Ladies and gentlemen, thank you for standing by, and welcome to the ABC Second Quarter Earnings Conference Call. [Operator Instructions] As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, Ms. Barbara Brungess. Please go ahead.

Thank you. Good morning, everyone, and welcome to AmerisourceBergen's earnings conference call covering our fiscal 2012 second quarter results. I am Barbara Brungess, Vice President of Corporate and Investor Relations, and joining me today are Steve Collis, AmerisourceBergen's President and CEO; and Tim Guttman, Vice President, Controller and acting CFO. During the call today, we will make some forward-looking statements about our business prospects and financial expectations. We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations. For a discussion of some key risk factors, we refer you to our SEC filings, including our 10-K report for fiscal 2011. Also, AmerisourceBergen assumes no obligation to update the matters discussed in this conference call, and this call cannot be rebroadcast without the expressed permission of the company. As always, those connected by telephone will have an opportunity to ask questions after our opening remarks. Now here is Steve Collis to begin our comments.

Thank you, and good morning, everyone. I am pleased to report that AmerisourceBergen once again delivered solid quarterly results, and our performance for the first half of our fiscal year 2012 positions us well to meet our objectives for the full year. In the March quarter, our revenues were up 2% to $20.1 billion. Earnings per share were up 5% to $0.81, and that's on top of a 22% increase in the prior year. We generated $236 million in operating cash flow and we repurchased $200 million of our shares. I'm especially proud that we overcame a challenging comp to this quarter, last year, and exceeded our internal profit goals for each business unit. During the quarter, we also made excellent progress integrating recent acquisitions and working towards the closing of our World Courier acquisition. Our strong cash generation and high-quality balance sheet continue to provide us with outstanding financial flexibility and give us the ability to fund our strategic initiatives, grow our business and return funds to shareholders. AmerisourceBergen is fortunate to be an important part of a growing industry. Demographics and initiatives aimed at expanding access to health care and coverage -- and health care coverage, should continue to drive organic growth in our industry over the next several years. In addition, launches of new pharmaceuticals, as well as new indications for existing drugs should also drive sales growth over the next several years. Whether the new therapies are traditional oral medications or complex biotech pharmaceuticals, AmerisourceBergen is well positioned to not only benefit from the distribution of new products, but also to offer pre-launch and commercialization services to manufacturers and to support patient access and reimbursement programs to help ensure that patients have access to life-saving therapies and that the products achieve their full potential in the…

Thanks, Steve, and good morning, everyone. It's my pleasure to be participating in my first earnings call as acting CFO. And I am pleased to report another solid ABC quarter and, most importantly, that our Q2 results are on track with our internal plan. The highlights this quarter: excellent top line growth at our Specialty and Consulting businesses; very good execution on new generic launches and continued focus on expense management across the organization; and finally, another quarter of strong cash generation. Now let's turn to the quarterly details. And starting with the top line, revenues were $20.1 billion, a 1.6% increase over last year's quarter. Drug company revenues were essentially flat, as we guided. We had strong performance in our alternate site and health system segments, offset by the loss of a large chain customer last year, as well as the impact from brand to generic conversions. The Specialty Group revenues increased 6%, led by 2 of our businesses with above market growth. ICS, our third-party logistics business and Besse Medical, our vaccine and physician office distribution business, which benefited from a full quarter impact of sales of a new ophthalmology drug. The Consulting group, though small to the overall top line, continues to perform well. Excluding their TheraCom acquisition, they had over 20% top line growth. TheraCom contributed just under 1% of our overall revenue growth in the quarter. Moving to gross profit. Gross profit was $695 million in the quarter, up 1.1% from last March, with a gross margin of 3.46% in the quarter, down about 2 basis points from last year. As we have discussed in the past, our second quarter was a very tough comp, due to the significant contribution in the prior year from oncology generics. In the second quarter 2011, these oncology drugs…

. Thank you, Tim. Operator, we'll now open the call to questions. [Operator Instructions] Go ahead, operator.

[Operator Instructions] Our first question comes from the line of Glen Santangelo with Crédit Suisse.

I just want to quickly follow up, Tim, with respect to some of your comments on the operating margin expansion goals for the year. Previously the company had expected operating margin expansion in the high single-digit, kind of low double-digit range and now, it seems like you're suggesting high single-digit. I guess -- could just give me a sense for maybe what has changed in that thinking? And I know there were some onetime costs that you're now embedding in your estimates, and I'm curious if there's anything else that I should be thinking about.

No, we changed our guidance to high single-digit. In terms of looking out, we did an assessment of the full year, and looking out, we had some deal costs in Q2 and some onetime items, nonrecurring items. And as we look out, we're going to have some similar costs in Q3 with the World Courier transaction. So when we look out and do a reassessment, we felt more comfortable that high single-digit was a realistic target for us for the year, and there's really nothing else factored into that.

And, Tim, maybe if I could just ask a follow up on the World Courier group. You originally sort of guided $0.06 to $0.10 worth of accretion and I'm kind curious, is there anything embedded from an accretion standpoint in your fiscal '12 guidance as it relates to World Courier? And it kind of sounds like you're going to be taking down some integration costs or acquisition-related costs next quarter. I don't know if you care to size those at this point.

Glen, no. We will have some transaction-related acquisition costs in Q3. Probably not more than the number that we had for Q2. And there is no accretion in our numbers for this fiscal year. We expect it to be neutral. And in terms of next year, for fiscal '13, we're still confident with that guidance of $0.06 to $0.10.

Our next question comes from Larry Marsh with Barclays.

So my question is as follows, Steve, around Medco. Here you're communicating -- I guess, is it fair to say that you voluntarily agreed to move up the termination date of your Medco relationship by 6 months? And if so, is there any benefit for doing so, and possibly foregoing that profit stream? And then just around the topic, I wanted to confirm, you said you've already have a relationship with Express Scripts. How long have you had that? And then have you disclosed or in a position to comment about the length of the suggested new contract under the RFP?

First of all, obviously, we are part of a very active process here and we want to be very respectful of that and some of the questions should really be directed to the buyer. But I think ABC, as you know, has been very proud of over 2 decades of service to Medco and now, you could almost say we are the incumbent here because we've had such a long relationship. So we wanted to demonstrate flexibility. We wanted to recognize that this is a new entity that has their own requirements and will have a different dynamics to relationship. And now it just made sense for us to be concurrent with the current requirements. So we demonstrated flexibility. We demonstrated that ABC is a good partner and listens to our customers and I think that, that will hopefully put us in a good position throughout the contracting process, but it will be competitive. And, I guess, the only internal benefit I can point to is that this is concurrent with our fiscal year, and whatever happens, we'll be in a good position to plan for it and to communicate that to our investors.

Okay. So it sounds like you're uncomfortable commenting about the length of the contract as proposed in the RFP at this point.

As far as we know, as far as we could say, it's pretty standard type of contract term.

Right. So we assume, maybe 3 years, but again, not commenting. And I guess just a follow-up to you and Tim around SAP implementation, we appreciate the update there. If you let it to go back or remember some of the bigger expenses for this, seemed to be fiscal '10 and '11, $40 million to $50 million a year, you've mentioned, Tim, stability sooner than you thought. Can you ballpark kind of expenses around SAP for you this year? And how do we think about that comparable to next year?

Yes. Larry, our guidance has been that we'll see some benefit for SAP next year, 6 months after our last DC deployment, so we expect that to be in Q4, and we've guided to $10 million. And we expect the full benefit of about $40 million to be in '14. And so far, the benefit that we've had this year for SAP is really incremental for that. I mean, this is just expense that we've been able to take out of our operating budget, which has probably been a few million dollars. So again, they're separate. One's not a part of the other.

I got it. Right. Expenses associated with consultants and such, but again, $10 million incremental next year, $40 million for '14. And then just to clarify, I think it's an important point, the guidance confirming the range, but you're suggesting the $0.02, which was the severance and transaction cost this quarter and the $0.02 which -- ballpark of transaction cost next quarter, are included now in that range. You're not breaking that out at all?

No, absolutely, Larry. We're GAAP, and we include that in.

And again, you're saying that's a big reason why you're top and the operating margin expansion has been pulled down?

Absolutely.

Our next question comes from Robert Jones with Goldman Sachs.

Just to go back to the Express Scripts contract. Steve, it sounds like -- you mentioned contract, or contracts, so I'm assuming there's some suggestion that it could be broken up. Any insight into this view or maybe, more importantly, what benefit that would create for Express to have this contract separated?

Well, I think, in terms of processing, there's not much differentiation between s $10 billion contract, or a $15 billion, or $20 billion contract, it's just that, that is the way these large contracts tend to go. And there could be some geographical, regional benefit, based on where they're planning to have their large mail-order sites, there could be a way to separate the specialty business with the core mail-order business. So we have 2 big specialty units so -- but again, these are questions that we probably are not that comfortable commenting on and could probably be best be directed to Express Scripts, sir.

No, I definitely appreciate that. And I guess just one follow-up, Steve. Given the somewhat more acquisitive nature of the company as of late, and I know you've gotten this question before and I imagine as you continue to do acquisitions, you might get it more in the future, relative to your peers. Any thoughts or discussion between you and Tim about moving to a cash EPS, or at least breaking out a cash EPS?

No, we haven't. We lack -- we think we report not only good earnings, but very high quality earnings and, at the moment, that hasn't been under consideration.

And we, in our public company filings, we feel we give pretty good disclosure on some of those differences, especially around intangibles. And the reader of those documents can go ahead and do that calculation.

Our next question comes from Tom Gallucci with Lazard.

Steve, I was wondering if you could expand on some of your prepared remarks around sort of international and how you see the opportunity may be there over -- not the near-term necessarily but the next few to 5 years, it sounds like maybe World Courier is a bit of a platform that you could grow from in different ways, so if you have any thoughts there, it would be appreciated.

Well there's a couple of things. First of all, again, we do $300 million in revenue a day, as ABC, but one of the things we've been very, very happy with is our specialty performance in Canada. This is -- this market works differently than it does in the U.S., but we've been able to do some joint programs, we've been able to help with a more complex reimbursement environment there, including a pretty robust product market that we -- that is not generally known. At least here, in the U.S., we think about it as single-payer market, that hasn't been the case. We've been able to help, we have a very strong presence with new infusible drugs. So what we've seen is a manufacturer environment that ABC is very comfortable in contracting with, that is looking for us to get into more countries. So we've been prompted to look at international opportunities by manufacturers. Then comes World Courier, we're in 50 new countries as of next week, hopefully. We have 1,500 associates that are very tenured. We've been extremely impressed with the quality of the World Courier associates. As you know, health care is very local. So we think that we have an opportunity to understand health care markets, both organic and acquisitive opportunities, with people on the ground there who speak the language and know the trends, know who's the right players, the ethical players, the high quality players in that environment. And we think that, that's going to give us a good opportunity. We also think that as the products that World Courier is managing are commercialized, as more and more of those products are commercialized and come to market as -- middle class is growing in some countries that we haven't traditionally thought about as being big [indiscernible] sort of -- and especially consumers of products, we think we're going to have an opportunity to participate in those commercialization strategies. Think about it, World Courier has handled those products, they know the treatment centers, they know the environment. So we think that we have to recharacterize part of the business, but we think we can do that, so long answer, but as you can tell, I'm very enthusiastic about this.

Sure, that's clear. And then maybe just one housekeeping item. On the CapEx, can you sort of breakdown your maintenance CapEx versus maybe what's additional and some of those projects that you highlighted earlier, do they seep into next year? Should we assume that it comes back down a little bit, or how are you thinking about that?

Good question. No, we -- when we look at maintenance CapEx, we think it's typically between about $100 million and $120 million. We have some big projects this year supporting our expansion up in Canada. We're looking at another DC project in the U.S. in terms of expansion, automation, renovation and our TheraCom acquisition. So I would say that the $200 million is probably a peak, and it definitely should come down next year. Probably about half of the maintenance CapEx is probably a good -- kind of a good range.

Our next question comes from the line of Robert Willoughby with Bank of America Merrill Lynch.

Steve, what kind of clarity do you actually have on -- does the RFP provide for you? I mean, I assume you would have size of the potential contract, the mail footprint you'd be serving, whether or not specialty would be there. I mean, are there some things you could disclose there that would be helpful for us?

I think, we partly said, Bob, I appreciate your interest in this and, believe you me, I am really interested in this and the ABC team is very interested in this. We're just participating fully in the RFP process, it has just begun. So I could tell you we really don't -- we think it's in the range of about a $20 billion contract. So I will tell you that Medco peaked with ABC at about 19% of our revenues in fiscal year 2011, and it's come off a few percent from that, and our current run rate is more in the mid-teens, 16% range. So we could potentially gain some couple billion dollars in new revenue here.

Okay. And any sense on timing, when a decision will ultimately be made, obviously, before October 1. But how much time would you need? And do you anticipate if you win, is there investment you need to make or in the unfortunate event you don't win, what kind of offsets we might see to your cost structure, some initiatives you'd pursue?

Well, we're mainly servicing the current business out of 3 DCs, and we certainly would start giving consideration to what it could mean if we lose. But from a more exciting basis, I think we do have the capacity to service this business without much incremental investment. And we look forward to talking about the different capabilities that ABC brings to the table. And we're participating fully in this contract.

And timing, Steve? Anything?

No, I just think you know -- I think you know -- you cover Express Scripts. You know they move quickly, so that's all I can tell you. They don't let the grass grow under their feet. So we expect them to have a very active and quick and decisive process unlike this other very public contract that we went through very recently. So that should make everyone happy, at least, we'd all know where we stand very quickly. We believe so.

Our next question comes from Ricky Goldwasser with Morgan Stanley.

Just a quick follow-up [ph] on the Medco Express side, from what we understand, specialty is included in your relationship with legacy Medco. Should we assume that the services that you provided to Medco on the specialty side are more of wholesale-type services, or do you also provide them kind of like the added value services that's associated with your specialty business?

We are both the wholesaler to the former Accredo division, the Accredo division of Medco, and now will be Express Scripts. And we have, obviously, worked very collaboratively with them in many areas including the hospital, pharmacy area and the specialty area. So I can't -- I'm not comfortable pointing to any particular program, but certainly as our largest customer, we spend a lot of time working on common approaches to the marketplace, and we would expect to bring that expertise and that market knowledge and the manufacturer relationships that we have to the combined entity now.

Okay, and then I have a couple of just questions from modeling purposes. For the SG&A level for the remainder of the year, should we assume same level as we saw in the March quarter or should we see a step up, and if so, can you quantify for us? And is it related to World Courier?

We, at this point, Ricky, we don't have World Courier finished yet, completed. But definitely with World Courier coming in 2 months in quarter 3 and we'll have them for the entire Q4, they will add extra expense. When I gave the guidance today this morning, again, I was talking about the core business being flat. For the core business, we will see a little bit of a step up in 3, but probably not dramatic. And again, we will have some nonrecurring acquisition-related cost in Q3, probably not in Q4.

Okay. And then can you just qualify to us the impact from a basis point perspective of the acquisitions on the margins for this quarter?

In terms of SG&A?

SG&A or operating margin.

Well again, we commented that we had about $11 million of SG&A expense in the quarter from our acquisitions, primarily TheraCom. So again, it's probably 4, 3, 4 basis points.

Our next question comes from Eric Coldwell with Robert W. Baird.

I think a lot of the timely questions have been answered, so I'll shift gears a bit. Health systems and alternate site in your drug company, sound like another good quarter there, above market growth, perhaps. I'm curious if you can define what's leading to this growth. It must be share capture, I don't want to lead you too much, but the market's clearly not growing at a rapid pace. You're primarily doing pharmaceuticals and not the other broad med service lines or other services into the health systems. So could you just give us some better sense on what's driving that growth in health systems and alternate site and then perhaps if you could frame it, would be helpful, too.

Well with health systems, we think we have a market share that is, at least comparable, maybe even the largest in the U.S. We believe we're with the right customers, we believe that we're growing with them. We believe that we have some nice little services that we provide that maybe don't get the headlines, but they are additive to their business, like helping them with 340B consulting, helping them with price pharmacy. So we have a very good practice in health systems, and we believe we're with the companies that are the leaders in that space, and I think some of our customers are there. Likewise with alternate care, I think ABC has been a leader there. Certainly our knowledge of specialty and our ability to offer an integrated solution on the specialty and drug wholesale side and our knowledge of the manufacturing environment and the patient environment and the reimbursement environment has been very, very helpful. And the Humana contract, we think ,was a direct result of that knowledge, and that's a very fast grower. We're with a lot of the companies that are growing faster than the market and when we discuss potential RFP responses, we look at who do we think will be the winners in a certain space, and we like to really target them and try to get them into the ABC portfolio. So I think you could look at it as it's not a matter of happenstance, it's a matter of strategically planning the accounts that we believe will be winners in the space.

Great answer, Steve. Could you put a frame around the growth rates in those 2 segments?

I think we can maybe look at that and invest it out. I think we've done some of that in the past. But we don't have a framework that we can share right now.

Our next question comes from Lisa Gill with JPMorgan.

I think that you made a comment earlier around your expectations for LIFO this year and within that comment, Tim, I think you talked about branded price inflation being less and more deflation on the generic side. Can you maybe just talk about what you actually saw in this quarter and then what you are seeing in the marketplace around an increase in competition, as far as the number of generic manufacturers that spend a nice steady state the last couple of years, are you seeing a trend that's perhaps changing a little bit, as we go through the next couple of months?

In terms of -- and when I speak of LIFO, just let me say that we look at our portfolio of drugs which -- in our mix and in terms of brand, last year we had pretty healthy price increases for brands, slightly above 8%. This year, we're tracking slightly below 8% again for our mix of inventory. So a little bit different, a little bit lower. But on the generic side, we really expect that we'll see some deflation, second half of the year, especially on Lipitor and Zyprexa, the generics when they come off exclusivity, which will help and give us a LIFO benefit. In terms of your second question about suppliers. I mean, last year we also had pretty good price appreciation on the generic side. It's still pretty good, but that's probably off a little bit this year, it's softened a little bit this year, but still pretty healthy.

Okay, great. And then, Steve, just one quick question for you on the oncology side of your business. We know of a number of these pilot programs that have been started by Aetna and United around the way they're paying their physician in trying to take the drug cost out of the equation, are you seeing that impact your business at all? And what are the physicians saying? And if it does take hold, what does that mean longer term, will that change the relationship you have with the physician, where you'll now have a relationship with one of the managed-care companies? How should we think about that?

Well, our strategy with the large payers is really to help them understand how important community oncology is. We believe that it's not only important from a clinical perspective, but we believe that the patient is best served being in the community, and even the payer is best served by those patients being in the community. So our big effort over there is really to help bring the 2 sides together. We have taken a lot of effort at ION, our physician services company, primarily focused on oncology, to help the 2 sides communicate better, have a transparent relationship. And we don't anticipate having a direct relationship with the payer, but we intend to help our customers contract more effectively and more transparently with the payers, and I think we're making a lot of progress there.

Your next question comes from David Larsen with Leerink Swann.

A question for Tim. It looks like, according to my model, your SG&A costs, on a year-over-year basis, declined by about $12 million. Can you describe sort of the cost control process you go through on a quarterly basis and if that's sustainable?

Sure, David. I mean, when we looked at the year, I mean, we knew and we guided that Q2 and Q3 would be very tough comparisons, I mean, we knew it going into the year. And we put word out through our businesses to really manage expenses this year. And we knew we had to focus in this area. So I mean, we looked hard at managing labor and payroll expense. We looked at outside consulting and services and then this year, too, we've had some good discipline and credit collections, and our bad debts are down. So really, it's all of our businesses focusing on headcount, on making sure they spend money prudently, and that's going to carry forward into quarters 3 and 4.

And then if I were to look at like, say, 3% of SG&A in fiscal '11, I'm coming up with like $35 million. So for the incremental acquisition cost with like World Courier group and these other ones, will all-in, that will be more than $35 million? And that's why they'll be -- that's why there was a slight reduction on the operating margin expansion guidance, is that correct?

Well, in terms of your question, the $35 million, no, I don't think the all-in -- I mean, we should be under that number. So hopefully that helps you in terms of some guidance but, again, we think we're managing expenses well. We also had the benefit this quarter and we'll have for the rest of the year in terms of SAP being stable, and we're seeing the benefits there. So all in all, I mean, I think what we're saying here is that expense management is offsetting the increases from the special charges and the nonrecurring charges.

Great. And then your merchandise inventory looked like it declined nicely on a sequential basis, maybe leading to an increase in cash flow guidance. That looked nice.

Yes, definitely. Like, David, in my comments, I've mentioned that we've really focused on working capital. All of our businesses are focused on it. Managing AR, managing inventories. So we are seeing some really good reductions in those areas, especially at our ABSG businesses.

Okay, our last question comes from the line of Steven Valiquette with UBS.

So I guess, just one more question on the Express Medco, I'm obligated at the end here with the -- I think you mentioned in your comments that in some ways you viewed yourself as the primary incumbent on the Express Medco contracts. I guess my question is, are you now happy this is going to an official RFP versus your previous thought pattern over the past 9 months since this deal got announced? Or are you disappointed? Is it because you thought you were the primary incumbent, or are you just indifferent? Just trying to get more color sort of on your view now, the new information versus kind of what you thought previously.

I was actually at a NACDS conference, and I heard one political pundit speak about the election, and they said incumbency is a 4-point advantage, so I was just trying to get that incumbent advantage in there. But that's just my view, I mean, I don't know if anyone else has that view. We did, of course, do more business with Medco than the current wholesaler did with ESR so, you could look at it as an incumbency but, I think, that's just really my view, but we are pleased that this has been decided relatively early in the process. That's very helpful from a planning perspective and, again, it's helped us have a very quick and interesting discussion with ESR. So we think that it's a positive for the industry and we think that, potentially, it could be positive for AmerisourceBergen.

Thanks, Steve. Now, Steve Collis would like to make some final comments before we go.

We know that it's a very busy day, so we really do appreciate everyone's interest and attention with AmerisourceBergen. I would like to commend my colleague and our acting CFO, Tim Guttman, for his leadership and contribution during this transition period. As you could see, Tim's really done a great job. So to wrap up, ABC thinks this is a really good quarter for us and especially given our tough comps, and we are proud to report good momentum on all fronts at this halfway point in our fiscal year 2012. Thank you again for your attention.

Thanks, Steve, and before we go, I'd just like to quickly highlight our upcoming events. On May 17, we'll be presenting at the Bank of America Merrill Lynch 2012 Health Care Conference in Las Vegas. And on June 6, we will be presenting at the Goldman Sachs 33rd Annual Global Healthcare Conference. That concludes our call for today. And now I will turn it back to the operator.

Thank you. Ladies and gentlemen, this conference will be available for replay after 1:00 p.m. today through midnight, May 3, 2012. You may access the replay service by dialing 1 (800) 475-6701 and entering access code 243852. International participants, dial (320) 365-3844. This concludes our conference for today, and thank you for using AT&T executive teleconference services. You may now disconnect.