Jan 31, 2019
Operator
Ladies and gentlemen, thank you for standing by. Welcome to the Q1 Fiscal 2019 Earnings Call.
At this time, all participants are in a listen-only mode. Later, we will conduct a question-and-answer session with instructions given to you at that time.
[Operator Instructions] As a reminder, this conference is being recorded. It is now my pleasure to turn the conference over to Vice President of Investor Relations, Mr.
Bennett Murphy. Please go ahead.
Bennett Murphy
Thank you. Good morning and thank you all for joining us for this conference call to discuss the AmerisourceBergen fiscal 2019 first quarter financial results.
I am Bennett Murphy, Vice President, Investor Relations for AmerisourceBergen, and joining me today are Steve Collis, Chairman President and CEO and Jim Cleary, Executive Vice President and CFO. On today’s call, we will also be discussing non-GAAP financial measures, which we use to assess the underlying performance of our business.
The GAAP to non-GAAP reconciliations provided in today’s press release are also available on our website. During this conference call, we will also make forward-looking statements about our business and financial expectations on an adjusted non-GAAP basis, including but not limited to, EPS, operating income and income taxes.
Forward-looking statements are based on management’s current expectations and are subject to uncertainty and change. AmerisourceBergen assumes no obligation to update any forward-looking statements or information, and this call cannot be rebroadcast without the express permission of the company.
We remind you there are uncertainties and risks that could cause our future actual results to differ materially from our current expectations. For a discussion of key risk factors and other cautionary statements and assumptions, we refer you to our SEC filings, including our most recent Form 10-K, and to today’s press release.
I would also like to remind you that we have posted a slide presentation to accompany this morning’s press release. You can find it at our website, investor.amerisourcebergen.com.
You’ll have an opportunity to ask questions after today’s remarks by management. We do ask that you limit your questions to one per participant in order to get us to as many participants and inquiries as we can within the hour.
With that, I will turn the call over to Steve. Steve?
Steven Collis
Thank you, Bennett, and good morning to everyone on today’s call. I am pleased to discuss AmerisourceBergen's solid first quarter fiscal 2019 performance, however our role in the supply chain value creation in the ongoing responsibilities and finally, our company’s strong position for long term growth and shareholder value creation.
First, our quarterly financial performance. Revenues were up an impressive 4% to $45.4 billion for the quarter and our adjusted diluted EPS was $1.60 for the first quarter, an increase of 3% compared to the previous fiscal year period.
As we left the last significant quarterly contribution from PharMEDium it is important to highlight the strong results from our core pharmaceutical distribution businesses. The continued execution by these businesses that are supporting growth of our customers and delivering strong performance in specialty distribution along with share buybacks and tax reform have helped offset the headroom caused by PharMEDium over these past four quarters.
We are extremely proud of the strong stock for fiscal 2019 and recognizing that this -- and recognize that this success would not have been possible without the hard work of our dedicated associates. I personally want to thank our 21,000 associates’ everyday on driving this performance and maintaining a high impact culture that unlocks expertise and facilitates collaboration with our customers, partners and fellow colleagues.
As I mentioned, the Pharmaceutical Distribution segment executed extremely well despite the ongoing challenges at PharMEDium. The segments double digit year-over-year revenue growth reflects several key successes.
First, I’ll read an end to this focus on execution in an evolving and dynamic marketplace, deepening relationships with our partners, providing the solutions they need and enabling patient access to pharmaceuticals wherever and whenever they need them. Next, our market-leading Specialty Distribution franchise of oncology and physician administered products continues to perform exceptionally well.
Our deep expertise in Specialty Distribution and comprehensive offering of services and solutions, both over the last several decades continues to empower community based providers to best service their patients by enhancing their ability to maximize fitness performance. Finally, we have had great success, great volumes with existing customers.
We believe that our portfolio of fast growing customers is a key differentiator and we are continuously seeking new ways to unlock value for our partners. With regard to PharMEDium we are disappointed with where we are.
But I’m actively working to resolve the challenges. First, we have continued to communicate with regulators regarding potential resolutions.
As those discussions continue, we are in the midst of conducting a comprehensive, strategic and financial review of the PharMEDium business. Our approach is both, thoughtful and decisive.
In fact, we have already engaged with a new CGMP consulting firm to support remediation efforts and enhancements across the entire PharMEDium business. In addition, we have begun a workforce reorganization to appropriately position the business to execute once remediation is complete.
Jim will provide more details in his comments. However, I want to reiterate that PharMEDium’s focus remains on patient safety and delivering the safest and highest quality products.
The strategic and financial review of the business will be all encompassing, and could result in further investments either business optimization activities or even a potential set of business. AmerisourceBergen want to ensure that decisions made from this review consider about the needs of PharMEDium customers and what is best for AmerisourceBergen and its shareholders.
It is important to take you take a step back and appreciate the overall strength of AmerisourceBergen core pharmaceutical distribution businesses, which has helped to offset the financial headwind from PharMEDium during the same period. I’m extremely proud of our core distribution team’s outstanding performance.
I want to personally recognize the operational excellence facing best-in-class expertise, tenacity and relentless focus on customer experience. AmerisourceBergen is executing, innovating and supporting customer growth, and we continue to find new ways to expand upon our robust and pharmaceutical centered value proposition to create additional value for our customers and partners.
Specific to manufacturers, our value proposition include services and support enhanced access for pharmaceutical commercialization and companion and production animal health products through our global commercialization services and Animal Health Group reported as Adam. As a group, during the first quarter these businesses achieved high single digit year-over-year revenue growth led by the standout performance of World Courier.
As a leading global specialty logistics, World Courier continues to achieve double-digit growth by delivering high tax logistics services and enhancing the customer experience with new offerings and technology improvements. Beyond World Courier, two of our other specialty commercialization services businesses serving customers outside the U.S.
for operations in both Brazil and Canada posted solid performances. The focus on these of these businesses on delivering differentiated services is showing promising results.
This quarter in particular, AmerisourceBergen consulting services benefited from strong performances in our Canadian operations, while also making good progress at Lash Group. Journey back to Lash customer launches onto the game changing fusion platform continues to advance.
Lash has also successfully extended key customer relationships, providing a stable and growing base of customer partnerships that position the business well for the long term. Finally, MWI expanded its relationship with our key animal health anchored customer and into its corporate account customer base demonstrating another example of our ability to deepen relationships with strategic partners throughout AmerisourceBergen.
As an enabler of access and creative efficiencies, AmerisourceBergen plays an important role in the supply chain, unlocking value for our partners and customers and delivering on our purpose to create healthier futures. AmerisourceBergen delivers complex, logistics and financial services driving cost efficiency within the healthcare supply chain and expanding patient access to vital pharmaceuticals.
Our focus on innovation and efficiency, together with scale, security, and capital we provide enable us to facilitate a broad range of functions that are crucial to multiple players within the ever evolving U.S. healthcare supply chain.
Over the past few months, there have been discussions in the U.S. regarding limitations around the ability of patients to realize the benefits of net prices for pharmaceuticals and I’ll negotiate on their behalf.
AmerisourceBergen is at its core, a healthcare solutions provider. As we look into the future, we believe there could be an opportunity for AmerisourceBergen and the distribution industry as a whole to help facilitate a possible solution for patient access to pharmaceuticals at the negotiated net prices.
Let me explain. The U.S.
pharmaceutical distribution industry possesses the fundamental tools and relationships to possibly facilitate patient access to discounted or net price pharmaceuticals at the pharmacy counter given our unique positioning in the supply chain as a physical link between manufacturers and pharmacies and ultimately patients. In fact, AmerisourceBergen and our peers have a long history of managing net price adjudication and health systems and alternate care settings.
Every day AmerisourceBergen provides the financial services to health systems and manufacturers that allows for patient, for provider access to pharmaceuticals at a negotiated net prices, based on their agreements with manufacturers and we execute hundreds of millions of these transactions annually. Given the strength of our business strategy, and ability to be a driver of all solutions, AmerisourceBergen believes similar processes could be utilized for adjudicating negotiated discounts in other settings, most notably retail pharmacy.
Certainly, this added service for the healthcare system would require time and investment. However, we are confident in both our value proposition and the industry’s ability to work together with policy makers and commercial partners to further enable access and create additional efficiencies within the supply chain.
This opportunity demonstrates one of the many ways AmerisourceBergen can employ our unique strength and ability to increase efficiency and create additional value for manufacturers’, payers, the U.S. healthcare system and most importantly, patients.
At AmerisourceBergen, we believe our responsibility to create healthier futures extends to social issues, such as engaging, and mobilizing to help create the opioid epidemic, an epidemic, a crisis that is facing all of us in the healthcare industry and in our country. AmerisourceBergen is driving the supply chain is one of a logistics provider and distributor.
We are responsible for getting FDA approved drugs from pharmaceutical manufacturers to DA and rated pharmacies at the same time based on prescriptions by licensed health care providers. Notably as a logistics provider and distributor, we do not have access to patient information and we are not qualified to interfere with a very personal clinical decisions made between patients and their physicians.
We take our role in the supply chain very seriously. We have adhered to all monitoring and reporting requirements, and provided daily reports to the DA of all controlled substances shipped to our customers, including opioid based medications.
We proactively stop suspicious orders, using algorithms and data analytics tools to identify orders of interest and to stop shipment of suspicious orders. We partner with our Good Neighbor Pharmacy Network, Walgreens and others on safe drug disposal programs.
On the philanthropic side, AmerisourceBergen foundation was close to other foundations and organizations to educate patients and support programs to help combat the crisis. Finally, AmerisourceBergen remains engaged.
Our board, our management team and all our 21,000 associates know that the opioid epidemic is a top priority that we must work collectively to address. We will continue to work.
We are continuing to work to combat the crisis, while defending ourselves against litigation and being responsible stewards of shareholders capital. In closing, AmerisourceBergen provides connectivity for stakeholders throughout the healthcare system and whether the themes are efficiency, effective use of data, transparency, new ways to support value based care, or the widening road especially medicines and precision medicine, AmerisourceBergen is well positioned to continue playing an integral role in helping our partners in what is certain to be an exciting future.
We have a clearly defined strategic focus on the U.S. pharmaceutical market, where we continue to see growth, strong patient demographics, significant value capture from increased pharmaceutical utilization, and a focus on delivering the best patient care.
Healthcare is a critical, integral part of the economy and pharmaceuticals clearly represents the most efficient form of patient care. AmerisourceBergen is attractive partner that helps enable success about stakeholders, both large and small to deliver care in what is a complex, healthcare market.
We are intensely focused on the problems or opportunities our customers have in their business, and respond by modifying and enhancing point based in our offerings to meet the different needs of manufacturers and providers. We remain confident in our ability to execute, evolve and transform our business to meet the needs of our customers, drive value for our stakeholders, and ultimately serve patients.
More than ever, we are united in our responsibility to create healthier futures. Now, I will turn the call over to Jim for a more in-depth discussion of our quarterly financial results and our financial guidance update for fiscal 2019.
Jim?
James Cleary
Thanks, Steve, and good morning everyone. My remarks today will focus only on our adjusted non-cash financial results, growth rate and comparisons are made against the prior year December quarter unless otherwise noted.
For a discussion of our GAAP results, please refer to our earnings release. As Steve mentioned, we had a solid quarter, with impressive performance in our core distribution businesses, helping to offset the continued headwind from our PharMEDium business.
As a reminder, the December quarter last fiscal year had a significant contribution from PharMEDium which we now lack. And the comparison beginning with the March 2019 quarter will get easier, as it relates to that business.
While there is some complexity in our quarter-over-quarter comparisons due to the consolidation of Brazil, both pro forma and specialty joint venture, which I will help normalize for throughout my remarks. The results this quarter came in largely as expected with adjusted EPS slightly better, due to some of the items that I’ll discuss later.
I will provide commentary in two main areas this morning. First, I will detail our adjusted, quarterly, consolidated and segment performance.
Second, I will cover our revised fiscal 2019 guidance, reflecting our updated expectations for PharMEDium. Turning now to our first quarter results.
We finished the quarter with adjusted diluted EPS of $1.60, an increase of 3% primarily due to lower income tax expense and a lower share count. Also, the current quarter benefited from a couple pennies of onetime corporate items that are expected to reverse in the March quarter, namely a reduction in deferred comp plan liability caused by the December downturn and the broad equity markets.
Our consolidated revenue was $45.4 billion up an impressive 12% primarily driven by strong revenue growth in the Pharmaceutical Distribution Services segment. Gross profit increased 8% or $90 million to $1.2 billion excluding the impact of consolidating Brazil gross profit would have increased 3% or $35 million.
Consolidated operating expenses increased 17% to $731 million. Excluding Brazil, operating expenses would have been up 9% and if we were to back down on H.
D. Smith, the increase would have only been 5% which includes an increase in bad debt expense that contributed about 2% of the 5% increase.
As the year progresses, the year-over-year comparisons will normalize since we acquired H. D.
Smith and began consolidating Brazil, both in January 2018. We are tracking right in line with our expectations for full year consolidated operating expense growth in the mid-single digits, albeit slightly at the high end of that range due to our inclusion of consolidating Brazil and guidance, consolidated operating income with $472 million down 3% with our operating margin down 17 basis points.
As we had previously communicated, the December quarter was expected to be a headwind for operating income, due to the significant contribution from PharMEDium in the first quarter of fiscal 2018. If you were to exclude the negative year-over-year impact from PharMEDium and the positive year-over-year impact from H.
D. Smith and Brazil, AmerisourceBergen adjusted operating income would have been of mid-single digits in the December quarter.
In the next three quarters of fiscal 2019, the year-over-year comparisons should not be distorted as it was in the December quarter given the meaningfully lower contribution from PharMEDium in the last three quarters of fiscal 2018 and the lapping of both the H. D.
Smith acquisition and the Brazil consolidation. Net interest expense increased 18% to $42 million.
Excluding Brazil, the net increase was 7% due primarily to debt issued last year to fund the H. D.
Smith acquisition, which we will begin to lap in the March quarter. Moving now to income taxes.
Our adjusted income tax rate was 20% and reflects primarily the lower U.S. corporate income tax rate resulting from tax reform and a discrete state income tax benefit.
The prior year quarter tax rate of 24% did not fully reflect the benefit from tax reform. Our diluted share count decreased 3% to 214 million shares.
In the December quarter, we decided to opportunistically repurchase shares earlier in the fiscal year than originally anticipated, buying back $226 million of our shares in the quarter. We exited the quarter with $900 million remaining on the share repurchase authorization that the board approved in November 2018.
Regarding free cash flow and cash balance, in the December quarter we had free cash flow of $400 million, which was primarily due to our net income as the change in our net working capital balances were relatively small. If you were to adjust for the gain from anti-trust settlement, adjusted free cash flow with $313 million in the quarter.
We’re off to a good start and continue to expect adjusted free cash flow to finish in the range of $1.4 billion to $1.6 billion. We ended the quarter with $2.5 billion in cash of which $550 million was held offshore, and the majority was U.S.
denominated cash. In the quarter, we repatriated $350 million of cash held offshore for general corporate purposes.
This completes the review of our consolidated results. Now I will cover our segment results.
Beginning with Pharmaceutical Distribution Services, segment revenue was $44 billion up 12%. As mentioned earlier, the segment continues to benefit from the growth of our customers, and especially our largest customer Walgreens and continued strength in Specialty Distribution particularly in Oncology.
Businesses throughout the segment continued to work diligently, thoughtfully and collaboratively to support our strategic partners. Segment operating income decreased about 4% to $373 million.
As previously disclosed, the December quarter was expected to be meaningfully impacted by the headwind from PharMEDium. Considering the significant contribution PharMEDium made in the previous fiscal year compared to a loss at PharMEDium this quarter.
As Steve mentioned, we’re in the midst of conducting a strategic and financial review of the PharMEDium business. Customer demand for sterile-to-sterile compounded products remains strong.
However, the path to achieving full regulatory compliance with the updated 503B standards has certainly taken longer than initially estimated, and we expect that our ongoing discussions with regulators will likely result in entry into a consent decree. Recognizing the shifting regulatory landscape and the current economics of the business, the management team has been evaluating PharMEDium’s current allocation of resources and making decisions to appropriately position PharMEDium to execute.
As Steve mentioned, the initial phase of the strategic and financial review led to the redeployment of capital from the workforce to remediation efforts. For fiscal 2019 guidance purposes, we have removed any contribution from the Memphis facility.
This downside scenario is factored into the original guidance. Therefore the lower end of our adjusted EPS guidance range remains unchanged at $6.65.
However, we are lower the top end of our adjusted EPS guidance range to $6.85 from $6.95 to reflect the updated view on the fiscal 2019 outlook of PharMEDium. As we continue to move forward on this path towards resolution at PharMEDium, we remain committed as taking the right step that consider both the needs of PharMEDium customers and what is best for AmerisourceBergen and its shareholders.
Taking a step back, our core pharmaceutical distribution businesses continue to perform quite well. We had strong revenue growth throughout the group and we continue to achieve double digit growth in specialty enabling access to life-changing specialty products, while our ION solutions group continues to provide key resources and expertise to community-based oncology practices.
As I said earlier for the consolidated results the same is true for the segment results. Operating income would have been up in the mid single-digits in the December quarter backing out both the negative impact from PharMEDium and the positive impact from H.D.
Smith in Brazil. I will now turn to the other segment businesses that focus on Global Commercialization Services and Animal Health including World Courier, AmerisourceBergen Consulting and MWI.
In the quarter total revenue was $1.7 billion, up 8% primarily due to the consolidation of the specialty joint venture in Brazil and growth at both World Courier and consulting Canadian operations. MWI’s revenue was flat this quarter, negatively impacted by the manufacturer switch to agency from buy sell which we not begin to lap as well as the late cattle movements and the exiting of a smaller business line.
From an operating income standpoint this group had operating income of $99 million down about 1%. World Courier continued its strong operating income throughout in the quarter.
However, and as expected the group didn’t have lower contributions from both MWI and Lash. MWI experienced pressure relating to rebates, but some of the rebate dollars recognized earlier in its strong fourth quarter in fiscal 2018, which had normalized by the fourth quarter of fiscal 2019.
MWI’s operating income growth rate is expected to improve going forward with the continued strengthening of its customer relationships and commercial partnerships. Finally, our consulting business was down year-over-year as Lash continues the implementation of Fusion.
During the quarter we made progress both in launching manufactured clients on this new technology platform and in new business development. The feedback on Fusion continues to be positive and we continue to believe it is a long-term value driver for the business.
Overall, we continue expect high single-digit operating income growth from the Commercialization Services and Animal Health group in fiscal 2019. This completes the review of our segment results.
So I will now turn to our fiscal 2019 guidance. Regarding revenue, we continue to expect growth in the mid single-digit percent range.
Revenue growth will normalized throughout the year to the mid single-digit range as we anniversary incremental business added in fiscal 2018 through our relationship with our largest customer as well as the Brazil Consolidation and H.D. Smith acquisition.
Regarding operating expenses, we continue to expect operating expenses to grow in the mid single-digit percent range. While operating expenses are likely to finish towards the higher end of that range due to the consolidation of Brazil.
We remain diligent in managing our expenses and leveraging our infrastructure particularly as we realized additional operational synergies from H.D. Smith.
Now I will turn to operating income. We now expect to grow operating income in the low single-digit percent range to reflect the impact to revise expectations at PharMEDium which I will cover as I discuss the revised guidance from a segment standpoint.
We now expect the operating income in the Pharmaceutical Distribution Services segment to grow in the low single-digit percent range. As I said earlier, we are now removing any contribution from Memphis.
We are certainly disappointed by where we are with PharMEDium, but we are extremely proud of the execution from businesses throughout AmerisourceBergen, particularly in core Pharmaceutical Distribution which are helping to offset the anticipated loss from PharMEDium in fiscal 2019. Excluding PharMEDium this segment is performing well.
The strong core fundamentals as we continue to benefit from our execution, market-leading specialty distribution and solid growth in full-line distribution which is continuing to benefit from our successful contracted balancing over the last few years. Turning now to Global Commercialization Services and Animal Health; we continue to expect operating income to grow in the high single-digit percent range driven by the continued strong performance of World Courier, ongoing initiatives and expected improvements at MWI and continue progress within consultant.
Moving below the operating income lines for the tax rate, we continue to expect our full-year adjusted tax rate to be in the range of 21% to 22% which more closely represents our normalized estimated tax rate. Regarding share repurchases given the level of share repurchases in the December quarter we now expect to finish the year around $215 million weighted average shares outstanding.
Regarding adjusted EPS, as I said earlier, we are narrowing our range to $6.65 to $6.85 lowering the top end due to our evaluation of business expectations of PharMEDium which reflect the assumption that Memphis facility will not reopen in fiscal 2019. Turning back to our guidance range overall, there are many variables that go into our guidance range including how well our business unit execute.
How well we are able to manage operating expenses, the efficiency and timeliness in capturing the H.D. Smith synergies and of course trends in brand and generic pricing and mix.
An additional key driver where we finish in the range will be execution at PharMEDium. How successful we are at remediation, operational effectiveness, financial efficiency and other strategic initiatives that we have underway at the business.
Turning now to cash flow. We continue to expect adjusted free cash flow for fiscal 2019 to be between $1.4 billion and $1.5 billion.
Lastly, we re not making any changes to our working assumptions around pharmaceutical pricing for the full fiscal year, broadly speaking both brand and generic pricing are trending relatively in line with our original expectation for the year. Certainly we are early in our fiscal year and we anticipate there will be some more band activity later in the year.
Regarding our fiscal second quarter adjusted EPS expectations, while we do not provide quarterly guidance I will note that our second quarter adjusted EPS is likely to be relatively flat compared to previous year period due to lower compensation in the quarter from brand manufacturers compared to last year, the headwinds from PharMEDium, albeit at much smaller than the one in the December quarter and due to some one-time items that I’ve mentioned earlier. In closing, AmerisourceBergen businesses continue to perform well.
The contribution and execution in core drug distribution businesses is impressive and continues to help offset the financial impacted challenges at our PharMEDium business. Core distribution fundamentals remain strong.
We have key anchor customers growing well across the enterprise. We are the leader in the fast growing markets for specialty distribution and services, and we continue to maintain a strong balance sheet.
AmerisourceBergen value proposition to its partners is undeniable and we are well positioned to create long-term value for all our stakeholders. Thank you for your interest in AmerisourceBergen.
Now here's Bennett to start our Q&A.
Bennett Murphy
Operator, we will now take our first question.
Operator
[Operator Instructions] And our first question comes from the line of Michael Cherny with Bank of America. Your line is open.
Please go ahead.
Michael Cherny
Good morning and thanks for all the colors so far. Just I want to start earlier some -- ask my question on PharMEDium and thinking about what this means to the total core.
Jim, you mentioned kind of mid single-digit. I guess you’d call it organic EBIT growth in the quarter.
As you think about rest of the year with H.D. Smith still having some synergies obviously lapping -- in that low single-digit growth for the year how do you think about what core should be?
And then, relative to the 200 to 300 basis points that you have talked about PharMEDium creating as a headwind for Pharma EBIT growth for the year, by my math, I think you’re already there for the year. So, how do you think about the headwind specifically at the low end of the range for PharMEDium going forward?
James Cleary
Sure. We had caught when we first provide guidance at the beginning of the year that operating income growth would be low to mid single-digits and now we’re indicating low single-digits and really the difference is taking out the upside scenario at PharMEDium.
And so we are seeing strong performance. As we talk about in the core businesses and kind of that in mid single-digit growth in the core businesses.
So as you think about PharMEDium the rest of the year and the impact, there was significant headwind in the December quarter that we talk about today. And then there would be much smaller headwind in the March quarter from PharMEDium, and then its basically flat Q3 and Q4 versus last year.
And so the PharMEDium headwind on a total basis represents about 2% to 3% headwind in operating income for fiscal year 2019, which is really the difference between the mid single-digit operating income growth and now the low single-digit operating income growth.
Michael Cherny
Okay. Thanks.
Operator
Our next question comes from the line of Robert Jones of Goldman Sachs. Your line is open, sir.
Robert Jones
Great. Thanks for the questions.
Yes, Steve, I just want to go back your comments on helping patients gain access and managing. I think you were talking about net price adjudication.
Just to get a little bit of a better understanding. How exactly would that work relative to the current system?
What role is ABC going to play? And then, are you envisioning a world because of the change towards net pricing that some of the -- that traditional services that might've been performed by others in the supply chain would potentially now be performed by the wholesalers?
James Cleary
Hi, Bob. Thanks for the question.
We manage so many contracts and we primarily manage them in the health systems and ultimate size [ph] of area, institutional settings. But the areas that we could really manage more representative net price through the contract system at pharmacy counter.
And it’s really simple as that. So, there’s a lot of investments that would be required as we load individual managed care contracts.
But we think that could be a simply remedy. The infrastructure exist, that the resources, expertise exist to do that.
And we have about all the setbacks that are counted. I mean, most recently the insulin patients and we think that would really help the image of the industry and the understanding and make it more comprehensive and explainable to various stakeholders.
So, we kind of – we are healthcare logistics and solution provider and we think that this would entirely consistent with that role without taking away from the very important role that others do including negotiating what that net cost should be. That’s my outlook.
Robert Jones
Got it. And I guess just one on the numbers, Steve, if I could go back to some of the comments around branded inflation obviously, we’re living in a low were branded inflationary environment, yet it looks like the result ex-PharMEDium and a few other the moving pieces that you guys called out that -- the core performed well, grew, expected to grow low single-digit.
Is this the type of performance we should expect in the current branded environment? Or do you think there still needs to be kind of a change in the economic structure that exist between the wholesaler and the branded manufacturer?
James Cleary
We’re happy with the quarter. I think we drove some value from really strong revenue growth, growth primarily coming from wide segment including our core customers.
We already have 5% of our contracts that are really subject to. We look to math, the amount that we earn from people service and than the amount that we earn from brand inflation.
Yes, that number has been coming down for years. And as you know it's another headwind that we have to deal with, but it's now at 5%.
So it's not within the range of other headwinds that we could potentially face. And it is legitimate discussion to be had and we often benefit from consolidation -- you know often and from consolidation on the manufacturer side.
Yes. This is not, it's usually not a negative event for us, because I think it’s well understood that the value we represent is fair.
So sometimes we having companies that are really strong, that are really good users of our commercialization services in acquiring others or we have a stronger fee-for-service agreement in place and we were able to retain the elements of that. And if we have a week of fee-for-service we will do that with acquirer.
We also have done a good job of making the new enterprise aware of why our agreements are market based and fixed [ph]. So our group that negotiated fee-for-service contracts is sort of one of the unsung heroes of AmerisourceBergen and the industry.
They do a really good job. And I think we have constructive discussions around value and what do we representing the channel.
The services that are asked in the first part of your -- of your question to me are very exciting because it could represent a whole new fee-for-service element for us as we do that very real work of loading managed care contracts at the pharmacy level. So I think that could be exciting new dimension for AmerisourceBergen.
Robert Jones
Got it. Thanks for the questions.
Operator
Our next question comes from the line of Steven Valiquette with Barclays. Please go ahead.
Steven Valiquette
Hi. Great.
Thanks. Good morning Steve and Jim.
So I guess for me just back in the PharMEDium operations for a minute here. I'm sure you spent a lot of time probably exploring Plan B alternatives over the past six to 12 months.
And I think for us as we think about various Plan Bs given what you know now about the Memphis situation, it's kind of thinking out loud does it makes sense to perhaps explore doing site transfers to other facilities? Does it make sense to look at a third-party contract manufacturers or CMO that you could work with to fill the gap?
And also there maybe even other acquisitions you could make to just add manufacturing capacity for that business? So guys, I’m just curious to hear more about this topic?
How you're thinking about any sort of Plan B that could potentially help the overall business? Thanks.
James Cleary
Yes, sure. And as you can imagine it is being commented on and we commented on in our comment today, we're in the midst of strategic and financial review of the business.
As we've indicated we've engaged with the new GMP consulting firm that we're working with. We did the workforce reorganization and putting more capital into the remediation.
We'll be reviewing and this review is comprehensive and it could result in a number of things, could result in further investments in the business, could result in a business optimization through a number of things and could also result in a potential sale of the businesses, as Steve said. And so it's really too early to speculate on future decisions, but we obviously, our future decisions we’ll consider the important needs of our customers and we'll also consider the needs of AmerisourceBergen and our shareholders.
Steven Valiquette
Okay. And the timing in all that's probably open-ended, right, there's no date you've been imposing yourself to figure this out one way or the other, we should probably does assume maybe sometime by the end of calendar 019 we'll get some clarity on this one way or the other.
Is that a good framework for now?
Steven Collis
Yes. We're putting out -- we're putting a lot of resources into this and doing an extensive review, but we're not putting a specific date on it.
Steven Valiquette
Okay. Got it.
Okay, great. Thanks.
Operator
Our next question is from the line of Lisa Gill with JPMorgan. Your line is open.
Lisa Gill
Hi. Thanks very much.
Good morning. I just wanted to follow-up back on PharMEDium again.
If we think about, Jim, that total contribution of our medium today, I know you talked about it in the growth rate, but if you were to think about exiting this business is there a way to quantify how much far medium contributes to the business today? And then secondly, you talked a lot about remediation.
I'm sure there is cost associated with that. So as we think about netting those out and have you thought about what potentially PharMEDium could bring as far as what you could tell it for?
Just trying to think that, because your core business looks so good, right now, just try to think about if we backed all of that out what the potential for AmeriSource would be?
James Cleary
Yes. I think that you're absolutely right.
I mean the core business is performing very well and I think the best way to look at PharMEDium from a financial standpoint is the point that we're making that -- but it's really the different for AmerisourceBergen between mid single-digit operating income growth and low single-digit operating income growth. As we said, it was a significant headwind in the December quarter will be a much smaller headwind in Q2 and flat versus last year in Q3 and Q4.
And you know in total it has approximately 2% to 3% impact on operating income over the course of the whole year. And so I think that's the best way to think about the financial impact of PharMEDium.
And as I said earlier we're just really doing this extensive financial review and strategic review and investing in the remediation and that process is ongoing.
Lisa Gill
But just so I understand that correctly, everything they talked about has to do with the Memphis facility and the headwind of that. The other roughly 60% of the business is still performing.
So, if you were to exit the business altogether there would be potentially an incremental headwind from the operating profit that you have from the rest of PharMEDium. Am I thinking about that correctly?
James Cleary
Yes. So Memphis is closed, as you know.
So the other three facilities do not cover PharMEDium’s fixed cost. And as the other three facilities production levels are limited a bit as we're really implementing additional procedures and additional testing.
But I think the key thing is to answer your question that the other three facilities don't cover PharMEDium’s fixed costs, and so, even with the other three facilities, let’s say, it is a headwind.
Lisa Gill
That's very helpful. Thank you.
Operator
Our next question comes from the line of Charles Rhyee with Cowen. Your line is open.
Charles Rhyee
Yes. Thanks.
I just wanted to ask one more about PharMEDium. I know that a lot about you guys talked about obviously you have remediation efforts going on in Memphis but you are volunteering -- voluntarily making investments in the other facilities.
Can you give us an update there? Or are we done in those facilities as well?
And at this point is the issues with the FDA is still solely in Memphis. And the other facilities are there no issues there.
Can you just give us a sense of what's going on the other side, because you had done more there on your own? Thanks.
James Cleary
Sure. We are continuing to make investments in the other facilities.
We're investing in additional procedures and additional testing and so production levels are somewhat lower at the other three facilities.
Charles Rhyee
But is there a timeline for when you expect those to be finished so that we see sort of a normalization in the production on those facilities?
James Cleary
Sure. It's ongoing in process and we haven't given a specific timeline.
Steven Collis
Yes. Just to hate [ph] the PharMEDium discussion, we’ve always target [ph] this as under 10% of the AmerisourceBergen profits at its peak.
We've said that to you in the past, so probably I think there's so many other important things to talk about with AmerisourceBergen and our performance in our segment. So we probably said as much as we want to say on PharMEDium.
Clearly we will be judged by the success of the radiation and our ability to get back in good stead with regulators. Probably, those of who are asking questions we probably done on this subject for the moment.
James Cleary
Appreciate that. Thank you.
Operator
Our next question comes from the line of Erin Wright with Credit Suisse. Your line is open.
Erin Wright
Great. Thanks.
I won’t ask on PharMEDium. And so you’ve successfully surrounded yourself and establish strong relationships with larger customers that supporting volume or supporting overall growth.
But from a profit perspective and excluding PharMEDium I guess can you speak to that quarterly cadence? And do you think you have enhanced overall visibility on that core Pharma segment profit growth over the next several quarters just given clarity around whether it be drug pricing or the regulatory environment?
Thanks.
Steven Collis
Thanks for the question. We are -- we're very proud of the performance of our Pharma distribution.
I think our customer’s growth and volume speak for themselves and the market is healthy. We have some trends that the next quarter is obviously generally our largest reported earnings quarter and we see no reason that that should discontinue.
Brand and generic, brand inflation was probably modest where we expected it. Maybe a little bit softer than last year for sure.
And we wouldn't be surprised if those trends continued given the political pressure that is on brand process. And I think that the lack of understanding about the growth was net process, there was actually a good article published in The Wall Street Journal this week on that.
So we felt we feel good about that. On generic deflation, we heard a lot of pronouncements at the JPMorgan conference about that turning still.
It's still fairly still fairly high. Generic deflation is still mid to high single-digits.
And we haven't called that out anymore because we've now had several years of that and we talking about that as a trade. So we are – we’re driving in this environment.
We're doing well. We’re reporting good numbers.
We have a stable customer base and we expect to be able to continue to report on along the lines to what our guidance has been. And we'll start work in the next couple of months on our fiscal year 2020 [ph] and hope to be able to share those updates as they -- as we make progress with you.
So I think that answer your question. Jim, did you anything different.
James Cleary
Sure, Steve. Yes.
I’ll addresses that and what I’ll add is that, with our guidance of operating income growth now low single-digit spend and the difference between low single-digits and mid single-digits is the PharMEDium headwind. And so, we are seeing as you say good performance out of the core businesses.
And addition to the things, Steve talked about, we're focusing on the H.D. Smith synergies and we're seeing very strong performance in our specialty businesses.
Erin Wright
Okay, great. And then if I could just add that sort of a quick question on Animal Health.
Could you provide the normalized growth excluding agency buy sell shift and Jim, I know you're familiar with the Mars business. But can you speak to your relationship with corporate accounts such as Banfield, VCA and others as well as contract internship from vendors potentially this year?
Thanks.
James Cleary
Yes, sure. So there are a couple questions there that we're going to look at growth without the shift from buy sell to agency.
There was growth in the companion animal business that kind of be that low single-digit or so growth in the companion animal business. So a little bit -- a little bit down in the Production Animal business because of delayed cattle movements which probably catches up and like December, January, February, lot of details there.
But I’d say that, with regard to our expanded relationship with Morris, I don’t think that that should really come as a surprise. We have a 20 plus year really strong relationship with Banfield and with Morris through that Banfield relationship.
And we're just always focused with them on working together to find more ways, to create value together commercially. And so, we're very pleased to expand that relationship.
But given the very long-term relationship I don't think it should really come as a surprise.
Bennett Murphy
Thanks. Next question please.
Operator
Our next question comes on the line of Eric Percher with Nephron Research. Please go ahead.
Eric Percher
Thank you. Maybe a gross margin question and I'll start with.
If we look at the disclosures now required on brand increases in California, I imagine five or six years ago that would have created an opportunity to forward buy. Is that today effectively nonexistent because of the way the DSAs are structured?
Or does that -- did that create -- does that create any opportunity?
Steven Collis
Eric, great question, and you're right five or six years ago that would have been more so -- even more so in this, because five or six years ago the increases were more profound. But now we have these very bilateral transparent relationships on inventory levels with the overwhelming majority of our manufacturers.
So, no, it's doesn't. And I think we did see some of this and that was more around an indication of what would be happening around January.
So that was helpful to us, but not a real positive financial impact from that.
Bennett Murphy
But we will say one more question.
Operator
Thank you. Our next question comes from the line of Ricky Goldwasser with Morgan Stanley.
Your line is open sir.
Ricky Goldwasser
Yes. Hi.
Good morning and thank you for taking my call. So, just wanted to ask clarification on guidance.
To make sure that we understand it, should we seeing that guidance in the March quarter that EPS is going to be or that EBIT is going to be down because there is still a headwind from medium and we don't have the year-over-year benefit from H.D. Smith?
And then second half of the year we should expect to see acceleration is PharMEDium is no longer a headwind. And if that's the case, I know, Jim you said that you're assuming some additional branded drug price increases later on in the year?
So are you guys assuming that we go back to kind of like more historical [Indiscernible], I know last year was an interesting year, 90% of price increases happened in the March quarter. But do you think that was an anomaly and that we should go back to more normal trending this year?
Steven Collis
Yes. And so, we are doing orderly guidance, but as I indicated during the call, what we are saying is that the second quarter EPS is likely to be relatively flat versus the second quarter last year.
And kind of some of the things that drive that in the second quarter are much smaller headwind, but still a headwind from PharMEDium. And then also there'll be some of little bit lower compensation from brand manufacturers compared to last year during the second quarter.
But I think also in your question you're asking about branded inflation overall and directionally it's as expected. When we did guidance we indicated mid single-digits in FY 2019 and that's still what we're expecting.
And of course can't talk about this without going back and saying that 95% of our buy side dollars are fee-for-service. So we're talking about this incremental 5% when we when we talked about this.
And so January is a little bit lighter than a prior year, but we're still seeing mid single digits in our slide 2019 guidance and feel good about that.
Ricky Goldwasser
Thank you, Steve.
Steven Collis
Here’s everyone, well thank you. I certainly, Jim and myself and the rest of the management team we certainly take responsibility for PharMEDium which we're not trying to avoid any discussion.
We just want it to be proportional and we recognize it's an overhang to our results. And we really also would appreciate your focusing on the overall strength throughout AmerisourceBergen whole businesses, for example, our resumption to growth and profitability, strong profitability action and other areas including our international development.
But our core business has scale efficiency, valuable partnerships, we're a channel. We try to point out how a few areas where the channel could be of great value to our manufacturer partners and all stakeholders, our leadership in specialty which has been almost two decades now that continues to be strong and innovative.
And we have -- finally we have a very strong balance sheet where we've been excellent stewards of shareholders capital. So we leave you with the thought that AmerisourceBergen is well positioned to continue to create shareholder value and thank you for your time and attention today.
Goodbye.
Operator
Ladies and gentlemen that does conclude our conference for today. Thank you for your participation and for using the AT&T Executive Teleconferencing services.
You may now disconnect.