ABC
#Thanks <UNK>, and good morning everyone
We're excited to start fiscal 2017 in a positive way
Our results and 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 fiscal '17 outlook
Please note that all financial comparisons are for the first quarter of fiscal '17 compared to the same period of the prior fiscal year unless otherwise noted
With 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 tailwind this quarter given the slowdown in branded drug inflation from July through December, while still having a meaningful revenue headwind from brand and 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 gross 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're still cycling through the repricing of two strategic long-term contract renewals which we have discussed in detail the past few quarters and 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 existing scale and capabilities where we can
Operating income, our adjusted operating income was $486 million up about $9 million or 2%
Our adjusted operating margin was 1.27% down three basis points from the prior year driven mostly by the pharmaceutical distribution segment bringing down six 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 U.S
versus international income
For the quarter our adjusted diluted EPS increased a solid 7% to $1.36 to 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 a couple of pennies of EPS benefit in the current quarter from the favorable timing on manufacturer rebates that we previously expected to earn in our March '17 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 a solid growth better than we expected in its retail, customer segment which includes Independent, Walgreens and other chains
Consistent with the past few quarters I should point out that the business continue to have a revenue headwind 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 headwind going forward
ABSG which is our specialty business and 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 a disciplined expense management combined with a 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 ended December '16 quarter generic deflation wasn't that meaningful
These headwinds 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 it's 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 the 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 at growth rate in the high single-digits while MWI's growth was slightly impacted by foreign exchange associated with their U.K
MWI continues to see high growth rate in the U.S
companion animal business, that's a percentage in the high single-digits and we are now encouraged as we're starting to see improving growth rate 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 the growth rate of 17%
This marks the first time that the segment has surpassed $100 million in operating income
As <UNK> highlighted MWI achieved records in operating income and operating margin
The business has a relentless focus on the customer, a drive to constantly improved capability and terrific expense management
Wrapping up our consulting business was also a strong contributor to the segments growth this quarter due to a 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 headwind into our Q2 '17 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 '16 free cash flow
This day of the week impact did not repeat in the current quarter and was a headwind
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 buybacks
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 are able to buy back roughly 8 million shares returning over $600 million to our shareholders
Now let's turn to our updated fiscal '17 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 reflect 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 '17 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 had added new commercial business which will benefit us and two, brand inflation realized in January will be a better revenue tailwind 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 occur incremental costs related to several of our IT and infrastructure investments
The third area, operating income, we are revising and moving to low end of our guidance up
Our operating income dollar growth will now be flat to up 4% versus fiscal '16. And the last area our adjusted share account
We'd expect our share account 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 track as planned in a repaid $600 million debt obligation that matures in May 2017. As in the past however, we will remain flexible and opportunistic in terms of capital deployment
Let me point out that the rest of our previously communicated fiscal '17 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 not changing our negative 7% to negative 9% generic deflation range for fiscal '17 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'll 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 in the high level of scrutiny
This is part of the reason we continue to have a somewhat wider adjusted EPS range
So 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
And 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 <UNK> to start our Q&A
Thanks Bob for the question and I'll take them in order
So the first one we did see brand pricing trail off a bit in our first quarter to December quarter
So that was a little bit of a headwind for our core drug business that we were able to cover
So that's true but then we got the 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 kind of weighted average basis but clearly the January price increases were in line with our 7% to 9% assumptions
So 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 and that's an open item but I think with our $0.20 range, I think <UNK> 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 as it trails off a bit we can still stay in the range but on probably the lower end
Yes, and I think <UNK> you hit it, I mean certainly we benefited – December is always one of the better quarters from MWI as they come down to year end contracts with manufacturers but going forward the consulting business I commented in my script that they will be implementing the new ERP system and they’ll be having some expenses in that area will ramp up a bit in quarters two, three and four
But it’s a great margin, it’s the margin have been fairly high
But I would say that - this probably isn’t the run rate but probably not that far off I mean it should be a good margin business and all those businesses leverage well
Let me go back, I mean 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 it trailed of a bit we would stay in our range and again I think that's important to me
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
I mean we’d had to go back and think about that and understand the impact but certainly it trails off a bit we feel comfortable staying in our range on the brand side
Generic deflation, I mean 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 that's what we’re seeing in terms of how that price - so how our acquisition cost is changing over period time
We're probably up towards the higher end of that range and so 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% and as we go through the year we'll update the range
Thanks Bob I’ll start
Certainly we reaffirmed our guidance and so I mean the guidance for free cash flow was at adjusted net income we're 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 our business we should see a nice positive free cash flow in our March quarter somewhat neutral to up a little bit the June quarter and then traditionally our fourth quarter is pretty high in terms of free cash flow
So that's how we get back to where we need to be for the year
And CapEx I think we said $500 million roughly - that’s reaffirmed and we should be right about that in that range and most of that is the DC work and the ERP system
So both were consistent and both we still feel good about
I’ll start <UNK> on the first one back to the generic deflation
We have not changed our methodology or approach
We've been very, 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 the ones that too have higher variability in that first year
So we've been very consistent and we track it
We look at the methodology and were still coming up in that range of minus 7 to minus 9 and again I said little on the high end right now at the minus 9. That's why we still feel comfortable at this point
Tax reform, I'm looking at…
Yes, thanks <UNK>
Let me clarify no, there’re couple pennies we called out a little bit of timing and that would be in pharmaceutical distribution so more on the drug company side
Right, yes the couple pennies to clarify - the couple pennies really we thought we would come as we earned in the March quarter they have pulled forward
We hit some triggers early but <UNK> point is right in terms of the MWI that our calendar year there are contracts of manufacturers around our calendar year and you always come down to proving that up based on final volumes and you have two different tiers and that helped us in the December quarter with MWI but that happens every December nothing unusual
I think the manufacturers realize we provide extremely valuable service in terms of the quantities we keep an inventory, the credit, the collections that we provide so I mean I think they realize it, it’s a very good value and very economical
And we had discussions, we had fee-for-service agreements over 10 plus years and we see those continuing and we don’t see those changing going forward though it seems to be very acceptable based on WAC pricing and that's how the industry is compensated
