted net income.

We feel good about our target for fiscal '18.

I would say that our range maps to our target.

And as you think about that range, the puts and takes, it certainly allow for revenue growth.

I mean, at the end of the day, 2 key factors would be the revenue growth and then, certainly, the mix of that revenue between brand and generic, both of which have very distinct working capital metrics.

So those are kind of the puts and takes.

But we're pleased with our target.

And as always, we'll work to achieve it.

Our next question will be from the line of Lisa Gill with JPMorgan.

Both in the prepared comments, Steve, as well as the comments around how to think about next year from Tim, you talked about contract conversion to offset generics.

And what I'm thinking is that if you talked about this in the past of separating out specialty versus generics versus branded, can you talk about where you are in that process of converting those contracts?

Number one.

And number two, what is your expectations longer term as to what that can do for your margin profile?

Lisa, thanks for the question.

We've been very focused on this for a while with the change in our business to where the specialty products all becoming the brand business, and it's part of the reasons why we entered into the transformation process, which we're very excited about in terms of what it could mean for the customers particularly and streamlining our business.

But about 90% of our brand business is covered by fee for services.

And we are focused on making sure that we get fair compensation for the value provided.

And those products are often could be orphan drugs or indications that entitle them to a much higher WAC price without much discounting.

And we have to make sure that those products, which are becoming a bigger and bigger weight of sales, not necessarily of units, that we do not lose money or that we make money on them, and we've been very focused on that.

And that's been a long process with our customers.

So our contracts are anywhere between 3 to as much as 7 years.

So every time we cycle through the contracts, we're making progress on that.

But it's still probably another 2 years before that discussion's been held with every single customer, I'd say.

Thank you, Lisa.

We'll go next to the line of Robert Jones with Goldman Sachs.

Right.

Still a lot of questions out there around what different participants are seeing with regards to generic pricing.

While generic pricing seems to have played out, it looks like much of the way you guys expected to see it play out in '17 and based on your guidance, it looks like you're thinking it's going to remain pretty consistent into '18.

I was hoping you could just maybe help us bridge the gap on what you're seeing from generic pricing relative to what a lot of the generic manufacturers are conveying as far as what they're seeing on generic pricing?

I'm sure you saw Teva out this morning with another negative pricing update.

So just hoping you could maybe square those different views to us.

Yes.

I mean, as big as Teva and they're a really significant part of our portfolio.

This is really our own portfolio, Bob.

It's -- so it really is unique to us, and it's affected by few participants in ProGen in particular.

But we are seeing that 7% to 9% range and that has been towards the top end.

One would hope it would start to turn.

This is the third year we're now dealing with this, and it's -- I used to think that thing a headwind.

It really has been.

We've done such a good job with growing the unit sales and our compliance rates have really increased, and this helps you stand still or do a little bit better in your overall generic sales, which (inaudible) releases profit.

Question about our profit mix, it's still very, very essential profit driver for us.

And so a lower deflation rate is probably the biggest upside we have.

In so many ways -- it impacts us in so many ways.

And so we like to see that, that generic deflation rate come down, even just the lower end of our guidance, 7%, would be very helpful.

And that will come from the line of George Hill with RBC.

Tim, I'm wondering can you provide any more color on what's exactly baked in for fiscal '18 as we think about the Rite Aid contribution?

You talked about the year being back-half loaded.

I don't know if there's any more color that you could provide around the revenue guidance for the operating income contribution or maybe even just the volume contribution would be helpful.

Yes.

Thanks, George, for the question.

On Rite Aid, I mean, we -- in Steve's script, I think he called out that we're already starting to ship to a few stores.

We'll onboard.

We'll see a pickup on that onboarding in calendar '18.

We'll be done onboarding in spring, so really before our June quarter.

And I think it's important.

I mean, I called out that really the fourth quarter, our fourth fiscal quarter is really the first quarter that we'll have all the volume.

And so again, it's helpful.

It's certainly helpful.

It's a part of our revenue growth.

And -- but I think we're really pleased with our guidance, our revenue growth to 7% to 9%.

That's only -- that's a portion of it.

But if you take out Rite Aid, we're really pleased that we're still growing specifically above the market, especially in our specialty business.

It will come from the line of Kevin Caliendo with Needham & Company.

Switching around why no -- in the guidance, there are no share buybacks.

Is that just conservative language?

Or is there a reason why you don't expect to repurchase any stock in fiscal '18?

No.

Kevin, this is Tim.

I'm jumping in.

Certainly, we guided for modest capital deployments in the share repurchase area.

As we do every year, we always enter the year assuming that we will do an amount that will offset the dilutive impact.

So our working assumption always entering the year is to make sure we keep our share count flat.

That's our commitment.

And then during the year, depending on cash flow and other priorities, we'll adjust accordingly.

We'll go next to the line of Charles Rhyee with Cowen.

I thought if I miss this earlier.

When we think about the guidance, what about volumes into WBAD such as coming in from Express Scripts?

Have you made any adjustments?

Or is there anything embedded in your expectations for that?

And then just a follow-up on that Rite Aid question earlier.

Is there any type of lag in terms of when Walgreens takes the stores on how immediately would the distribution piece shift over?

Or is there any type of transition period where you would continue to serve the stores even the Walgreens was operating them before they could switch over to you for distribution?

But let me just start with Rite Aid and then we'd all set the WBAD, Express Scripts.

So we will begin shipping to Rite Aid in this quarter, to some of the Rite Aid stores in this quarter, the ones that will be acquired by WBA, not the latest Rite Aids, of course.

And it will be phased in through the spring of 2018.

So it has been incorporated into our fiscal year guidance, and it will ramp more in the second half of fiscal year '18.

It'll be very important.

As far as the Express Scripts joining WBAD, that's nothing that would have impacted our guidance yet.

It's really is an opportunity.

I think right now, we focused on helping onboard them successfully.

But the bulk of the work is really being done between WBAD and Express Scripts for the moment.

But we remain mindful that once that is all operational, that this could be an opportunity for us, and we continue to be -- believe that this is a positive opportunity in the long run for us.

Our next question, that will come from the line of Brian Tanquilut with Jefferies.

Just wanted to hear your thoughts on Amazon.

Obviously, a key topic in terms of how you think -- what the strategy is there for playing defense.

And also, as we think about your medical supplies and med device distribution business, what exactly, if you don't mind, sizing that, again, given the Amazon risk in the background?

Yes.

And so after this, we have our associates calling.

We get some questions in to be ready that they'll ask so that we can cover them.

All 8 questions are on this particular question.

So certainly, not only capture the imagination of our sell-side and other industry commentary, even our internal associates.

So we are always interested and aware of what competitor threats could come in.

And we face them through our technology front in like some of our commercialization, the Lash businesses.

We distribute to probably as close to 100,000 sites between all the different companies that we have within AmerisourceBergen, when you think about even a Besse and a PharMEDium, the amount of distribution we're doing is enormous.

But it doesn't scale compared to probably a couple million households that Amazon does.

But I think that to just look at what we do is distribution really simplifies integrates what is a very complex service that we provide specially focused on pharmaceutical care.

Just as a reminder AmerisourceBergen is not big in medical supplies or medical products.

So we haven't really encountered Amazon at all yet as a threat.

I look at it and I'll say this for so -- you know a year ago or so now that they could be a potential customer for us.

Many, many years ago, I'm sure that wholesalers had to augment should they service mail order facilities.

So it could be an emerging customer opportunity.

The pharmaceutical licenses, we think that's about the B2B business in medical.

We think that this again is a very complex area.

For example, our recently opened Olive Branch facility, we needed 70 licenses.

Do I think that a company that can start this ASW business would have a problem getting 70 licenses?

Absolutely not.

But I do think that the generation of services that we provide, let's say, the community pharmacy, these are not services that are easily replicable.

When you look at the smaller customers that maybe are more their natural customer base, these are the customers that are most reliant on AmerisourceBergen for terms, for data, for connectivity to third-party payers, for merchandising, for business coaching, for patient refill reminders.

I mean -- so it goes on and on.

So I think the point is that we have these prime vendor contracts.

We verify them from a marketing and branding perspective and a lot of the smaller customers, even in -- not only in Good Neighbor Pharmacy but also in areas like MWI and Oncology Supply.

Our manufacturers rely on our data and our secured supply chain and logistics.

And this whole -- just if you want to look at another area where I think it adds to complexity of what we do, the evolving stand on the opioid is another example of where it's a very specific pharmaceutical care function that we do.

And we don't think that we are descaled.

It's hardly like you're talking about Walmart coming in and going against a regional hardware supply distributor many, many years ago.

So just to summarize because we know that's a key question, we are much more than a wholesaler.

We provide key services that are very health care and pharmaceutical specific to our customers.

And Tim, I think I did a (inaudible) if you can add anything.

Yes, just Steve, that was awesome.

And I would just say and just remind our listeners and again, we are not only ADC, but the sector.

We are extremely efficient at what we do for a very fair margin and taking title.

And also, I think we're -- we continue to invest.

Again, we're on a little bit of the offensive here where we continue to invest in leading-edge solutions to service our customers and ultimately the patients even better.

That will come from the line of John Ransom with Raymond James.

What are your comments, if you have any, on this generic pricing collusion?

It would appear the whole channel is named.

And what's your perspective on that?

And what kind of traffic have you had with the folks that are lobbying these acquisitions?

I have my General Counsel right next to me, and he's shaking his head.

But John, we really can't comment on that at all, and (inaudible).

So...

I would just say, John, I mean, the one thing -- and we've always said this.

We've been very consistent.

There's certainly a firewall between ABC and the wholesaler or manufacturers in terms of pricing.

We're notified.

They send us e-mails and PDFs and -- when they adjust pricing, and that's when we learned about it at that point.

We'll go next to the line of Ricky Goldwasser with Morgan Stanley.

Can you comment just on what you're seeing on the sell-side environment?

I think you spoke about compliance.

But how are you seeing competition?

How does that compare to earlier in the year?

And what is your expectation as they embedded in the guidance?

Ricky, we called this out at beginning of '17, and it's the same for '18.

We really don't have a lot of renewals.

It seems that there's always guiding waves in '16 and the beginning of '17, were -- but we had that already under contract with big renewals for us.

So we were not involved in any large renewals, such as Kaiser and CPA, which we had the year before Express Scripts.

So we -- and again with '18, we have very little in renewal.

But I think that people are understanding the theme.

The market has really understood now with solid communication, I think, from our industry about the shift to very high and often specialty products or really clinically differentiated or the immuno-oncology products.

These are very, very big drivers of our business.

And what I experienced in all the years I was running specialty was more line item pricing.

And in the drug wholesale business, I'd say, that's not really line item pricing, but its category pricing.

You have to look at these products as categories, and I think industry is clearly moving to that.

The more the customers can understand, that is better.

So we see the pricing as being very stable but competitive as always.

So thanks.

That will be from David Larsen with Leerink.

Tim, can you talk about your operating expense growth assumptions?

And if you brought the 5 DCs online, were any of those costs recorded in like fiscal 1Q, 2Q or 3Q of this year?

And then will those costs abate as you head into fiscal '19?

We had a little bit of that cost in Q3 again sequentially, but the DCs were not open for the entire -- for the entire third quarter.

When we got to the fourth quarter, we had all 5 DCs virtually open.

The cost don't abate as we move forward.

That's kind of the run rate for those 5 new DCs entering into '18.

But again, I think the key point there is we start to have new revenue and Rite Aid revenue also coming on.

So there's just a better match of revenue and OpEx.

So hopefully, that answers your question.

But when we -- last time when we gave our earnings back in -- for Q3, we thought that maybe our OpEx in '18 would be slightly higher.

Again, we weren't done with our plan process.

We commented on that in the last call.

We've gone back to the businesses.

We worked hard.

We've pressure tested, and we're really pleased with our OpEx growth for '18 of 4% to 6%.

We have a question from the line of Glenn Santangelo with Deutsche Bank.

Tim, maybe if I could just follow up on that expense question.

I think in your prepared remarks, you said that your CapEx guidance was $325 million, and 60% of that or almost $200 million was related to these transformation-type investments.

So I heard your answer to the previous question that maybe some of those expenses will continue into fiscal '18 as you bring those DCs online.

But how do we think about those operating expenses on a go-forward basis, particularly around the IT investments?

Is there some portion of that 60% that's related to the transformation that's onetime that will ultimately go away?

Yes.

Thanks, Glenn and welcome back.

The way to think about it we have 4% to 6% at one point.

Again, I kind of go back to the June quarter.

We thought there might be some transformation OpEx that we might need.

Nothing is contemplated right now.

We -- at this point, we don't think we need anything.

So it's not in that 4% to 6%.

But I think importantly, as you think about our OpEx, we were not -- again, 4% to 6% is a tie.

I mean, we're in an evolving health care market.

We need to do better than 4% to 6%, and that's our objective.

So we're going to see that 4% to 6% in fiscal '18.

As we move into fiscal '19, that should come down to, what I would say, should be a more normalized rate because we start to eliminate duplicate systems and we start to gain efficiencies.

So clearly, our objective is to move into '19 and start to realize the benefits from all that CapEx that we've had.

That will come from the line of Eric Percher with Nephron.

I want to follow up on the questions on obtaining a fair margin across classes.

It sounded like you used the word customers, and it sounded like that was largely sell-side focused.

How much of the effort is focused on the manufacturer and the buy-side?

And as we look out to fiscal year '18, is the movement of specialty through the mainline distributors still a negative impact on margin overall?

Are we seeing that specialty is -- continues to weigh on margins even as it may contribute to add to gross profit?

Yes, Eric, thank you.

It's a really excellent question.

So we do have a lot of discussions with the manufacturers.

I mean, there is consolidation in the industry and manufacturers like Pfizer are getting into biosimilars and immuno-oncology products and Merck.

So there's a lot, of course, for discussion, and we all -- we have a team that's focused on it.

Those are good discussions about what can we do with our commercialization businesses as well as the traditional wholesale business and maintaining a fair fee for service.

And I think what we would always say is we have these prime vendor contracts that are structured and are long, several years and so we need to work within the parameters of that.

And I think manufacturers certainly understand our business and the contribution we have.

So excellent question.

We're very focused on both, the buy and sell-side contracting.

Tim, was there other part of the question you want to answer?

No, I think, Steve, well said.

I mean, certainly, we're focused on sell-side.

We talked about that and communicated.

We're making really good progress.

We -- as Steve mentioned earlier I think in Q&A, we have more room to go there.

But again, we just need to make sure we get fair compensation for each category class of drug that we sell to customer, and those are ongoing discussions.

We're making progress.

Yes.

And Eric, I think the other part of your question was really specialty products that are going to mail order specialty pharmacies.

And those tend to be very aggregate and often they are only given to a handful of pharmacies of which are U.S. [bio consum comes to be one].

So we have adapted to this marketplace.

But it could be a profit.

It is a mix challenge because those are not our highest-margin products.

However, I will tell you that we are seeing a surge in physician-administered products again.

We had the potential hospital out-patient changes yesterday.

So I've been around this for nearly 25 years now, and I think things change.

And the importance of the physician marketplace, not only to AmerisourceBergen but to the patients, is very, very fundamental.

And I think we're seeing those products had strong pipelines, and we're very excited to see that.

And AmerisourceBergen has so many wonderful businesses that have had a great history that will be really are adapted around services to the physicians.

So I think we have some very positive trends as well.

So with that, the question from Eric, I think we've got a lot of ground covered today.

After this fiscal year '17, we'll be remembered for our capital investments, the conclusion on Rite Aid for our ability to execute and deliver long-term value.

So this is Tim's first year as CFO, and we told the board we hit our EPS guidance every year.

And so we're very proud of that.

And fiscal year '18, we're excited that has begun.

The team is executing well, and I think we will be judged on how well we do on transformation and manage our key customers and key supplier relationships.

So we have a lot of confidence that we'll do that very expertly as you can always expect from AmerisourceBergen.

Thank you for your time today, and we look forward to being in touch with all of you.

Ladies and gentlemen, your conference will be made available for replay beginning at 10:45 a.m.

today, November 2, 2017, and running for one month until December 2, 2017, at 11:59 p.m.

To access the AT&T executive playback service during that time, please dial area code (320) 365-3844 and enter the access code 432400.

That will conclude your conference call for today.

Thank you for your participation and for using AT&T's Executive Teleconference service.

You may now disconnect.