Apr 28, 2011
Executives
Michael Dicandilo - Chief Financial Officer, Principal Accounting Officer, Executive Vice President and Chief Operating Officer of Drug Unit R. Yost - Chief Executive Officer, Director and Chairman of Executive & Finance Committee Barbara Brungess - Vice President of Corporate & Investor Relations Steven Collis - President and Chief Operating Officer
Analysts
George Hill - Citigroup Inc Lisa Gill - JP Morgan Chase & Co Ricky Goldwasser - Morgan Stanley Helene Wolk - Sanford C. Bernstein & Co., Inc.
Steven Valiquette - UBS Investment Bank Thomas Gallucci - Lazard Capital Markets LLC Glen Santangelo - Crédit Suisse AG Robert Willoughby Lawrence Marsh - Barclays Capital Robert Jones - Goldman Sachs Group Inc. Unknown Analyst -
Operator
Welcome, and thank you for standing by. [Operator Instructions] Today's conference is being recorded, if you do have any objections, you may disconnect at this time.
Now I would like to turn the call over to your host for today, Ms. Barbara Brungess.
Ma'am, you may begin.
Barbara Brungess
Thank you Amy. And good morning, everyone.
And welcome to AmerisourceBergen's earnings conference call covering our second quarter of fiscal 2011. I am Barbara Brungess, Vice President of Corporate and Investor Relations.
And joining me today are Dave Yost, AmerisourceBergen Chief Executive Officer; Steve Collis, President and Chief Operating Officer; and Mike Dicandilo, Executive Vice President and Chief Financial Officer. 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 expectation. For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2010.
Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the express permission of the company. As always, those connected by telephone will have an opportunity to ask questions after our opening remarks.
Now here is Dave Yost to begin our comments.
R. Yost
Good morning. And thank you for joining us.
As you know from our press release this morning, ABC had another strong quarter in a series of strong quarters, with revenues of $19.8 billion, up $416 million and over 2% from last year, with both gross margin and operating margin continuing to expand year-over-year. GAAP EPS of $0.77 was up 22% over last year, particularly noteworthy performance, when you recall that our last March EPS was up 34% over the previous year, which was up 17% the year before that.
Strong performance on top of strong performance. This is our sixth consecutive year we expect to increase our operating margin, and this quarter is the 14th consecutive quarter we have increased our operating margin on a year-over-year basis.
And we are increasing our operating margin at the same time we invest in our future through the implementation of a new ERP [enterprise resource planning] system in the drug company. Our asset management remains strong, and we finished the quarter with a robust $1.9 billion in cash, helped in part by some favorable timing.
So lots to like about the quarter, with ABC continuing to demonstrate it is a good company, in a good industry. I would describe things that ABC is "steady as she goes," with all business units performing according to plan, with the exception of stronger than anticipated results in our Specialty Group, most notably from generics, particularly though not totally, Oxaliplatin.
Though we are usually uncomfortable talking about a single product, Oxaliplatin is an exception, since it accounted for a large part of our extraordinary performance this quarter, and of course, totally winds down during our June quarter. Our EPS guidance for the year has been increased to reflect this better than expected performance in Specialty, and Mike will provide details.
Our focus continues to be on specialty distribution and generics, and this quarter, as last year, both were strong. And again this quarter, our 2 growth drivers overlap, as we had strong generic contribution in Specialty.
The industry continued to be vibrant and resilient, with new generic introductions, providing incremental opportunities to the solid fundamentals of organic growth and cost leverage. I want to reiterate my Investor Day message that this is a good time to be invested in wholesale drug space, particularly ABC.
We have just increased our FY '11 guidance to double-digit EPS growth on top of the 31% increase in EPS that we delivered in FY '10. Again, lots to like about ABC.
In our FY '12, we expect to experience the benefits of the largest retail brand and generic product conversion in history. Starting our first fiscal quarter, which follows a strong generic introductions in Specialty in FY '10 and FY '11.
In FY '13, we expect to experience the benefits of our new ERP system and the elimination of running dual IT platforms, as well as carryover benefit from generic introductions late in FY '12. FY '14 should benefit from the 32 million or so uninsured patients entering the healthcare system, with pent-up demand for pharmaceutical products.
And our FY '14 and '15 should be good years for generic introductions including biosimilars. As you all know, on March 14, I announced that I would retire as CEO, effective July 1 on my 64th birthday.
And that 17-year ABC veteran, Steve Collis, currently Chief Operating Officer, will succeed me. As noted at the time of the announcement, this change has been in process for some time and the transition continues in a very orderly manner.
You will recall that Steve has served as President of our drug company, founded and was President of our Specialty Group, that at the time included our consulting business that is now a separate operating unit. Steve is eminently qualified to lead ABC.
He participated in every major decision that has made at ABC since the merger of 2001, and I have talked to him almost every business day since then. I am very confident about ABC's future under Steve's leadership.
With Steve moving to CEO, we have expanded Dave Neu's responsibility to be President of the drug company. Dave is a 29-year company veteran, and most recently was in charge of all operations for the drug company.
Before that, Dave headed up all retail sales for the drug company. Dave joins a senior leadership team, with over a century of industry experience, and is a strong an executive team as you will find in any high performance company.
That ABC circle of life just keeps getting better. Here's Steve Collis, the soon-to-be CEO of ABC.
Steven Collis
Thank you, Dave. And good morning, everyone.
Before I begin my comments on our results, I want to congratulate Dave again for his many years of distinguished service to AmerisourceBergen. And thank him for the personal support he has given me during this period of transition.
I am both honored and humbled by the opportunity to lead this company, and I'm incredibly excited about the future for AmerisourceBergen. We operate in a vibrant and growing industry that is competitive but stable.
Our diverse customer base, with only one customer representing over 10% of our revenues and our comprehensive portfolio of products, helps us continue to drive consistent performance. Introductions of new generic pharmaceuticals will continue to provide additional incremental growth opportunities beyond the solid industry fundamentals of organic growth and cost leverage.
At ABC, our focus continues to be on Specialty Distribution and Generics, both of which made important contributions to the current quarter, and will continue to be important contributors in the quarters and years ahead. Importantly, industry pricing remains stable, with few billion-dollar accounts changing hands over the last several years and none moving recently.
Furthermore, we always stay active in Washington and our recent visits to the Hill do not cause any concern to our current outlook. As Dave mentioned, the first 6 months of our fiscal year 2011 are off to a strong start.
With the incremental benefits of specialty generics pushing us above expectations. Mike will detail our financial results, but I would personally like to highlight a few things.
Our revenues were up a solid 2.4% in the quarter, in line with expectations and we continue to expect to hit our targets for the year. Our contract with Longs CVS will come to an end this summer, and we will no longer serve any portion of Longs CVS after September 2011.
But we have partially offset that impact, buying some new business, including a contract with a large Medicare Part D provider, which we signed during the quarter We had very strong gross profit growth of over 12% in the quarter, driven by contributions from specialty generics. It is important to note that much of the out-performance we have experienced over the last several quarters, in terms of both gross margin and earnings, have been driven by very significant contributions from Oxaliplatin.
While we have a few weeks remaining of Oxaliplatin inventory, the benefit we received in the second half will be significantly less than the benefit we received in the first half of 2011. As we look ahead to next year, we see an unprecedented year for oral solid generics, particularly in our retail channel.
While the conversion of large brands to generics will moderate our historic top line growth expectations, we expect a banner year in gross profit for our drug company. ABC is well positioned to take advantage of this unprecedented industry event with our market-based generic strategies.
Including our proprietary ProGeneric solution program, Good Neighbor Pharmacy, Long-Term Care programs and strong presence with regional chains. We also continue to experience growth in our sales of oral solid generics to the hospital segment.
Our operating expenses were higher in the March quarter of our fiscal 2011 as expected. However, we continue to expect our expenses for the full fiscal year will be flat, except for the duplicate IT spend we have previously discussed.
Mike will detail these particulars in the quarter, but I want to assure you, that we at ABC will continue to observe our CE2 philosophy: Paying strict attention to cost efficiency and cost effectiveness. Our operating margin in the quarter was up a significant 24 basis points on top of a very strong performance last year, driven, in large part, by contribution from Specialty Generics.
Strong operating earnings performance, combined with a lower share count, drove earnings per share up 22%, on top of the 34% increase we experienced last March. On the strength of that performance, we are increasing our earnings per share guidance for the full fiscal year 2011 to a range of $2.41 to $2.49.
Given the strength of our cash flow and our cash balance at the end of the March quarter, I want to affirm our often stated position on acquisitions. Our criteria for acquisitions are as follows.
They should increase our value offering to our existing customers, both up and down the channel. They should be within our established core competency.
They should increase shareholder value. While we have not contemplated any contribution from acquisitions in our guidance, we are receptive to acquisitions and have spent over $1 billion in the last 8 years on acquisitions.
We continue to be interested in opportunities in pharmaceuticals and Specialty Distribution and services, as well as consulting and packaging services. And while we would be very comfortable in the $200 million to $300 million range, we would readily consider something larger, if it made good strategic sense and would deliver value to our company and our shareholders.
We remain in excellent position for acquisitions, both financially and organizationally. As we have said before, in the event that we do not find acquisitions that increase shareholder value, we will consider returning monies to shareholders, either through increased share repurchases or dividends.
And as Mark will detail, we have increased our share repurchase expectations for the current year. [indiscernible] to announce the performance of the individual business units, I want to once again highlight the areas I've been focusing on as Chief Operating Officer and during the transition period.
As I mentioned in our Investor Day back in December, I focused on four key areas to drive the shareholder value: Firstly, collaborating to drive innovation for providers and manufacturers; secondly, increasing customer and supplier value; thirdly, expanding our business in targeted markets; and fourth, maximizing operating efficiency through cross-company collaboration. I believe that focusing on these key areas will enable us to continue to deliver value to our shareholders, and will position us well to take full advantage of the opportunities that lie ahead.
The large Part D provider customer contract signing that I mentioned earlier, is a very good example of how cross-company collaboration is leading to innovation, innovative solutions for our customers. Beginning in May, we will provide that customer with brand, generic and specialty pharmaceuticals, primarily for their mail order business.
Specialty products are becoming increasingly more important for all of our customers, and we believe the strength of our specialty value added services and the expertise we can provide to both manufacturers and healthcare providers give us a unique opportunities to provide tremendous value across the channel. Almost every discussion we have with the drug customer or potential customer, has a component of a specialty discussion to it and we believe our expertise and leadership in the specialty area is translating into an advantage on the core drug wholesale business.
AmerisourceBergen Drug Corporation delivered a strong quarter, including double-digit growth in our proprietary generics program, ProGeneric solutions. As Dave mentioned during the quarter, we named Dave Neu, President of ABDC [AmerisourceBergen Drug Corporation].
Dave Neu has been instrumental in leading several key projects in the drug company, has had a key role in our business transformation project and is currently working on projects that will improve operational and sales force productivity in an ERP-enabled environment, and will help ensure we capture the full value of a generic and other opportunities that lie ahead for our customers and for the drug company. I believe his commitment to customers, suppliers and associates, and his experience leading both sales and operational efforts will enable him to continue to drive value for all our stakeholders in 2011, 2012 and beyond.
We continue to be on track with the implementation of our business transformation project in the drug company, and we are preparing to convert our first distribution center to SAP this summer. Once the first conversion is complete, we will begin to convert the other distribution centers one at a time, and we expect to complete the whole process by the end of calendar 2012.
Moving on to our Specialty Group, our ability to capture value from large generics and Oncology Supply business continued in the quarter. While inventory of Oxaliplatin are winding down, and we will miss the outsized contributions it has made since its launch in August of 2009, we will continue to see contributions from gemcitabine, which launched in mid-November and docetaxel, which launched in mid-March through the remainder of the year.
Oxaliplatin will return to the market in August of 2012. To date, the benefits from gemcitabine and docetaxel have been in line with expectations.
We continue to maintain our market share in community oncologists and our Nucleus Solutions for physicians continues to gain traction. We do believe that patients are best served in a physician setting, and we work hard every day to provide physicians with the tools and information they need to run their practices efficiently and to receive adequate reimbursement from payers.
Most recently, our visit was over 400 of our largest oncology customers at our LPP, large practice program meeting, in Washington. I am always impressed with our customers' dedication to their profession and to their patients.
And I'm proud of the long tradition ABC has of providing value to that important segment, as they meet the daily challenges of the modern healthcare practitioner. For example, we gained significant traction with ABSG's marked half-point position portal during the quarter.
Marked half point is another example of collaboration across our business units, and one that creates an efficient system for managing oral prescriptions in community oncology practices, which also allows physicians to coordinate total patient care with better visibility to oral medication compliance and adherence. ASD, applied plasma, nephrology and vaccine distributor, performed well in the quarter, which was the first full quarter during which nephrology services were reimbursed under the new binding mechanism.
Our Consulting Services group also had excellent performance in the quarter as it continued to broaden the scope of the services they provide beyond specialty and biotech manufacturers to other branded and generic manufacturers as well. With close to 2,000 associates, our Consulting Services group remains a market and thought leader in helping manufacturers prove the value of their products and expand market access to those products.
Our expertise in reimbursement, patient compliance and adherence programs, comparative effectiveness and other data analytics helps improve patient access to drug therapies and helps ensure the efficient delivery of those therapies. The Packaging Group had a strong quarter, as they continue to expand their services to both branded and generic pharmaceutical manufacturers, providing state-of-the-art packaging for dry oral solids to injectables and commercialization and clinical trial support solutions.
Before I turn it over to Mike, I want to reiterate how excited I am about the future of our company and how much I'm looking forward to being its leader. We have a successful and disciplined business in a strong industry, and we have a wealth of very talented associates whose dedication to excellent performance is unmatched.
I am honored to lead our associates and I truly believe that our future together is very bright. Now here is Mike.
Michael Dicandilo
Thank you, Steve. And good morning, everyone.
Another outstanding quarter where solid execution and disciplined capital management in nearly all areas of our company met our expectations, and was accentuated by our extraordinary performance in the specialty generics area. This tremendous performance in Specialty enabled us to far exceed our original goals and led to an increase in our diluted EPS guidance for fiscal 2011.
I will spend some time detailing our performance in the specialty generics area, particularly the impact of Oxaliplatin, which was responsible for nearly all of our upside over expectations in the quarter. Also, while we are very pleased with our March 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.
While our fee-for-service agreements have mitigated much of our quarterly earnings variability from manufacturer price increases, the 10% or so of our brand name business that is still subject to the timing and magnitude of manufacturer price increases, continues to benefit the March quarter more than any other, and as usual, will normalize in the second half of the year. Now let's turn to the March quarter results, and starting with our top line, our revenue of $19.8 billion in the quarter was up 2.4%, in line with our expectations.
The drug company grew 4%, in line with our targets. And the Specialty Group was down 2%, in line with our guidance of flat to down 5% for that unit.
Drug company growth continues to be driven by the growth of some of our largest customers. And the Specialty top line continues to be impacted by the prior year loss of a large 3PL customer, the change in reimbursement methodology in the dialysis base and generic introductions, which have moderated top line growth, but provided a huge boost to our gross profit.
Gross profit of $687 million was up a robust 12% in the quarter and gross margins expanded by a sensational 31 basis points over last year. While the drug company had a solid March quarter with double-digit generic revenue growth and good performance on the fee-for-service side, the majority of our gross margin expansion came from the Specialty Group, and was driven by the 3 large specialty generics, Oxaliplatin, Gemcitabine, and to a lesser extent, Docetaxel, which was launched late in the quarter.
These 3 specialty generic drugs contributed approximately $0.16 to our EPS in the quarter, with over 70% of this current quarter contribution coming from Oxaliplatin. This compares to the $0.06 benefit provided solely by Oxaliplatin in the prior year March quarter.
For the six months ended March, these 3 drugs have contributed $0.22 to EPS with $0.16 of this benefit derived from Oxaliplatin. As a reminder, in fiscal '10, Oxaliplatin contributed $0.25 to our earnings and our original expectation for fiscal '11 was that the 3 specialty generics combined would contribute at least $0.25 to our fiscal '11 EPS.
Our current expectation is that these three specialty drugs will contribute between $0.36 and $0.40 to fiscal '11 earnings, which is directly responsible for our increased fiscal 2011 earnings per share guidance. As we mentioned earlier, Oxaliplatin inventory will run out in our third fiscal quarter.
And we expect that it will provide a benefit of $0.05 to $0.06 to our third quarter earnings, with 0 contribution in Q4. Looking ahead to fiscal '12 for a moment, with only a minimal benefit from Oxaliplatin expected in fiscal '12, after its relaunch in August of 2012, and with the post-launch moderation from the other 2 large specialty generic products.
Our early expectation is that the earnings contribution from these 3 products in fiscal '12 will be substantially less, most likely in the $0.10 to $0.15 range or down approximately $0.25 from fiscal 2011. The good news is that our early look at the oral solid patent expirations that will provide a boost to the drug company in fiscal '12, should substantially offset the gross profit decline in Specialty Generics and provide us a pathway for solid growth in fiscal '12.
As we all know, the patent expiration landscape is a very dynamic one, and we would expect to have significantly better information on our assessment of the fiscal '12 impact from generic introductions by the time we complete our fiscal '12 planning process and present our fiscal '12 guidance in early November, as usual. Before I leave gross profit, our LIFO charge for the March quarter was $13.5 million compared to $10.7 million last year, and for the six months was $23.4 million compared to $18.5 million last year.
The increases reflect the continued strong manufacturer price increase environment. And as a result, we can expect a full year LIFO charge to be in the $30 million range, similar to fiscal '10 and much higher than our original target of $15 million.
Operating expenses of $322 million in the quarter were up sequentially as expected, and increased 7% over the prior year with almost 1/2 of that increase relating to our cost of maintaining duplicate IT systems. And the remainder due to increases in incentive compensation and bad debt expenses.
For the six months, operating expenses were up 4%, and we continue to expect that operating expenses for the full year will grow less than our revenues. As a result of our gross profit increase, operating income increased an impressive 17%, and operating margins expanded by 24 basis points in the quarter.
With our increased guidance, we are now expecting operating margin expansion to be in the mid- to high-single digit basis point range for the year. Below operating income, net interest expense of $19 million was down 1% in the quarter, reflecting slightly higher interest income in the current quarter.
Our effective tax rate in the quarter was 38.1% compared to 37.9% last year, and we continue to expect our normalized effective rate to be closer to 38.4%. Our diluted EPS in the quarter of $0.77 increased by $0.14 or 22% compared to March of last year, and exceeded our 18% growth in net income due to the reduction in average diluted shares outstanding.
This share reduction resulted primarily from our share repurchase program, net of stock option exercises over the last 12 months and the dilutive effect of stock options. Average diluted shares in the quarter were $279.8 million and common shares outstanding at the end of the period were $273.7 million.
Now let's turn to our balance sheet and cash flows, which were outstanding in the quarter. Before I get into the numbers, I am pleased to announce that as expected, we have replaced both of our primary liquidity facilities that were scheduled to expire in 2011, with terms in line with our expectations.
In March, we completed a new 4-year $700 million revolving credit facility, replacing our then existing credit facility of similar size. And just today, we extended our $700 million receivable securitization facility for an additional 3 years.
These new facilities should provide us with ample liquidity to meet our working capital needs over the next few years. Turning back to the quarter.
We generated $676 million of cash from operations, bringing our six-month total to $577 million compared to $346 million for the first 6 months of last year. We continue to do an excellent job of managing inventory receivables and had some favorable payables timing as well at the end of the quarter.
Capital expenditures were $44 million in the quarter and $94 million for the six months, and based on our run rate and a pipeline of attractive internal projects, we’ll exceed our previous annual target of $150 million and we’ll probably be closer to $175 million. Despite the fact that we are ahead of our pace after six months, we continue to expect free cash flow to be in the $625 million to $700 million range for the year, but likely will be at the higher end.
Keep in mind that we do approximately $300 million of sales per day and timing of cash receipts and disbursements at quarter end can have a big impact on our quarter-to-quarter cash flow results. Average inventory days on hand during the quarter were 25 days, consistent with last year.
Average DSOs during the quarter of 17 days were the same as last year and average DPOs were down one day. Our gross debt to total debt and capital ratio at the end of March was 30%, in line with our target range of 30% to 35%.
We bought back $70 million of our shares during the quarter and have now bought back $255 million through the first half of the year. With our strong cash flow performance in our first 6 months, we are raising our guidance for full year share repurchases in fiscal '11 to $598 million, the entire amount we had remaining in authorizations from the board entering fiscal '11.
This is approximately a $200 million increase from our previous annual share repurchase assumption of $400 million. Our cash balance of $1.9 billion at the end of March leaves us with great financial flexibility as we move forward and even with the $200 million of additional stock buybacks by the end of the year, we should continue to have significant amounts of cash to deploy in excess of the $500 million or so we need to run our day-to-day business.
Now moving to guidance. Reflecting our out-performance from specialty generics in the March quarter, we are raising our diluted EPS guidance to a range of $2.41 to $2.49 per share from our previous range of $2.31 to $2.41 per share.
This new guidance continues to assume revenue growth of 2% to 4%, reflects increased operating margin expansion, which is now expected to be in the mid- to high single-digit basis point range, free cash flow at the high end of our $625 million to $700 million range and an increase in share repurchases, which are now expected to be $598 million for the year. In addition, with remaining Oxaliplatin inventory expected to be depleted in our fiscal third quarter, we would expect the total contribution from specialty generics to be significantly greater in our fiscal third quarter than in our fiscal fourth quarter of 2011.
To summarize, our new fiscal 2011 guidance range reflects GAAP EPS growth of between 9% and 12%, despite a 3% headwind from prior year litigation gains and significant duplicate IT costs as we transition to our new ERP system. So another great quarter in a series of great quarters.
And we continue to be excited about our positioning in the marketplace, the dedication and the enthusiasm of our associates, and our ability to execute in a dynamic industry. Here is Barbara for Q&A.
Barbara Brungess
Thank you, Mike. We will now open the call to questions.
[Operator Instructions] Please go ahead, Amy.
Operator
[Operator Instructions] Our first question comes from Robert Jones with Goldman Sachs.
Robert Jones - Goldman Sachs Group Inc.
You guys called out generic Oxaliplatin as a big contributor in the quarter, given this is supposed to be a period of bleeding inventory, how does this beat your expectations? Maybe if you could give us a little color around pricing and who still has supply left around that product, that'd be helpful.
Steven Collis
I'll start off, and then go to Mike. This is Steve Collis, you should know about the accent.
But the biggest factor here was that there is limited inventory in the markets, and we obviously are a big participant in the market, as well as the large increase in the ASD price, and I think 92% or 94% increase in the quarter. And that's really what drove it.
Mike, any additional color?
Michael Dicandilo
Yes. Certainly that increase the ASD, Robert, gave us an ability to maintain pretty significant margins while providing great benefits to our physician customers as well.
So it's really more the pricing, and as I said, we continue to have some remaining inventory that will provide a $0.05 to $0.06 benefit in Q3. It's roughly enough inventory to cover us halfway through the quarter or so.
Robert Jones - Goldman Sachs Group Inc.
That's helpful. And I guess, just one more on the Specialty, if we think about the generic Taxotere launch, I was wondering if you could characterize how that launch has gone so far, relative to your expectations?
And then I guess, looking forward, if you could share with us your expectations for this product for the balance of the year, specifically in terms of the competitive landscape at pricing?
Steven Collis
I think we gave you some pretty detailed guidance on what specialty generics could mean to us in the back half of the year, but really everything has gone pretty much as expected. It was not an at-risk launch as Oxaliplatin was and really pretty much as expected.
Operator
Our next question is from Larry Marsh with Barclays Capital.
Lawrence Marsh - Barclays Capital
So I just wanted to -- my follow-up question, I'll start with first, and then I have a bigger picture question, the follow-up then is for Mike. And that is, it seems like you're saying the generic specialty expectations for this year, $0.36 to $0.40 versus your prior, at least $0.25, so that's up $0.11 to $0.14.
Your overall guidance is up $0.08 to $0.10. I know some of that is offset with a higher LIFO charge, was anything else specifically that you called out to reconcile the differences?
Michael Dicandilo
No, I think, Larry, keep in mind that we said at least $0.25. And our internal expectations, obviously, when we were doing a little bit better most likely in the high $0.20s.
So I think the way we look at it is the expectation's up around the $0.10 or so and that's right in line with our guidance raise. And that's despite the fact that LIFO, our expectation is a charge is going to increase by about $15 million or so or $0.03 from our expectations.
So I think they're very much aligned.
Lawrence Marsh - Barclays Capital
Good picture [ph] there. Okay, that sounds right.
And consistent with that, I think you've always said Oxaliplatin has been somewhat unique in the market because of at-risk launch, obviously, you were very aggressive early on and now it's come back. So I guess your message around Taxotere is -- it's consistent with your expectations, but clearly from a margin standpoint, it's hard to match -- hard to nearly match the Oxaliplatin contributions last year.
Is that right?
Michael Dicandilo
Hard to match the contribution and hard to match the duration of the benefit, which was extended, of course, that's specific to Oxaliplatin’s situation.
Lawrence Marsh - Barclays Capital
And another question is really on the Med D [Medicare Part D] provider that you disclosed previously. And I know Steve, one of the things you'd said is part of the value proposition that is resonating more in the marketplace as a combination of your ability to drive value in generics and brand, along with specialty.
Can you elaborate a little bit, you're now buying the brand specialty and the generics, I guess, for this customer. Despite the fact that in the marketplace you think that they would be going direct on some of these products.
What's changing the mindset? And could you see other larger customers do the same thing in the future?
Steven Collis
Well, we're not buying it, we're distributing it to them, Larry. But of course, I think specialty, of course, manufacturers typically go to a much smaller amount of distributors.
There are not that many qualified distributors. We certainly have the bandwidth and the footprint there.
And we also have a lot of knowledge, not only about distribution, but our Services business really differentiates us and complements us. We use the term in the transcript “thought leader,” and it's very apropos because that is what we are and we get recognized on that.
Just about every large drug company wholesale customer is interested in more access and more patient throughput of the specialty product. So that clearly is becoming a competitive advantage, and it's definitely -- we lead often with those discussions with RFPs.
Operator
Our next question is from Robert Willoughby with Bank of America.
Robert Willoughby
Steve or Mike, despite the advent of generics over the years, we have your gross margin that's basically fallen since 2003 or fallen or flat, I guess, despite some generic launches. And really in 2010, only up as a matter of the specialty and less the oral solid.
So I guess, why shouldn't I be a bit more pessimistic about the margin prospects going forward? But conversely, from a balance sheet perspective, why shouldn't we be a bit more optimistic about the cash flow opportunity on lower working capital going forward?
Michael Dicandilo
Well, Bob, I would really point you to operating margin expansion because there's a lot of other factors that go into gross profit including the growth of some of your largest customers and your mix of business and the like. But I think the most impressive thing is for us, we've expanded our operating margin really since the advent of fee-for-service, at least 5 basis points each of the last 5 years.
And despite increasing our EPS 31% last year and increasing our operating margin in the high teens, we're doing it once again, I think that's the power of generics and the power of our model. And I think that has also turned into part of the cash flow story as well.
Our goal for cash flows have been that our free cash flow approximates our net income. And you can only do that in an environment where you can grow revenues and keep working capital neutral, which is hard to do.
And we've been able to do that and we've actually -- our free cash flow has actually exceeded our net income for each of the last several years. So I think we're very pleased with the impact that generics have had both on our operating results and on our cash flow.
Robert Willoughby
Can we see working capital actually fall over 2012, 2013 time frame or just not possible?
Michael Dicandilo
Well, we always hope to have modest improvements. And I think we're going to continue to do that.
Certainly what generics do give us is a little bit more influence with the manufacturers, and we continue to get slightly better terms on generics, than we get with brand names, and hopefully, we can turn that to our advantage. I think we've got to keep in perspective, that even though the generics continue to be the majority of the prescriptions, the dollars continue to be very much weighted towards the brand name products.
Steven Collis
Of course, the larger customers pay quicker. So it just depends on how the mixes come out in the future.
So larger customers tend to pay quicker.
Operator
Our next question is from Lisa Gill with JPMorgan.
Lisa Gill - JP Morgan Chase & Co
As we listened to Hospira the other day, they talked about sales of generic Taxotere being higher than their expectations. Can you talk about whether any purchasing opportunities in the quarter, where maybe you're still seeing it in your inventory?
So that would be my first question. And then secondly, just around acquisitions.
Historically, being in that $200 million to $300 million, I think, Steve, you made the comment today that the company would be willing to look at larger acquisitions. But if we think about the consolidation of the industry and the narrow focus that you have, I don't really see a lot that would be above that $200 million, $300 million if you don't move outside the U.S.
So my question is, are you contemplating or would you contemplate an acquisition on the international side?
Steven Collis
I'll start off with the international acquisitions, and Dave and I, actually, I took over Dave's board seat at IPW and we also had a group of European wholesalers visit us recently. So we do have a lot of dialogue with international wholesalers.
What is surprising is how much better our business is than theirs. It really is sobering.
First of all, just one thing I'll point to, which is very, very glaring, is the difference in relationship with the manufacturers. If you don't have the sort of trust that we have in our business, it's hard to do these reimbursement programs, it's hard to do the adherence programs, it's hard to have these intricate fee-for-service agreements.
So it's just very, very different, and we would really like to fund synergies and acquisitions and we don't really see those on the international side. On your first question -- your second question about the docetaxel, it was a typical launch.
We might have ordered a little bit more inventory than we would in any course of business, but nothing exceptional. And we're happy with the demand for docetaxel.
And our customers are ordering as expected. Mike, you're closer to that, you want to?
Michael Dicandilo
Yes, nothing -- I would just agree with Steve. Nothing unusual or normal load up for our new product introduction and everything seems to be going very much according to plan.
Lisa Gill - JP Morgan Chase & Co
And then Mike, if I can just ask a follow-up, just around ASP when you talked about it as it pertains to Oxaliplatin earlier. Should we just understand that you're not directly reimbursed, right?
It's the physician practice that's reimbursed, it just offers you the opportunity to have a little more flexibility around price, when no reimbursement rates are higher, is that the correct way to think about it?
Michael Dicandilo
That's exactly right, Lisa.
Operator
Our next question is from Glen Santangelo with Crédit Suisse.
Glen Santangelo - Crédit Suisse AG
I just have 2 quick ones. Mike, I just want to make sure I understood all your guidance correctly, you sort of suggested that the fiscal '11 Specialty contribution would be $0.36 to $0.40 and then in '12, that falls to $0.10 to $0.15, with a net difference of a headwind of about $0.25.
So you sort of suggested that the generic launches in fiscal '12 and the clip kind of lines up neatly with your fiscal year, that incremental contribution you think is at least $0.25? Is that sort of what you're suggesting?
Michael Dicandilo
Yes, I think generally, Glen, that's the message we're trying to give, is that we will have a substantial offset. It's obviously, very early and there's a lot of time between now and the beginning of the year.
But I think, our early look is that we should have a substantial offset to the specialty headwind with the oral generic, oral solid generic side in the drug company. And the only caution I would give to that is, obviously, the higher we go in our range in 2011 and particularly, if we're high due to the items that are nonrecurring in '12, the harder it is to add on top of that growth rate.
But I think, our early look is we look -- we see a great offset, and we see a nice growth here in '12.
Glen Santangelo - Crédit Suisse AG
Okay. And then maybe if I could just ask one follow-up along that.
I mean, clearly the contribution from the specialty generics is nice, but could you maybe talk about what you're seeing in terms of the profit trends on your base generics business? There's been a lot of talk, obviously, around the pricing around generics.
And so you're sort of suggesting that the increase in the guidance this quarter was solely attributable to the increase in Specialty. So could you maybe focus your comments a little bit on the traditional generics business and what you're seeing there?
Michael Dicandilo
Yes, I think it was a very solid performance with our traditional oral solid generic business. We did have a slight uptick in launches year-over-year in the quarter, which helped us out.
And that's something we had expected based upon the calendar for this particular quarter. We continue to see a bit of generic price increases, again, not overly material to us, but a nice little incremental benefit.
And as I've said, the circumstances that caused some of those price increases are still out there, and we may see some of those in the future. They're obviously pretty hard to predict.
But I think, the way I would characterize it is very solid performance. Very much in line with what we expected.
Operator
Tom Gallucci with Lazard Capital Markets.
Thomas Gallucci - Lazard Capital Markets LLC
I guess, first question was just around buybacks versus acquisitions, doesn't sound like international is all that attractive in your view. You've talked about being open to acquisitions as you guys always do, but you did increase the buyback expectations for the year.
So should we -- I guess, just conceptually be thinking, that acquisitions are, sort of, a longer-term thing on the radar screen as opposed to there being anything unusually imminent there?
Steven Collis
No, we're always very active. We're always having ongoing discussions, and we don't have any acquisitions in our guidance as we said.
But we remain active and we do see opportunities, particularly in the specialty distributors and service providers. Mike, anything?
Michael Dicandilo
Yes, Tom, I think we said this from very early in the year, to the extent that our cash flow expectations or cash flow met our expectations, and we didn't spend an unusual amount on acquisitions. We would have the ability to upsize our share repurchase.
So I think what we've done is just very much in line with that. But as Steve said, doesn't change our view on acquisitions.
And the fact that is we continue to be very active in a corporate development perspective, looking for things that would add value to our shareholders, but in the meantime, if they're not there, we'll periodically return monies through share repurchase.
Thomas Gallucci - Lazard Capital Markets LLC
So you felt good about the balance sheet, I guess and your flexibility to do deals even with a little bigger buyback?
Michael Dicandilo
Exactly.
Thomas Gallucci - Lazard Capital Markets LLC
Okay, good. And then just my follow-up was on the SAP conversion.
Can you just sort of remind us about how the benefits roll in? And maybe, ultimately, the cost savings that you're expecting?
Or I guess the elimination of also [ph] redundant costs along the way?
Michael Dicandilo
Tom, coming into this year, and really starting the fourth quarter of last year, we mentioned that we would have $10 million of incremental costs per quarter, continuing through the end of calendar '12. At the end of calendar '12, we expected to be complete with our customer and distribution center implementations of the new system, and at that point, we'll really start to be able to unhook the old system and start to capture some of those duplicate costs that we were spending up until that point, it may not be day one, it may take a little bit of time in fiscal '13.
But we'll certainly start to realize those savings during that time period. And certainly, one of the reasons we put the new system in was just not to avoid the duplicate costs, but to improve our processes, improve our customer experience and -- putting in the system, we think, gives us somewhat of a competitive advantage.
So I think we'll hopefully realize some of those benefits as well.
R. Yost
And Tom, just to refresh your memory, Steve mentioned we're right on schedule. We've gotten the -- we're doing the back office now in the new system, and as Steve mentioned this summer, we'll rollout the first so AC.
So we're steady as she goes in that schedule.
Operator
Our next question is from Steven Valiquette with UBS.
Steven Valiquette - UBS Investment Bank
So Mike, you made it pretty easy, given all the color on the specialty generics, I think we definitely all appreciate that. My additional question tied into that, that haven't been asked yet is that, as far as the fiscal '12, the $0.10 to $0.15 in the specialty for next fiscal year, you should probably just assume you've taken a conservative stance in that regard, would you assume maybe the full multisource generic markets for generic Gemzar and Taxotere, in particular, but then maybe there could be an upside if we see fewer manufacturers in those markets, is that kind of a way to think about that?
Michael Dicandilo
Yes, I think that's right. I think we assume a handful of manufacturers with each product.
And some of the benefits from the reimbursement start to kick in after 6 months or so. So I think both of those will contribute to that moderation in fiscal '12.
Steven Valiquette - UBS Investment Bank
Okay. And then just real quick, just on the -- you talked about some price increases tied to generic supply disruptions helping you a little bit, but just kind of curious again, I mean, how would you characterize that for the current environment, March quarter versus let's say a year ago?
Is that helping you materially? Or is it about the same year-over-year, just trying to get a sense for generic supply disruption activity the way you see it?
Michael Dicandilo
I'd say the price increase has been a slight benefit. Year-over-year, there's definitely a lot of issues that are out there.
I think we try do the best job for our customers. And our broad sourcing philosophy certainly helps us to do that.
But when there's just not any product out there, there's sometimes very little that we can do. And that's been evident lately.
It was evident at some point last year as well. And I'd say, it's a slight benefit overall this year.
Operator
Our next question is from Helene Wolk with Sanford Bernstein.
Helene Wolk - Sanford C. Bernstein & Co., Inc.
Just a quick question around competitive dynamics and whether you're seeing any changes in the marketplace following the Kinray and U.S. Oncology acquisitions?
Steven Collis
Helene, firstly on the U.S. Oncology, we have definitively maintained our market share.
We have some dialogue going on with some McKesson customers that don't necessarily want to be associated with U.S. Oncology, but nothing remarkable, it's really steady as she goes and we are absolutely maintaining our market share and we really very much focused on the service side and looking at the value add we can give to oncologists.
On the Kinray side, and obviously if you will listen to the earlier call, we continue to believe that this is an opportunity for us. We have been and always have -- we've been active in the New York market for a while, and we've added a few customers.
And we continue to believe that there's an opportunity for us.
Helene Wolk - Sanford C. Bernstein & Co., Inc.
Great. And then just a question for Mike, around the pattern of operating expenses.
I know you gave us some good clear guidance around sort of what we should expect for the full year, any thought or advice on how it plays out between the quarters?
Michael Dicandilo
Yes, I think you'll see, you should see a slight increase sequentially in the third quarter and the fourth quarter, Helene. In the third quarter, we put through our annual merit increases.
In the fourth quarter, we run our customer trade show, which just adds several million dollars to the expense in the fourth quarter. So slight upticks in the second half of the year.
Operator
Our next question is from Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley
Just a couple of questions. First of all on the operating margin progression, you talked about operating margins up mid- to high-single digits this year.
When we think about fiscal year '12, do you expect a greater improvement in operating margins next year? If growth from new generics with exclusivity is more than offset, kind of like the smaller specialty contribution that you've talked about?
Michael Dicandilo
Well, Ricky, I think you're going to see a year next year were top lines are going to be pretty, pretty flat and could be slightly down, depending upon the timing of some of the launches and I think that implies that you're going to have to grow your EBIT through margin expansion. And I'd say, that would be our goal at this point.
R. Yost
I think the other thing Ricky is, as you look at '12, I mean you got to put in perspective where we've been in '10, '11 and then '12. Our '10 was huge.
We were up -- our EPS was up 31% that year, we followed it up now with another strong year. So you've got to put those years in comparison as you're -- in perspective as you're looking at our '12 and '13 and beyond.
Ricky Goldwasser - Morgan Stanley
Okay. And just on the generic, I'm not sure if you gave the data point, but what was the growth for your generic business?
Steven Collis
Mid-teens growth.
Operator
Our next question is from George Hill with Citigroup.
George Hill - Citigroup Inc
To follow up on Lisa's question earlier, it's very early, but as you start to see changes in the specialty delivery model, especially in cancer as some of these drugs are carved out in the medical benefit and trying to be carved into the pharmacy benefit, do you see any risk there or any exposure there to what your reimbursement rate look like and profitability in that space?
Steven Collis
As I've said, we do have progress for all the drugs but our bet is with the physician. And we are really focused on the physician in helping maintain those drugs through the physician delivery system.
George Hill - Citigroup Inc
Okay. And then a quick follow-up on M&A, while it doesn't sound like -- international sounds kind of quiet, are you guys seeing an opportunity in unit-dose packaging?
And are you seeing an increased demand for those services from your provider customers? And is that something that you guys are looking at?
Steven Collis
Yes, we have a business that does that. We believe we're one of the largest players in that space and certainly the business is doing very well, and is slightly ahead of expectations.
But still relatively small within the $25 billion, $20 billion that we do, roughly in the quarter, so.
Operator
Our last question comes from A.J. Rice with Susquehanna.
Unknown Analyst -
This is Brandon [ph] for AJ. I guess the last question here would be, branded drug price inflation.
What were your expectations coming into the year? And have price increases so far this year been a little better than what you've been looking for?
Michael Dicandilo
Brandon, this is Mike. Yes, they certainly have.
I mean we have had brand price inflation that has been an excess of 8%. Each of our last two fiscal years and our expectation was that, that was going to moderate some, maybe in the 5% to 6% range.
But I think halfway through the year, it certainly seems that the greater than 8% mark is going to hold. And certainly that seems to be driven, particularly by some of the larger drugs that are going to go off of patent.
So it's been a pretty robust first half.
Barbara Brungess
And now Dave would like to make some final comments.
R. Yost
I just want to thank you again for joining us and for your interest in ABC. We continue to be very bullish on our industry and the position that we've got in that industry.
We just reported a strong quarter in a series of strong quarters and raised guidance on a year that followed a year that had a 31% increase in GAAP EPS. So there's lots to like about ABC.
This is my 56th and final quarter I will report as CEO, and I'm happy to be waltzing out the door on a very high note and with the prospects of the company being so bright. There's absolutely no doubt in my mind that ABC will continue to prosper under Steve's leadership.
And yes, that ABC circle of life will just continue to get better and better. Thank you for the support you've given ABC over the years that I have been associated with it, and thank you very much for the support you've given me over the last 56 years -- last 56 quarters.
Though sometimes, it seemed like 56 years, but it's actually 56 quarters. All things considered, it's been a great ride, so thank you very much.
Barb?
Barbara Brungess
Thanks, Dave. And before we go, I just like to highlight two upcoming events.
On May 11, we'll be attending the Bank of America Merrill Lynch Healthcare Conference in Las Vegas and on June 8, we'll be attending the Goldman Sachs Healthcare Conference in Rancho Palo Verde California. Thank you all very much.
Operator
Thank you for participating in today's conference. You may disconnect at this time.