Oct 30, 2014
Executives
Barbara A. Brungess - Vice President of Corporate & Investor Relations Steven H.
Collis - Chief Executive Officer, President, Director and Member of Executive Committee Tim G. Guttman - Chief Financial Officer, Principal Accounting Officer and Senior Vice President
Analysts
Glen J. Santangelo - Crédit Suisse AG, Research Division Robert P.
Jones - Goldman Sachs Group Inc., Research Division Ricky Goldwasser - Morgan Stanley, Research Division Robert M. Willoughby - BofA Merrill Lynch, Research Division Eric Percher - Barclays Capital, Research Division Garen Sarafian - Citigroup Inc, Research Division Lisa C.
Gill - JP Morgan Chase & Co, Research Division
Operator
Ladies and gentlemen, thank you for standing by, and welcome to the ABC Fourth Quarter Earnings Call. [Operator Instructions] As a reminder, today's call is being recorded.
I'll turn the conference now over to Ms. Barbara Brungess.
Please go ahead.
Barbara A. Brungess
Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fiscal 2014 fourth quarter and fiscal year-end. I am Barbara Brungess, Vice President, Corporate and Investor Relations.
And joining me today are Steve Collis, AmerisourceBergen President and CEO; Tim Guttman, Senior 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 a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2013 as well as our quarterly filings for fiscal 2014.
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 Steve Collis to begin our comments.
Steven H. Collis
Thanks, Barbara, and good morning, everyone. I'm very proud of the results that we are presenting today, and I commend our exceptional associates for the stellar financial and operational performance we reported this year.
Over the last few years, we have examined our industry with fresh eyes, and we have taken bold steps to enhance the role of the wholesaler in the marketplace. The unique knowledge and expertise we have developed, our partnership philosophy and our increasingly global reach, enable us to influence and shape health care delivery by providing innovative solutions for both pharmaceutical manufacturers and health care providers.
By working creatively to address the current challenges in health care, we seek to drive value for all of our stakeholders, and I believe we have accomplished all of that and then some in our fiscal year 2014. In financial terms, we exceeded all of our objectives.
Our revenues for the full year were up 36%. Our adjusted earnings per share were up 24%, and we generated free cash flow of $1.2 billion.
We made substantial investments in our infrastructure, acquired a minority stake in Profarma in Brazil, invested in a specialty joint venture with Profarma, successfully refinanced some of our long-term debt and taking both of our share repurchase programs together, we bought back almost $800 billion -- $800 million of our stock. As a result of our financial stewardship, we enter fiscal 2015 with tremendous financial flexibility.
Our execution was equally strong from an operational perspective. We successfully implemented one of the largest and most complex contracts in the history of the industry ahead of schedule.
We opened a new state-of-the-art pharmaceutical distribution center in Florida and expanded and augmented several other facilities, all while improving service levels to all our customers. Furthermore, we have enhanced our relationships with suppliers through the introduction of new solutions and through our participation in the Swiss procurement joint venture.
Fiscal year 2014 was a transformational year for AmerisourceBergen. We substantially strengthened our core business, and we head into the coming year with excellent momentum.
Over the last year, our entire industry has transformed itself in an effort to better address the changing needs of the health care landscape. Wholesalers continue to demonstrate that the value we provide to the channel goes well beyond the aggregation of demand and the logistics of getting products from one point to another safely and securely.
We help ensure efficient pharmaceutical care and broad access to products, while allowing our customers to focus on caring for their patients. It is an exciting time to be in the pharmaceutical services industry.
Organic growth rates in the U.S. pharmaceutical market are improving, driven by better economic conditions, health reform initiatives and successful launches of new brand products.
Some of those of new products have the ability to cure previously intractable disease. The R&D pipeline is full of innovative products that hold a potential to make great strides across many disease states.
The combination of an advanced therapeutic medicine and expanding access to health care drives growth opportunities and more importantly, meaningfully improves patient lives. AmerisourceBergen is uniquely positioned to help ensure these products get to market as efficiently as possible and to support efforts to ensure patients have access to these complex new therapy across all sites of care.
Let's turn now to the performance of AmerisourceBergen. Our performance in the September quarter was exceptional in a year that has been quite strong.
On a consolidated basis, our revenues were up 29% and our adjusted EPS was up 36%, driven by strong performance across our businesses and tremendous performance specifically in ABDC. Our working capital trend improved, and we finished the quarter and the year with $1.8 billion of cash on our balance sheet.
Tim will provide further details, but I want to call out some highlights from our business units. With each passing year, our individual business units become less distinct from one another and instead focus their efforts on collaboratively meeting the needs of suppliers and customers.
This is especially true in the specialty area, and our oncology service line offering is a good example of the power of drug company, Specialty Group and our manufacturer services businesses working together. The different perspectives and expertise they each bring to the table creates unique opportunities to deliver value in a fast-changing market, and our suppliers and customers appreciate the ability to achieve a comprehensive solution with AmerisourceBergen.
The strength of our results in fiscal 2014 is no doubt a benefit of that collaborative approach. AmerisourceBergen Drug Corporation, of course, had a very strong quarter.
Revenues were up over 30% even as we anniversary-ed 1 month of the new Walgreens brand business. Solid organic market growth and a contribution from the sale of the new hepatitis C drugs also contributed to ABDC's revenue growth.
We brought our new Orlando distribution center online, launched 2 new customer centers and we finished the onboarding of all of Walgreens' generics business. I commend our ABDC associates for the incredible job they did while implementing the largest contract in our history.
It was quite an undertaking, and to have done so ahead of schedule and on budget was laudable. But it was also done in a manner that was not disruptive to our other customers or to the rest of our business.
So I truly applaud and appreciate their efforts. We are also pleased with the progress we have made improving our generic sourcing by working with Walgreens, Alliance Boots and the Swiss joint -- JV.
These financial benefits were also achieved ahead of schedule and contributed to our September quarter and will continue to ramp as we enter our fiscal 2015. In addition to the new business that we have brought on, new products launched on our generic private label program, BluePoint, also contributed to our growth.
A few overall market trends contributed to our growth as well. Brand price inflation remained strong.
The new hepatitis C drugs contributed to both revenue and gross profit dollar growth. Generic price inflation is still an important factor.
It was roughly flat on both a sequential and year-over-year basis for the quarter. And finally, market growth is improving across the board, which drove strong performance in our independents, health systems and alternate site customers.
One of the benefits of partnering with AmerisourceBergen is that we work hard to ensure all of our customers have access to the latest life-changing therapies. Whether you are an independent who is qualified to handle sophisticated specialty products or a hospital on the cutting edge of care, our extensive relationships with biotech and other manufacturers helps ensure our customers and their patients have access to these important products.
2014 was a momentous year for ABDC, and the investments we've made in our people and in our infrastructure will help drive both innovative services and greater operational efficiency going forward. ABSG had solid results in the quarter as strong performance in our plasma and vaccine business offset modest performance in our community oncology business.
While reimbursement issues persist for community oncologists, we believe the provider market has stabilized. We believe that oncology care will continue to be provided across various venues, and we continue to invest in new technology and services to ensure that our customers remain in the forefront of the evolution of cancer care.
Our manufacturer services businesses performed well in the quarter, with World Courier coming in especially strong. The unrivaled service offerings in this area are a key driver of value for both our manufacturer and provider customers.
The expertise we bring to bear in the regulatory, compliance and policy area, along with our experience in developing patient adherence, reimbursement and assistance programs, is a clear differentiator. The knowledge base, combined with the immense scale of our distribution businesses and our increasingly global reach, make us the ideal partner for those who don't just want to tackle current challenges but see greater opportunities on the horizon.
One of the most gratifying things about the performance we had in fiscal 2014 is that we meaningfully expanded our ability to shape health care delivery and to positively impact the communities we serve. We have the means not only to continue to make important investments in our business, but also to launch and fund the AmerisourceBergen Foundation.
This new foundation will primarily support 501(c)(3) organizations that address the needs of the patients we serve. We will formally launch the foundation over the next few months.
From a business operations perspective, we have launched AmerisourceBergen Global Manufacturer Services GmbH in Bern, Switzerland or AmerisourceBergen Switzerland, a new entity that represents an important step to support global manufacturer relations and our commercialization strategy. Peyton Howell, our President of Global Supply Chain and Manufacturer Services, has moved to Bern, and she and her team are developing and implementing the next generation of commercialization services for pharmaceutical manufacturers.
With the dramatic changes in the pharmaceutical manufacturer landscape, AmerisourceBergen Switzerland is positioned to function as an intermediary of all types of pharmaceutical manufacturers, fostering strategic relationships and focusing on specific new value-added activities. This new business will provide data analytics and market intelligence to insist manufacturers -- to assist manufacturers with their supply chain effectiveness and will serve as a platform to manage and grow ProGenerics, our proprietary generics formulary, and other global generic programs.
ABC Swiss co represents a critical step in the process of expanding on international presence while improving the services we offer our partners. As we have previously disclosed, we are nearing the completion of our national distribution center in Columbus, Ohio and expect it to be fully operational by the end of the calendar year.
This new facility will streamline certain branded manufacturer contracts by providing a single ship-to point for products for manufacturers who wish to utilize the service. Through integration with our SAP infrastructure and other advanced warehouse management and materials handling tools, it also enables us to redistribute products within our network more efficiently and support our future growth.
Looking ahead to fiscal 2015 and beyond, we are well positioned to continue to deliver on our long-term goals. We aim to grow revenues with the markets, grow adjusted EPS in the mid-teens, earn a return on invested capital that exceeds our weighted average cost of capital, generate free cash flow that exceeds net income and return a minimum of 30% of our free cash flow to shareholders.
We will continue to be excellent stewards of capital and redeploy it wisely to both grow our business and enhance shareholder returns. We have a strong track record of investing in assets and internal projects that add value to our business and improve our service offering to manufacturers and providers.
We will continue to expand those efforts, both in the U.S. market and internationally.
We remain keenly focused on the pharmaceutical services space, which we believe has excellent opportunities for growth in the years ahead and ample opportunities for AmerisourceBergen to continue to differentiate itself. Turning to fiscal 2015 specifically.
We expect the strong trends in overall market growth to continue, while trends in certain specific areas will moderate. We expect the contribution from generic inflation to be flat year-over-year and for community oncology to be relatively flat for the year.
Operating margins will be pressured as we launch Swiss co and the national distribution center. And similar to 2014, the fast-growing hepatitis C products will contribute gross profit dollars but at a lower margin.
We will, of course, continue to benefit from having a full year of the generic business from Walgreens, and the benefits from the Swiss procurement JV will continue to ramp into fiscal 2015. Tim will provide greater detail, but in summary, on a consolidated basis, we expect revenue growth in the range of 7% to 8%; we expect adjusted diluted earnings per share from continued operations growth in the range of 10% to 13%; free cash flow generation in the range of $1.04 -- $1.4 billion to $1.7 billion; and including both of our share repurchase programs, we expect to purchase $800 million of our shares.
Following our stellar performance in fiscal 2014, we enter 2015 with good momentum, and we are exceptionally well-positioned to meet our financial and operational objectives going forward. One final word about fiscal 2014.
As I look back over the year, I'm of course, pleased with our outstanding financial and operational performance. I'm even more pleased, however, with how we achieved it.
Through bold thinking and unmatched execution, we established unprecedented ways to create value for all of our stakeholders. We have great partners in Walgreens and Alliance Boots, and our innovative long-term strategic relationship has driven tremendous value for all 3 partners, with more to come in the years ahead.
Our success in these areas gives me great confidence that we will continue to make vital and differentiated contributions to the marketplace and thereby provide excellent returns to our shareholders while continuing to provide increasing value to our customers. Now here is Tim.
Tim G. Guttman
Thanks, Steve. Good morning, everyone, and thank you for joining us today.
As Steve mentioned, we wrapped up a historic year at ABC as our organization successfully onboarded our largest customer, Walgreens. We are very proud of our organization as we outperformed all of our key financial targets we established at the beginning of the year.
We did this while managing through significant change, including heavy investing in our infrastructure. Even more important, we did this without negatively impacting our customer service levels.
Again, we want to thank the ABC organization for all of the extra effort made this year. Before I start my detailed review, let me cover a few high-level comments.
My remarks this morning will focus on our adjusted results from continuing operations. In our press release, we included a reconciling table between GAAP and adjusted results, where we've highlighted the specific items that we excluded.
We will cover 2 of these excluded items as I work through recapping our September results. Please note that all financial comparisons are for the fourth quarter ended September 2014 compared to the same period of the prior fiscal year, unless otherwise noted.
I have 3 main items to cover this morning. First, I will recap fourth quarter consolidated and segment performance.
Next, I'll spend a few minutes on our full year performance. The third item, I will wrap up my prepared comments, covering our fiscal '15 expectations.
With that, let's start the detailed September quarter review. Beginning with the top line.
Revenues were $31.6 billion, up 29%. Our Pharmaceutical Distribution segment was responsible for the strong overall revenue growth, consistent with the prior 3 quarters.
Excluding the Walgreens growth, our consolidated revenues increased nearly 9%. Roughly 2/3 of this revenue growth was the result of the new hepatitis C brand drugs.
The quarter's adjusted gross profit increased 29% to $927 million. The growth was due to strong performance at our Pharmaceutical Distribution segment, driven by better-than-expected revenue growth on both the brand and generic side.
Operating expenses. Consistent with previous quarters, this fiscal year, we had an increase in expense to support the onboarding of the Walgreens business at our Pharmaceutical Distribution segment.
Additionally, we had an increase in employee incentive compensation due to our outperformance. We also expensed the initial contribution made to establish an ABC tax-exempt charitable foundation.
Because of these specific items and the normal seasonality of the September quarter having higher expenses, our total operating expenses increased 27% to $503 million. Operating income.
Our adjusted operating income was $424 million, up $98 million or a very strong 30%. This quarter marked the highest growth of the fiscal year.
Our adjusted operating margin was 1.34%, up 1 basis point. Moving below the operating income line.
Interest expense net was about $15.5 million, down about 17%, mostly due to refinancing a portion of our debt that we completed back in May. Income taxes.
Our adjusted income tax rate was 37.5% for the current quarter. This brought us right in line at 38% for the full year.
For the quarter, our adjusted diluted EPS from continuing operations increased 36% to $1.10, driven by exceptionally strong organic operating income growth. Our adjusted diluted share count was 231 million shares, down about 2%.
It's important to highlight that this share count excludes both the impact from shares repurchased under our special share authorization and the dilutive impact of the warrants. I would refer you to our press release where we have included a new reconciling table that highlights the calculation of our adjusted diluted share count.
Let me switch and cover our 2 large GAAP items, warrants and LIFO. Warrants.
The fair value of the warrants increased to approximately $1.1 billion as of September 30. This resulted in a warrant expense in the quarter of $156 million.
Both of these amounts increased as a result of ABC's higher share price at September 30 compared to June 30. LIFO.
This quarter, we completed our annual LIFO calculation. Consequently, we recorded LIFO expense of about $54 million, to reach a full year LIFO expense of $348 million, which is higher than last year.
Brand price inflation at just under 12% and inventory mix are typically key drivers of our annual LIFO expense. However, this year, we did not have the same level of generic drug deflation we had in prior -- in the prior fiscal year due to the pricing environment as well as the lack of drugs coming off of exclusivity.
These 2 factors contributed to our year-over-year LIFO expense increase. Let's move forward and discuss our segment results, starting with Pharmaceutical Distribution.
Total segment revenues were about $31 billion, up 29%. As mentioned earlier by Steve, drug company led the way with a 33% revenue increase.
In the quarter, we anniversary-ed the start of the Walgreens contract. Consequently, we only had 2 months of incremental brand revenues in addition to the new generics business.
Our revenues in our core drug business continue to be better than expected, driven primarily by 3 items: increased sales to our largest customer, the new -- the 2 new hepatitis C brand drugs and the impact from a continued strong manufacturer pricing environment. On the generic side, we had solid growth in our ProGenerics program, with revenues growing as a percentage in the low teens.
And as a reminder, the Walgreens generic business does not run through our ProGenerics business line. Our specialty business group had an overall revenue increase of about 13%.
We continued to see very good revenue growth in oral oncology, plasma and ophthalmology. ICS, our third-party logistics business, also had very good revenue growth.
These sales growth percentages for the drug company and for specialty are before intersegment eliminations, consistent with how we've reported these growth rates in the past. Moving to gross profit.
The segment's gross profit was about $790 million, up $185 million or about 31%. Drug company was the driver of the majority of the segment gross profit increase as a result of their high revenue growth.
During the quarter, generic price appreciation was better than we previously expected and also contributed to segment results. Operating expenses were $404 million and were up about 31%.
Similar to prior quarters this fiscal year, the expense increase was primarily due to supporting the segment's significant volume growth. Additionally, this quarter, to finish the Walgreens implementation by September 30, we supplemented our full-time staff with temporary resources in our distribution centers.
Also, we are operating 2 distribution centers in Florida which added extra cost in the September quarter. We will transition all of this Florida customer business to our new DC in early fiscal '15.
Adjusted segment operating income was $386 million and up 31%, driven by the outstanding performance of our drug company, which includes successfully onboarding the Walgreens business faster than anticipated. We can now move to our Other segment, which includes Consulting Services and World Courier.
In the quarter, the segment revenues increased $134 million or about 26% to $652 million. Our consulting business had revenue growth of about 20%.
Our TheraCom distribution business, which is within consulting, drove most of this growth. A few of the key drugs they distribute continue to gain market share.
Switching to World Courier, their revenue growth was positively impacted from an adjustment where we corrected intercompany revenues last fiscal year in Q4 '13. Excluding this adjustment, World Courier's revenue increase this quarter was about 8.5%, driven primarily by higher volumes.
From an operating income standpoint, this segment had operating income of $37 million, with growth of about 25%, due primarily to the record performance of World Courier. This completes our segment review.
Let me switch gears and cover a few key fiscal '14 financial metrics. Overall, we did very well, meeting or exceeding our revised guidance targets.
Revenue, on a full year basis, our growth was 36%. Excluding the positive impact from our Walgreens contract, our revenues were up 8%.
The new hepatitis C brand drugs accounted for roughly half of this revenue growth. Our largest customer, Walgreens, represented just under 28% of our total revenues in fiscal '14.
Our specialty business finished the year at nearly $20 billion, with revenue growth of about 11%, led by ASD, Besse Medical and ICS. These 3 businesses accounted for about 90% of the total dollar increase.
Our oncology supply business was essentially flat for the year, as expected, due to the community oncology environment and also brand-to-generic conversions. Our adjusted operating income increased a stellar 21% to $1.56 billion.
Our adjusted operating margin finished at 1.30%, a decrease of 17 basis points. This margin was better than what we originally expected, and it also included the negative effect of a few basis points from the lower-margin new hepatitis C brand drugs.
EPS. Our full year adjusted diluted EPS was $3.97, up 24%, mostly due to our strong organic operating income growth and very little from share repurchases.
Cash flow. We are extremely pleased with the progress we made in this area.
We finished well above our revised expectation of $1.2 billion for free cash flow. The positive impact from a higher generic revenue mix as well as our drug company operations group effectively managing inventory level, helped drive outperformance in this area.
And finally, share repurchases. Under our regular share repurchase program, we purchased $538 million of stock, which was above our original guidance.
Under our special share repurchase program, we continue to make steady progress. This program is used specifically to offset anticipated warrant dilution.
We have repurchased approximately 3.4 million shares or $252 million through September 30. Combined with our hedging program, we've made good progress toward offsetting as much of the expected warrant dilution as is economically feasible.
Now let's turn to fiscal '15 expectations. Revenues.
We expect consolidated revenue growth in the 7% to 8% range. We expect higher revenue from our largest customer, Walgreens, mostly as a result of generic distribution being ramped at a full run rate for our entire fiscal 2015.
Just the incremental generics business will represent about 2% of our growth. This growth is also expected to come from the following categories: new brand drugs, like those that treat hepatitis C; overall script and volume growth from an improving U.S.
economy and a positive contribution from health care reform; and finally, continued growth in our specialty business. Our revenue growth will be somewhat dampened due to a previously disclosed customer loss and meaningful brand-to-generic conversions.
Gross profit. Our gross profit dollars will clearly be up.
We will have a full year benefit from both Walgreens generics and the procurement joint venture. We also expect a better generic launch schedule than we saw in fiscal '14.
In terms of key launches, we now expect that generic Nexium will be delayed and will now launch in June 2015. This means we won't have the full 6 months of exclusivity in this fiscal year.
Our working assumption for generic price inflation is that the dollar contribution will be relatively flat in fiscal '15. Headwinds in the gross profit area include contract renewal, certain customer losses and lower growth in specialty due to continued reimbursement pressure and maturing generic oncology drugs and no offsetting new oncology generic launches.
Operating expenses. We expect year-over-year dollar growth as a percentage to be in the high single digits.
The increase is driven primarily from 3 key areas. One, we will be incurring a full year of direct costs associated with supporting the Walgreens business, primarily distribution center labor expense and delivery; two, we have expenses directly associated with a few key initiatives, like the national distribution center in Columbus, Ohio, and the startup of our Swiss business and continued investment in our IT infrastructure, especially around EDI, security and a track and trace system -- these IT expenses are required to scale and support our business going forward; and finally, three, we have normal run-of-the-business increases, such as compensation, incentive and health care costs.
The expenses that I highlighted in these first 2 categories, full year of Walgreens distribution and the new initiatives, account for approximately 60% of the overall dollar operating expense increase. Operating income.
For fiscal '15, we expect our year-over-year dollar growth to be 8% to 10%, driven primarily by the drug company. Our fiscal '15 growth moderates somewhat by a few items: phasing in of the national distribution center; expenses coming faster than gross profit; fairly high incremental operating expenses associated with our new Swiss business; and lower growth in our specialty business.
Switching to operating margin. We expect our margin in basis points to be relatively flat to up slightly in fiscal '15.
Our margin will be impacted by the rate of growth of our 2 largest customers; timing of brand-to-generic conversions, like Nexium; and the continued ramp of hepatitis C product revenue. These 3 items can move our margin up or down by several basis points and can make pegging of margin goals difficult.
Interest expense. Our interest expense is expected to decrease slightly due to a stronger cash position and also refinancing a portion of our debt last year.
Tax rate. Through our new business initiatives, we expect to see our adjusted tax rate decrease to about 37% for the full year.
Share repurchases. Our guidance assumes $400 million in regular share repurchases.
Importantly, with our anticipated share price and expected level of exercises, we don't expect our adjusted diluted share count to decrease much, just about 1%. Adjusted EPS.
We expect our fiscal '15 adjusted EPS to be in the range of $4.36 to $4.50, an increase of 10% to 13%. We expect our adjusted EPS to be greater in the second half of the fiscal year compared to the first half due to the phasing of generic price appreciation, similar to what we've experienced the last 2 years and also the generic launch calendar.
An item of note: our first fiscal quarter typically has the lowest level of brand and generic price appreciation of our 4 quarters. Switching over to cash flow.
CapEx is expected to be approximately $300 million. Given the improved cash outlook for ABC, we believe this is the right time to further invest in our core drug business and specifically, our distribution center network.
About 1/3 of our CapEx spend is slated for distribution center capacity and automation improvement. As always, we expect a good return on these infrastructure investments.
Free cash flow. We expect to have an excellent year in terms of free cash flow due to higher generic revenues and the fact that generics have beneficial working capital metrics.
Free cash flow will be in the range of $1.4 billion to $1.7 billion, and it also includes the expected benefit from rightsizing our inventory now that we've reached the full rollout of the Walgreens business. In addition to the regular share repurchases I highlighted before, we also expect to use about $400 million to continue to offset future warrant dilution through our special share repurchase program.
In summary, I know that my comments today were longer than usual due to covering the quarter, year-end and also '15 guidance, so thank you for your attention. Our commitment: we will continue to make the right investments in our business and allocate our capital thoughtfully to ensure long-term success.
As always, we greatly appreciate your interest in ABC. Now here's Barbara to start our Q&A.
Barbara A. Brungess
Thanks, Tim. We'll now open the call to questions.
[Operator Instructions] Please go ahead, John.
Operator
[Operator Instructions] We'll go to the line of Glen Santangelo with Crédit Suisse.
Glen J. Santangelo - Crédit Suisse AG, Research Division
I just wanted to follow-up on some of the comments you made. I mean, the company obviously has been through a lot of positive transition here in the last 18 months.
And now that you've kind of emerged from it, as you sit back, you look at the cash flow generation and the strength of the balance sheet, do you feel like you're at a -- in a position now where you can start to think more strategically? Or do you kind of take a breath and just kind of focus on getting the operations right?
I mean, how do think about capital deployment from here?
Steven H. Collis
Glen, thanks for the comments. I'll start off and then let Tim comment.
I mean, obviously, we went through a very significant operational hurdle again. As we pointed out, both Tim and I pointed out, I think we came through it very strong, not only for our Walgreens customers, but for all of our customers.
We have more inventory. I mean, in 26 of our -- we have 26 distribution centers -- 23 of them had some level of automation improvement, streamlining, new equipment coming in.
So we really had significant work to do. The cash flow came in strong the last couple of quarters.
Our balance sheet is strong. But again, we're doing some $400 million a day in sales, so you need to look at it in terms of that context.
But clearly, our first prize has always been to find the right type of acquisition. We're very encouraged by the success of World Courier.
World Courier has also given us a lot of, I'd say, organizational muscle, as we look at dealing with things like exchange control and FCPA, the treasury issues, the tax issues. So it's -- I think we really are in a good position.
And we also are very excited about our WBAD and the new AmerisourceBergen Switzerland office. That really gives us a good foray into global operations.
So definitely, we, in a way, feel like the team is just getting started and we've got lots of significant opportunities.
Glen J. Santangelo - Crédit Suisse AG, Research Division
Okay. Maybe if I could follow-up with a question for Tim.
I mean, appreciate all the detail you gave with respect to fiscal '15. But within your sort of comments, I think you mentioned that the benefit from annualizing the Walgreens generics business on your top line would be about a 2% contribution.
And so when I look within the broader context of your 10% to 13% EPS growth in the guidance, is it fair to say that just the annualized benefit of Walgreens probably accounts for about 1/3 of that and the other 2/3 being more the organic growth, taking into consideration all the other headwinds and tailwinds you mentioned?
Tim G. Guttman
Yes. Thanks, Glen.
No, I -- we definitely have a benefit next year of ramping up and having the generics at a full run rate. So again, I think the other thing, too, that you have to consider is that we're going to have that full run rate from the procurement joint venture next year.
So I mean, I think it's a combination of things that drive -- I mean, I really don't want to parse out the growth. I mean, I think, again, it's kind of the big 3: having generics, having the joint venture, and a better generic launch year -- all kind of drive the margin a little bit up and better operating income.
And I guess, if I can, I just like to go back and talk about your first question a little bit too, is -- clearly, it's top of mind. We want to make sure that as our cash improves, we have an overhang from the warrants.
And again, we'll look opportunistically. Steve talked about being committed to long-term earnings growth.
That's a big consideration for ABC. So having those warrants, as we get closer to those expected exercise dates, we want to make sure we use our cash thoughtfully to offset those -- offset that dilution.
We're committed to that.
Operator
And that's from Robert Jones with Goldman Sachs.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
Just, I guess, a follow-up around one of Glen's questions around the procurement platform. I guess, the first one, more quantitative, see if I can ask this a different way.
I mean, curious if you could share anything more specific, Tim, on what's factored into guidance from the better purchasing. It's been over a year now, and I know this is an important arrangement, big swing factor to numbers.
So I'm curious if you could just give us any more clarity around what the contribution is that's baked in. And then, I guess, on the qualitative side, there has been some concern in the marketplace that the original synergy expectations from these larger generic purchasing platforms might not actually be playing out in the marketplace as many of the generic manufacturers aren't really able to meet the demand needed to drive the volume-based savings originally thought of.
Just curious if you guys had any updated perspectives on that as well.
Tim G. Guttman
Yes. Bob, I'll take the first one since you directed it over here.
Quantitative, no, I appreciate the question. Again, it's very sensitive.
I mean, we're real pleased with where we're at. We've had progression each quarter in '14 in terms of what we've seen from the procurement joint venture.
We're at a good jumping-off point now going into '15. Again, pretty much in line with what we expected way back when, when we kind of announced the deal in terms of savings as a percentage.
So I don't think we want to get too fine on the dollar contribution because of competitive reasons.
Steven H. Collis
Yes. I mean, I'll just say that if you look at some of the changes that have occurred in the manufacturer generic landscape, I mean, with the big trading partners we have there, I mean, enormous changes since we announced our transaction.
And again, we think that the 3 partners scale up very well to these global multinational companies with increasingly sophisticated supply chain, regulatory requirements, pricing requirements, pressures from austerity programs in different markets. So we focused at first on generics.
There's no reason -- you look at the caliber of the people that are involved in WBAD and -- from both Alliance Boots and Walgreens side and the people that we are contributing, I mean Peyton's experience with commercialization, all of these should be assets for the platform. So we are bullish on where this could be in the short, medium and long term.
Robert P. Jones - Goldman Sachs Group Inc., Research Division
That's helpful. And I guess just a quick follow-up would be, we've seen the retailers face some pressures both from inflation and reimbursement rate pressure.
I'm just curious if there's any impact or any thought around potential changes with your agreement with Walgreens relative to some of the moving pieces in the landscape.
Steven H. Collis
Every customer we are able to look at differently. We model on overall profitability.
Certainly, we think that the reimbursement -- the price increases is more of a reimbursement issue than a procurement issue. To get the reimbursement tables adjusted quicker in this day and age is certainly a priority.
We have seen a broader price inflation trend. Obviously, we listened to the calls in the last day or 2, and this is a theme that is clearly on top of mind.
We think that it's -- there's some very valid drivers as to why price increases are occurring. We're expecting -- we had a very good year with price increases this year, better than we expected, and we're expecting to at least hold steady for next year.
So I would say that's a significant expectation, that price increases will continue.
Operator
That's from Ricky Goldwasser with Morgan Stanley.
Ricky Goldwasser - Morgan Stanley, Research Division
A couple of follow-up questions, first on generic inflation. So just to clarify, Steve, Walgreen on their call said that they expect low single-digit inflation.
So how does your comment resonate with theirs? Do you assume a similar level of increases?
Steven H. Collis
Well, again, we really manage 2 big type of generics -- our ProGen formulary, which we have, obviously, formulary control over, and that's a lot what our independents and other customer base -- other customer segments, including health systems, tap into. We also then hold -- handle our customer generic files.
And that -- certainly, Walgreens is foremost in that category, very significant contract generic acquirer. So we sometimes have different contract terms, et cetera, within ProGen and with the other generic sector.
So I don't think that those 2 statements are mutually exclusive. We -- and again, sometimes, you have to look at the detail of these statements.
Is it -- are we talking about the branded environment? Are we talking about the generic environment solely?
We do expect that there still is -- the vast majority of products are subject to price deterioration in the generic market. We believe some 70% to 80% of the products will experience some level of deflation, which has been the typical model.
So I think you also have to look at where the fiscal years lie. We're a September year obviously.
There's some significant difference depending on where people's fiscal years lie, measurement periods, et cetera. But Tim, I can see you want to answer this question.
Tim G. Guttman
Yes. No, I would just add, Ricky, that what we forecast -- I mean, Steve, you hit it.
Again what we forecast is specific to us and the manufacturers we use and inventory levels. We're really not trying to forecast the rate in the market.
I think we'll stay consistent with what we said last quarter, is that we're -- for our basket of generics, we've seen an increase, slightly positive inflation this year versus maybe slightly negative kind of the period before. So it's changed.
But that's all I would add, Steve.
Steven H. Collis
Thank you.
Ricky Goldwasser - Morgan Stanley, Research Division
Okay. And then just one follow-up.
I mean, obviously, the cash flow generation guidance is quite impressive. I think in -- you talked about some inventory management.
Should we assume, going forward, that this is kind of like a new level in how we model cash flow generation for ABC for the longer term? Or is this just kind of, like, a 1-year phenomenon?
Tim G. Guttman
Yes. No, great question, Ricky.
I'd tell you we're really proud of our cash -- I mean, our cash conversion cycle. With all the complexity this year in managing through our cash conversion cycle, our working -- or kind of our net working capital days only increased 1 day between '14 and '13.
So really, really hats off to our drug company. But I would say in '15, there are probably 2 -- there probably are some items positively impacting that won't repeat.
Again, kind of bringing on generics, finishing up the Walgreens kind of build and getting to a run rate and then also rightsizing our inventory, there's some benefit in there. But I would say that, going forward, with a healthy generic mix, we expect -- we always expect our free cash flow to be above net income and to increase every year.
Operator
And that's from Robert Willoughby with Bank of America Merrill Lynch.
Robert M. Willoughby - BofA Merrill Lynch, Research Division
You just answered it. Thank you.
Operator
And we'll go to Eric Percher with Barclays.
Eric Percher - Barclays Capital, Research Division
So thinking back 18 months ago when you announced the agreement, I know you talked to being able to maintain your long-term growth target, I think 15%, over a multiyear period. And I guess we've seen multiple years now with bringing brand on and generic on from the distribution side and now this year, with the ramp of the sourcing benefits.
As you look out, is there a further ramp that this agreement continues to drive? Is there a significant ramp from sourcing itself?
How do you think about continuing to drive the 15%?
Steven H. Collis
I mean, there's really -- I mean, in Dave Yost's time, we'd talk about growing revenue with probably a pretty robust top line growth. We'd talk about operating margin leverage, and we'd talk about capital deployment, share buybacks.
Obviously, the stock multiple has increased. So some of those have changed, but we're still committed to that sort of a growth range in the long term.
It's certainly how we think about our compensation plans, our long-term incentive plans. And we've been proud of our track record.
If you look at the compound annual growth rate and EPS since 2001, we've really done a great job in that range, maybe a couple of points higher. I think the early years were driven by fee for service and even higher organic growth rates.
We're trying to do some things internationally, where the growth rates aren't as high. But we are focused on the specialty area, where you should see higher organic growth rates.
So we've added a lot of complexity to our business, but we think that's very consistent with the demands of our stakeholders, including manufacturers and providers. So we're not backing off those hurdles or those targets, whichever one you want to use.
Eric Percher - Barclays Capital, Research Division
So it sounds like you have a lot of tools. But the tool -- the piece of this that came from the agreement with WBAD, Walgreens, et cetera, may be running its course?
Steven H. Collis
Well, we -- if you look at our portfolio -- I think when I became CEO and before that, for 2 years, was President of the drug company, we were really missing that big chain segment, and we are sincerely proud to have partnered with Walgreens. It's been a great partnership.
We're looking forward to really the completion of Walgreens Boots Alliance next year. We think that, that's going to be -- it really increased the opportunities and the focus that the 3 of us have together -- I guess it will be the 2 of us have together.
And we are looking forward also to other synergies that we can drive on the brand side, on international specialty, working together with World Courier. These opportunities we haven't fully explored yet, which we think will be very fruitful in the year ahead -- years ahead.
But this is -- also, Walgreens organic growth rates have been a nice boost to our revenues, coming in ahead this year of what we expected.
Eric Percher - Barclays Capital, Research Division
And quickly, you mentioned that generic inflation will be flat in your assumption. If you have flat inflation on your book, does that mean that the impact to incremental benefits from inflation would be relatively small as compared to when you were going from deflation to inflation?
Steven H. Collis
If they were -- if we are -- I guess, if the numbers came in higher than we expected, there would be a benefit as it did this year. But I'll let Tim comment.
Tim G. Guttman
Yes. Just, Eric, I mean, we talked about the dollar contribution being essentially flat.
And if it's better, it moves us up in the range. If it's worse, but we -- that's why we have a range.
I would just say that we think we're being appropriately right here in terms of our working assumption, and it's an area that's always difficult to predict and also to know when it's going to happen. So we think we're kind of going into this, into '15 with the right guidance.
Eric Percher - Barclays Capital, Research Division
So you have to refill that each year? So if you had 5%, you get another 5% that simply refills what you saw the prior year?
Tim G. Guttman
Yes.
Steven H. Collis
Yes.
Operator
We'll go to the line of Garen Sarafian with Citi.
Garen Sarafian - Citigroup Inc, Research Division
First, just quickly on guidance. But not surprisingly, timing of Nexium launch and generic pricing inflation are 2 of the big swing factors to hit earnings it seems.
So excluding those, what are the key variables?
Tim G. Guttman
Yes. I would say one of the bigger ones out there that we haven't really talked about, we're still in a holding pattern on, it's still an active process, is the DoD.
We talked about that last quarter. There should be notification the end of the year.
That's clearly one. And I would just say the other swing factors would be just some of the hep C and the uptake and having a new drug out there versus the old drug.
Just some of those -- some of the contributions we made in that area, too, could move us up or down in the range.
Garen Sarafian - Citigroup Inc, Research Division
What's the assumption on DoD in the current guidance then?
Tim G. Guttman
Well, the current guidance is like -- again, we have a piece of the contract. We've factored in that we retain our piece, that we have at a lower margin.
Garen Sarafian - Citigroup Inc, Research Division
Got it, okay. And then just switching gears.
You mentioned health reform initiatives as a positive contributor a couple of times in the prepared remarks. So could you just elaborate a little bit more as to how you're thinking about health reform and how much weight you're giving it in fiscal '15?
Steven H. Collis
We note that there's some 8 million to 9 million, maybe as many as 10 million new patients being covered through exchanges and other mechanisms. That definitely is driving growth.
There could be more on Medicaid programs. There's some evidence that our independent customers have disproportionate market share there, but it's overall good for the market.
Look, we -- the new data coming out from the most established reporting companies will show you that the market is very robust. We've seen more robust top line growth than we've seen before.
However, 1 product has been more significant to that growth than probably the patient attrition that we've seen. So it's -- again, this is a great industry to be a part of.
I was participating last week in the international wholesaler federation meeting, and the U.S. market is still the envy of the rest of the world.
This is a wonderful market to have most of our business be resident in.
Tim G. Guttman
Yes. I would just jump in and say that our working assumption is a pretty modest increase.
We always -- when we talk health care reform, we always say the economy too because it's hard to really tell what's driving script growth. I mean, it's definitely up.
We're seeing a benefit, but it's hard to say what's causing it. But for '15 in our growth assumption for revenue, we probably have 0.5% kind of factored in there, excluding those hepatitis C drugs.
We kind of carve those out and do a separate assumption on those.
Operator
And we'll go to Lisa Gill with JP Morgan.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
I just had a question, Tim, to start with, around the tax rate. If I do the math, it looks like every 100 basis point reduction is about $0.07, and I would assume that, based on your commentary, some of this is because of moving some of the operations over to Switzerland.
Is there incremental opportunity over the next couple of years to continue to bring that tax rate down?
Tim G. Guttman
Thanks, Lisa. Yes, I would -- let me just comment that we -- as Steve mentioned, we're thrilled that Peyton and her family have moved over to start this business.
There is a benefit in our tax rate from that. But also, we're seeing a benefit from not only that, but BluePoint, our private label, is giving us a little bit of an advantage and also World Courier.
But to get to the main point, yes, I do think it's an area of focus. It's a pretty big expense for ABC, and we're being very thoughtful about how to look at our tax rate going forward.
Lisa C. Gill - JP Morgan Chase & Co, Research Division
And then thinking about BluePoint. Can you give us any incremental color around BluePoint?
So is it being run out of Switzerland? What are some of the opportunities there?
How do you anticipate that, that business will grow over the next couple of years? And furthermore, are you actually manufacturing the product?
Or is this more of a repackaging type of operation?
Steven H. Collis
Well, it's definitely more of a repackaging, relabeling, importation, demand aggregation. There's a well-established precedent in the wholesaler market in the U.S., and we thought this was a great opportunity for some of the x U.S.
suppliers to aggregate demand. It's been well received in the marketplace, good adoption by our customers.
We've really had this in the works for a couple of years, but launched this year. But our repackaging facility is really done out of Ireland, and that was planned before.
But certainly, having the group in Bern helped coordinate with Peyton, and we actually had this in the works before we went into the WBAD partnership. So it's definitely a growth driver for us and one that we'll carry on focusing on.
Barbara A. Brungess
Steve, do you have some...
Steven H. Collis
Yes. Thanks, everyone, for your time.
I know it was an extremely busy day today. But let me just conclude our discussions for today by really reiterating that ABC is in terrific shape.
Our teamwork and confidence that maybe I haven't touched on enough today because I'm just so proud of where we are as a company, our ability to take on new challenges and opportunities, I believe, has never been higher. At all levels, we thrive on working together as we meet the challenges and opportunities the markets are presenting to us.
We really feel that we're just getting started, and you can look forward to great things to come from the AmerisourceBergen team.
Barbara A. Brungess
Thanks, Steve. And with that, we'll turn it back to the operator.
Operator
Ladies and gentlemen, that does conclude your conference for today. Thank you for your participation.
You may now disconnect.