Oct 29, 2015
Executives
Barbara A. Brungess - Vice President, Corporate & Investor Relations Steven H.
Collis - President and Chief Executive Officer Tim G. Guttman - Executive Vice President and Chief Financial Officer
Analysts
Robert McEwen Willoughby - Bank of America - Merrill Lynch Garen Sarafian - Citi Investment Research Robert Patrick Jones - Goldman Sachs & Co. Lisa Christine Gill - JPMorgan Securities LLC Eric R Percher - Barclays Capital, Inc.
Operator
Ladies and gentlemen, thank you for standing by and welcome to the ABC earnings call. At this time all participants are in a listen-only mode.
Later we will conduct a question-and-answer session. Instructions will be given at that time.
And as a reminder, this conference is being recorded. And at this time I would like to turn the call over to our first speaker, Barbara Brungess.
Please go ahead.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Thank you, Colin. Good morning, everyone, and thank you for joining us on this conference call to discuss AmerisourceBergen's September quarter and fiscal year 2015 results.
I am Barbara Brungess, Vice President, Corporate & Investor Relations for AmerisourceBergen. And joining me today are Steve Collis, President and CEO of AmerisourceBergen; and Tim Guttman, Executive Vice President and CFO of AmerisourceBergen.
During the conference call today we will make some forward-looking statements about our business prospects and financial expectations, including, without limitation, revenue, operating margin and taxes as well as the pending acquisition of PharMEDium. Forward-looking statements are based on management's current expectations and are subject to uncertainty and change in circumstances.
We remind you that there are many uncertainties and risks that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors and other cautionary statements, we refer you to our SEC filings, including our Form 10-K for fiscal 2014 as well as our quarterly and other filings with the SEC, the press release from – I'm sorry, and the press release and the Form 8-K filed on October 7 in connection with the pending PharMEDium acquisition.
We will be discussing non-GAAP financial measures, which we use to the underlying performance of our business. The GAAP to non-GAAP reconciliations are provided in today's press release as well as on our website.
AmerisourceBergen assumes no obligation to update any forward-looking statements or information which speaks as of their respective dates and this call cannot be rebroadcast without the express permission of the company. Those connected by phone will have an opportunity to ask questions after our opening remarks.
Now here is Steve Collis to begin our conference.
Steven H. Collis - President and Chief Executive Officer
Thanks, Barbara, and good morning, everyone. We've actually changed locations within our headquarters here so the train should not be very prominent today and I'm sure you'll all appreciate that.
I am just tremendously proud of the results that we are presenting today and I commend our highly engaged associates for the outstanding financial and operational performance we achieved this year. Our success is being driven by the approach we take to the market today.
We constantly seek to examine our industry with fresh eyes. We've already taken steps necessary to avail ourselves with the opportunities that we see unfolding and we work collaboratively and creatively to address challenges we see in front of us and our partners in the pharmaceutical supply channel.
The unique knowledge and expertise we have developed, our partnership philosophy and our increasingly global reach enable us to influence and shape healthcare delivery by providing innovative solutions for both pharmaceutical manufacturers and healthcare providers. Our results are a testament to the precision and proficiency with which we run our business and the value we deliver to all of our stakeholders.
In financial terms, we exceeded all of our expectations for fiscal year 2015. Our revenues for the full year were up 14% to $136 billion and adjusted earnings per share from continued operations were up 25% to $4.96.
Free cash flow was exceptionally strong this year, coming in at a record $3.7 billion. The strength of our financial position enabled us to make important strategic investments including the acquisition of MWI Veterinary Supply and most recently the pending acquisition of PharMEDium.
The addition of these two high quality assets to the AmerisourceBergen portfolio demonstrates our commitment to the pharmaceutical supply channel and the opportunities we see inherent in us. It also highlights our ability to extend our existing capability into new markets and to continuously enhance the services we are able to provide to our existing customers.
We could not have made these two significant investments in the same calendar year if we did not have tremendous confidence in our ability to manage complex diverse businesses that enhance the level of range and services that we provide to the market. Moreover, in addition to making these investments, we have also made substantial progress in offsetting the expected impact of warrant exercises we anticipate in fiscal 2016 and 2017.
At this stage, we've essentially completely offset the impact of the warrants and I'm very proud that we have so adroitly been able to fulfill the commit which we made to our shareholders when we first entered into the long-term strategic relationship with Walgreens Boots Alliance. This relationship, which will be coming up to our three-year anniversary, has thus far been a tremendous success and we look forward to many more benefits in the years ahead.
We selected WBA as our long-term partner, not only for cultural fit, but also because we believed they were the best long-term partner for us in the retail chain space. And certainly their performance as our largest customer and sourcing partner has been a very significant contributor to our performance over the last few years.
Our operational execution was also very strong this year. All our customers have benefited from enhancements we have made to our infrastructure, and we have certainly been realizing the benefits of the increasing scale of our business where we have more than doubled the number of lines we manage over the last 25 months.
We also continue to execute on our advanced programs and services from manufacturer customers including those that are provided by AmerisourceBergen Switzerland. While we have substantially strengthened our core business over the last two years, we always feel like we can and should do better.
Our customers are being challenged and they want and should expect that we will step up in new innovative ways as well. This is what excites and motivates our team.
We also continue to work on the associate experience part of our business and I feel we are not only attracting, and importantly, retaining exceptional talent, but we are being recognized for our culture in the marketplace. Just this week we were named one of the coolest places to work in Philadelphia by Philadelphia Magazine.
Not that you can put this in our EPS guidance, but it's still recognition that we are proud of. For many, many years, wholesalers have proven to be one of the most resilient and reliable components of the pharmacy core channel.
Over the last few years our entire industry has successfully transformed itself in order to better address the changing and consolidating needs of the healthcare landscape. Wholesalers have proven to be adept at providing value that goes well beyond the essential services of aggregating demand and the logistics of getting products from one point to another safely and securely.
We help enable efficient pharmaceutical care and the widest possible access to products, which allows our customers to focus on expertly caring for their patients. It remains an exciting time to be in the pharmaceutical services industry.
Organic growth rates in the U.S. pharmaceutical market are solid.
Health reform initiatives continue to improve access to care and new and innovative products are coming to market. In recent years, we have seen new products come to market that dramatically improve the lives of patients and often in cost-effective ways.
The R&D pipeline remains full of promising new products. And the combination of advanced therapies and improving access to care not only drives growth opportunities, but, most importantly, meaningfully improve patients' lives.
The high percentage of generic scripts in the market will help pharmaceutical care be an even greater driver of efficient healthcare for many of the therapies that we deliver. AmerisourceBergen is uniquely positioned to help ensure products get to market as efficiently as possible and that patients have access to both traditional and complex new therapies across all sites of care.
Let's turn now to the performance of the AmerisourceBergen in the September quarter. Tim will provide the financial details, but I want to call out some highlights from our business units.
AmerisourceBergen Drug Corporation had a good quarter, with revenues up 8%, even as we continued to fully anniversary the onboarding of the Walgreens business. Our growth was driven in large part by solid organic volume growth.
While generic drag inflation has slowed meaningfully over the course of the year, generic sales are strong across all of ABDC's customer segments. We are very pleased that our Good Neighbor Pharmacy chain, health systems and alternate site customers all performed well in the quarter.
Last quarter, I spoke about enhancements we have made to our programs through our independent pharmacy customers. The opportunities that exist for ABC to partner with pharmacists to impact the delivery of healthcare in the U.S.
will be an important contributor to our growth going forward. For many years we have been proud advocates for community pharmacies that increasingly provide some of the most important patch points to ensure patients have access to medications and to other aspects of care.
We also remain very active with regulators and legislators both independently and through our trade associations to expertly advise and inform those important constituents on pertinent issues for our industry and our customers, especially with respect to issues regarding the safety and security of the pharmaceutical supply channel. With the close of the September quarter, we have now fully anniversaried the onboarding of the Walgreens distribution business.
Since the implementation of this historic distribution contract, Walgreens has exceeded our internal growth estimate as a customer this quarter, this year and last year. As our retail business has grown substantially over the last two fiscal years, we've also had strong performance in our health systems and alternate site segments.
In early October, we were very pleased to announce the definitive agreement to acquire PharMEDium, the premier national provider of outsourced compounded sterile preparations to acute care hospitals in the U.S. This acquisition represents an important investment in our ability to provide market-leading services and solutions to our health system customers, a customer segment that is playing an increasingly important role in the provision of healthcare in the U.S.
PharMEDium's proven ability to consistently deliver high-quality ESPs in key therapeutic areas combined with their impressive track record of growth made them a compelling addition to ABDC. Because we expect PharMEDium to make a significant contribution to our fiscal 2016 and we expect the transaction to close during the first quarter, we have included the anticipated contribution from PharMEDium in the guidance we are giving for fiscal 2016 today.
AmerisourceBergen Specialty Group again had impressive results in the quarter, with a number of different factors driving strong sales. Setting aside the impact of some previously reported manufacturing imposed changes on certain oncology products, which moved some revenue from Drug Company to specialty, ABSG revenues were up an impressive 15%.
Our physician distribution businesses, ASD and our community oncology business all performed very well in the quarter. We continue to be very confident and proud of our specialty franchise.
Our market leadership in this area is rooted in customer intimacy and deep experience. This informed knowledge has been the inspiration for the investments we have made in this business and the portfolio of service we have developed over many years.
Our capabilities extend well beyond sophisticated logistics and into the distinct requirements for specific disease states and unique classes of products. The combination of services and expertise we offer helps both manufacturers and healthcare providers manage the opportunities and challenges of this most dynamic segment of the market.
I believe the true differentiator of our specialty business is our collaborative approach to bringing innovative solutions to both our physician and manufacturer customers. Working in concert with our business partners is the best way to both discover and deliver value in the long run, especially in a marketplace that is increasingly focused on the cost of care.
During the year our GSMR, global supply and manufacturer relations (sic) [Global Sourcing & Manufacturer Relations,] (14:49) business unit, based principally out of Berne, Switzerland, also known as AmerisourceBergen Switzerland, has made important inroads on the brand, specialty, generic and consumer areas to establish an even greater level of professionalism and coordination between suppliers and our customers. This also includes an almost 24/7 communication rhythm with our partners at WBAD.
Let's turn now to the other segments. We had a full quarter of MWI in our results and we are very pleased with their performance.
We have made excellent progress on the integration. We have met with most of the large animal health manufacturers and made good progress on identification of synergies.
One area where we see a lot of opportunity is in sharing and enhancing technology, not just in our warehouses and distribution centers, but also in the systems and proven methodologies with which we interact with customers and suppliers. We have made a few tuck-in acquisitions in this area, specifically over the last several months.
And while they are small relative to the size of our total business, they are very important to the future of the animal health platform. The companion animal business was especially strong in the September quarter, with growth in the low teens.
I have to say that with just seven completed months under our belt, we are delighted by how the MWI integration into ABC has gone. Moreover, we feel very confident that MWI will continue to deliver excellent performance in fiscal 2016 and will make important differentiated contributions to the value we provide to the pharmaceutical supply channel as we add this complex new segment to our business.
MWI's willingness to embrace and implement new ideas and their ongoing commitment to outstanding execution and customer service gives us great confidence in the future of their business and the role that they will play as part of ABC. Our manufacturer services business also had a solid September quarter.
Our expertise in developing patient access and adherence programs and the experience we bring to bear in the regulatory compliance and policy areas are clear differentiators today. Our increasingly global reach in our manufacture services and clinical trial logistics business further expands our value proposition to manufacturers as we look to expand our ability to offer complex solutions for high-value pharmaceutical products launched in most of the developed world.
As I've said many times before, it is a great time to be in the pharmaceutical services industry in both the human and animal health segments. Better economic conditions, health reform initiatives, successful launches of new brand products and population demographics drive organic growth rates in the U.S.
pharmaceutical market. Advances in veterinary medicine improve the quality of life of companion animals and give pet owners far more choices in maintaining their health.
In addition, increasing global demand for protein drives the production side of the market and creates opportunities to extend the expertise MWI has garnered in the U.S. into the developing global markets.
As we look ahead to fiscal 2016 and, as I mentioned last quarter, there are a few headwinds and tailwinds that we ask you to bear in mind as you think about our growth rate for next year. Tim will cover the specifics of our expectations, but I want to highlight a few areas.
First the tailwinds. Continued solid organic revenue growth driven primarily by customer and product mix, better generic launch outlooks and five months incremental benefit from MWI.
The headwinds are significant impact from DOD contract repricing in the first half of this recently past fiscal year. Other customer contract renewals anticipated in fiscal 2016, notably Casa, whose contract expires late in the fiscal year and, as we have shared before, that contract will be about seven years from when we first entered into this generation of the contract.
Third, declining dollar contribution from generic inflation; no one-time benefits from some of the cash flow drivers we experienced in fiscal year 2015. There are a few additional assumptions to contemplate as you think about fiscal 2016.
We assume no valuation from warrant exercises because we have the 2016 warrant 100% hedged. $0.22 to $0.26 of net contribution from PharMEDium and no meaningful contribution from biosimilars in 2016.
We remain confident that biosimilars are an exciting opportunity for ABC. As discussed before, we believe we will have a particularly strong role, especially in the physician-administered biosimilar products.
The challenges remain on the legal and regulatory side, which prevent us from being too bullish on what biosimilars could contribute to ABC in the short to medium term. Before I turn it over to Tim, I want to take a moment to thank our associates for delivering excellent performance in fiscal 2015.
Our value creation is a result of flawless execution, creative thinking, and the courage to implement bold, new ideas. And our associates are the firm foundation upon which our performance is booked.
They share my conviction that doing things efficiently and being part – and being an expanding and dynamic channel partner with a view to the future will be what sets ABC apart. The always-improving quality of our offerings, our seamless execution, and our thoughtful capital management all help us grow our business in ways that help ensure we will generate long-term value for our manufacturer and healthcare provider customers, our shareholders and our other stakeholders for many years to come.
Now here is Tim.
Tim G. Guttman - Executive Vice President and Chief Financial Officer
Thanks, Steve. Good morning, everyone, and thank you for joining us today.
As Steve mentioned, we completed another excellent year at ABC. Let me spend a minute to quickly recap a few highlights.
Our drug company executed extremely well this year, it finished the fiscal year setting internal records for both product service levels and order accuracy for all of its customers. Our Specialty Group continues to grow and execute as well.
They had their best revenue growth year in the last eight years, with all the businesses in the portfolio contributing. We added MWI and are in the process of closing PharMEDium; both are respected leaders with high market shares, and both have excellent long-term business prospects.
Finally we exit the fiscal year with a strong balance sheet, while virtually eliminating the expected impact of the dilution from the future exercise of the Walgreens warrant. I have four main topics 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 topic, I will briefly cover warrant hedging progress to date. And the fourth and final topic, I will wrap up covering our fiscal 2016 expectations.
So, let's begin our Q4 review. The financial results that I provide this morning will all be on an adjusted basis, unless I specifically call them out as being GAAP.
Also, please note that all financial comparisons are for the fourth quarter ended September 2015 compared to the same period of the prior fiscal year, unless otherwise noted. For Q4 2015, our revenues increased roughly $4 billion to $35.5 billion, up an outstanding 12%.
Our growth, on a comparable basis, so excluding MWI, was just under 10%. The quarter's gross profit increased $135 million, 15%, to about $1.1 billion.
Almost all of the dollar growth came from our Other segment, primarily as a result of adding MWI. Our pharmaceutical segment was challenged this quarter with a tough comparison, which we anticipated and called out previously, the repricing of the Department of Defense contract and the specialty strong contribution from generic price appreciation back in the September 2014 quarter.
Operating expenses, our total OpEx increased about $103 million, or 20%, to $606 million, consistent with a change in gross profit dollars that I just covered. The Other segment drove virtually all of the dollar growth, again, due to the acquisition of MWI.
Operating income was $456 million, up $32 million or 8%. Our adjusted operating margin was 1.29%, down about five basis points, driven by the pharmaceutical distribution segment being down 11 basis points this quarter.
Moving below the operating income line, interest expense net was about $27 million. 40% of this expense, or all of the increase, is related to our MWI acquisition financing.
Income taxes – our tax rate was 37% for the current quarter, down some from the prior year. I should highlight that our tax expense and associated tax rate are higher this quarter because of a one-time $10 million reserve of a deferred tax asset, originating from state net operating losses that we will not likely be able to utilize.
This negatively impacted our adjusted EPS by $0.04. For the quarter our adjusted diluted EPS increased 6% to $1.17, driven primarily by the addition of MWI.
Our adjusted diluted share count was 230 million shares, essentially flat to last year. Let's move forward and discuss our segment results, starting with Pharmaceutical Distribution.
Total segment revenues were about $34 billion, up 9.5%. As mentioned earlier by Steve, Drug Company had solid revenue growth up of 8%, driven by two items.
The first item, we benefited by solid volume growth and to a lesser extent, a strong brand pricing environment. And the second item, we benefited from the final ramp of the Walgreens business.
This key customer accounted for about 60% of the increase in revenue dollars. Beginning in Q1 2016, we anniversaried a full ramp of the Walgreens business and we look forward to growing with this customer in the years ahead.
Our Specialty Business Group had an overall revenue increase of about 24%, similar to the last three quarters, adjusting for the shift in certain oncology revenues from our Drug Company to our Specialty Business. Our Specialty Business grew an impressive 15% from higher volumes, a continued good pricing environment, and new drug introductions.
Specialty's growth came primarily from sales in oncology and ophthalmology drugs. The sales growth percentages for the Drug Company and Specialty are before intra-segment elimination, consistent with how we have reported these growth rates in the past.
Moving to gross profit, the segment's gross profit was $794 million, essentially flat. We saw solid gross profit growth in our Specialty Business due to their higher revenue growth.
Our Drug Company, even with strong revenue growth and a solid contribution from generic Abilify, was still behind last year's gross profit, due to the two sizeable headwinds that I called out previously. Importantly, let me highlight that these two headwinds will continue to be a challenge for the segment in our first quarter 2016.
So, as you think about our quarterly progression, please remember that these will carry over into the first quarter. The segment's gross profit margin decreased 11 basis points, primarily because of these two items.
Operating expenses were slightly over $400 million and were flat year-over-year. Adjusted segment operating income was $388 million and, again, essentially flat.
Solid performance by our Specialty Group was offset by the expected lower contribution from the Drug Company. We can now move to our Other segment, which includes consulting services, World Courier and MWI.
In the quarter, total segment revenues were $1.6 billion, up significantly due to the addition of MWI. On a comparable basis, so excluding MWI, segment revenue growth would have been, as a percentage, in the low-teens.
MWI continues to have solid revenue performance as a result of their Companion animal business. Excluding the Idec (28:03) impact, Companion would have had a growth rate as a percentage in the low teens.
From an operating income standpoint, we had a significant increase, about $30 million, to a total operating income of $68 million. The segment benefited mostly from having MWI included in the quarterly results, but our consulting business also made a very good contribution this quarter.
MWI did incur a one-time bad debt expense of about $4 million in the quarter, related to a U.K. customer that negatively impacted their results.
For those that have followed MWI in the past, you know it's highly unusual for the business to have a bad debt at this dollar level. Let me switch gears and cover a large GAAP item that occurred in the quarter.
We determined that we have a permanent write-down of $31 million in our equity investment in ProPharma, a Brazilian pharmaceutical wholesaler. That write-down is due to the significant decline of ProPharma's stock price from our initial investment date to the date of our impairment testing.
We concluded that the decline of the stock price is other than temporary, since the stock price declined significantly over one year ago and has not recovered since. Let me point out our investment in the specialty joint venture where we are 50-50 owners with ProPharma continues to ramp and is tracking to forecast.
Because of this, there is no impairment of our specialty joint venture assets. This completes our review of the September quarter.
I'd like to now cover just a few key fiscal 2015 financial metrics. Overall, as Steve mentioned, we did very well meeting or exceeding our increased guidance targets.
Revenue on a full-year basis, our growth was nearly 14%. Excluding the impact from MWI for approximately seven months, our revenue growth would have been 12%.
Our largest customer, Walgreens, represented roughly 30% of our total ABC revenues in fiscal 2015 and finished slightly ahead of our expectations. Our Specialty Business finished the year at $24.4 billion with revenue growth of about 24%, both are records.
Again, excluding the impact of the oncology drug revenue that shifted, ABSG's revenues on a comparable year-over-year basis was an impressive 15%. Our adjusted operating income increased 22% to $1.9 billion.
Our adjusted operating margin finished at 1.40%, an increase of 10 basis points. MWI, a higher margin business, drove about half of our 10 basis-point improvement.
EPS, our full year adjusted diluted EPS was $4.96, up 25%, mostly due to our strong organic operating income growth, the addition of MWI and the benefits from a lower consolidated tax rate. Cash flow.
We are extremely pleased, completing the fiscal year with free cash flow of $3.7 billion. We had a positive impact from higher total generic revenues, up more than 30% full-year 2015 versus full-year 2014, aided by the onetime ramp of Walgreens generics business.
With better working capital metrics, this significant increase in generic volume was an important driver of our extraordinary cash flow this year. Let me also point out that we did have timing differences, which had a positive impact of about $550 million to our free cash flow.
Duplicate inventory of $150 million, that was a negative in fiscal 2014, reversed and helped us in early fiscal 2015. We also had about $400 million of timing here recently in September.
With four business days before Labor Day we were able to order and receive some brand inventory, sell through and collect most of the AR by September 30 while the AP wasn't due until October. This pulled a working capital benefit forward from fiscal 2016.
That's all I have for comments covering our full-year 2015. Next I will recap our warrant hedging progress.
As Steve highlighted, we are 100% hedged against the 2016 warrant exercise, meaning we will not have an increase to our adjusted diluted share count with the warrant that's exercised by Walgreens most likely in March 2016. This quarter we also made significant progress against the 2017 warrant.
We now believe we are 94% covered based on the September 30 ABC share price. This means the uncovered portion, the 6%, translates to about 1.4 million share shortfall at September 30, 2015.
As a reminder, the PharMEDium acquisition will help cover through its income growth any remaining EPS dilution from the anticipated share shortfall once the 2017 warrant is exercised. I'd ask people to refer to the new table we added in our press release that highlights our caps call option coverage at various ABC share prices, which you should find helpful.
Now let's turn to our fiscal 2016 expectations. The guidance that I provide will include our planned PharMEDium acquisition.
Our working assumption is that we will report the business in our fiscal 2016 results for about 10 months. Revenues, we expect consolidated ABC revenue growth in the 8% to 10% range.
Let me provide some overarching comments about revenue growth. Approximately 1% of our expected consolidated revenue growth will be due to having MWI for an incremental five months in fiscal 2016.
PharMEDium will add less than one-half of one percent to our consolidated revenue growth. And as a reminder, this business will become part of ABDC and will be included in our Pharmaceutical Distribution segment.
In terms of segments, we expect Pharmaceutical Distribution to grow revenues in the high-single digits. Within this segment, our Specialty Business is expected to grow as a percentage in the low teens.
We expect our Other segment revenues to grow about 30%, which is aided by having MWI for the full fiscal year. Gross profit.
We don't provide specific guidance on gross profit, but here are a few key assumptions. Generic price inflation, consistent with what we communicated in the past, we expect to see some moderation in the dollar contribution amount in fiscal 2016 compared to fiscal 2015.
Consequently, this represents a headwind for us, especially in quarter one. Brand drug inflation, we expect to see some moderation in the inflation rate.
Generic drug launches, we expect a better year in terms of dollar contribution. Contract renewals, as we have previously stated, ABDC will have a headwind for the first two quarters from the Department of Defense renewal and in the last quarter we will have the impact from the Kaiser contract, which we are working hard to renew.
Next, operating expenses. We expect a fairly high percentage growth rate in this area due to adding the incremental five months of MWI and, to a lesser degree, PharMEDium.
About 60% of the consolidated expense increase will be related to these two new businesses. A portion of the remaining increase is related to additional IT and DC infrastructure costs related to our large CapEx project.
Examples of the costs include duplicate costs to run parallel IT systems, additional labor and startup costs that can't be capitalized. Operating income.
We expect operating income dollars to grow between 16% and 18%, driven primarily by ABDC and the addition of PharMEDium. Also, we had the benefit of having MWI for the complete fiscal year.
Switching to operating margin. We expect our margin and basis points to be up 8 basis points to 12 basis points, due primarily to the addition of higher margin businesses.
Interest expense. Our interest expense is expected to increase significantly, 35% to 40%, due to having a full year of financing relating to MWI and the new financing for PharMEDium.
Tax rate. Our guidance is to the full-year adjusted tax rate of approximately 35.5%, which may vary from quarter to quarter.
Share repurchases. Our guidance assumes that our adjusted share count will increase by about 1% in fiscal 2016.
This is due to curtailing our regular share repurchases until we make progress on our credit metrics, getting them back to target levels. As we make progress against our obligations during the year, we will be thoughtful, as always, with our capital deployment.
Adjusted EPS. We expect our fiscal 2016 adjusted EPS to be in the range of $5.73 to $5.90, an increase of 15% to 19% over our fiscal 2015 adjusted EPS of $4.96.
This range includes the benefit of the PharMEDium acquisition that we've highlighted previously, a net contribution of $0.22 to $0.26 for ABC. Relative to the two large headwinds I've called out previously, the DOD contract renewal and moderation in generic price appreciation, it's important, again, to cover our expected EPS quarterly progression.
We expect Q1 to have growth in the mid to high-single digit range. By the time we get to Q4, we expect EPS growth to be in the low 20% range.
Switching to our cash flow. CapEx is expected to be approximately $400 million.
Given our cash outlook, we believe this is the right time to invest in our core drug business and specifically our distribution center network. We plan to spend about 25% of our CapEx to build one new distribution center and also replace or upgrade four existing DCs.
We also expect to spend an incremental $100 million on IT infrastructure projects, including two large multi-year projects, a data center consolidation and a new business operating system for our consulting business. Free cash flow.
We expect to return to a more normalized free cash flow this fiscal year as we anniversary the benefit of the significant increase in our generics business. Consequently, we expect free cash flow to be in the range of $2.3 billion to $2.7 billion.
In summary, I know that my comments today were longer than usual due to covering several topics, including guidance, so thank you for your attention. Like Steve, I'd like to personally thank all the ABC associates for the efforts made this year delivering these outstanding financial results.
We are excited about starting the new fiscal year and we believe the company continues on the right course to deliver long-term growth. We appreciate your interest in ABC.
Now here's Barbara to start our Q&A.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Thank you, Tim. We will now open the call for questions.
We ask that you please limit yourself to one question and a brief follow-up, so we can accommodate as many callers as possible. Colin, please go ahead with Q-and-A.
Operator
Thank you. One moment, please.
And first we'll go to the line of Bob Willoughby with Bank of America. Please go ahead.
Robert McEwen Willoughby - Bank of America - Merrill Lynch
Thanks. Steve, did you say "the coolest company in Philadelphia"?
Is that like an air conditioning reference? I'm not sure I'm seeing that otherwise.
Steven H. Collis - President and Chief Executive Officer
Yeah, yeah, we've had a lot of cracks about it, but I told my predecessors it's not your grandfather's AmerisourceBergen. But I think it's just we had focused a lot on the social experience.
We've done a lot of great things for our associates, including having open area working, bar graphs, different sort of development opportunities, which they appreciate. I mean, these are actually some of the things that MWI has appreciated about joining ABC is a lot of the development programs we have.
And, yeah, I think the culture is something that truly is setting up more and more apart with enthusiasm and passion people have for the business. For example, I was at our World Courier office in London on Monday, I'll tell you it's very infectious, the passion that group has.
Essentially it's the same people that were there when we acquired the company and that was a long time – I believe it was actually just a little bit after we completed the acquisition. But the same is true wherever we go.
I was in Ireland with our BluePoint folks Friday. So, just – but more importantly, from a scale perspective the U.S.
business is also very true of that whether it's Frisco, the Specialty Group, Charlotte, the consulting services, and Philadelphia, and all our Drug Company regions. So, I mean I'm just pointing out that our culture is really a strong driver of our performance and the confidence that Tim and I have that we can pull off two very complex deals like this.
And we – $5 billion in acquisitions in one year is definitely a sign that we have a lot of confidence in our ability to execute.
Robert McEwen Willoughby - Bank of America - Merrill Lynch
Well, I'd say you're not paying Larry Marsh enough. But I guess, as my follow-up, can you just give us a quick update on PharMEDium and just some of the FDA issues they have?
Where does that stand?
Steven H. Collis - President and Chief Executive Officer
Well, it's interesting, because I think if you go back to the pedigree legislation, we were so focused on it and got slightly irked last year – two years ago that it was being held up by compounding part of (43:09), the drug safety and quality. And now that's turned out to be what we think is probably one of the key drivers for our investment decision here is the quality requirements that are going to come, that are already resident in that business and we think it will only improve.
Increase the vigilance that will be required from these pharmacies and the scale is only going to increase. And we were just so impressed with their competitive differentiation and their commitment to quality.
The acquisition idea has been very well received by our health systems customers. We had some – one of our big customers said "Did you guys take your bold pills?"
That was one of the comments they gave us back. But we had a quick diligence, yeah, it's not of the overall footprint to say smaller even a smaller acquisition, like World Courier, with four very large compounding pharmacies of which we managed to visit all of them during our diligence.
But we're excited and we think that there will be a very iterative dialogue always with the FDA and other regulators, but we expect that we will continue to set the bar for quality in this area. And we think that the service will be – it's not a commodity service at all, this a high-quality service, it's complex, and like I said, when we announced this, if my family was being – getting a sterile IV, I'd like it to come from PharMEDium.
I can't believe that a hospital on its own can create the center of excellence that a company like PharMEDium can for these sterile preparations. So, we're expecting to close sometime in the next two to three weeks.
We haven't heard back yet from the FCC, but we're well positioned to close and we're excited to bring them on board and we do expect that we will close fairly shortly because Tim wouldn't have included it in guidance if we hadn't had that strong expectation. So, Tim, anything else to add?
Tim G. Guttman - Executive Vice President and Chief Financial Officer
I would just say the other thing, just to remind people for the conference call, I mean, we did a fair amount of diligence, we were aware of all the outstanding items and we're committed to investing and resolving and we think the regulatory to be a competitive moat. If we do it really well, it will protect our market share.
Robert McEwen Willoughby - Bank of America - Merrill Lynch
Okay, thank you.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Thanks, Bob. Next question, please.
Operator
Next question is from the line of Garen Sarafian with Citi Research. Please go ahead.
Garen Sarafian - Citi Investment Research
Good morning, Steve and Tim. So I guess, first, right off the bat, given yesterday's announcement, how are you scaled currently to take on a large new retail client across branded and retail?
I know that, in Tim's remarks, there was an investment in a new DC. I'm wondering, sort of, if that's sort of related to just potential growth.
And just overall what type of investments you need – you would need to make and how quickly you could get there?
Steven H. Collis - President and Chief Executive Officer
Yeah, it's really early because, obviously, we weren't under the tent. We anticipated that WBA would be a consolidated, that's one of the reasons why we entered into this very comprehensive relationship with them.
And so far, that thesis has proved to be very, very intact. And, we were, irrespective of any consolidation, we were expanding our network.
Some of our centers definitely have been around 30 years. I remember when I joined Bergen, for example, in 1994, that Houston was the standard, Mansfield.
And those are some of the ones that are now older, they were the standard, most modern DCs in our network. So, it's definitely time that we needed to expand the network.
But I think it's a good example of us investing in our core business and being ready for new development and new growth. We always had customers that are growing the fastest, many of them.
That is something that's always evident in our thinking when we select who we're going to try to retain and who we're going to go after in a competitive RFP type situation. So – and then our exposure to specialty is a benefit to us, not only in growth but also in any changes and price increases, because specialty drugs, because of ASD in particular, have a lower exposure to price increases historically than the way that other brand drugs and the (47:44) the top brand drugs and established therapies.
Even the self-administered ones wouldn't – MS and rheumatoid arthritis combo, typically the physician-administered have the lowest exposure to price increases. So, not a good thing about our business, so we were very well prepared.
We've announced four new DCs and one that will be completed this year. And we're looking more like Orlando models for these new larger DCs where we have 300,000 to 400,000 square feet.
So, that's pretty impressive and we use the same footprint, it's very efficient, we've retained a lot of the people that worked on the AmerisourceBergen integration. We've retained a very good engineering and distribution science department that continues to – performing excellently for us.
And we've used it to consult with customers on different projects as well. So they're a great resource for us and probably something we don't talk about enough.
Tim, anything to add? No?
Tim G. Guttman - Executive Vice President and Chief Financial Officer
Thanks.
Garen Sarafian - Citi Investment Research
So I guess you guys are very well prepared. But I guess is it sort of in months increments or is it something that will take longer than that to just prep up for?
Steven H. Collis - President and Chief Executive Officer
Well, we – as far as your initial question on Rite Aid, we point to a very long regulatory – not – I mean, I'll just go with what Stefano said yesterday in that we also – we shouldn't really comment on what the existing distribution obligations are. It wouldn't be appropriate for us to comment.
Garen Sarafian - Citi Investment Research
Got it. And then – on the Walgreens overall, you've been pretty consistent categorizing the work you've done and the three buckets and the branded and then the generics and then the overarching third other bucket.
So, I'm just wondering what are you building into this year from the other bucket that I really haven't heard yet much about. And, of course, given the recent announcements, how does this impact the plans that you have for this year in this other bucket?
Steven H. Collis - President and Chief Executive Officer
Well, I think the recent announcement would probably be mostly in bucket one and bucket two but, again, that's not current. So bucket three continues to be discussions around specialty, you know, is there a benefit to doing more on the consumer HBA or DC side, some benefits of – from – for Good Neighbor Pharmacy from some of the competencies that WBA has well-established.
Clinics is one that we pride some models on for example, but also network co-development. So those are the areas.
And I think having Ornella on our board, who has been a champion of independent pharmacy in Europe, and having both Stefano and Ornella and a lot of the former Alliance Boots people having more exposure to the U.S. market.
But the wonderful heritage that they have in wholesale I think is going to really bode well for us. So we continue to have great discussions about bucket three.
I'll tell you bucket two, which is the sourcing, has been terrific. We still think we're the most global.
We have overall still the largest sourcing contracting ability. And I think you've seen Stefano's really strong inclination to grow both organically and through acquisition and Alex having a strong focus on the customer experience in the stores.
So, we are very pleased with where we are. And (51:25) in international specialty, I think there's a lot that we're working on.
It's just with the type of size that they are, but even AmerisourceBergen is as well, it's hard for them to show up directly in any of the results from quarter to quarter, but you will see a long trend, I believe, towards more collaboration and joint innovation, co-investments we're looking at in a few markets, et cetera.
Garen Sarafian - Citi Investment Research
Got it. Thank you.
Tim G. Guttman - Executive Vice President and Chief Financial Officer
Yeah, I would just remind everybody, we said bucket three would be three to five years. We're kind of at that point, we're stilling adding top-to-top meetings and talking to our partners.
And they've been busy and we've been busy, but clearly we still have discussions and we think we can do some things commercially together as we go forward.
Garen Sarafian - Citi Investment Research
Thanks.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Thanks, Garen. Next question, please?
Operator
And next we'll go to the line of Robert Jones with Goldman Sachs. Please go ahead.
Robert Patrick Jones - Goldman Sachs & Co.
Yeah, thanks for the questions. I guess just a couple questions on the guidance assumptions.
So it sounds like you're expecting declining dollar contribution from generic inflation. Just to be clear, you are still assuming an inflationary environment, you're not thinking about deflation next year?
And then this seems to be a bit of a moving target, where inflation has been and where it's going. I guess how much visibility do you guys have or do you feel you have around this important driver?
Tim G. Guttman - Executive Vice President and Chief Financial Officer
I guess I'll jump in and start, Bob. We are assuming a positive contribution.
We're modeling 2016 after we – just to give some goalposts here, we're modeling 2016 after the second half of our fiscal year. So our June quarter, September quarter, we've taken that two quarter and period and said that's probably the run rate, so that's how we're thinking about 2016, positive contributions to GP.
In terms of inflation-deflation, we have a large portfolio of generics. That basket can still be somewhat deflationary and still provide positive contribution to your P&L.
We really haven't commented on where we think that portfolio would be, but again, I would assume, as we've been in the past slightly positive with that portfolio, it's going to be slightly negative in 2016.
Robert Patrick Jones - Goldman Sachs & Co.
Okay. And I guess just on the other side, on the branded inflation assumption, it sounds like you're expecting branded pricing to moderate.
That sounds like a little bit of an incremental update. How impactful, I guess, will that be on the outlook?
And then is the expectation for some moderation in branded pricing, is that something that you're observing currently in the marketplace and that's why you're baking it into the outlook?
Steven H. Collis - President and Chief Executive Officer
Well, I'd say the highest inflation I can ever remember this year at 15%. So I think there's been a lot of publicity about that.
And it's not driven as much by the smaller products that are often used, say, in hospital anesthesia It's some of the bigger products as well, which has been well recorded. And I don't expect that – we've probably seen more a resumption to the low teens or even high single digits.
That's the range that we would see. Again, ABC, our portfolio's very geared towards specialty, which as I've said a little while ago, because of ASP on the physician side, you don't see the big increases there that you see in other sectors.
So we think that pharmaceuticals will still, of course, provide excellent healthcare efficiency and especially when they're administered in the correct settings with the right sort of adherence programs, it's one of the best drivers of value. And I think manufacturers, I think you just have a lot of therapies that provide excellent value and then they look at new therapies being introduced and the efficacy of those drugs and I think there's been a propensity to increase that.
I think the change generally gets overestimated and things take a lot longer than you expect. And a good example I can give you is the pedigree rule.
Everyone knew that it had to be made, it had to be passed, it made sense, it was going to cause a lot of inefficiency in the system, so the states started passing down pedigree rules. But it's very, very hard to get legislation passed, as you know.
We know this week's events, but notwithstanding that, it always does seem to get very hard to get legislation passed and I would just remember that when you make any assumptions on how things will change, especially from legislation.
Tim G. Guttman - Executive Vice President and Chief Financial Officer
Yeah, Bob, I would just say, to level-set everybody, remember with brand, we probably have 95% of our brand volumes tied up with fee-for-service agreements and we're probably in the third, fourth evolution of contracts. So again, a change in brand inflation is not a big driver to our P&L.
It's a sweetener maybe, but it's not going to impact us. And I would like to just for 30 seconds go back to generic price appreciation.
We talk a lot about it, but just to remind everybody, the bottom line is this generic volume and capturing the wallets and not having the leakage. It's the rebates and incentives you get from your manufacturer partners, it's launches.
Those are the things that really drive your P&L more so and what we focus on than something that's not in our control as generic price appreciation. It's, again, an enhancer, but those other categories are really significant to our P&L.
Robert Patrick Jones - Goldman Sachs & Co.
Understood. Thank you.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Thanks, Bob. Next question, please?
Operator
And next we'll go to the line of Lisa Gill with JPMorgan. Please go ahead.
Lisa Christine Gill - JPMorgan Securities LLC
Thanks very much. There's always a lot of talk about global procurement in your deal that you put together a couple years ago with Walgreens.
But, Steve, we don't generally hear you make announcements about customers that come onto that platform. Can you maybe just give us an update as to where you are on that?
And what are some of the offerings that you have in the marketplace for your existing customers?
Steven H. Collis - President and Chief Executive Officer
Yeah, so I can answer that a few ways, Lisa. Thanks for the question.
The best way and the most practical way for an ABC customer to access the WBAD benefits is through our ProGen formulary. We're focused every day on making that the best overall value basket.
So it's not really the headline news. But we do these massive business reviews and the first I think on page 8 or 9, we start getting into ProGen volume.
And when I get the data, I know it's the first thing I look at, how are we doing in ProGen because it's so important to us and it's a key driver. And ABC, I think with the SAP implementation and with Bob Mauch coming on as President and his strong analytical background, our analytics get stronger and stronger all the time.
And it's very complex because there's 2,000 important generic products. And a lot of our customers are in the market and outside of our usual peers there's also some other companies that get into generic telemarketing and some of those are even operated by our peer companies.
So, it's a very dynamic marketplace and we focus every day on making sure our customers understand it. Recently I've been really impressed with some of the dashboard tools that we have so that our sales reps can do incredible deals, have great access to very powerful and up-to-date tools to show customers exactly what their true net pricing is, taking into account full rebates, et cetera.
So we're doing a good job. I think we'll carry on getting even better.
Again, they Alliance Boots heritage, I think people really understand how we need to compete against short-run wholesalers, et cetera. So there's a lot of strong commonality we have.
And then Peyton's group being based in Berne I think is also very helpful. So that might be one way that I'd answer question.
Just quickly, I know because we're coming close to – we're actually over our time. GNP with Dave Neu is being fully focused on that.
We've announced we had our strongest new level of service offering, we call it the next generation of services, and a lot of that is around adherence, a lot of it is around new network programs, a lot of that is really encouraging the highest level of compliance from our customers. So that's all going well.
We had over 800 customers sign up the first month to go on our Elevate platform and we'll give you further updates on that. We just had a lot to talk about on this call, but we're very bullish about where it's going.
Lisa Christine Gill - JPMorgan Securities LLC
Is there a way, though, with that 800 customers, can you talk about how that's grown over time or what that compares to the total number of customers that you have, so we can just get an idea, Steve, of the incremental opportunities around this?
Steven H. Collis - President and Chief Executive Officer
Yeah, we will do that on the next call. The 800 was just the people who immediately signed up to switch from our GNP Provider Network to Elevate just literally in the first couple of days.
And that was just based on the strong trade show we had in Las Vegas. But we will, Barbara, give you an update on that because we are very excited about the GNP platform and how it's proceeding and we want to make sure that we stay in the leadership position.
We did win the J.D. Powers brand satisfaction survey this year again, so we note that and we're very pleased about that.
Lisa Christine Gill - JPMorgan Securities LLC
Okay, great. Thank you.
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Operator, I think we'll take one more question.
Operator
Yes, and that will be from the line of Eric Percher with Barclays. Please go ahead.
Eric R Percher - Barclays Capital, Inc.
Thank you. So, a question on revenue and margin and as you do your forward plan for this year I imagine you're also thinking through (61:37 – 61:44).
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Eric? Operator, can you hear me?
Operator
Can...
Eric R Percher - Barclays Capital, Inc.
Can you hear me?
Operator
Yes, Mr. Percher.
Please continue.
Eric R Percher - Barclays Capital, Inc.
Were you able to hear the first part?
Barbara A. Brungess - Vice President, Corporate & Investor Relations
I can hear you now. But why don't you start over, Eric?
Eric R Percher - Barclays Capital, Inc.
Okay. So a question on revenue and margin.
And looking at 8% to 10% growth, less, of course, the little bit of acquisition. These are high numbers relative to recent history.
It sounds like you're taking a prudent amount of brand inflation, perhaps returning to the mean a bit from this high-growth year. As you look at 8% to 10% or maybe it's 6.5% to 8% once you pull in acquisitions, do you think that's the sustainable growth rate going forward?
And then as you look to your margin on the growth that you're getting here, obviously we don't have generic conversion in the same way. In fact, we have generic inflation working against us.
How do you think about the margin profile and your ability to drive margins, understanding that you have a couple of factors working against you this year?
Tim G. Guttman - Executive Vice President and Chief Financial Officer
Yeah. Hey, Eric.
This is Tim, I'll start. We have a very strong portfolio of businesses, customers, I should say.
And they're large and they're fast growers, so we think we're advantaged that way, to grow faster than the market. I think we've proven that the last few years.
That's why we – we do have inflation baked in there. We do sell a large mix of brand drugs, but at the end of the day, large customers like a Walgreens and like a Kaiser and others, the GPOs grow faster and that helps us.
And let's not forget we also have Specialty, a strong franchise that we called out should grow in the low teens for 2016. So we're pretty optimistic about our topline revenue growth.
In terms of margin, margins will be flattish. Again, I called out that we're going to be up 10 basis points in 2016 with most of that coming from the new businesses.
So that's MWI and PharMEDium. We're really focused on growing operating dollars, I mean, that's what we do.
And that's first and foremost. And then sometimes the margin is challenged because of these large customers and the pricing they get.
So it puts a little bit of margin pressure on the P&L. But, again, we focus on growing dollars to drive the EPS growth.
I don't know, Steve, if you have any comments?
Steven H. Collis - President and Chief Executive Officer
Yeah, I think the last thing we try to do, if you just – I would love to make this comment, because it's one I'm exceptionally proud of. If you look at – set aside the $3.7 billion we had in cash flow in fiscal year 2015 and go to the more normalized rate we predicted, but you'll note that it's almost double our EPS growth rate, a little bit less than that.
Of course, when you look at it, it's only about six days sales. However, we've done a great job of taking that cash flow, managing through the warrant hedging, which has been significant, over $2 billion of – about.
And then two acquisitions with our strong balance sheet that will differentiate us both in services and margins. MWI, I think was well understood, but PharMEDium, if you look at their financial performance, it's been absolutely, for a large business, one of the most impressive growth rates I've seen since our early days of Specialty.
It's pretty – their financial performance was what really, really attracted our attention. And our ability that we can continue to carry on driving significant numbers.
So if you look at the job ABC's doing, we're investing in our core businesses with differentiated complex, higher margin services. And that cash flow is what gives us the ability to do it.
And we've always said our first prize is great internal projects. So, for example, when I was at Heathrow this week, there's a $300,000 testing machine that they're going to buy, which will save us $300,000 in testing expenses.
Not anything we'd normally talk about, but that's a great example of why internal investments work the best for us. Our national (65:52) center has been an absolute home run, particularly now as we bring it into fiscal year 2016.
SAP, it cost us a lot more than we expected, but we couldn't have done the things we're doing without it. That's prize number one.
Prize number two is World Courier, PharMEDium, and MWI. And PharMEDium is still too early to call, but MWI, I think, and in World Courier we feel terrific about the way we've been able to bring in the people, the customers, the suppliers.
So I think we're doing the job that you're all paying us to do very, very well. And I just wouldn't look – underestimate the importance of that cash flow and how it's – how it's fitting into our ability to carry on managing our margins, our growth rates, and invest both in internal and external projects.
So I just – I did want to make that point as we wrapped up. So thanks, Eric; and Barb, I'll just conclude by saying how proud we are of our performance this year.
It really has been a great couple of years. We're excited about developments in the marketplace.
No one can accuse our sector of being boring at all. And this is an incredibly dynamic time to be in this industry.
And I'm just very proud of the way ABC's positioned – the way we're approaching customers, the way we're approaching associates. Actually the relationship I have with our board, I should say, is another great element in our success.
So, hopefully this call will demonstrate both the value we're providing as well as the confidence we have in the future. Thanks for your time today.
Barb, are you going to close?
Barbara A. Brungess - Vice President, Corporate & Investor Relations
Yes, thanks, Steve. And for those who are still on the line, I know we left a lot of people in the queue, so we'll try and get to you as soon as we can.
But before we sign off, I just want to highlight that we'll be at a couple of upcoming investor events. On November 4 we will be attending the Citi Healthcare Conference in New York.
On December 10 we'll be attending the Bank of America Chicago Healthcare One-on-One Conference and in January we'll be attending the JPMorgan Healthcare Conference in San Francisco. With that I'll turn it back to the operator.
Operator
Thank you. And ladies and gentlemen, this morning's conference call will be available for replay and that will be after – give me one moment, please, I do apologize – after 1:00 p.m.
today through November 5, 2015, ending at midnight. You may access the AT&T replay service at any time by dialing 1-800-475-6701 and entering the access code of 370374.
International participants, please dial area code 320-365-3844. Those numbers once again are 800-475-6701, 320-365-3844, with the code 370374.
That does conclude our teleconference call for this morning. Thank you very much for your participation and do you have any closing remarks?
You may now disconnect.