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Edited Transcript of ABC earnings conference call or presentation 2-May-19 12:30pm GMT

Q2 2019 AmerisourceBergen Corp Earnings Call

CHESTERBROOK May 6, 2019 (Thomson StreetEvents) -- Edited Transcript of AmerisourceBergen Corp earnings conference call or presentation Thursday, May 2, 2019 at 12:30:00pm GMT

TEXT version of Transcript

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Corporate Participants

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* Bennett Murphy

AmerisourceBergen Corporation - VP of IR

* James F. Cleary

AmerisourceBergen Corporation - CFO & Executive VP

* Steven H. Collis

AmerisourceBergen Corporation - Chairman, President & CEO

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Conference Call Participants

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* Glen Joseph Santangelo

Guggenheim Securities, LLC, Research Division - Analyst

* James Auh

Cowen and Company, LLC, Research Division - Associate

* Kevin Caliendo

UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution

* Lisa Christine Gill

JP Morgan Chase & Co, Research Division - Senior Publishing Analyst

* Rivka Regina Goldwasser

Morgan Stanley, Research Division - MD

* Robert Patrick Jones

Goldman Sachs Group Inc., Research Division - VP

* Ross Jordan Muken

Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology

* Steven James Valiquette

Barclays Bank PLC, Research Division - Research Analyst

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Presentation

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Operator [1]

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Ladies and gentlemen, thank you for standing by, and welcome to the ABC earnings call. (Operator Instructions) As a reminder, today's call is being recorded. I'd now like to turn the conference over to your host, Jim Cleary. Please go ahead.

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Bennett Murphy, AmerisourceBergen Corporation - VP of IR [2]

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Thank you. Good morning, and thank you all for joining us for this conference call to discuss AmerisourceBergen Fiscal '19 Second Quarter Financial Results. I am Bennett Murphy, Vice President, Investor Relations. 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 be discussing non-GAAP financial measures. Reconciliations of these measures to GAAP are provided in today's press release and are also available on our website at investor.amerisourcebergen.com. We've also posted a slide presentation to accompany today's press release on our investor website.

During this conference call, we will 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. For a discussion of key risks and assumptions, we refer you to today's press release and in our SEC filing, including our most recent 10-K. AmerisourceBergen assumes no obligation to update any forward-looking statements.

And this call cannot be rebroadcast without the express permission of the company. (Operator Instructions)

With that, I will turn the call over to Steve. Steve?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [3]

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Thank you, Bennett, and good morning to everyone on today's call. I'm pleased to talk about AmerisourceBergen's continued strong performance in the second quarter of fiscal 2019. On this call, I will highlight how our business remains well positioned for the long-term growth and how AmerisourceBergen unites the stakeholders across the health care supply chain as a solutions provider and good corporate citizen.

First, our fiscal 2019 second quarter financial performance. Revenues were up a solid 6% to $43.3 billion for the quarter and our adjusted diluted EPS was $2.11 for the second quarter, an increase of 9% compared to the previous fiscal year period. We are extremely pleased with our performance in the second quarter, which was driven by solid growth in customer volumes, double-digit specialty distribution growth and overall strong execution across both the Pharmaceutical Distribution and Global Commercialization Services & Animal Health groups.

I first want to thank our 21,000 associates, who are really driving our performance. I couldn't be more proud of their dedication, solution-oriented mindset, focus and passion for our customers and partners. And I consider it a privilege to work alongside them every day. Our teams are executing well across our robust portfolio of businesses as we continue to enhance the experience and value that we provide for our customers and partners in the industry.

Our Pharmaceutical Distribution services team, notably in specialty position services and health systems, continued to deepen their customer relationships and seek new ways to unlock value for our partners while enabling patient access to pharmaceuticals. Finally, we are proud of how our Global Commercialization Services & Animal Health group continues to execute, grow and deliver differentiated services for pharmaceutical manufacturers and veterinarians.

Next, an update on our comprehensive, strategic and financial review for PharMEDium. As part of this process, we determined that the best way to maximize the value of the business was to close PharMEDium's smallest and least-automated facility and consolidate production into the business' remaining 2 open facilities to service customers more efficiently and effectively. We believe this decision should optimize the business more appropriately for the long term while ensuring that PharMEDium's focus remains on patient safety and delivering the safest and highest-quality products.

In addition, as you may recall, we engaged a cGMP expert consulting firm to help us with our review of this business unit. After taking into consideration PharMEDium's enhanced quality assurance and quality control procedures and independent evaluations from our cGMP consulting firm and the business unit's new president, we have determined that it will be difficult for PharMEDium's overall volumes to return to previous levels in the next few years.

In addition to our internal review, we have continued discussions with regulators. And based on discussions to date, we expect to enter into content decree in the June quarter. Subject to the successful completion of third-party orders, we anticipate that a consent decree will allow our commercial distribution to continue at the 2 open compounding facilities. Additionally, we expect that a consent decree would specify requirements that must be satisfied prior to resumption of commercial operations at the Memphis facility. Based on these updates, Jim will provide more details in his comments regarding PharMEDium's financial outlook.

However, despite this challenge and as evidenced by this quarter's results, AmerisourceBergen continues to execute and deliver strong growth and performance. Our differentiated strategic and -- our differentiated strategy investments have positioned us to continue delivering long-term sustainable growth in fiscal 2019 and beyond.

At the core of our strategy remains a clearly defined pharmaceutical-centric focus. AmerisourceBergen continues to benefit from growth in the U.S. pharmaceutical market, which was driven by strong patient demographics and prescription utilization gains as well as pharmaceutical innovation across brand, specialty and biosimilars. In fact, the specialty market is experiencing significant growth as an increasing number of breakthrough medicines continue to improve the current standards of care.

Our undisputed leadership position in specialty distribution and services places AmerisourceBergen at the forefront of this rapidly growing market segment. While we report distribution and commercialization services in separate segments, together they represent our extensive footprint and comprehensive portfolio in specialty that we have built through decades of significant organic and inorganic strategic investments. Our expertise and capabilities empower us to support the complex solutions needed in both specialty distribution and pre- and post-commercialization services.

Specialty distribution, which includes oncology and physician-administered products, continued its double-digit growth in the second fiscal quarter as we continue to create value for our customers. This part of the U.S. health care market is growing well as patient utilization of these life-altering medications continue to increase. The efficiency of the distribution channels we enable, combined with key services and solutions we provide our physician practice customers, are core reasons why AmerisourceBergen remains the preferred partner of choice. For example, Besse Medical extends AmerisourceBergen's reach and relationship to over 65,000 non-oncology community physician sites, accelerating access to the products, insights, technology and guide needed to elevate their practice performance and patient experience.

On the commercialization side, we continue to increase the depth and span of our manufacturer services, making ourselves the essential partner for the global pharmaceutical industry. For example, World Courier, the most trusted specialty logistics partner in the world offers high-quality innovative services, which provides the customized support and flexibility that manufacturers value for clinical trial logistics and commercial services, such as those needed in cell and gene therapy.

World Courier continues to move innovation forward through recent technology and packaging advancements, like NOVA and Cocoon, which deliver increased efficiencies and enhance experience for their customers, empower their sustained growth and demand for their services. In the years ahead, the strong pipeline of innovative and complex specialty products and increasing number of biosimilars in the market should further increase demand with an innovative distribution and commercialization services that we provide for our partners.

AmerisourceBergen applies the same innovative masthead towards all opportunities or issues that arise across this dynamic and exciting health care landscape. Our ongoing investments in state-of-the-art services and solutions continues to differentiate our business and enable new value-creation opportunities for our partners, customers and the entire health care supply chain. Likewise, our focus on driving data connectivity throughout all our offerings further distinguishes our ability to meet the evolving needs of our stakeholders and solidify AmerisourceBergen's position as a trusted data company in our industry that stakeholders depend upon to help them deliver care and improve efficiency at scale.

As an industry, AmerisourceBergen and peers create secure nationwide supply chain that produces reliable, accessible and transparent data and analytics that consistently deliver value for our stakeholders. For example, manufacturers value and trust data generated by AmerisourceBergen, which enables them to proactively manage their daily services -- their daily service and inventory levels. On the other end of the supply chain, our unique set of analytics tools empowers 4,600 pharmacies and our Elevate Provider Network with solutions that help pharmacies maximize profitability, improve operational effectiveness and enhance patients' care.

We take great pride in our responsibility as a trusted data source and our role as a solutions provider in the supply chain. With this solutions-oriented approach in mind, we continue to believe there's a facilitation role that we can play if the U.S. health care system shifts to one where patients need to access discounted pharmaceutical prices in the pharmacy at the point-of-sale. Given our fundamental tools and trusted relationships, we believe AmerisourceBergen and its Pharmaceutical Distribution peers would be best positioned to support the transition.

Our existing capabilities and proven experience managing and maintaining complex contract administration and charge-back systems today provide the necessary building blocks the operationalize a charge-back system to handle point-of-sale discounts in the pharmacy. Given pharmaceutical distributors' existing relationships built on fairness and trust with their pharmacy customers and manufacturer partners, position distributors to approach this potential reform with solutions that are fair, efficient and transparent. With support and industry alignment, AmerisourceBergen is ready to play a role in pursuing a distributor-facilitated model. This unique opportunity will further embody AmerisourceBergen's purpose of being united in our responsibility to create healthier futures. In fact, our purpose is the driving force behind everything we do.

As a company, AmerisourceBergen recognizes the importance of strong corporate citizenship as a cornerstone to long-term shareholder value creation. We are especially excited by the continued progress and development detailed within this year's Corporate Citizenship Report, which follows externally accepted standards for sustainability reporting and is our most comprehensive report to date. Here are a few highlights.

First, we have invested in 2 solar energy pilot projects located at our distribution centers and introduced several packaging innovation solutions that help reduce waste and energy usage in our efforts to improve the sustainability of our operations. In addition to help enhance our inclusive culture, where our associates respect and support one another, we launched the Connect With Respect campaign and supported colleagues impacted by hurricanes and wildfires through our Associate Assistance Fund. Finally, the AmerisourceBergen Foundation, an independent, not-for-profit, charitable-giving organization continues to invest in health-related causes that help increase health care access for human and animal populations and ensure prescription drug safety.

As a distributor of pharmaceutical products, AmerisourceBergen manages the transportation of medication, including controlled substances from manufacturers to licensed providers. We take our role in the supply chain seriously and work to combat opioid abuse by ensuring safe and secure distribution, maintaining operational integrity, advocating for the highest regulatory standards and community outreach. All of this, in addition to reporting all controlled substance orders to the DEA and halting suspicious orders.

AmerisourceBergen and the AmerisourceBergen Foundation are committed to making a difference in our communities and providing communities across the country resources to combat the epidemic of opioid misuse. Together, our 21,000 associates, Board of Directors and partners will continue to further our efforts, collectively working to boost our reach and improve across our communities and the supply chain to create a healthier future for all.

In closing, AmerisourceBergen is well positioned to continue creating shareholder value and delivering long-term sustainable growth. We are proud of our ability to execute, evolve and transform our business to meet the needs of our partners through our value for our stakeholders and ultimately even patients -- and ultimately serve patients. We won't be complacent. We're making investments in our people, solutions and infrastructure and focusing on the problems or opportunities that our customers have in their business.

AmerisourceBergen is committed to being a thought leader that drives solutions, enables access and creates additional efficiency. We have the utmost confidence that our differentiated strategy will create sustained long-term value for our stakeholders. More than ever, we are united in our responsibility to create a healthier future. And as always, we appreciate AmerisourceBergen.

Now I'll turn the call over to Jim for a more in-depth discussion of our quarterly financial results and our upward revision to fiscal 2019 EPS guidance. Jim?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [4]

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Thanks, Steve, and good morning, everyone. My remarks today will focus only on our adjusted non-GAAP financial results. Growth rates and comparisons are made against the prior year March quarter unless otherwise noted. For a discussion of our GAAP results, please refer to our earnings release.

As we have reached the halfway point of our fiscal year, we are extremely proud of the execution throughout AmerisourceBergen to deliver strong results. Our continued strong performance is especially impressive, given that this quarter still has a notable year-over-year headwind from PharMEDium. Looking ahead, we expect to lap any notable headwind beginning in the June quarter.

Before I discuss our results this morning, I want to first take a moment to discuss the GAAP asset impairment charge that we have taken for PharMEDium. Based on the current analysis of the business, we now expect that PharMEDium will have lower volumes due to the implementation of enhanced QA/QC procedures and the continued closure of Memphis. This conclusion was reached in accordance with the evaluations of PharMEDium's new president and our cGMP consulting firm.

As part of the comprehensive strategic and financial review, we updated our long-term outlook at quarter end. We continue to see that there is a demand for compounded sterile preparations. But given the estimated production limitations over the next few years, we determined that the estimated undiscounted future cash flows indicate that the asset should have a lower carrying value. We used a variety of scenarios with probability weightings to make this determination. We subsequently performed a fair value test using discounting cash flows to determine the asset impairment amount of $570 million. After a consent decree is finalized, PharMEDium expects to have further clarity on the remediation requirements to reopen Memphis and maintain the other facilities in operation as well as the overall production ramp pace expectations.

As a reminder, PharMEDium is expected to be a headwind of about 3% in fiscal 2019. And this represents an adjusted operating income loss of about $50 million for fiscal 2019. For comparison purposes, PharMEDium had only a small operating income profit in fiscal 2018, down from a significant operating income profit in fiscal 2017.

Turning now to discuss our second quarter results and the continued strong execution by AmerisourceBergen. I will provide commentary in 2 main areas this morning. First, I'll detail our adjusted quarterly consolidated and segment performance. Second, I'll cover the upward revision to our fiscal 2019 EPS guidance.

Moving now to our second quarter results. We finished the quarter with adjusted diluted EPS of $2.11, an increase of 9%, primarily due to higher operating income, lower net interest expense and a lower share count. I will note that there were some positive general and administrative expense items that hit in the second quarter and had been expected to be realized later in the year.

Our consolidated revenue was $43.3 billion, up 6%, primarily driven by strong revenue growth in the Pharmaceutical Distribution Services segment. Gross profit increased 3% or $40 million to $1.3 billion. Consolidated operating expenses increased 1.5% to $702 million. As a reminder, in the second quarter of fiscal 2018, there were some true-ups related to the accounting for recognizing PharMEDium's remediation costs, which impacted both cost of goods sold and operating expenses. Normalizing for those adjustments last year, our gross profit this quarter would have increased 3.8% while our operating expenses would have increased 2.6%. These items net out and have no impact on the operating income comparison.

As it relates to operating expenses this quarter, we have solid overall expense management as we continue to be focused on effectively managing operating expenses throughout the business. Additionally, the positive general and administrative expense items that I referred to earlier represent roughly $0.05 of EPS in the quarter. Expense management is so important in the health care industry. And it's especially impressive that our teams were able to execute on expense management while delivering strong customer service and continuing to ensure safe, secure and efficient patient access to care.

Consolidated operating income was $617 million, up 5%, with our operating margin essentially flat. As we had previously highlighted, we expect the March quarter to mark the last significant headwind for operating income related to PharMEDium. That headwind was offset this quarter by strong results from our consolidated businesses in Brazil, which we expect to normalize in the third quarter. If you were to exclude both PharMEDium and consolidated Brazil, our consolidated operating income growth would still have been 5%, helped by the lower-than-expected operating expenses in the quarter, as I discussed earlier.

Net interest expense decreased $5 million to $43 million due to an increase in interest income. Given strong cash flow year-to-date and the better-than-expected interest income, we now expect our net interest expense to be lower than originally anticipated.

Moving now to income taxes. Our adjusted income tax rate was 21.5%, up slightly from the prior year quarter due primarily to some relatively small discrete items. As a reminder, the prior year quarter tax rate did reflect the benefit from tax reform.

Our diluted share count decreased 4% to 213 million shares. In the quarter, we purchased approximately $100 million of our shares and now have roughly $800 million remaining on the November 2018 share repurchase authorization. Year-to-date, we have now repurchased $325 million of shares, bringing our total share repurchases in the last 4 quarters to over $900 million.

Regarding free cash flow and cash balance. Year-to-date, we have adjusted free cash flow of $803 million, putting us right on track with our guidance for the full year adjusted free cash flow of between $1.4 billion to $1.6 billion, although the timing of free cash flow was earlier in the year than expected. We ended the quarter with $2.9 billion in cash, of which $520 million was held offshore and the majority was U.S.-denominated cash. This completes the review of our consolidated results.

Now I'll cover our segment results, beginning with Pharmaceutical Distribution Services. Segment revenue was $42 billion, up 6%. This segment continues to benefit from growth of some of its largest customers, continued strong growth in specialty distribution and overall market growth. Segment operating income increased about 6% to $517 million. As discussed earlier, the March quarter had a headwind from PharMEDium but was offset by the favorability related to Brazil. Normalizing for both of these impacts, segment operating income still would have increased 6%.

Our core Pharmaceutical Distribution businesses continued to execute extremely well, growing volumes with our customers while effectively managing operating expenses. Our teams are working with partners, both upstream and downstream, to deepen existing relationships and deliver outstanding services and solutions all while working diligently to operate the most efficient distribution network.

I'll now turn to the other segment, which includes businesses that focus on Global Commercialization Services & Animal Health, including World Courier, AmerisourceBergen Consulting and MWI. In the quarter, total revenue was $1.7 billion, up 5%, primarily due to growth at Consulting's Canadian operations and World Courier. Consulting's Canadian operations, or Innomar, has had solid growth as it continues to deliver innovative solutions to specialty manufacturers while improving product access and increasing supply chain efficiency in the Canadian market. World Courier had strong revenue growth as demand for their high-touch global specialty logistics continues to be strong. MWI's revenue was up 2%, limited by severe winter conditions impacting customers on the production animal side of the business.

From an operating income standpoint, this group had operating income of $100 million, up 3%. World Courier continued its strong momentum with strong volume in weight growth trends. The group's operating income growth rate is increasing as expected as we continue to drive cost efficiencies across the group and we anticipate solid growth at MWI in the back half of the year. While fiscal 2019 continues to be a transition year for Lash, we are excited for the long-term outlook of the business as we have had notable success in winning new business in addition to having key anchor manufacturer relationships renewed or adding programs. The Fusion platform continues to be a differentiator for Lash's service offering and positions the business well for the long term.

This completes the review of our segment results. So now I'll turn to our fiscal 2019 guidance. As we said in this morning's press release, we are raising our fiscal 2019 adjusted EPS guidance to a range of $6.70 to $6.90, up from $6.65 to $6.85 as our businesses continue to execute at a high level despite the headwind from PharMEDium.

The only other guidance item we are updating this morning is a minor change to our expectation for weighted diluted shares outstanding for the year. Given the buybacks so far this year, we are lowering our expectation for weighted shares outstanding to approximately 214 million shares, down from our previous expectation of approximately 215 million shares for the year.

Lastly, we are not making any changes to our working assumptions around pharmaceutical pricing for the full fiscal year. Broadly speaking, after the first half of the year, both brand and generic pricing are trending relatively in line with our original expectations for the year. But I'll note that it's still relatively early in our fiscal year.

Turning back to our guidance range overall. Factors that move us within our range include: business unit performance; operating expense management; brand and generic pricing and mix; results from PharMEDium; and HD Smith synergy capture. Based on how we are evaluating these factors today, we are less likely to be at the bottom of our range.

Regarding the expected cadence for our adjusted EPS for the rest of the year. While we do not provide quarterly guidance, I will note that certain expense items referenced earlier were initially expected to benefit the third quarter but actually benefited the March quarter. Keep that in mind as you adjust your quarterly models for the rest of the year to align with our updated full year guidance.

In closing, we are extremely proud of the execution throughout AmerisourceBergen to deliver continued strong results. AmerisourceBergen has spent decades evolving to become the enterprise we are today, having built a robust portfolio of businesses and capabilities, attracting and developing talent, and fostering key customer relationships, all while maintaining strong financial discipline and investing internally and externally to ensure we are offering our partners unparalleled value and efficiency.

Thank you for your interest in AmerisourceBergen. Now here's Bennett to start our Q&A.

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Bennett Murphy, AmerisourceBergen Corporation - VP of IR [5]

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Operator, we're ready for our first question.

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Questions and Answers

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Operator [1]

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(Operator Instructions) Our first question will come from the line of Glen Santangelo from Guggenheim Securities.

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Glen Joseph Santangelo, Guggenheim Securities, LLC, Research Division - Analyst [2]

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Steve and Jim, I just wanted to sort of follow up on the gross margins within the core distribution business. I mean you've given us some color about the Brazilian piece and PharMEDium may be offsetting what happened in Brazil. But the gross margin came in a little bit better than what we were looking for. And I was wondering if you could help us unpack what's going on there, so we can help us better assess the sustainability of that trend.

And then I'll just get my follow-up out of the way. The biggest question we're getting from investors is about the reimbursement pressures at retail pharmacies and how that may be impacting the independent pharmacy channel and what that could mean for wholesaler economics over the intermediate and longer term. So any thoughts on those 2 issues would be helpful.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [3]

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Yes. Glen, thanks for the questions. This is Jim, and I'll answer the first question. And then Steve will take the second question. So regarding margins, as I talk about the quarter, I'll focus on operating margin. And let me kind of take a step back and first say from a big-picture standpoint that we feel confident that our value proposition is high and we earn a fair margin. And our margins are clearly justified by the services we provide, including logistics and access and efficiency and financing and security.

And now kind of getting into the quarter, in our distribution business, you asked about revenues were up 6% and operating margin was up 6%. And as you noted as we adjust out the headwind from PharMEDium and the tailwind that we had this particular quarter from Brazil, operating income and distribution was still up 6%.

And I'd call out a couple of things. There was good performance across many business units. But one in particular that I'll call out is growth in specialty distribution, which there are added services that we provide, wraparound services that we provide, in particular to physicians. And that's really benefited us during the quarter and plays out in our operating margin and operating income growth.

And the other thing I'll call out during the quarter is just really good performance on expense management. We had very nice performance there in the quarter. One thing I will call out though, as I said in my prepared remarks, there were about $0.05 during the quarter of general and administrative expense benefits that we received during the quarter that we had expected to receive over the balance of the year. And so that did help us in the quarter.

But overall, we're really pleased with our performance and really pleased with our operating income growth and our operating margin. And then of course, one thing that will benefit us on that front in future quarters is we've really lapped the tough PharMEDium comparisons and the comparisons don't have that notable headwinds going forward that there -- or we don't expect them to have the notable headwinds going forward that we have in past quarters.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [4]

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Yes. Thanks. And Glen, on the second question, really around reimbursement pressure, our customers -- it really depends a lot -- informs a lot by your contracting strategy. So particularly, if you're in narrow networks, you know, I know when we do the Elevate work, for example, it's really important that we take into account the manageability of contract rates that we adopt for Elevate. And we have a lot of discussions with our independent base that we contract on behalf of for that. There is a lot of talk. I think you're referencing can independents survive in this environment? And no, we're seeing independents' market share remains fairly consistent.

I think because of the differentiated service they provide, the communities that they're in, their role as a local health care practitioner, very accessible. I think they work very hard. And there's a continuity of service there that, I think, a lot of patients are very fond of, so. And then I think ourselves, our industry, has been very helpful to the overall growth and survivability of the independent pharmacists. And they have other key partners like buying groups. But the services we offer them, including analytics, technology, professional services, sourcing services, are very critical to their survival. And we think that they do differentiate them. And we in particular think that being a Good Neighbor Pharmacy and Elevate member differentiates you further within that important subset.

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Operator [5]

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Our next question will come from the line of Robert Jones from Goldman Sachs.

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Robert Patrick Jones, Goldman Sachs Group Inc., Research Division - VP [6]

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I guess just to pick up on the first question for you, Jim. Even if I account for that $0.05 of the positive G&A that you highlighted, it still seems like based on your original expectations for this quarter to be flat to last quarter obviously came in much better, it seems like the implied back half is lower than what you guys would have been anticipating before the results today. So I'm just curious if there's any other dynamics at play there that you could share.

And then to Steve, my follow-up would be you've mentioned now a few times about ABC and the wholesalers being a facilitator of the flow of funds in a potential point-of-sale discount world. So just wanted to get a sense from you, now that we're a quarter later, what are you hearing out of D.C.? And how significant of a revenue and profit stream could this be for ABC and the group?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [7]

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Okay. Thanks. And I will again answer the first question and then Steve will answer the second question. Regarding what we are seeing over the balance of the year, I mean, of course, it's still relatively early in the year, and we've increased our guidance range, of course, to $6.70 to $6.90. And as we look at the balance of the year, the factors that move us within the range are business unit performance, operating expense management, brand and generic pricing, results from PharMEDium and HD Smith synergy capture probably are the ones that are a little bit less under our control, but of course, with the brand and generic pricing, and to some extent, the results from PharMEDium, given the negotiation of the consent decree.

But as I said during the prepared remarks, based on how we're evaluating all those factors today, we're less likely to be the bottom of our range. And then one other thing I'll just call out that I think is important to consider, when we did our guidance at the beginning of the year, the low end of our range was $6.65. And I think it's important to remember that we indicated that what would move us to the low end of that range was the downside scenario at PharMEDium of not reopening Memphis. And that is the current expectation. And so we've been able to overcome that and increase our guidance range due to strong execution across numerous AmerisourceBergen businesses. But again, I'll comment that it is still pretty early in the fiscal year.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [8]

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Yes. Bob, thanks for the question. And one thing that I would start say, I'd much rather -- everything that I -- we work very hard on balancing our portfolio to make sure that all the products are profitable. And we've talked a lot about that. And we've been talking about that for years. And I think that, you know, stage of fruit, we're not where we'd like to be entirely. But we obviously had an effort, just to be very frank, to make sure that generics and generics with the deflation, was not a growing, robust part of our portfolio as it had been in the past, that this was not as much of a headwind. And I think you've seen some of that play out.

Just on the question about distributors and adjudication, great question. I'm really proud of the team. I mean the way we brainstorm, you talk about the work that gets done between information resources -- to give you a glimpse into the inner workings of the company, the work that was done here before we could put out the release between information resources, our digital people and our core business operations, the Elevate people, I think it's really amongst the finest thinking that we've done in a long time just to think about the future, look at the problems and be proactive about putting a solution out there.

Having said that, it still is not a clear picture. There needs to be tremendous cooperation amongst all -- some of the industry stakeholders. I do think that sometimes people forget that not all products are heavily rebated. We're talking about a category of products, which is fairly large and have specific characterizations around how they get prescribed and how patients utilize them and how they get dispensed and how manufacturers are negotiating with PBMs and other insurance parties. So I think that's important. But we are positive about our role.

I think we've been quite confident, intellectually confident to state that we can perform this service that's analogous to some other services we provide. But it's more complex because we have to take a data feed from payers and claims. So we stand ready to do that work. We need help and we need alignment that the wholesalers are the right party to do that. We have a strong faith and confidence that we can do that because we are an honest, neutral party. And we do this in the institutional setting very frequently. So it's not that a big of a stretch for us. And we have these strong relationships that we can leverage. And I think that over time, I've been saying for a long time that it's inevitable that companies like AmerisourceBergen will have a stronger payer/patient relationship in terms of the services we provide to payers. So maybe that's part of the evolution of the market, and we look forward to playing that role.

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Operator [9]

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Our next question then will come from the line of Ross Muken from Evercore ISI.

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Ross Jordan Muken, Evercore ISI Institutional Equities, Research Division - Senior MD and Head of Healthcare Services & Technology [10]

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So maybe just sticking on sort of the independents theme, obviously your partner in WBAD talked about less generic procurement savings this year and maybe a slightly tougher environment. Obviously, less generic deflation is also good for you guys. But just in terms of your independent customers, we've heard more anecdotally and after seeing some of the numbers from NCPA there's -- given some of the issues with DIR fees and other things, the independent base is seeking sort of better generic procurement and sourcing than what they have had.

And obviously, those 2 things kind of go against each other in terms of what the environment is and what they need. And so in the guise of keeping this important customer base kind of healthy, I guess how do you kind of balance what you can kind of provide to them, maybe incremental services, maybe they need you more than they did in the past versus sort of that push and pull of what the generic market is offering today?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [11]

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Yes, it's a good question. So WBAD is now 6 years old. I mean just to remind everyone, in 2013, we joined the alliance that has already been created between Walgreens and Alliance Boots at that time. And we think that it's been very successful. In fact, historically, it narrowed the gap tremendously between how independents would source generics versus how chains can. And I think if you look back, that really dovetails very well into theme that I've talked about, about how important wholesalers have been for the overall survival of independents. So we look at these statistics very carefully.

And there's a juxtaposition, if you wanted to say, between what our generic profitability is and what our compliance rates are. And we've talked about that. We are obsessed with our compliance rates and our independents feel that we're giving them a fair deal as we all are maintaining our profitability in this important segment of the business. So that is something that we're very aware of. It's not something that's new to us. It's always been the stance.

But we are confident in the value proposition that we provide to Good Neighbor Pharmacy and to all of our customers. And we are aware reimbursement pressure and other health care policy pressures are -- it's nothing -- it's not new to us. We have been engaging in these discussions and have been proactive more and more in those discussions with our key customers as well as our suppliers so that we can help really plan for about managing through changes.

The DIR fees, you referenced those, those were a surprise. About 3 years ago when I went to our Vegas trade show, I was really surprised at the intensity of the independent base about that. And we really try to help. And I think people are in a much -- pharmacies are in much better position now to understand what the exposure to DIR fees could be and to manage that accordingly. So we feel that some of those things have not necessarily, in my opinion, been fair. But we've been able to help our base manage through that.

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Operator [12]

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Our next question will come from the line of Steven Valiquette from Barclays.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [13]

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So just a question here around generic pricing. Obviously, it's very topical right now. Thinking back about 4 or 5 years ago when drug distributors really captured a lot of earnings upside from generics, there were a lot of generics that were going up in price pretty materially, a lot of list price increases. In the current environment, the trend seems to be a little bit more of generic prices stabilizing, not really going down anymore but really not a lot of generics going up in price, at least based on the data that we're looking at. So just curious maybe if you can or are able to discuss that at a high level, how important that is when thinking about the potential for distributors to capture incremental profits in the current environment?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [14]

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Yes. So regarding generics, what we're seeing is that the deflation is generally in the range of our original expectations. So when we look at it overall, we see it generally in the range of our original expectations. And as we said at the beginning of the year, as long as it stabilizes and is in that range, we won't call out a particular percentage on a quarterly basis. We are hopeful that the commentary from manufacturers on portfolio optimization leads to further stabilization. We're optimistic over a period of time that the market returns to historic levels of mid-single digits in terms of deflation. And then on supply constraints, we are seeing some volume impacts there. But it's -- that's just kind of one of the things that we've been seeing in the market and relatively small.

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Steven James Valiquette, Barclays Bank PLC, Research Division - Research Analyst [15]

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I guess at the end of the day, are you seeing a consistent relationship right now between the buy-side generic pricing trend versus the sell-side generic pricing trend? That's really, I think, what's critical at the end of the day.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [16]

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Yes. We have been tracking that. And in terms of that spread, we've seen that spread as relatively constant.

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Operator [17]

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Our next question comes from the line of Lisa Gill from JPMorgan.

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [18]

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Steve, I'm wondering if maybe you could just talk a little about the impact around potential changes on Medicare Part B. You talked about your specialty business and growth there. But do you see incremental opportunities if we start to see changes around reimbursement on the Part B side? Or do you see any risk to your specialty business?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [19]

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The specialty business is doing really well at the moment from a key product innovation on the manufacturer side. And if you look at our colleagues reporting, our manufacturer colleagues reporting, so much -- the growth that you're seeing in some of the larger pharma companies, it is around oncology. And we have this incredible franchise there and, in fact, had some customer wins within that segment. A lot of our customers, which we've always talked about, are the consolidators, that are the acquirers.

So we're seeing some important macro trends pertinent to AmerisourceBergen that Jim referenced within our specialty distribution business. And it's hard to exactly gauge our market share because of the data -- access to good data. But we think that our distribution market share could have gone up a bit there -- I think invariably it has because of the growth of our customer base.

And as far as that actual Part B goes, we don't think the reimbursement is really fair right now. I think a lot of the oncologists I've talked to really rely on their commercial base. We hope that there could be some changes, there could be beneficial, maybe more around fees. And there's some skepticism about the sustainability of those fees. But really, these are nothing that is new that we are overly concerned about as far as Part B.

I think what is a positive is that particularly commercial payers and, hopefully, Medicare understand the important role that community oncologists play with patients. And the other trend we're seeing is that more Part Bs in -- more Part Bs drugs in important areas like ophthalmology, urology, et cetera that is another positive trend. And that's why we highlighted the strength and access of our Besse Medical business. So hopefully, that answers your question. And we'll take the next...

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Lisa Christine Gill, JP Morgan Chase & Co, Research Division - Senior Publishing Analyst [20]

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That's helpful. And then just as a follow-up, Jim, when we think about the $800 million that's left in the share repurchase, you've only brought the share count down by roughly 1 million shares. How do we think about that playing out throughout the rest of this year?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [21]

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Yes. And so as a reminder, we don't include unidentified capital allocation in the guidance. As we said during the call, we've done $900 million worth of share repurchasing over the past 4 quarters. And we'll continue to look at opportunistic share repurchases as part of our capital allocation. But as I said before, we don't include unidentified capital allocation in the guidance.

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Operator [22]

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And our next question will come from the line of Kevin Caliendo from UBS.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [23]

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I want to change it up a little bit and talk about the animal health business. You mentioned the weather had a negative impact on MWI on the production side. And Zoetis this morning called out a miss in their U.S. livestock business partially caused by the timing of distribution or distributor purchases. Is there any of these delays can be pushed into the next quarter, meaning there could be a little bit of a makeup? Can you talk a little bit about the dynamics of what's going on, on the production side for MWI?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [24]

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Yes. And as I said during my prepared remarks, MWI grew 2% during the quarter. In fact, I said that, that was limited because of the severe winter weather. And so companion animal grew faster than production animal during the quarter and, yes, there was -- as those of you that follow the animal health business or follow what they got, some of the weather in the Midwest during the second fiscal quarter, it really did have an impact on production animal business. And I'd have to say, to answer your question, some of that is lost and then some of that will kind of flow into the next quarter. I would have to just make an overall comment that sometimes weather impacts that business. It happens from time to time. But overall, over the long term, we view it as a very positive, very healthy long-term business.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [25]

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On the companion side, I know it's only been a quarter. But has -- have you seen any impact yet from the Covetrus merger, or the merger of the Schein and Vets First Choice businesses in the marketplace yet?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [26]

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Yes. Schein and Covetrus are good competitors. We have good competitors in that market and they are one of them. And we'll just continues to focus on our areas of strength. We're particularly strong in corporate accounts. We're particularly strong in our operating efficiency in that business. We have really good value-added services and technologies both in the production animal market and in the companion animal market, a strong sales force. So we'll continue to focus on our strengths in building the business. But I'm sure that Covetrus will continue to be, as they have been, a strong and good competitor.

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Kevin Caliendo, UBS Investment Bank, Research Division - Equity Research Analyst of Healthcare IT and Distribution [27]

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Is there any plans to try to grow out your own platform, just similar to the Vets First Choice Vetsource platform?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [28]

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Yes. We are a shareholder of Vetsource. And we've been very happy with our interest in that business and partnering with them. And then we have other kind of value-added technologies like [Allied TBM], for instance, that we have internally.

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Operator [29]

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Our next question will come from the line of Charles Rhyee from Cowen.

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James Auh, Cowen and Company, LLC, Research Division - Associate [30]

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It's James on for Charles actually. So World Courier seems to be continuing to perform well. If I recall correctly, it was noted previously that you expect operating profit growth there to grow at or in excess of 20% in fiscal '19. Can you give us some color on like what's driving that level of growth? Has growth year-to-date been in line with that expectation? And is that sustainable over the longer term beyond fiscal '19?

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [31]

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No. So James, no, we didn't -- we don't give that specific guidance for a business within our other sector. But we did have an outstanding year, a very high-growth year in 2018 World Courier. And when a business has 2 or 3 back-to-back very strong growth years, we were pleased with the brand they've put and they continue to hit their internal milestones, and more importantly provide very important services to their manufacturer partners. So we couldn't be happier with the business. It's an international business that's been a really strong success for us.

And we have high confidence in the management there. We've made strong internal investments. It's a complex business for us to run and operate in 50 countries. And a lot of the value add that ABC has done there, if you look back over a long time, has been strengthening the internal controls, the financials, really helping them with how you cross contracts out. We think that it was always a good business. We've added a lot in terms of management, expanded the services and helped just manage and inform the business data. So I think it's a great case study within ABC for what is a successful acquisition.

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James Auh, Cowen and Company, LLC, Research Division - Associate [32]

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Okay, great. And can you provide us with an update on Lash maybe, particularly the Fusion implementation? How is Lash tracking towards return to growth in fiscal '20?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [33]

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Yes. So we're really pleased with the progress that Lash is making. From a financial standpoint, it's still a transition year for Lash. But they're doing really well in terms of new business development and new business wins and signing extensions and adding to programs with existing customers. And we really feel strongly about Fusion for the current and for the long term and the benefits that it will have for Lash and for manufacturers and patients.

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Operator [34]

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Our next question will come from the line of Ricky Goldwasser from Morgan Stanley.

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Rivka Regina Goldwasser, Morgan Stanley, Research Division - MD [35]

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So Jim, a two-part question. But the first, Jim, when we talk about the $0.05 benefit in the quarter from the lower operating expenses, should we think about this as a sustainable benefit that we can flow through our model going forward or is just kind of like more of a onetime item?

And then for Steve, I just wanted to revisit the WBAD question. I mean obviously, your largest customer and sourcing partner has highlighted some meaningful headwind for them from lower generic sourcing benefit. So what are you seeing on your end? How are you mitigating it? I know you responded before that the -- you're seeing the sell versus buy-side spread being stable. Should we interpret that as you're actually getting better pricing from the sell side?

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [36]

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Yes. I'll take the first part of that question. The $0.05 of G&A benefits during the quarter is really timing. And it's things that we expected to happen throughout the balance of the fiscal year, particularly in the third quarter, that ended up benefiting us in the second quarter.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [37]

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Yes. On WBAD, I think we have a very -- the relationship really works because of the strength of the data and the sources that we have between Walgreens, Alliance Boots and AmerisourceBergen and also has been further strengthen our key partners, especially Express Scripts but also an institutional pharmacy partner like PharMerica. So we feel like it's really well positioned. When we -- we are painfully aware of generic deflation and brand inflation and the growth of specialty.

So when you look at the $160 billion in revenues and the planned profits, the contemplation of a lower contribution from WBAD is definitely something we thought about in our fiscal year '19 planning. And we'll continue to think about it. So the sourcing component is very important. We think the model's been very successful, of course, you know, others sort of copied it. But the original stakeholders that we have in the -- the original stakeholders that we have are very powerful, informed stakeholders and good partners to have. So I hope -- I'm getting that the time is actually up. So I'll turn that to Bennett.

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Bennett Murphy, AmerisourceBergen Corporation - VP of IR [38]

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And that's the last question we have time for. But I'll turn the call back over to Jim for some closing remarks.

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James F. Cleary, AmerisourceBergen Corporation - CFO & Executive VP [39]

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Yes. I'll just take a moment here and then I'll turn it over to Steve for closing remarks. But I'm going to go off-script just a bit and recognize Steve for just having celebrated his 25th year milestone as an AmerisourceBergen associate. And congratulations, Steve, and thanks for your leadership and for your 25 years of service to all AmerisourceBergen stakeholders.

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Steven H. Collis, AmerisourceBergen Corporation - Chairman, President & CEO [40]

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Thank you, Jim. I hope that someday, people will think of me as a senior spokesperson, but I'm not ready for that yet. But honestly, as I sit here today, we had a fabulous quarter. We're proud of the results we had. But if I think about the requirements to do what AmerisourceBergen does, I'm more confident than ever in our value proposition. And the services that we provide continue to grow in scale, in quality, in magnitude. And that's really both upstream and downstream. And I feel that they are critical to health and outcomes and management of our key customers, whether they're in the pharmaceutical space, but also to facilitate patient access to care.

So you mentioned 25 years, Jim, but really since our merger in 2001, if you look at the company that we've built, the key cultural aspects of people, the relationships that we've built, the differentiated services and solutions portfolio, the businesses that we've acquired and the strong financial flexibility we have, probably the most financial flexibility we've ever had in our future, I just feel very confident that we can successfully navigate the complexity of the U.S. health care system and deliver long-term shareholder value.

So thank you for listening. I thought the quality of the questions today was excellent from our sell-side community. I appreciate your interest in AmerisourceBergen today. Thank you.

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Operator [41]

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Thank you. Ladies and gentlemen, that will conclude our conference for today. Thank you for your participation, and for using AT&T Executive TeleConference. You may now disconnect.