Apr 23, 2010
Executives
R. David Yost - President and Chief Executive Officer Michael D.
DiCandilo - Executive Vice President and Chief Financial Officer Michael N. Kilpatric - Vice-President, Corporate and Investor Relations
Analysts
Lawrence Marsh - Barclays Capital Eric Coldwell - W. R.
Baird Tom Bellucci - Lazar Capital Market Robert Jones - Goldsmith Bank Ms. Ricky Goldwasser from Morgan-Stanley Elaine Wolf -Unidentified
Michael Kilpatrick
Good morning, everybody and welcome to AmerisourceBergen Conference Call covering the fiscal 2010 second quarter. I'm Mike Kilpatrick, Vice President of Corporate and Investor Relations and joining me today are David Yost, AmerisourceBergen President and Chief Executive Officer and Michael DiCandilo, Executive Vice President, and CFO.
During the conference call today we will make some forward-looking statements about our business prospects and financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.
For discussion of some key risk factors we refer you to our SEC filings including our 10-K report for fiscal 2009. Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call and this call cannot be taped without the express permission of the company.
As always, those connected by telephone will have an opportunity to ask questions after our opening remarks. And here is Dave Yost, AmerisourceBergen President and CEO, to begin our remark.
David Yost
Good morning and thank you for joining us. As you probably know from our press release this morning, ABC delivered a very strong second quarter that ended in March resulting in a very strong first half of our fiscal year that began October 1, 2009.
This outstanding first-half performance followed our last fiscal year's 17% increase in EPS and is ahead of a 16% compounded annual growth rate we delivered over the last 8 years. There's a lot to like about this quarter, Michael will drill down on the details but here are the highlights: revenues once again crossed the $19 billion mark up a road by 11.5% year over year, an instant replay of the last quarter; gross profit also increased in double digits again, expenses were down as percent revenue versus last year driving operating margin of 18 basis point this quarter, the (inaudible) PS were $0.63 on a gap basis up a road by 34% over the last year that's on top of the 17% increase last March.
We did a good job of controlling our receivables and inventory and had over $1 billion in cash on March 31st. The quarter reflected the theme of consisting growth that continues to be characteristic of ABC.
Our two primary growth drivers, generics and specialty continued to be key elements of our performance and position us well for the future. Before I address some of the company's specifics, a few words on the industry: First, healthcare reform, health care reform is now the law of the land, though the real work is just beginning as the regulations are written.
Though the details remain to be seen, we think our industry and company has fared very well. Though eventually, filling the prescription doing a whole and providing [Rx] coverage for tens of millions of the [uninsured] will not have an immediate impact, the long comeback that for our industry in ABC is very positive.
Eventually, establishing a regulatory framework for via similar could ultimately, be as beneficial to our special business as generics are to our traditional wholesale business. Our lash and (inaudible) consulting business with our category of foreign [bees], PhDs and reimbursement counselors now has the greatest potential work they've ever had.
In medicare, generic pricing formula for our retail customers though not as robust as what it would like was ultimately the preferred set of version instead of the house version has featured a better definition of cost. Our pharmaceutical manufacture partners clearly emerged as part of the solution to the issues facing healthcare, a dramatic reversal of their positioning the last time healthcare reform was addressed.
So taking in total we're pleased with the long term impact, healthcare reform will have in our business. It reinforces our long-term confidence in our industry and our company and further validate our two primary growth drivers, specialty and generics.
Second, pharmaceutical industry revenue growth, the IMS were cast of 3% or 5% for calendar 2010 seemed to be in the right zip code to us and is reflected in our strong revenue growth this quarter. Third, manufactural pricing department, fee for service of course, delegates much of the impact the wholesalers from brand name manufacture price increases.
As previously stated, we expect brand name price increases to be down from the 8% to 9% range, we experience the last two years and that continues to be the case, with our [guest and the currently] above our original expectation of 5% to 6%. Fourth, competitive pricing environment within our industry, I would continue to describe new environment as competitive much stable with few billion dollar pieces of business in [plan] in the next 12 months or so and few billion dollar pieces of business changing wholesalers historically.
Now, a closer look at ABC, our [robust] 11.5% revenue increase of $2 billion to over $19 billion reflected the strength of the overall market, strong growth in our larger customers and new business particularly in our drug company where both the retail and industrial segments delivered double-digit revenue growth. New business, largely from 2 group (inaudible) organization, one retail, and one institutional contribute over 4% of the total revenue growth and has now largely at [adversary].
So it should be no surprise, that revenue, growth for the second half of the year will more closely reflect the market growth. Our discussion with CBS regarding the former Long's business and Walgreen regarding the Duane Reade business are on-going.
Our current contracts on both accounts carry will and FY 11 at a minimum and could be extended, past our current contracts. We have a great relationship with both CBS and Walgreen and the former Duane Reade leadership team most of which is remaining a place.
In discussing revenues, it is important to note the wide diversity of our customer base with only one customer representing more than 10% of our business and the next largest in the 5% range. In addition, all that our largest customer moved to us for at least some of their generics, a drug our good neighbor pharmacy franchise-like program for independent and regional change retailers.
Now numbers about 3,700 stores. We have over 5,000 stores participating in GMP-provider network, providing access to third-party pairs.
Especially group continues to have a $16 billion annual run rate with about half of the revenues in oncology products, 2 oncologist. We service the largest number of oncology practices in the industry by a large margin.
And significantly, most of the largest are most innovative. ASD are vaccine, nephrology, and blood plasma distributor and ICS are third-party logistics program for our third-party logistics company has strong revenues in the quarter as did our consulting businesses [lash] and extended.
Our double-digit gross profit increase this quarter reflected our [attracted] customer [mixed] and generics. We continue to benefit from the at risk launch of our (inaudible), generic [Eloxatin] and that benefit will continue to our second half during the last year on map.
Our (inaudible) is a good example of our two-growth drivers of specialty and generics coming together with a strong generic contribution and a specialty [space]. We have noted on frequent occasions that we'd like to specially space because many new price will enter the market through that channel and especially products frequently provide an opportunity for expanded value added services.
Especially [channel] can also provide generic opportunities as demonstrated by [actual plan] for our large market position in this space proved very beneficial to both manufacturers and dispensers. Within oncology, we currently anticipate generic introduction of Gemzar and Taxotere in November and a [remidax] in December of 2010, the first quarter of our fiscal 2011.
Cost control continues to be an important part of a culture of ABC and our CE2 customer efficiency, cost effective program is an important part of that culture. This quarter, the associates of ABC drew total operating cost down 20 basis points versus last year added a 156 basis points is percent of revenue, equal to historic record low of this metric achieved last quarter.
Our total operating costs in dollars this quarter were below last year in spite of 11.5% or almost $2 billion increase in revenues, demonstrating dramatic cost discipline and our ability to leverage our existing infrastructure. At ABC, controlling costs is part of our DNA, and having cost discipline is always an added advantage.
It is important [to know] that we delivered outstanding cost control, at the same time we continue significant expenditures on business transformation, our new SAP based, ERP system. Our BT program is on schedule and on budget, and will position us extremely well to meet the future demands of our customers.
We are currently in test on several elements of BT and expect to begin implementing back office functions of BT later this fiscal year. Along with controlling expenses, our associates continue to do an outstanding job, controlling our inventory and receivables, driving our [DSL] this quarter to 17 days.
Our receivables performance is a key indicator of the strength of our customer-based and that we're delivering value to our customers. Operating margin expansion has continued to be a key focus of this management team.
In each of the last four fiscal years, we have increased our operating margin by five to eight basis points, and of course, the basis point on 75 billion is a significant seven and a half million or one and a half [cents] of share. This quarter, and this has continued our trend, at this fiscal year, we expect to increase our operating margin again, this time in the high single or low double-digit basis points.
Given our strong balance sheet, let me reiterate our position on acquisitions. Although, non are contemplated in our values, we are receptive to acquisitions and spent over a billion dollars in the last eight years on acquisitions.
In acquisition and our basic business of pharmaceutical distribution or related business like Bellco, would have appealed to us and we would look to stay within our area of core competency. We are in excellent position for acquisitions, both financially and organizationally.
And when you add up all the elements, we had a great quarter and a great first half of our fiscal year and have reflected our optimism with increasing the guidance for EPS for fiscal of 2010. Before I turn the floor over the Mike for some added [color], let me reiterate my enthusiasm for our industry and company.
We have a tough comparison for our second half but this management team has a history of delivering EPS group in many different environments. In just the last three years, the EPS increased has been 20%, 14% and 17%.
Our new guidance of $2 to $1 to $2.10 per share represents a 19% to 24% increase over last year. With our strong presence in generics and specialty, we are extremely well placed in the industry.
We have a demonstrated track record of controlling costs and increasing operating margin. Healthcare reform has enhanced our long term prospects.
It is very early to (apply) about FY 11, but with our positioning in generics and specialty, I am very excited about our prospects for FY 11 and beyond. Here's Mike.
Michael DiCandilo
Thank you, Dave and good morning everyone. It is very exciting once again to report quarterly results that have a tremendous amount of positive factors.
Our results, which include double digit revenue and gross profit increases, expense reduction, working capital discipline, and strong cash flow, all leading to greater than 30% EPS growth, are simply outstanding. They reflect incredible efforts, by our associates, unparallel customer service and continued exceptional operational execution.
And the good news is, that our strong positioning in the growth areas of the market, generics and specialty, should continue to provide us with strong opportunities for growth in the foreseeable future. Certainly, we will have [suffered] comparisons to the prior year in the second half of fiscal 2010, as we anniversary some of our significant customer [wins], the new generic product introductions.
Despite the [suffered] comparisons, our new guidance reflects 19% to 24% EPS growth for the year. I will detail that new guidance at the end of my remarks.
While we are extremely pleased with our second quarter results, I would like to remind everyone that from a quarterly earnings perspective, the March quarter has traditionally been our strongest quarter and this year is no exception. Despite a number of moving parts, a substantial portion of this sequential increase in our EPS from the December quarter to the March quarter, relates the benefits from manufacture price increases during the March quarter.
Certainly our fees for service agreements have mitigated much of our quarterly earnings variability from manufacture price increases. However, the 10% or so of our brand name business that is still subject to the timing and magnitude of manufacture price increases continues to benefit the March quarter more than any other, and as usual, will normalize in the second half of our fiscal year.
Now, trying to the income statement, which all walk down starting with the top line, our revenues increased to 11.5% in the quarter, driven by 13% drug company growth and 5% specialty group growth, our significant customer contracts that we added last year, primarily in March and April, contributed about 4.5% and 5.5% of our total growth, and drug company growth respectably. The majority of this new business has now annualized and we expect market growth in the second half of fiscal 10 from these customers.
The remainder of the drug company growth was driven by the growth of some of our largest customers, as well as overall market growth. Especially group grew 5%, driven by [ASD and ICS].
Our service and consulting companies also grew at a [robust] pace. While we continue to expect that our revenue growth will be in the 7% to 8% range for the year and in line with market growth of 3% to 5% in the second half of the year the continued strong growth rate of our largest customers could easily drive us to the higher end of our range.
Our gross profit in the March quarter grow a double digits for the second consecutive quarter increasing 11% over the quarter year, as a result of our top line growth including (robust) generics growth. As I mention last quarter, we expected to receive a substantial positive impact from recent generic launches in the March quarter though reduced from the first quarter benefit and that is exactly what happened.
Generic launches contributed $0.08 to our quarterly earnings below the first quarter impact but well above the couple of pennies, we consider normal in any quarter. A significant amount of this benefit continued to be from (inaudible) which has the result of a settlement between its generic manufacturers and the brand manufacturer can no longer resolve by the generic manufacturers after June 30.
However, generic product already in the channel at that date can continue to be sold and with our existing inventory levels in especially group, we expect to have product available in the market place at least through our fiscal year end. And that benefit is now reflected in our increase DPS guidance.
One other note on gross profit in the quarter we did benefit by approximately $12 million from an annual rebate through up with the generic supplier. On a percentage basis gross margin decline to basis point as the contribution from the greater than 20% generic revenue growth and recent generic launches largely offset the impact of our largest customers growing faster than the overall market in normal competitive pressures.
Our (inaudible) charge in the quarter was $10.7 million compared to $11.6 million last year. For the six months the charged was $18.5 million compared to $16.5 million a year ago.
Moving to operating expenses, we continue to enjoy significant operating leverage especially in the drug company as expenses decline despite the double-digit increase in revenue. Expenses as a percentage of revenue decline 20 basis points as productivity in our distribution centers continues to improve in our CE2 philosophy of customer efficiency and cost effectiveness resolve it in ongoing savings.
As we moved through the second half for the year, we will see some sequential expense dollar increases as expected due to the timing of our annual compensation cycle and increase expenses related to our ERP enabled business transformation program. For the year, we continue to expect operating expense increases in the 1% to 3% range.
As a result of reducing expenses while growing revenue in the double digits, operating margin in the quarter increased by an impressive 18 basis point zero over the last year. In the second half of the year, we would've expect our operating margin expansion to moderate due to a reduce benefit from the generic introductions, the growth of our larger customers in top of prior comparison.
But with our strong, [performed performance] in the first half , we now accept our four-year operating margin expansion to be in the high single digit below double-digit basis point range well above our original expectation for fiscal 2010. Below operating income net interest expense of $19.3 million increased 33% over the priority year reflecting the full quarter impact of our November [fund] offering.
Neither of the related [revolver] pay down as well as lower range earned on our invested cash balances. We continue to expect our four-year net interest expense to be approximately $20 million higher than it was in fiscal 2009.
Our effective cash rate in quarter was 37.9% below our anticipated effective rate for the year of 38.4% primarily due to the impact of completing certain federal tax audits. Our record quarterly deluded DPS is $0.63 grew by 34% compared to last year.
The EPS have increased, exceeded our 26% growth and net income due to a 6% reduction in average outstanding deluded shares compared to the last year's quarter, primarily due to the impact of our share repurchase programs over the last year. Now let's turn to our cash flows and a balance sheet, where we continued to demonstrate excellent performance.
We generated $388 million of cash from operations in the quarter bringing our six-month total to $346 million compared to $32 million for the first six months of the last year. We have $45 million of capital expenditures in the quarter in $88 million for the six months and continued to expect to spend in a $140 million range for the year.
We could be slightly higher depending on the timing of certain expenditures related to our business transformation program. From a statistical standpoint, average inventory days' on-hand during the quarter were 25 days, down one day sequentially as expected from our calendar year end seasonal pick and we were also down a day from the prior year.
Receivables management continues to be a focus and we had outstanding performance once again as average DSOs in the quarter were 17.2 days down a day from a year ago. Average DPOs were up about a half day due to the timing of quarter-end purchase activity.
From a share repurchase perspective, we purchased $111 million of our stock in a quarter bringing our six-month total to a $255 million well ahead of the phase necessary to meet our guidance of $350 million of sharing purchases for the year. We ended March with more than a billion dollars of cash on our balance sheet and as we have said consistently, our first priority from a cash deployment perspective, is to grow our business.
As we have historically demonstrated it, to the extent we do not deploy capital for that purpose and we remain on target to meet our cash flow goals and certainly depending on our overall market conditions, we could exceed our current year share repurchase targets. Now turning to our updated fiscal 2010 guidance, we have raised our deluded earnings per share guidance by $0.12 to a range of $2 and $1 to a $2 and $0.10 which represents a 19% to 24% increase over 2009 EPS from continuing operations which has a reminder we were strong at 17%.
As we have consistently reinforce since giving our original guidance for the year in November, we expected our first half of year to grow significantly faster than the second half due to the positive impact of our new business in generic launch timing in the first half and tougher comparisons to the second half of last year and none of that has changed. The new EPS range continues to reflect an annual revenue growth assumption of 7% to 8% for the year.
The most significant change to our assumptions is the increase in our operating margin expansion to the high single digit to low double-digit basis point range from below to the mid-single digit range. This reflects both our strong stepping quarter performance as well as the expectation that we will receive some continuing benefit from [actual plan] in the second half of our fiscal year.
We have also raised our free cash flow expectation, to arrange a $525 million to $600 million for the year. Our share repurchase expectation remains unchanged at $350 million.
So again, a fantastic quarter and an incredible six months we're we have taken advantage of our strong market positioning, executed extremely well, while continuing to build for the future and our future looks very bright for AmerisourBergen. Now here's Michael Kilpatrick for Q&A.
Michael Kilpatrick
Thank you, Mike. We'll now open the call for questions.
I will ask you to lend me yourself to a question and follow-up, so that everyone has an opportunity before we get to additional questions. Go ahead, Rosy.
Operator
Thank you. If you would like to ask a question, please press star one on your touch-tone phone.
You will be prompted to record your name. To withdraw your question at anytime, you may press star two.
Once again, if you would like to ask a question, please press star one. One moment for the first question please.
Our first question comes from Lawrence Marsh of Barclays Capital.
Lawrence Marsh
Thanks and good morning everyone. I (inaudible) the last quarter was once of the ages, I think this one is in the same zip code so, I'd encourage you to keep it up and make it a habit, congratulations.
My question is really this: you know, you've communicated over the years of baseline earnings growth target of 15%, you've compounded at 16%. Obviously you already addressed, you're facing, a very difficult challenge or [comps] in fiscal 11 because of the big generic number this year.
Now, are they are going to give you guidance this early. I guess my question will give you confidence that you could still be in the same current earnings growth baseline range for next year or, you know, would you be the minds who is trying to back out for positive contribution for [month's full] (inaudible) as you'd, you know, come over the baseline in order (inaudible) closed for next year.
Unidentified Company Executive
Well, I will say, you know, it is too early. You know, for FY 11 but I will say there's still a things we look, we think a very positive for FY 11.
You know, I mention on the call that the chance that we're going to have [Jim's] are tax appear. Remember [DAXUP], [APSA], you know, coming in we're going to have some generic introduction on the drug side as well.
Now, we expect to continue to do a good job of controlling our expenses, as we have in the past. We will not have some of the head wins in FY 11 that we had in FY 10.
So, we are very excited about our future here and I want to be careful, we look at the entire year not the kind of quarter at a time.
Lawrence Marsh
Sure. I guess a follow up, just to make sure I heard it correct, is there any change in terms of (inaudible) Long's or doing re-contract that would give you confidence to volumes now well in the fiscal 11?
And I guess it's not anymore [operational] when you think we might get resolution of this contracts?
Unidentified Company Executive
The Long's contract, Larry, is volume base.
Larry Marsh
Right.
Unidentified Company Executive
And the volume download that's pushed out at, at the let the time, you know.
Larry Marsh
Okay.
Unidentified Company Executive
That's one of the reasons why we're seeing a Long's go out a little longer. You know, I would say clearly by the end of the summer, not later, for sure, when we will give our FY 11 guidance I think we'll have a pretty good handle on that where we stand with those businesses.
What is, as I mentioned in the call, we have [actual] relationship with both of those our companies and that so, we look forward to discussing it with them.
Lawrence Marsh
Right. Thanks so much.
Unidentified Company Executive
Thank you (inaudible). Next call operator.
Operator
Our next question comes from Eric Coldwell of W. R.
Baird.
Eric Coldwell
Hi, guys. Thanks very much.
The Specialty Group growth of 5%, I'm hoping you can possibly quantify for us the impact of generic next shift in the segment and then the other of our contributors for the 5% growth versus your expectations. Thanks so much.
Mike DiCandilo
Hey, Eric. This is Mike.
As we said to be the beginning of the year, our expected growth rate for our Specialty Group was in the 5% to 7% range and they were right in that territory, generics, we expected them to have a couple of percentage point impact on the overall growth rate, and that's really what they had this quarter. You know also, when there's a slight decline in ESA it's a year over year, where they were down in 7% in total but a little bit greater than that in the Specialty Group.When I'm talking in ESA, I'm really referring to the ESA [Houston] Oncology.
We are happy with the growth rate and the performance. Although as you know the generics impacted or moderated the top line growth, they certainly contributed strongly to the bottom line.
Eric Coldwell
Hey, Mike. I know it's not the [ESA] broad portfolio that individual products, I don't know it has a major impact on the total result but [Baxter's] out today with fairly negative news and a forecast on the plasma market.
You guys are probably the largest plasma distributor, could you talk about what you're seeing in that area and what kind of an impact that might be having?
Unidentified Company Executive
Erick, I'll [chime] in, you know, we do our plasma distribution within our company called [ASD] and as you recall in my [previous remarks] I called out ASD is having a very strong revenue performance this quarter. I think it's important to put in perspective, our plasma business not just a billion dollar business.
So it's a relatively a small part of our total business but I will tell you, it's doing fine and it's one of our growth drivers going forward.
Eric Coldwell
Thanks very much.
Unidentified Company Executive
Thanks there. Next question, Rose?
Operator
Okay, question comes from Oncology of Lazard Capital Market.
Oncology of Lazard Capital Market
Good morning. Thanks for all the detail.
Certain thing, you back in a little bit of [Marsh's] question. Just, is there a way for you to sort of frame the relative opportunities as you're thinking about it, some of the generics we've seen late last year, early this year versus the few that you called out, Dave, that you could expect you know, later this year?
Unidentified Company Executive
This time I don't think we want to get into sizing some of the fiscal 11 opportunities. I mean, certainly, there is not one individually as large as [actual plan] but certainly you started adding up the cumulative value of a lot of the introductions and particularly the first two that Dave mention (inaudible) are in tax [security].
And specially, we think there's going to be significant opportunity from new introductions in 11.
Oncology of Lazard Capital Market
This (inaudible) thing I just [drew around] town is the fact that actual plot was an at risk launch. I mean, we didn't see that one coming before it hits.
So, my only point in calling up somebody's new products that might be coming our way in FY 11 is just kind of put in perspective when you're dealing with our business. You've got, you got a lot of products.
You're not really tight to the one's specific products so I think the key take away of the actual [plan] issue is the opportunity since specialty. I've got a very, very strong positions specialty and it was also got a very strong positioning in generics, and this is a great case where they came together.
And I think you're going to see more of that. One of the issues of healthcare reform is what happens with the whole issue via a similar.
I mean, there's a pretty big estimate out there on with some of the, by similar opportunities are and 11, 12, 13 in a multibillion dollar ranges or so. We think our positioning here in a specialty with the by similar's coming is really, really strong case and that was one of the points I was trying to make with the introductions we see in a relative short term.
Unidentified Company Executive
Okay, and then just a following up on the acquisition [environmental]. Obviously, you're open to do with, deal [sort of] in the [core] business.
Can you discuss just here, I have a (inaudible) looks, maybe now versus six months ago where the level of activity that you see out there? Thank you.
Unidentified Company Executive
You know, Tommy. It really hadn't changed very much.
I mean, we continue to be very active. We got several people who are in that environment all the time that, you know, looking around.
But we really haven't seen any increased in the activity. We've predicted earlier, in this year before the fiscal year started, we might see some activity as the value, the wholesalers trading it up.
Sometimes people who are in that space but not public companies look at that evaluation say, would you maybe now is a good time to sell. But we really haven't seen that yet.
But you know we can respond very, very quickly and I got great cash position. We got a great credit position, a great organization to respond.
So, if something comes out we could respond very quickly.
Michael Kilpatric
Thanks. Next call, operator.
Operator
Mr. Robert Jones of [Goldsmith Bank].
Your line is now open.
Robert Jones
Thanks to the question you answered. Just a specific follow-up on guidance just to unclear.
You can actually continue to sell generic of Laxatin beyond the June 30 settlement timing?
Unidentified Company Executive
That’s correct
Robert Jones
Yes. The generic manufacturers cannot sell it there after June 30.
But the product that's in the channel as of June 30 it can be sold through by a (inaudible).
Unidentified Company Executive
And what's the shelf life on that product?
Unidentified Company Executive
I think, close for two years.
Robert Jones
Okay, thanks. It's helpful and that just one broader question.
It seems that the new termed impact from healthcare reform on pharma has been maybe a little higher than originally anticipated particularly in the medic-aid rebate side. They keep talk about how is it all [this in tax] ABC and then maybe what the implications could be for the [broader] supply chain?
Thanks.
Unidentified Company Executive
The issue of the rebate goes directly from the manufacturer to the government. So, it really does not affect us at all.
So we're really immune from that, from that impact.
Unidentified Company Executive
But as I said a long term impact of healthcare reform, we think it's very, very strong for our company and for our industry as well. And I think it's particularly know where these at.
The big pharma is clearly in all pharmaceutical manufacturers are really viewed it. It's part of the solution to some of the issues regarding health care.
So, now even though the rebates are affecting the manufactures in the short term and they do not affect us in the long term I think the whole industry is going to be a lot stronger.
Michael Kirkpatric
Next question please [Rosy].
Operator
Mr. Ricky Goldwasser from Morgan-Stanley.
Your line is now open.
Ricky Goldwasser
Yeah, hi.
Unidentified Company Executive
Good morning and congratulations we’re in a very strong quarter.
Unidentified Company Executive
Thank you.
Ricky Goldwasser
I had a couple of follow-up questions. The first one was on Long's, just to clarify that the existing contract which you're saying now is to going to go through fiscal year 11 that includes generic purchasing.
And the second of [Barrack] was on the IBIG question, and you said that you expect the IBIG to continue and be a growth driver for you in the future. Can you just comment what's you're seeing on the pull through demand from your end market?
David Yost
First of all, Ricky, I did not mean say or imply that the Long's contract will take us through FY 11. I said it would go in the FY 11.
It's a volume based contract. We’re not exactly sure how long it goes and if it gets close to its end of course, we would hope to be able to negotiate and then perhaps keep an even longer, past our current terms.
In terms of the IBIG market, Ricky, we'll a little uncomfortable. You're drilling down on individual products, that there’s several manufactures in that area getting up our blood of (inaudible) business.
You know continues to be a good business, continues to do just fine. We look for AST, which includes several product categories to be a growth driver of forces as we go forward.
Michael DiCandilo
Just to have a clarification, to your first or additional information, on your first question. The Long's contact continues to include generics.
Ricky Goldwasser
Okay. Thank you.
Michael Kirkpatric
Thanks, Ricky. Next question please.
Operator
Elaine Wolf of (inaudible)]. Your line is now open.
Unidentified Analyst
Hi, good morning. Thanks for taking the question.
I would like to ask about the impact of the Pfizer transition. If you could just remind us to what played out in the first quarter, our first calendar quarter.
And then what is expected in terms of the go forward for the rest of the fiscal year?
Michael DiCandilo
Oh sure. Elaine, this is Mike.
Pfizer's fee for service agreement with us began on January 1st and as a result we'll see a pretty level impact from Pfizer as we go forward. Historically, most of what we got from Pfizer was in the March and the June quarters.
So, we did historically have a contribution in the March quarter which is, all said a pretty well with the compensation we're getting from fee for service. There's not a big, we don’t expect really a material impact from the chains and either our March or June quarters.
We do expect a little pick up in September and December. But again, it's not really material to any one quarter and the earlier indications are as working very well for both parts.
David Yost
You know we talked frequently about the diversity of our customer base. And there's might be a good time to call out the diversity of our supplier base as well.
For we have no one manufacture does more than 10% of our revenue. So, our revenues are really spread over a wide manufacture base.
I think it is important concept when evaluating the risk in our business.
Unidentified Analyst
Great. And any impact in terms of the balance sheet what we are seeing in DSLs or anything that’s worth calling out the material.
Michael DiCandilo
Yes, I think it is all in continuation of the discipline that we have, the focus we have on our receivables. The strength of our customer base and the diversity of that customer base, I think really, really helps us and not only are the DSO's down but when you look to year to year our significant past receivables are down to, are down very, very significantly.
And I think, you know, the better service you give to the customer, the more you willing you're pay and the less speech you have and I think that’s the requisitions to all of that.
Unidentified Analyst
I was thinking specifically around the inventory and the Pfizer transition any change in the March balance that we should be aware or the contribution there?
Michael DiCandilo
Now the, you know, the Pfizer transition, the previous Pfizer agreement although not only on a fee for service basis, had a very strong inventory management component. So, there is not a big impact on working [capital] from new Pfizer agreement.
Unidentified Analyst
And one last question if I can indulge, just regarding the set of [rows] that you achieved in the drug distribution business relative to what we're seeing at least in an initial IMS data. Any sense of whether that sort explaining the difference around stocking, destocking or any other explanation or help that you can give us or insight.
Michael DiCandilo
Now, I mean, I let Dave comment as well but, we were up 13% in the quarter as we said in the drug company and the drug company, 5.5% of that came from new business in addition to (inaudible), the biggest driver of growth in the quarter was the strength of our largest customers which grew faster than the market.
David Yost
Yes. The only thing that I would ask is you just got to be a little careful by quarter by quarter you know what I mean.
We look at the year. We look at the broad, the whole year.
We don’t provide quarterly guide and that's one of the reason. You get(inaudible) from one court to another, you guys be really be careful about jumping on top and then you think it’s a trap.
Operator OK. Thank you.
Unidentified Analyst Next question please. (Inaudible) Operator Our next question comes from [John Wilson Raymond James].
John Wilson Raymond James Hi. Good morning.
What I, this is from Mike. What do you think the second biggest driver of the outside the [sheet]?
What, it seem number one (inaudible), number two is. Mike Yes.
I think number two is the fact that are close that came to a higher than we expected. John and I, you know, were sorted out the year with a 5%to 7% in a growth revenue assumption.
And now we raise the 7% to 8% and I said it’s, you know, it’s easily be going up in that range. So, I think the revenue growth, the generic component that came with that revenue growth and the fact that we handled it with barely lot of expenses.
And you know, showing that leveraged that we had in the business. So, I think that’s the second driver of the above.
John Wilson Raymond James Great, secondly you mentioned the kind of quickly, there’s a $12 million trap in the quarter. Could you explain that and should we think about that one time or that trough up that maybe represents the profit, there should be an over multiple quarter that just happen here.
I can only answer one quarter. Mike Yes, I think the ladder (John).
It’s not unusual for us to have trough ups, particularly with the generic suppliers over rebates. In particular case, we have an annual rebates component of our agreement.
And because of rumors acquisition, and rumors new product introduction there is some confusion over on what was, what it is included. And we rap that out in March.
Raymond James So you brought out the profits in March quarter. There is a couple of sounds Maybe two sounds that maybe you won’t thinking about and we would not thinking about cause it just happen in rebates.
Mike Yes. Raymond James OK.
All right. Mike And John again, I just speak to you know why we don’t give quarter a guy.
We look at the whole year. And you know, get some infatuation you know, from time to time individual quarter.
Raymond James Sure. And just some other quick things, we certainly seeing the retail pharmacist suffer more pharmacy go larger and pressure from mocking from medicate.
How was that being reflected and they are dealing with you? What do you hearing in that from some point?
Mike Well, I mean were trying to work out perfectly with that John. I mean one of the great strengths we bring them is our strong generic program.
A generic program called, you know, (progen). You know, we think we would bring them the best generic proper opportunities available in the market place.
You know every bid is good. The competition is dealing with the big box chains in the like.
So, you know, were working very, very close with that. We have a coaching program.
We’re working with that now. You know, help them render a business of better.
We have a big private labor program, commercial program in a like. We’re kind of work very closer with them.
I will honestly tell you John long as I’ve been in this business which is you know. Raymond James It’s a long time, a really long time.
Mike You know people maybe talking about in the minds of the independent. I got to tell you there is, they keep talking about.
There are different kinds of programs. Drive in medical equipment.
You know, vaccine program there’s like. So, they continue the whole run and do fine.
Raymond James Thanks John. Mike Okay.
Operator Our next question comes from (Celestine Angelo) of Bank of America. Celestine Angelo Hi, I will be sitting in for Celestine.
I don’t think I will be getting comfortable of that name as part of my franchise but. Unidentified Analyst I am glad you identified your self.
Because we’re going to have trouble with there voice there, you know. Celestine Angelo I do have a comment on the chain business, the longs in the [Dynwe Web] relationship as you put it.
But can you give us a general rule from what kind of working capital of those chains tie-up on, you know, data base basis for you. Would we see longing, you know, for improvement or distortion in your inventory in terms as a return, as a result some lost business potentially.
Unidentified Analyst Yes, there is a, this is Mike Bob. No big impact.
You know [long], fairly adorable retailer, fairly normal. A profile again keep in mind, you know [Dywne] reads.
You know about $500 million a year worth of business. And there is a very small part our business that is 1 percent.
You would not see a meaningful impact on our working capital sites. Raymond James Okay.
Any kind of rules from those percent of revenues on inventory might be, bare in minimums. You have to keep supporting those just not any break out Unidentified Analyst Yes, nothing.
Again, I won’t give anything specifically. And keep in mind in total in our company.
You know our networking capital is presented by revenues about 1 percent here. So, you know the receivable in the inventory actually goes wasted as the payable associated with it so it is not big impact.
Michael DiCandilo
And the profile Bob is not dramatically different, I mean you know there is a same kind of products the same manufactures the like that they are the base retail (inaudible).
Robert Jones
Michael DiCandilo
Thanks Bob. Next question please.
Operator
Liza Gale, from JP Morgan you line is now open.
Liza Gale
Thank you. Good morning, I was wondering if – could you please follow up on your comment around the (inaudible) that you said that all of your customers buy some of their generics from another source, is there any way you can clarify that for us to say you know.
That X presented to me think that it could be Y just try to frame what the opportunity is around the generic market in the next couple of years.
Michael DiCandilo
Good morning Liza. Well, you know Liza.
What I said is you know all but are in a largest customer buy list some of their generics so, you know from isn't it a metrically rank very closely you know by customer. I think there's a key pick way here we don't think we have upsize.
I think we done a better job of capturing, you know our generics, our total generics [span] out here for our customers. But, it was truly we (clearly) we have some upsize.
David Yost
Yes, Liza in one way we tried to give some guidance on that you know we think you know probably the biggest penetration particularly on our pro-generics program has been in a retails sector. We think were capturing you know north of % 80 of the available generics (span) in that area.
And you know that continues to come up is our complaints increases, you know where we put a lot of focus on and were we had a lot of success. And recently has been in the Internet site market and were the product is fully use or a little bit more customize that it time for a little bit more specialize we spend a lot of time customizing our pro-generic program you know for the off-sites customers.
And you I think were probably 50 to 60 percent penetrated there so we've got more room to go. On the Hospitals site you that historically we have always supply the Hospital that they very large percentage of their generics.
But a lot of that has been through Hospital GPO contract and I think you know going back to look last August you know how long we made our agreement with (novation) for us to supply oral solid generics. Tutor Hospitals under our program you know the percentage that has come from our program, versus the percentage of the generics coming from Hospital GPO contract has continue to rise.
And I think continue to represent a good opportunity for us going forward. So, I can give you a little bit of the segment by segment for you.
Liza Gale
And this is just one other follow up. We think about the overall promo soco market cloth have had a chance to look at that $ 250 that (certain the donor hold) by the manufacturers and what is the potential impact would be for the drug wholesalers?
Michael DiCandilo
Yes, Liza we have really spent a lot of time look. And I think it's going to be pretty small I don't think its goanna have much impact and its goanna be phase out you know through, you know when the (general) whole start kick in you know its kind all over the place.
Depending upon the individual patience self. I goanna till, I don't think the $ 2.50 is gonna create to $ 2 to $250 is gonna be a big issue but I gonna till you as you get out fill out it and a later years when you do not hold.
The % 50 that still up by the brand new manufactures and you know we got the in this unsure people you know coming in the literally by the millions. I mean is like just you know 18 19 million, I think that is gonna have a heck man impacts.
So, that the reason we look out you know pass FY 11 in the 12 and 13. Why pay the metrics on this business if it can't get really good.
I mean you got all the uninsured you got the increase demand there you got the man from generics and the whole (value consumers). Which is a little bit a wild cards so, as far as we can see I gonna till you we continue in a very optimistic about this industry and our own life.
Liza Gale
OK, great I appreciate the comment.
Michael DiCandilo
And next (Gary Billy).
Operator
(Unidentified Analyst) from (inaudible) the line is now open.
Unidentified Analyst
Yes, thanks (Jen). My question hey, Dave I just want to follow up one more time (annexure) what I'm try to understand can you give us a little bit of a better since for maybe how many manufactures are sale the product today.
Because, you know it is clear that you won't be able to buy a generic version of the after June 30 but I'm trying to get the better since for maybe you know for how many manufactures are out there how much supply could be out there what kind of impact that's maybe hide on pricing. Because giving the (shelf life) I mean there's a obviously a scenario where you can have product willing to fiscal 11 if I'm thinking that correctly.
Michael DiCandilo
Will, you know the first (bog) you know I think six manufactures are several doses and some people more than role of others. How much product is after to be seen, I mean we don't know yet there's a point how much the manufacturers you know can sale is it (inaudible) there are specially group of have a [pack dry] [inaudible] I mean it will remain to be seen.
I think we are going handle on that, you know in a next few weeks and I will clarify by the time we announce our (calling) (inaudible) for clarify that. But, it is a little bit moving target right now we are also don't know what's gonna happen with the a lot of thing creasing (inaudible).
Unidentified Analyst
Yes, it is.
Unidentified Analyst
Right. So, in your (vision) ultimately that pricing after June 30 is gonna change obviously.
But, by my calculation you know this one drug could be % 7 or % 8 of your total earning this year and I'm trying to (con in size) that up and compared to potentially (Jim Son) (inaudible). I think about the magnitude or what the specialty opportunity could be.
Michael DiCandilo
Will you know you could, were gonna do that too. But, in cancel of what happen with those two props is depend on that fund it what happens with being with the (plan).
So, there's a little bit unknown at this point at again we just want to make sure everybody understands my (explain) in FY 11. I think were gonna continue good opportunity in FY 11.
Unidentified Analyst
OK, thank you. Next caller please.
Operator
[Richard Plouse] of Jefferson Company you line is now open.
Unidentified Analyst
Yes, just really quick here on a specialty side maybe if you can talk a little bit about the (transfers') seeing in the you know, areas of consultant packaging and things along those line and the opportunity on the go basis.
Unidentified Analyst
Well we got, you know, a couple of different issues. And you know what , I talked a little about packaging.
In the cases of the consulting, [inaudible] relatively small, you know, part of the business. But I will tell you, I think there are opportunities, you know, that exist right now, the best had even been.
You know, Mike and I just [inaudible] and last year, you know, companies and that you know, that [there were] what they would describe as a target-rich environment at the moment. So, we think we have some great upside on the consulting business.
You know, the thing that's t nice about the consulting business is not only the fact that [it's a lot harder] both margins, you know, than are distribution business as you would expect. But it also provide a [mortuary] in the businesses.
So he introduces us to manufacturers that will bring in new products to the market and [the like]. So a really good space for us to be and it's a really [integral] part of our [growing] market strategy.
Unidentified Analyst
Yes, we didn't talk much about the packaging group, you know. As a reminder, it's, you know, a less than a half percent of our total [webs] but the group performed very well in the quarter of both revenues in operating income were up into double digits.
They did have a fairly easy comparison to last year. As you remember, last year we, because of some [FDAD] delays, you know, we didn’t have some new product growth we expected.
But I think the group has rebounded, the performances been strong, and it continues to be an important part of the business.
Unidentified Analyst
All right, thank you very much.
Unidentified Analyst
Thank you. We'll take one more call.
[Rosy]
Unidentified Analyst
This is [Steven Baliquet of the UV App].
Unidentified Analyst
Hi, thanks. I have a couple of questions here.
We'll have botanical sides, so there are two [inaudible] of the line. First one is, as far as taxes here and competitors, they're likely to be approved as a 505 D2 branded MDA product of the (post-straight) substitutable generics.
I'm wondering if that still presents she would the same, you know, higher than average profit opportunity given the dynamics of the oncology distribution market, you know, similar to (inaudible) a little bit. That's question number one
Unidentified Analyst
Which are a multiple choice that true or false (inaudible)? I'm just kidding.
You know, I think it's a little early to, you know, [pi] on Taxotere. You know, one of the issues that have a big influence on the pricing, the number of manufacturers involved, and the ability for them to get, you know, raw materials.
So, I got to tell you. You know, six months, it's really pretty early to here and any one of (inaudible) market not only, you know what the impacts they wanted to show.
Unidentified Analyst
OK, that's fair. Do you have a questions, you (inaudible) already mentioned and maybe I ask [] So we never way.
So, we seem somebody has brand generic [elements] that the (inaudible) will actually [drop] the year where I'm able to read [the channel] and wait for the (inaudible) to come up inthe market. (inaudible) generic [at the content], generic normal (inaudible) of [few others].
I just that, I'd like to question I guess I know a situation. I can't believe that into [Riyadh] over a year and I recognized those (inaudible) a year, or do you, in those cases still onthe [inventory] right away and the customers [hold on] for a year.
I was trying to get (inaudible) it's recognize from the host dealer [level].
Unidentified Analyst
And today spend we have an [inventory] on hand. We would sell on a normal course and it would not have a situation works (inaudible) upfront.
Unidentified Analyst
OK, good. OK, all right thanks
Unidentified Analyst
Thank you very much, and thank everyone for been on all today. I'd like to turn it over to Dave Yost,CEO for some final comments
Unidentified Analyst
Well, I just wanted to thank everybody for joining us for pretty interested in Amerisource Bergen. You know we can be very excited about the [registry] and our opportunities within that industry.
Our two [primmer], good driver generis specialty. We take continue the position as driver well for the future (inaudible) for the short time or long time and we look forward to sharing our turn a (inaudible) with you and a lot of part of joy.
Thank you very very much.
Unidentified Analyst
Thank you [inaudible]. Operator that concludes the call.
Unidentified Analyst
Thank you for joining today's conference call. You may disconnect this time.