Cencora Inc (COR) 2017 Q1 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. I would like to turn the conference over to Ms. Keri Mattox.

Thank you. Good morning, and thank you all for joining us for this conference call to discuss the AmerisourceBergen FY17 first quarter financial results. I am Keri Mattox, Vice President of Corporate and Investor Relations for AmerisourceBergen. 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 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 expressed permission of the Company. We remind you that there are uncertainties and risks that could cause our 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. You will have an opportunity to ask questions after today's remarks by Management. We do ask that you limit your questions to one per participant in order for us to get to as many participants and inquiries as we can within the hour. With that, I will turn the call to Steve. Steve?

Thank you Keri, and good morning, everyone. I am pleased to discuss our first-quarter results and the improved outlook and financial guidance we are providing for FY17. Our broad portfolio of businesses performed in line or above our expectations for the quarter. Revenues were up 4% to $38.2 billion, and adjusted diluted EPS grew more than 7% compared to the previous fiscal year, positioning us to meet our FY17 objectives.

While there have been challenges and head winds, we continue to see US pharmaceutical sector growth and resilience, driven by patient demographics, a strengthening US economy, a robust pipeline of new brand drug launches, and an increasing focus on value and outcomes. Brand pricing actions taken earlier this month reinforced the stability of that market, but also underscore the careful consideration that manufacturers are putting into their pricing strategies in the current environment.

Today, I think that all of us in the industry have the opportunity and the responsibility to enhance patient access, drive efficiency, and ultimately reduce overall health care costs while creating value. At AmerisourceBergen, we take this responsibility seriously, and are we believe uniquely positioned to realize the opportunity. Our customer base, leadership position in specialty products, innovative approach to services and solutions, and strong history of financial stewardship all position us to out-pace the market's projected growth in coming years.

Now I'd like to discuss our key differentiators, and how they helped AmerisourceBergen and our associates deliver a strong first quarter. First, we believe we have the best customer base in the business. Our broad and diversified portfolio of growing customers across all of our businesses performed well in the first quarter.

We enjoy long-standing collaborative relationships with our anchor customers, and they continue to out-perform. Walgreens Boots Alliance remains a strong and aligned partner, and we look forward to continuing to expand our opportunities to deliver value. Additionally, we continue to make progress in our efforts to strengthen our customer relationships, expand within our existing customer base, and evolve our contracts and pricing strategies for brand and specialty products to better reflect changing market conditions.

Customers understand this, and are open to finding mutually beneficial solutions. We are working with them to do so. Ultimately, we believe that we have the strongest customer base in the industry, and our objective is to create customers for life.

The strength of our business is reinforced by the high quality of our customers and our ability to develop long-term collaborative partnerships with them. We are here to support their innovation, and together to advance and enhance patient care.

Second, our leadership position in specialty products puts AmerisourceBergen at the forefront of a rapidly growing market segment. When we refer to our [scan and] specialty products, it's important to note our market-leading position in both full-line distribution, as well as specialty distribution. This quarter we are pleased to see continued growth of specialty products available through full-line distribution, affirming the value and efficiency of the prime vendor model for our customers, including hospitals, health systems, and community pharmacies.

We once again had a great quarter across our specialty business, with very strong results. Our specialty distribution business revenue grew double digits year over year, with strong contribution primarily from oncology and community oncology solutions. Our market-leading patient services, biopharma consulting business, and clinical trial logistics business also continue to make important contributions in supporting existing and newly launched specialty products.

In the quarter, AmerisourceBergen continued to be selected as a pharmaceutical services partner for a wide range of new specialty products, with access through both full-line distribution and specialty distribution, further establishing our leadership in this area. We've also expanded patient access to new biosimilar products, recently completing negotiations with key pharmaceutical manufacturers for this differentiated, new product category.

One example of how leadership in the specialty arena is helping drive patient access is our assessment of the risk to community oncology care and patient access inherent in the Part B demonstration project, and our ability to mobilize in support of our customers and patients.

As I believe you all know, [reposed] Part D payment model was not finalized by CMS late last year, and will likely not be reintroduced by the new administration. There were many concerns about what the proposed model would mean for physicians, patients' access to critical medications, and overall medical care. AmerisourceBergen was a vocal opponent of the proposed model, and I'm very proud of the work we did in Washington to voice the industry concerns and educate key agencies and lawmakers.

With our market-leading franchises and ability to provide an integrated commercialization service offering, AmerisourceBergen is the global leader in the distribution and support of specialty drugs across a wide spectrum of channels. We are proud of our trusted partner status and close collaboration with manufacturers and providers, to ensure patient access to all types of specialty products.

Third, AmerisourceBergen's innovative approach to services and solutions is driving our customers' growth. We continue to execute and succeed within a challenging health care landscape by offering our customers the most innovative and business-critical solutions needed to drive their growth. The customer responses to our services and enhanced offerings has been extremely positive.

We believe are strategic services and solutions are enabling us to grow within our existing customer base. We do this while carefully controlling costs, and always taking a thoughtful and measured approach to capital expenditures. For example, we are making smart, significant investments in, and improvements to our ERP systems and customer solutions.

Offerings and initiatives like Good Neighbor Pharmacy and our Elevate Provider Network continue to add value and build on the integrated suite of services of resources available to independent pharmacies, ultimately helping them grow. Elevate's core capabilities enable independents to better engage with payers, and patients to drive improved adherence and easily access data to support faster, more accurate reimbursement, two critical needs for these community pharmacy customers.

We are also about to fully roll out our ABC order program, a state-of-the-art e-commerce system designed by pharmacies for pharmacists that provides intuitive tools to order effortlessly, manage inventory, access data and information, and resolve any issues quickly. Additionally, our improved first-to-shelf program for new generics products has helped us service community pharmacies and ensure competitiveness in their local markets. We executed flawlessly and expanded patient access with several new generic launches in the first quarter.

We have also seen continued growth and market-leading service levels of PRO Generics, our proprietary generics formulary. We will continue to look for ways to protect and enhance the role of community pharmacies so that they can continue to service the health care needs of millions of patients.

We're also making great progress on our capital investments and enhanced systems. To better position ourselves for the future and engage with their customers, we are building our new state-of-the-art distribution centers, which are expected to be fully on line by the end of FY17. These distribution centers incorporate best-in-class technology and our continuous improvement processes to help us deliver on our commitment to provide an exceptional customer experience.

We are also building our systems to better support our Lash Group commercialization services, World Courier Logistics business, and our overall IT infrastructure. You can expect that we will continue to invest in data solutions, analytics, and internal and customer-facing IT capabilities. We believe that AmerisourceBergen is the trusted data Company in our industry, and we want to continue to build on our information technology security and innovation to accelerate customer and growth in today's market place.

Fourth, our strong history of financial stewardship and proven ability to integrate acquired businesses gives AmerisourceBergen an advantage in driving growth. AmerisourceBergen takes a strategic approach to capital deployment. Over the past five fiscal years, we have returned about $8 billion to shareholders through our dividend and share repurchases programs, and we invested more than $7 billion through acquisitions and capital expenditures. We are proud of our ability to seamlessly integrate our acquired businesses, and they continue to exceed our expectations.

A driver of that out-performance in our second quarter was the contribution from our recent strategic acquisitions, [MWI] Animal Health and PharMEDium. In fact, MWI operating income and operating margin hit record high levels in the December quarter, fueled by organic growth, new product innovations, and achievement of sales goals with key manufacturers, especially on the companion side of the business. We believe that MWI is the largest distributor of animal health products as measured by revenues.

As we come into 2017, MWI is committed to providing value to its manufacture partners, as well as providing customers with the most comprehensive product offering in its history. Just last week, I had the pleasure of joining MWI for its national sales meeting, which was attended by all MWI sales associates and manufacturers. I continue to be impressed by MWI's demand-creation sales force, and by the business's ability to successfully grow penetration rates among existing customers, which clearly underscores the value of the level of services it provides.

Finally, we continue to approach capital deployment strategically and opportunistically. We think broadly about the future of health care, and are always evaluating innovative ways we could further diversify and grow AmerisourceBergen through the addition of new best-in-class and market-leading businesses.

In summary, our differentiated industry position and continued strategic execution resulted in a strong quarter, and we have an improved outlook for FY17. I'll let Tim provide more details here, but I'm very pleased with and inspired by the stellar contributions of our 19,000 associates. Their talent and continued commitment to the success of AmerisourceBergen is the key driver of our growth, and I'm proud of our collective ability to achieve our quarterly goals and objectives, despite a challenging market place and sector head winds. Thank you to the AmerisourceBergen team.

As we move further into 2017, we have great confidence in our unique portfolio of integrated services and the significant value we bring to pharmaceutical manufacturers and provider customers. Our consistent execution enables people to access the health care products they need, ultimately improving the lives of patients, and delivered long-term value to all of our stakeholders. Now let me turn the call over to Tim for a more in-depth look at our quarterly financial results, and are updated financial guidance. Tim?

Thanks Steve, and good morning, everyone. We're excited to start FY17 in a positive way. Our results in business fundamentals were better than we expected. Several of our businesses made key contributions to our results this quarter, and I will cover these highlights in my prepared remarks.

I have two main topics this morning. I will recap our Q1 adjusted results and our revised FY17 outlook. Please note that all financial comparisons are for the first quarter of FY17, compared to the same period of the prior fiscal year, unless otherwise noted. With that, let's move to our results.

Revenues were $38.2 billion, up 4%. Our pharmaceutical distribution segment accounted for the majority of our revenue growth, due to our diverse customer mix, and the strength of our ABSG specialty business.

Let me highlight that we had one less business day in the current quarter versus the previous year. We also had less of a revenue tail wind this quarter, given the slow-down in branded drug inflation from July through December, while still having a meaningful revenue head wind from branded generic drug conversions. Our ABC consolidated revenue growth would have been nearly 6% on a comparable basis, which means adjusting for the one-day difference in business days.

The quarter's adjusted growth profit increased by 1% to $1.1 billion, and was entirely due to the growth in our other segment. Our pharmaceutical distribution segment was down this quarter with a difficult comparison, as we are still cycling through the re-pricing of two strategic long-term contract renewals, which we have discussed in detail the past few quarters. In the current quarter, we began to anniversary the acquisition of PharMEDium.

Operating expenses -- we are very pleased with our progress in managing operating expenses, which were virtually flat compared to last year. Our businesses continue to make meaningful progress, focusing on their cost structures, ensuring they spend in the right areas, and leveraging at existing scale and capabilities where we can.

Operating income -- our adjusting operating income was $486 million, up about $9 million, or 2%. Our adjusted operating margin was 1.27%, down 3 basis points from the prior year, driven mostly by the pharmaceutical distribution segment being down 6 basis points this quarter.

Moving below the operating income line, interest expense net was about $35 million, up some from last year. The increase is due to a combination of slightly higher average borrowings outstanding, and also higher interest associated with the build-to-suit leases we had to capitalize last quarter. Income taxes -- our adjusted income tax rate was 33.1%, down some from the prior year, as a result of changes in mix of US versus international income.

For the quarter, our adjusted diluted EPS increased a solid 7% to $1.36. This 7% growth was driven by the outstanding performance in our other segment, the benefit from an improving tax rate, and a lower diluted share count. I will highlight that we did have $0.02 of EPS benefit in the current quarter from the favorable timing on manufacturer rebates that we previously expected to earn in our March 2017 quarter. This finishes our review of ABC consolidated results.

Let's move forward and discuss our segment results, starting with pharmaceutical distribution. Total segment revenues were $36.6 billion, up 4%, with our drug Company growing just under this level. Our core drug business saw solid growth, better than we expected, in its retail customer segment, which includes independents, Walgreens, and other chains.

Consistent with the past few quarters, I should point out that the business continued to have a revenue head wind of about 1.5%, due to lower hepatitis C drug sales, primarily in our non-retail customer segment. After this current December quarter, the hepatitis C comparables get better, and shouldn't be a meaningful revenue head wind going forward.

ABSG, which is a specialty business, had an overall revenue increase of 10%, driven primarily by volume growth. This is the 12th consecutive quarter that ABSG has had top-line growth at 10% or more. We continue to see excellent revenue growth in oncology, and to a lesser degree in nephrology. Overall, the business continues to capitalize on positive pharmaceutical industry trends, and we remain a clear leader in this space.

Segment operating income was $374 million, and was down 2%. Our ABSG business continued their high level of performance, producing strong operating income growth through disciplined expense management, combined with their revenue growth.

Our drug company was down year over year, as anticipated, primarily due to the two key customer contract renewals, slightly lower contributions from price appreciation, and the impact from generic deflation. Last year in the December 2016 quarter, generic deflation wasn't that meaningful. These head winds were partially offset by a higher contribution from PharMEDium.

I'd like to point out that our drug company's performance was better than we expected, and the business is building positive momentum from both top-line revenue growth and an improving contribution from generics. We are committed to continuous improvement.

The drug company has sharpened its focus on maintaining high customer service levels, and implementing leading customer solutions. As a result, we are seeing generic compliance rates gradually improve with customers, which translates to higher volumes.

We can now move to our other segment, which includes consulting services, World Courier, and MWI Animal Health. In the December quarter, segment revenues were nearly $1.7 billion, up just over 5%. Both consulting and World Courier had growth rates in the high single digits, while MWI's growth was slightly impacted by foreign exchange associated with our UK business.

MWI continues to see high growth rates in their US companion animal business, as a percentage in the high single digits. We are now encouraged, as we are starting to see improving growth rates in the production animal side of the business.

From an operating income standpoint, this segment, had an outstanding quarter, with operating income of $112 million, and a growth rate of 17%. This marks the first time that the segment has surpassed $100 million in operating income. As Steve highlighted, MWI achieved records in operating income and operating margin. The business has a relentless focus on the customer, a drive to constantly improve capabilities, and terrific expense management.

Wrapping up, our consulting business was also a strong contributor to the segment's growth this quarter, due to its solid revenue growth. They delivered these results while continuing to focus on implementing a business process redesign, which includes a new ERP system. This completes our segment review.

I'd like to now cover key working capital and cash flow items. In the December quarter, as expected, we had a negative free cash flow of $570 million. As we have discussed in the past, we continue to make a working capital investment with our largest customer, Walgreens. This investment will continue to be a cash flow head wind into our Q2 2017, when the investment is complete.

When comparing to last year's free cash flow, we also had a sizable, positive day of the week cash impact to our Q1 2016 free cash flow. This day of the week impact did not repeat in the current quarter, and was a head wind. We ended the quarter with roughly $1.8 billion in cash, with $645 million of this amount offshore.

The next area I'd like to cover is share buy-backs. We purchased $230 million of shares during the quarter, and we finished the quarter with $890 million left on our November 2016 share authorization. We're pleased that from late September 2016 through December 2016, we were able to buy back roughly 8 million shares, returning over $600 million to our shareholders.

Now let's turn to our updated FY17 expectations. As I mentioned before, we are very pleased with our strong Q1 results, and we are now raising our adjusted EPS guidance to a new range of $5.72 to $5.92, which reflects growth of 2% to 5% versus last fiscal year.

I will provide guidance comments in four key areas, first revenues. Our previous guidance was 6.5% to 8% revenue growth. Even with our Q1 2017 ABC consolidated revenue growth of 4%, we believe we will now be at the high end of this range, due to two factors that will enable us to ramp our revenues during the course of the fiscal year. One, our drug company's largest customer, Walgreens, has added new commercial business which will benefit us; and two, brand inflation realized in January will be a better revenue tail winds going forward.

The secondary operating expenses -- given the continued focus by our businesses on managing costs, we are revising our full-year OpEx growth rate to 4.5% to 6%. We expect that our expenses will increase over the course of the fiscal year to support the revenue ramp. Additionally, we start to incur incremental costs related to several of our IT and infrastructure investments.

The third area, operating income, we are revising and moving the low end of our guidance up. Our operating income dollar growth will now be flat to up 4% versus FY16. The last area, our adjusted share count -- we'd expect our share count to creep up somewhat, given that we front-end loaded our share repurchases. We expect modest share repurchase activity in the near term.

Our first priority now is to ensure our free cash flow tracks as planned, and to re-pay they $600 million debt obligation that matures in May 2017. As in the past, however, we will remain flexible and opportunistic in terms of capital deployments. Let me point out that the rest of our previously communicated FY17 financial guidance for ABC consolidated is unchanged and reaffirmed at this time.

Before I wrap up, I'd like to comment on our working assumptions for the pharmaceutical drug pricing environment. I will cover generic drug pricing first. We are now changing our negative 7% to negative 9% generic deflation range for FY17 at this time. After one quarter, based on our drug company's generic drug portfolio, we are tracking in line with this assumption.

As we progress through the year, we will hopefully have more clarity on generic pricing trends, and if needed, we will revise our assumption. Moving to brand drug pricing, we are comfortable with our 7% to 9% brand inflation rate assumption, based on the WAC price increases we realized in January. Both the number of brand pricing announcements and the overall percentage increases were right in line with what we had assumed.

As a reminder, we also anticipate that we will have a certain level of brand price increases in the June, July time period. This is clearly an open item, given the unpredictability of pricing actions and the heightened level of scrutiny. This is part of the reason we continue to have a somewhat wider adjusted EPS range.

In closing, a better-than-expected quarter, and a solid start to our fiscal year. As always, we continue to deliver outstanding service, solutions, and value to our customers each and every day. At the same time, we look to drive operating efficiencies. This is a winning combination that enables AmerisourceBergen to grow and create long-term shareholder value. Now here's Keri to start our Q&A.

(Operator Instructions)

Robert Jones, Goldman Sachs.

Good morning, thanks for the questions. Tim, I wanted to make sure I got the message right on the branded pricing and the gross profit in the pharma segment. It sounds like branded pricing in the December quarter came in a little bit lighter than you had expected, and that weighed a little bit on the gross margin. But it sounds like January you've seen price increases more in line with your expectations.

As we think about the full year, are you in fact changing the underlying assumptions for gross profit in the pharma segment, given the way pricing has played out? Then on the back of that, based on the comments you just made, if you don't see price increases over this summer, are you able to stay within the full-year guidance range?

Yes, thanks Bob, for the question, and I'll take them in order. The first one, we did see brand pricing trail off a bit in our first quarter, the December quarter. That was a little bit of a head wind for our core drug business that we were able to cover.

That's true, but then when we got to January, we saw the price increases relatively in line with last year in terms of the number of announcements. The percentages were probably a little bit less overall on a weighted-average basis, but clearly the January price increases were in line with our 7% to 9% assumption. No change there. We're keeping that assumption for the full year.

I think our point in my script was really to say that there is another time period coming, June, July. Our guidance still has a certain level of pricing activity in our assumptions. That's an open item. But I think with our $0.20 range, I think Steve and I and the Management team, we're comfortable that if that trailed off a bit in June or July, we would still fall within the range okay. But again, that's just one item; but I would say we feel good that if the brand inflation -- again I'll repeat myself -- if it trails off a bit, we could still stay in the range, but on probably the lower end.

Okay, got it. Thank you.

You're welcome.

Steven Valiquette, Bank of America Merrill Lynch

Thanks, good morning, guys. Congrats on the results. On this topic, we're getting some in-bound queries regarding your largest customer. Just given that you have this long-term 10-year contract with your largest customer and the fact that you went through a bit of a re-pricing with that customer last year, is there any reason to think that there would be another near-term renegotiation of those contract terms, or should everyone in the investment community just assume that ABC should be all be set with the pricing on that contract for a while now, just given the renegotiation last year? Thanks.

Hi, Steve. Thanks for your comments. The latter is our understanding. It's a fluid market, things change, but there's nothing in our trends. I think if we go back to the deal we did in 2013, essentially we came up with a very good basis for a long-term contract, which took into account some of the anticipated changes that we saw coming with the faster growth in specialty products, but much more rapid generic deflation than we may have expected for 2013, 2014. But I think the teams were very thoughtful. We spent a lot of time thinking about the way to price that model. Then we updated the contract just less than a year ago.

We feel that it's very fair, but we are in close touch with our colleagues in Chicago. Their businesses had a good quarter, and we're expecting some good organic growth in the back half of the year, which is a driver in our revenue for us. Honestly, the relationship -- the actual -- not only at my level, but the levels below, the daily interactions are strong and consistent. We have one of our most senior sales people that's full time on the account that I think is doing a terrific job for us.

Okay, that's great. Thanks.

Ricky Goldwasser, Morgan Stanley.

Yes, hi. Good morning, and congratulations on the performance in the quarter. I have a couple of follow-up questions here. First of all given the moving parts in guidance, I know you talked about operating expenses being up for the remainder of the year. When we think about different segments for the other segment, obviously, very impressive increase in margins. Is this new margin level sustainable going forward? That's question one, and then I have a follow-up on that.

I will start off, and then Tim can follow up. There's definitely some seasonality in the other sector. In MWI, in particular, there were some -- we called out some forward items, some hitting some thresholds on some rebates. That's definitely, as we learn more about the business, it's our second December quarter that we had MWI as part of the ABC family, so we've become more used to that. There is some seasonality in our Lash business and World Courier. Tim, anything you would add particular on the overall margin?

Yes, and I think Steve you hit it. Certainly we benefited -- December is always one of the better quarters from MWI as they come down to year-end contracts with manufacturers. Going forward, the consulting business -- I commented in my script that they'll be implementing the new ERP system, and they'll be having some expenses -- expenses in that area will ramp up a bit in quarters two, three, and four.

It's a great margin. The margin's been fairly high. But I would say that it -- this probably isn't the run rate, but probably not that far off. It should be a good margin businesses, and all of those businesses leverage well.

Okay. Given that, if we think about the performance for the distribution segment going forward, and in light of your comments around some of the assumptions you're factoring for that second price increase, first you said that if it trails off a bit you'd still be comfortable with the low end guidance, so just to clarify that, because I think that's an area we're definitely getting a lot of questions on -- whether if manufacturers decide to hold off on that second price increase? Even if that happens, do you feel comfortable with the different levers in the business at the low end of your guidance range? That's one.

Second of all, on generic pricing, you said you were comfortable with the negative 9%. Just to clarify, is that generic price deflation range includes both the price deflation for the products and any dynamics on the sell side? Is that a net deflationary number?

Yes, Ricky, thanks. I'll start, too. Let me go back. I think the brand -- your brand question is a good one, and I think I should clarify. I think I said when I answered Bob's question first, I said if it trailed off a bit we would stay in a range. Again, that's important. I'm not going to comment if we had zero price increases for the rest of the year, and we didn't see any pricing activities. We'd have to go back think about that and understand the impact. But certainly if we trailed off a bit, we feel comfortable staying in our range on the brand side.

Generic deflation, we've been very consistent on the minus 7% to minus 9%. We've always pegged that off of our acquisition cost of the acquisition cost in our inventory, to let people know that's what we're seeing in terms of how that price -- how our acquisition cost is changing over a period of time. We're probably up towards the higher end of that range. I think I answered your question, but again, that's how we calculate. It's on our portfolio, our mix of business based on our fiscal year. But we still feel good about that minus 7% to minus 9%. As we go through the year, we'll update the range.

Thanks, Ricky. Samantha, can we have the next question, please?

Robert Willoughby, Credit Suisse.

Hi. Tim, there was no reference to cash flow in the press release. Can you just remind us what your targets are for the year there, and what maybe the capital expenditure number will be? That's still ticking a little bit higher than where we were. Then for Steve, what's the likelihood of deals? This year you've been quiet here for a bit. Are you back out there looking, and that influence your plans to retire the debt that's coming due this year?

Thanks, Bob, I'll start. Certainly we reaffirmed our guidance. The guidance for free cash flow was at adjusted net income, or just slightly above, so we're still on that. I know we had a negative free cash flow in Q1, but the cadence -- seasonality in the business, we should see a nice positive free cash flow in our March quarter, somewhat neutral to up a little bit in the June quarter, and then traditionally our fourth quarter is pretty high in terms of free cash flow. That's how we get back to where we need to be for the year.

CapEx, I think we said $500 million, roughly. That's reaffirmed, and we should be right about that, in that range. Most of that is the DC work and the ERP system. Both were consistent, and both we still feel good about.

Yes, thanks, Robert. Then on the M&A front, one of the things about having our portfolio is that there's different cadence with all the businesses. Some of our businesses are not particularly M&A oriented. I would point to PharMEDium, which is such a strong CGMP business and I think had such strong organic growth trends, it's really no point to do M&A in such good market share momentum.

MWI, I think we've done a few small tuck-ins. We're very active. We've done some work in the UK. I think there's some technology there on the production side which is very compelling, very sticky, and very innovative, as the world moves towards more of a lot-feeding type of production animal business. Then some of the practice management technology we have on the companion animal side I think is transferable. That's a business, for example, where we would have a lot of interest.

Specialty. We don't really see that institutional presence in the rest of the world. Not that much interest, but definitely all of the individual portfolio companies remain active. They stay close to the market. We -- Tim and myself and our group with [San Park] are very active.

If we can find other companies that have strong growth dynamics, are leaders in their respective markets, a strong management team that's interested in being part of our knowledge reach and partnership culture, you could see us act upon that, because we do have the flexibility. We do believe that M&A has become a good competence of ABC that we've demonstrated a lot of effectiveness at. Thank you.

Thanks, Bob. Samantha, can we move on to the next caller, please?

Garen Sarafian, Citi Resources.

Good morning, Steve and Tim. Not sure if we're doing only one question or one plus one follow-up, so I'm going to in ask two in one and go from there. One is on -- just a follow-up on generic price deflation, maintaining the 7% to 9% range. Tim, you made some commentary also on maybe towards the higher end.

Given what happened -- perhaps the volatility of it a year ago same time period, from the December into the March end quarter, could you just elaborate on any changes in the forecasting methodology that you're using, whether it be the inputs you use or any changes in the methodology? Perhaps it's just applying a more conservative take on the same process, but just wanted to see how you're approaching it that gives you confidence this year?

Secondly, you didn't really comment on taxes. I know it's a very fluid environment in terms of tax reform, but if you could specifically comment on border taxes and if -- how that would impact a Company such as yourself? Should the net tax reform benefit be favorable if the incremental dollars -- if it's positive, would that have a different capital deployment priority, or would it be treated equally?

I will start, Garen, on the first one back to the generic deflation. We have not changed our methodology or approach. We've been very consistent. It's always based on our drug Company's portfolio of what they have in inventory, weighted average. It's based on our fiscal year. We do exclude generic items that have not been on the market for longer than one year, so we take out the ones that do have higher variability in that first year.

We've been very consistent, and we track it. We look at the methodology, and we're still coming up in that range of minus 7% to minus 9%. Again, I said a little on the high end right now, it's a minus 9%. That's why we still feel comfortable at this point. Tax reform, I'm looking at --

I was in DC last week. I think we have a lot of important partners just waiting to see all over the border. There's a lot of basic medical products that take like gauzes and syringes and bandages that are almost all manufactured overseas, so there could be a very significant increase in them. I was on the board of a med-tech company when we had the medical device tax, and it was a very significant. It does affect consumer demand. I think we've seen some models outside the US where prescription medications and medical products are excluded from that. We really don't know.

As far as ABC goes, I think you can see we're proud of our operating margin performance, but it was 127 basis points, so there's not much room there to absorb additional taxes. We would be very mindful of that.

We are very only really in BluePoint are we the importer of record. It's a couple of dozen products that we do in BluePoint that we'd have to think through the ramifications, but we think our supplier partners would be supportive. They work BluePoint for a certain reason. We don't see it as a big risk at all, but there's certainly environmental risk.

I've heard this described as the most complex area of anticipated legislation that there is, so something we'll be very active in. I think ABC will participate with trade associations, will be very much looking at what the manufacturers are thinking.

I was with a couple of manufacturers last week that are big importers of insulin, so very significant ramifications for them. A lot of the insulin's manufactured abroad. I think we have to really wait and see with a lot of what's proposed. I would be hopeful about corporate tax reform, but again, we don't know any further details, so really not worth spending too much time on conjecture.

Got it. Thank you, guys.

Eric Percher, Barclays.

Thank you. Steve, you mentioned in your prepared comments that you're seeing in the biosimilars space the ability to differentiate. I think you used the words new product category. Have you seen the ability to create a new class of trade here? What is the case for SD or traditional distribution versus specialty pharmacy? Maybe the last point on that question would be, have you begun to work with physician networks and been able to drive share and adoption?

Yes, thanks Eric. I think we've got three products in the market. All of them are very different. Even the legislative pathway that one of them has taken is very different. We do -- I do believe we've made progress towards saying to our existing brand manufacturer if you launch us -- if you launch these products, then speak to us. It's a different channel, there's different services that we can provide -- be that Exenda, be that at Lash, be that at ION, be that at US Bio, our specialty pharmacy.

There's lots of different ways we can help you approach the market place. A lot of the products so far have really been in the health systems arena. That's an area that we believe we have a lot of strength. I think the dialogue between the manufacturers is interactive. We have our point of view. I think we've had to change some hearts and minds on what the distributors' role could be in these products.

I think when it comes more into physician market place, you will see manufacturers have a more developed pathway that they really have worked with organizations like ABSG and ION, so we expect our role would be enhanced there. Definitely a difference between a patient administered and practice administered or physician administered products for the way that AmerisourceBergen works, as you would know. Thanks, anything else? Did I get all that, Eric?

Is the idea that in the health system market place that they are looking for -- they would much rather see it go through standard distribution, but in the physician market you have a lot of value to add, and more likely see it in specialty distribution?

Yes, absolutely. In specialty pharmacy, that again will be a different market, which we will have a different road. Of course, we have so many of the specialty pharmacy customers are AmerisourceBergen portfolio customers. We will endeavor to work with them and have a differentiated value. I think we've said for some time that we are hopeful and expressive of the view that the economics for biosimilars should start off somewhere between a brand fee-for-service and a generic fee-for-service, with a high ASP-type generic product.

You could look at that 180-day exclusivity period on generics, where there might only be one product. We've always said the GP dollars are good there, because we've got a high average selling price, but because there's not that competitive element yet, you won't quite see the GP percentages that we'd ultimately like when there's a competitive offering here. Thank you.

Thanks, Eric. Samantha, can we move on to the next question, please?

Lisa Gill, JPMorgan.

Thanks very much and good morning. Steve, when we had the opportunity to spend time together in San Francisco, we talked about the competitive market on the independent side, and talked a lot about CPA. I think that maybe one of your comments were misconstrued. You had said at the time you were informed that a fairly large buying group had informed you they were going to move somewhere else. My understanding is that was back in the time frame of 2015, not for the most recent period. I just wanted to confirm that, to start with?

That was -- the contract lasted -- we had over a year ago, so that was one where we've been able to retain about half of the customer base. But certainly in the recent past history, it's nothing that's current at all. I apologize if I wasn't clear. No, that's really all in the past. We had a good -- thank you for the question because (inaudible - technical difficulty) anticipating it.

We do well with (inaudible - technical difficulty) We had a very good quarter with them. We're growing our market share with them, with their wallets. I think we're using big data. We honestly have much better tools and ability to monitor compliance. More importantly, maybe to explain compliance and why it's bilaterally important.

I think our sales reps have [op-eds]. We have the changed health care relationship. I think we have some new tools that really enable their communication and data-enable their communication. We will continue to grow our commitment to the independent customer base and the services. I think in return, our customers are understanding that we expect maximum share of wallets.

If there are issues on pricing, talk to us about it, because it's a complex portfolio. At any one time we could be sending them a couple of thousand products, so talk to us if you're seeing things in the market place. I think that's been very well accepted. As the market gets more challenging for the independents, hopefully the objective is that they draw even closer to AmerisourceBergen.

That's helpful. Thank you for the clarification. My one follow-up would just be for Tim. Tim, you talked about the gross margins in the other segment. I think if I heard you correctly you said there were a few pennies from manufacturer rebates. Does that pertain to the other segment specifically? I'm thinking about the sustainability of what we saw on the gross margin side, on that side of the business as we move through the next several quarters?

Yes, thanks, Lisa. Let me clarify. No, the $0.02 we called out, a little bit of timing in that would be in pharmaceutical distribution, so more on the drug Company side.

And ended up we hit some rebates. We had some great performance on achievement of sales goals, which we -- you're never quite sure if you're going to hit it until December, literally.

Right. The $0.02, to clarify the $0.02 really we thought would come in and be earned in the March quarter. They got pulled forward, we hit some triggers early. But Steve's point is right in terms of the MWI, their calendar year. Their contracts with manufacturers are on a calendar year. You always come down to truing that up based on final volumes, and you pass through different tiers. That helped us in the December quarter with MWI -- but that happens every December. Nothing unusual.

Okay, great. Thank you.

Eric Coldwell, Baird.

Thanks very much. Well, my luck this morning -- my four questions have been asked and answered, but I'm going to just do a very simple one. You mentioned, Steve and I think Tim as well, that you've done some tuck-in M&A, probably a little more weighted to the other segment. The last deal I can track I think dates back about a year ago. I don't think you've done much by looking at the cash flow statement, but could you give us a sense how many deals have you done, maybe revenue or earnings magnitude over the last 12 months? Maybe some nature of what you've done in tuck-ins?

We bought an agri-feed business up in one of the small provinces in Canada that was $2 million. It's the first deal that -- I wasn't present that day in the office, and the executive committee voted without me, so that's how small it was to approve the deal.

The point is we have tremendous faith, and Jim and the team really know the regional competitors extremely well. Part of their goal has always been to make MWI the preferred distribution partner in case they are considering selling. That's really what we would see.

Eric, you're right. Essentially we've been investing a lot in our own business. We've done six new greenfield distribution centers. We've got tremendous investment going on in our Lash, our fusion project, in those DCs, new systems for World Courier, and a lot of new services for Good Neighbor Pharmacy and Elevate. We've got -- there's always a lot of great projects to keep us busy, and we have a challenging but we think loyal customer segment.

Always a lot for us to invest in. A lot of work going on at PharMEDium, making sure that we're ahead of the curve there. Jen Adams and the team there, very interested in continuing to raise the bar there. There's just a lot we can do internally, and I think you've seeing a record capital investment year at AmerisourceBergen -- definitely since the SIP years. Probably in absolute dollars -- maybe not comparative dollars, but in absolute dollars -- an absolute record investment year this year.

That's great. I will leave it at that. Thanks so much, Steve.

Thanks, Eric. Samantha, I think we have time for maybe one or two more questions to wrap up the hour.

Michael Cherny, UBS.

Good morning, guys, and thanks for taking the question. Just to touch quickly, there's been a lot of commentary around obviously the branded price trajectory, and obviously commentary in the market around how brand manufacturers are handling those price increases, or lower price increases versus historical, what they're doing to change their negotiating strategy.

As you think about the conversations you've had with your keeper and manufacturers over the last three, six months, what has the tenor been in terms of offsetting service versus value, how you go to pitch your business to them and your value proposition in an environment where they may be a little more reluctant to take the pricing increasing that they had historically?

Thanks, again. This is a wonderful question, because we get to clarify. It's not like 10% of our fees get earned from inflation. In 10% of the contracts, the dollar volume of the contracts, we have a component that's earned from inflation. That's an important clarification, and we've been trying to make that over the last few investor meetings.

I was actually in one of those meetings with one of our top five or six suppliers. I think our team was able to talk through that very professionally, very objectively. It has been part of the value that we've traditionally earned. I think there's a meritorious argument to move towards a very transparent model, but those conversations I think are ongoing. As those contracts renew with the manufacturers and new people service, we'll get -- I believe that -- I'm very positive we'll get them done. We'll get that component that's ascribed to inflation removed from the fee-for-service. Anything to add, Tim?

No, I think the manufacturers realize we provide an extremely valuable service in terms of the quantities we keep in inventory, the credit, the collections that we provide. I think they realize that it's a very good value and very economical. We've had discussions, we've had fee-for-service agreements over I don't know 10-plus years. We see those continuing, and we don't see those changing going forward. It seems to be very acceptable to be based on [WAC] pricing, and that's how the industry is compensated.

Samantha, I think we have time for just one last question.

David Larsen, Leerink.

Hi, congratulations on a good quarter. Can you talk about what you're seeing on the sell side? Obviously there's been a bit of pressure on the independent space. Are we largely through that? Did those prices come in in line with your expectations in the quarter? Has that really been contained to the independent segment, or have you seen any impact to the larger chains or regional chains? Thanks.

We didn't have a very active quarter in terms of renewals. That's the timing with how things go. We haven't had a very active quarter, but in preparing for this call, and we do of course every month our reviews. Tim and I met with all the key sales people in the drug Company. Everything's pretty much as normal. Our customers are hunkering down, looking at issues like DRR fees and other things that are challenging to them, looking at network composition, staying in the networks, performance network star ratings.

Nothing, really. I think our volume of generic compliance is certainly improving, so some of the programs that we've introduced are showing fruit. They've been productive, so nothing particular to report. We've been consistent about this for a couple of quarters there. We don't see any fundamental changes in the way we market with independent pharmacies.

That's great. One last quick one. If President Trump gets more aggressive about putting pressure on drug company CEOs to control price and cause price to pull in, are you taking steps now with regards to your contract to basically protect your margins going forward? Maybe if you could give any incremental color around what you're doing or what you could do in the future if rhetoric around this heats up even more, that would be very helpful? Thanks.

It's important to note that we really buy at the wholesale acquisition cost. There's a lot of once we ship and bill and receive payment for those products, which you know you can see we've managed our DSO pretty well. There's a lot that goes on after that. It's by and large really past us.

One of the strong attributes of AmerisourceBergen in terms of our existing model is we don't bill a lot of -- we almost exclusively -- 99% of our revenues we don't bill third-party payers. We're either billing the manufacturer or the provider. A lot of that will really go past us.

If there was a huge change where the growth rates in our industry were impacted, it would be a negative for us. There's no doubt it would be a very strong head wind, because we start off with the industry growing in the high single digits -- US industry growing in the high single digits.

If that were to really alter, if we were to go to a flat industry, I think we have flexibility in our contracts. We would have to look at it on both the provider, the sell-side, and the buy-side contracts. That stands to reason.

A lot of work to do there. Congress would have to be involved. I think again that this is a remarkable industry with a lot of innovation, and I think we'll come up with the right solutions for the industry -- not necessarily AmerisourceBergen. I think our industry will come up with the right approaches, and we're proud to be a part of that. Thank you. Keri, we'll wrap up now.

Yes. Samantha, I think that was it for questions. Steve, if you want to make any closing comments, I think we're all set for the hour.

Yes, thank you. This was our first quarter with Keri, and I think she did a great job. Hopefully you're all enjoying the interaction you had with AmerisourceBergen. We are really pleased with our strong start to the fiscal year, pleased that we could raise the guidance for the balance of the year, and we'll look forward to updating you at the end of next quarter. Again, we're excited about the progress we've made towards achieving our FY17 goals. Many thanks.

Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation, and for using AT&T Executive Teleconference Service. You may now disconnect.