Ladies and gentlemen, thank you for standing by. Welcome to AmerisourceBergen First Quarter Fiscal 2018 Financial Results Conference Call. At this time, all phone lines are in a listen only mode. Later, we will conduct a question and answer session and instructions will be given to you at that time. As a reminder, today's conference call is being recorded.
I'll now turn the conference over to your opening speaker for today, Keri Maddox, Vice President, Corporate and Investor Relations. Please go ahead.
Thank you. Good morning and thank you all for joining us for this conference call to discuss the AmerisourceBergen fiscal 2018 Q1 financial results. I'm Carrie Maddox, Vice President, Corporate Investor Relations for AmerisourceBergen and joining me today are Steve Collis, Chairman, President and CEO Tim Gutman, Executive Vice President and CFO. On today's call, we also will be discussing non GAAP financial measures, which we use to assess the underlying performance of our business. The GAAP to non GAAP reconciliations are provided in today's press release as well as on our website.
During this conference call, we will also make forward looking statements about our business and financial expectations on an adjusted non GAAP basis, including, but not limited to, EPS, operating margin and income taxes. Forward looking statements are based on management's current expectations and are subject to uncertainty and change. AmeriCorpsburg assumes no obligation to update any forward looking statements or information, and this call cannot be rebroadcast without the expressed permission of the company. We remind you that there are uncertainties and risks that could cause our future actual results to differ materially from our current expectations. For a discussion of key risk factors and other cautionary statements and assumptions, we refer you to our SEC filings, including our most recent Form 10 ks and to today's press release.
I would also like to remind you that we have posted a slide presentation to accompany this morning's press release. You can find it at our website, investor. AmerisourceBergen.com. You will have an opportunity to ask questions after today's remarks by management. We do ask that you limit your questions to 1 per participant in order for us to get to as many participants and inquiries as we can within the hour.
With that, I'll turn the call over to Steve. Steve?
Thank you, Carrie, and good morning, everyone. Today, I am pleased to discuss our Q1 results as well as AmerisourceBergen's continued execution, the stability we are seeing in the marketplace and our company's strong positioning for long term growth and shareholder value creation. Revenues were up 6% to $40,500,000,000 for the quarter and our adjusted diluted EPS was $1.55 for the Q1, an increase of 14% compared to the previous fiscal year period. Importantly, our core pharmaceutical distribution businesses are executing extremely well, growing volumes with key customers and segments and continuing to effectively manage operating expenses. We are very pleased with the strong start for the fiscal year.
We are proud of this continued solid execution and I want to take a moment to again thank our amazing team of 21,000 associates, including those that have recently joined us through the acquisition of H. D. Smith for their dedication and performance. As I've said before, it is our associates around the globe who help shape our culture, power our corporate transformation and drive our growth. So again, thank you.
With 1 quarter complete in fiscal year 2018, we believe that our consistent ability to execute and achieve more will continue to drive growth and create value in the healthcare market and for our shareholders. My comments today will be focused on 3 topics. 1, AmerisourceBergen's proven continued execution 2, the current market landscape and 3, our strong positioning for long term growth. So first, execution. I continue to be extremely proud about how MarisourceBergen is successfully navigating the healthcare market.
We're growing our revenue and our gross profit with a diverse portfolio of fast growing customers. We're successfully servicing the new business in volume from AllianceRx and Rite Aid. Walgreens has now acquired more than 600 Rite Aid stores and has said that they'll continue at an increasing pace moving forward. We were fully prepared and are seamlessly adding these stores into As we said at the time of the deal announcement, we're very proud to bring H. D.
Smith, which was the largest independent wholesaler in the U. S. Into the Marisol Bergen family. It's a best in class operation with a diversified customer base and the strategic cultural fit with our own business is very strong. Importantly, we're also continuing to make great progress in increasing the purchasing compliance across our existing customer base.
This strategic and focused effort is driving generic product volume growth and helping us to offset what has been higher than historic deflation rates. We also continue to execute across specialty distribution, oncology and physician administered product distribution, where MarisourceBergen has long been the leader. In the first quarter, we marked our 16th consecutive quarter with 10% or greater revenue growth for this part of our business. I really believe that innovation is a hallmark of AmerisourceBergen. In the Q1 alone, we supported the launch of virtually all of the new specialty products and we also convened more than 150 community oncology providers and patient support teams to explore the future of immuno oncology with our Ion Solutions Group.
Of course, execution is also about successfully navigating through challenges. We are committed to enhancing PharMEDium's assurance and quality control programs and continuing to build its position as the industry's market and quality leader. That includes remediation efforts currently underway at our Memphis facility, where we voluntarily suspended operations in December. We are working diligently and communicating with the FDA to fully comply with the agency's 503 regulations and new compounding in policy priorities. There will be an impact to our fiscal year 2018 financial expectations for the business, which Tim will talk about in more detail in a few minutes.
But this business and its offering is strong and we feel we are best positioned to execute over the long term. Meeting and growing market demand and delivering the highest quality products to our customers. In our other segment, Commercialization Services and Animal Health, market leader MWI continues to grow revenue, driven primarily by strong U. S. Companion animal market.
I just returned from a meeting of our MWI sales associates. And I must say that I've been consistently impressed with their knowledge and passion for the business and the customers they serve. MWI has established itself not only as the market leader, but as a valuable demand creating extension of our manufacturer partners businesses. World Courier also had a very strong Q1. Its position as the leader in global specialty logistics services drove compelling volume growth and overall performance.
We are especially proud of its recent designation as the first logistics company to attain global good distribution practices or GDP, certification against 3 major GDP standards and the only provider to hold a GDP certification with such wide and global scope. As we're continuing to execute at Lash Consulting, launching the Fusion platform, which is a game changer for the industry, The customer migration and onboarding progress has been in its early stages, which is having an impact on the segment, But we are confident that we have the right team, technology and an unrivaled expertise to make this an important growth driver for our company over the long term. Generic buy side deflation has been higher than historic norms for several quarters, creating a headwind for us and our business. That deflation rate, however, has been stable. We continue to see it tracking in the high single digits in Q1 in line with our expectations.
Brand inflation is also tracking in line with our projections. We have no major contract renewals on the across our industry. Finally, 3rd, Amerisource Bergen is strongly positioned for long term growth. As Tim will talk about in a few more minutes, there are significant benefits for AmerisourceBergen as a result of recent tax reports. As a U.
S. Taxpayer with primary U. S. Income, the new tax rate enhances our ability to invest in our business to innovate and to deliver value to our shareholders. Over the long term, this enables AmerisourceBergen to grow our U.
S. Business. In the last 2 years alone, we've continued our commitment to improving and enhancing our business, investing nearly $1,000,000,000 in capital spend to create operational efficiencies, leverage scale and provide best in class customer service. We are well positioned to realize long term benefits from our state of the art services, distribution network and IT investments. AmerisourceBergen's innovative platform also differentiates us in the health care industry and we continue to build our portfolio of high value services and integrate them into our customers' businesses.
For example, we've been able to show that community pharmacy customers that opt into our full line of services and solutions grow faster than their peers and more growth and success for our customers ultimately means more growth and success for AmerisourceBergen. I'm happy to report that our highly automated distribution network now includes 6 of our planned 7 new distribution centers and we are confident that our capacity and capabilities are industry leading. We've also made our industry leading. We have also made strategic investments in our IT systems, positioning AmerisourceBergen to realize greater operational efficiency and increased operating leverage. As we've discussed on past earnings call, in 2017 2018, we're rolling out 8 new IT systems including ABC order for the Pharmaceutical Distribution business, key systems at NMR and World Korea, a new e commerce platform at MWI and Fusion at Lash.
These systems enable us to better run our day to day business and importantly to quickly and efficiently service our customers and their patients. Another driver for long term growth in AmerisourceBergen is our established undisputed leadership in specialty. We continue to offer 1 of the industry's broadest ranges of clinical trial support, consulting and commercialization services, data analytics and specialty product distribution. With specialty growth outpacing the broader pharmaceutical market, this is definitely a growth opportunity for AmerisourceBergen. Another opportunity for future growth is in biosimilars.
With several biosimilars and follow on biologics now approved by the FDA, we're advancing towards a marketplace where those products have a greater impact on patient care. ParaSol Spoken has always taken a strategic approach to biosimilars, recognizing them as the distinct product launch that they are and we feel our market position, particularly our market leadership, especially in community oncology is a differentiator for us. Our diverse, fast growing portfolio of customers also strongly positions AmerisourceBergen for long term growth. With Walgreens, Express Scripts, Kaiser, CPA and so many others, we have built integrated strategic partnerships that support and accelerate expansion, driven by our customers' performance and leadership in the fast growing specialty market. AmerisourceBergen expects to outpace the U.
S. Pharmaceutical market growth Finally, at AmerisourceBergen, we have the talent and the team in place to maximize and realize all of these opportunities. I'm so proud of the strength of our team and how AmerisourceBergen continues to internally develop and elevate our leaders. They are leading, executing and delivering great results. In summary, AmerisourceBergen is strong.
We are evolving and transforming our business to best meet the needs of our customers, drive value for our shareholders and ultimately serve patients. We are united in our responsibility to create healthier futures. Now let me turn the call over to Tim for a more in-depth discussion of our quarterly financial results and our financial guidance update for fiscal 2018.
Thanks, Steve, and good morning, everyone. Consistent with past quarters, my remarks will focus only on our non GAAP adjusted financial results and growth rates and comparisons are made against the prior year December quarter unless otherwise noted. For a discussion of our GAAP results, including one time adjustments related to tax reform, I'd ask that you please refer to our earnings release. As Steve mentioned, we had a solid quarter and our focus continues to be on executing across our businesses. Overall, we finished better than we expected, driven by execution in several of our priority areas despite a couple of headwinds.
Our commitment as we move forward is to always deliver outstanding service, solutions and value to our customers. This morning, I will provide commentary in 2 main areas. First, I will highlight our quarterly consolidated and segment performance. And the second area, I will cover our revised fiscal 2018 expectations, including impacts from tax reform and PharMEDium. Let's begin with our Q1 2018 results.
We finished the quarter with adjusted diluted EPS at $1.55 an increase of 14%. This included $0.15 from the benefit of the new U. S. Tax legislation. I will provide more color on the impact from tax reform shortly.
Our consolidated revenues were $40,500,000,000 up a solid 6%. Operating income, our adjusted operating income was $488,000,000 up $2,000,000 with our operating margin down 6 basis points. As expected and as we had previously communicated, we had a much higher growth rate in our operating expenses due to costs associated with new distribution centers, duplicate IT costs resulting from the implementation of new systems and variable costs supporting our higher revenues. Given the timing of the on boarding of the Walgreens new store business, we expect this disproportionate relationship between gross profit contribution and operating expense to continue at least for the next quarter. Moving below the operating income line.
Income taxes. Our adjusted income tax rate was 24.2% and reflects primarily the positive impact from tax reform and the new lower U. S. Corporate income tax rate. Our annualized effective tax rate is based on a blended calculation using the previous corporate federal tax rate for 1 quarter and the new 21% tax rate for 3 quarters applied against our U.
S. Pretax income. For fiscal year 2018, the impact of tax reform will contribute about $0.60 to our adjusted EPS. During the December quarter, we also had a slightly lower tax rate than expected due to ongoing tax initiatives. Our adjusted net income increased about 13% to $342,000,000 as a result of our lower tax expense.
Our diluted share count decreased slightly to 221,000,000 shares. In the December quarter, we repurchased a modest amount of shares given our announced H. D. Smith acquisition and our subsequent bond offering. We exited the quarter with $766,000,000 on our current Board share repurchase authorization.
Moving over to cash flow and our cash balance. In the December quarter, we are off to a good start given that we had a very slight negative free cash flow of about $60,000,000 which is better than we expected. This year we had a benefit from sales mix and also continued efforts in managing our working capital including our inventory level and turns. Last year, we were still making our working capital investments with our largest customer. We ended the quarter with roughly $3,000,000,000 in cash, which includes the proceeds from our November debt issuance.
However, it's worth noting that in January, we used cash to fund and close our acquisition of H. D. Smith. Of our total cash balance at December quarter end, we had about $1,100,000,000 offshore and majority of this amount was U. S.
Denominated cash. This finishes the review of our consolidated results. Next, let me switch and cover our segment results. And we can begin with Pharmaceuticals Distribution Services. Total segment revenues were $38,900,000,000 up nearly 6%.
The segment continues to benefit from the growth of our largest customer Walgreens, which includes incremental specialty drug sales to AllianceRx. We started servicing AllianceRx in the Q3 of fiscal 2017, so we haven't yet anniversaried this new business. During the quarter, we also had very good revenue growth across our existing customers in the independent retail segment. Our inside sales team is increasingly serving as a resource for our independent customers, focusing on their product and service needs, while helping to ensure customers are optimizing their contracts by reaching and exceeding their generic compliance rates. This creates a win win for our customers and our business.
Let me highlight year over year, we are extremely pleased with the overall decrease in our generic leakage percentage down roughly 400 basis points. Moving over to specialty distribution, defined as oncology and physician administered specialty drugs and consistent with our previous reporting of legacy ABSG, we saw revenues increase 12%. Volume trends continue to be very good, especially in oncology led by new innovative drugs and also ophthalmology and MS. Wrapping up the segment, we did have a revenue headwind of about 100 basis points from lower hepatitis C revenues again this quarter. Segment operating income increased by 2% to $388,000,000 The segment benefited from solid revenue growth notably from specialty products.
Additionally, we realized the benefits from driving higher than expected Pro generic revenues. We were pleased with the contribution from Pro and our overall margin during the quarter. The segment's 1st quarter results and year over year comparisons were negatively impacted by PharMEDium where we had lower than expected revenues and profit contribution. PharMEDium's 503B outsourcing facility were inspected by the FDA beginning late calendar 2017 and carrying into early 2018. As a result of these inspections, voluntarily suspended operations at our Memphis facility.
Memphis is our largest 503B production facility and our most highly automated one. We are engaging an ongoing dialogue with the FDA to implement any corrective actions that should be taken and to confirm a clear pathway to full compliance with this facility. We were previously optimistic that Memphis operations would restart in early January. However, the facility remains closed and we currently anticipate that operations will resume this quarter. We fully expect to ramp production through the second half of the fiscal year and exit the year at full production.
It's important to note that all of the other PharMEDium inspections are now complete and our other 3 503B facilities have remained operational throughout this process. Because of the time and certain ongoing incremental expenses required to perform remedial measures, PharMEDium's contribution to adjusted EBIT and EPS in fiscal 2018 will be lower than anticipated. As Steve mentioned, we are committed to continuing to build PharMEDium's position as the industry's market and quality leader. PharMEDium's business fundamentals remain strong and unchanged. There is certainly high demand for outsourced compounded sterile preparations.
Additionally, we believe that FDA's new 2018 guidance will provide further clarity and increased oversight around the 503 standards. We believe this will be another positive for our business and create new opportunities. Overall, we remain confident that we will cycle through this remediation period and ultimately we will increase PharMEDium's competitive advantage while delivering the highest quality compounded sterile preparation available today. We can now move to the other segments. Businesses that focus on global commercialization services and animal health and include World Courier, AmerisourceBergen Consulting and MWI.
In the quarter, total revenues were $1,500,000,000 up 12%. All three businesses contributed to the revenue growth. World Courier had an excellent quarter with records in both shipments and billable weight. MWI had revenue growth as a percentage in the low teens, driven mostly by lines shipped that increased in the high teens. On a comparable basis, we had a 10% growth rate in companion animal revenues.
MWI is benefiting from a growing U. S. Market, but they also continue to gain incremental share. From an operating income standpoint, Stifrouk had operating income of $100,000,000 down about 6% or $7,000,000 As I just highlighted, World Courier had strong operating income growth as a result of the business' increase in revenues and mix of business. However, the segment did have lower contributions from both MWI and Consulting.
MWI had a tough comparable to last year when they earned certain manufacturer rebates based on established revenue targets. These rebates did not repeat in the December 2017 quarter. Additionally, MWI had higher operating costs, primarily associated with a higher number of shipments and revenues. That said, MWI's operating income growth rate is expected to improve going forward and we are confident they will meet their full year contribution target. Finally, our consulting business was down year over year due primarily to the implementation of Fusion and the cadence for Lash's new business development pipeline.
During the quarter, we made progress converting and supporting manufacturer clients on this new technology platform. However, the conversion process is slower than we previously anticipated, which slows down Lash's ability to onboard new business. We are excited by the feedback we are receiving on Fusion so far. And despite the slower than anticipated ramp, we remain confident that this new platform will be best in class, a unique asset and a long term value driver. Now let's turn to our revised full year fiscal 2018 expectation.
Consolidated revenues, we continue to expect growth between 8% 11%. This growth rate includes the onboarding of the Walgreens Rite Aid stores, which will accelerate into our 3rd fiscal quarter. The growth rate also includes 9 months of revenue contribution from the new H. D. Smith business.
Consolidated operating expenses. We are now able to formally adjust for the addition of the H. D. Smith business. As a result, we expect our OpEx growth rate will be between 6% 8%.
Let me emphasize backing out the incremental OpEx impact from H. G. Smith, we would be right in line with our previous OpEx guidance. Consolidated adjusted operating income. We now expect to grow between 1% 4%.
Importantly, without the impact of PharMEDium, our operating income guidance range would have remained unchanged. Let me cover the revised guidance from a segment standpoint. We expect the following: Pharmaceutical Distribution Services, growth of 1% to 4%, reduced to reflect the impact from PharMEDium. Again, we believe these regulatory initiatives are near term challenges for the business. We have the right people and resources mobilized to address these items.
We are confident that PharMEDium will remain a trusted partner to our customers for their outsourced compounding needs and a compelling long term growth driver for ABC. On an overall basis, excluding PharMEDium, this segment is executing well. Core fundamentals are strong. Volumes, generic compliance rates, customer renewal sell side rates and margins are all performing We now expect operating income growth to be between flat and up 2%. Compared to prior guidance, this is a decrease due in large part to our Fusion Technology transformation that I just discussed at our Lash Consulting business.
Moving below the operating income line, tax rate. Our guidance assumes a full year tax rate of 23% to 24%, primarily lower to reflect the ongoing benefit from U. S. Tax reform. We also expect a slightly better than anticipated contribution from the accounting for share based compensation and also from continued tax initiatives.
Looking forward, so for fiscal 2019, at this point, we expect to see a further decrease in our tax rate of 150 basis points to 200 basis points due to the net full year impact of tax reform. Interest expense. Although we did not guide specifically on interest expense when we provided our initial fiscal 2018 guidance, since we issued debt in connection with our H. D. Smith acquisition, it's important to highlight that we will have about a 25% increase in our quarterly interest expense beginning in Q2 2018.
Share repurchases. We continue to guide to modest share buybacks generally enough to offset the dilutive impact from employee stock option exercises. Adjusted EPS. Our fiscal 2018 range will now be $6.45 to $6.65 This revised range includes the estimated positive impact from tax reform of $0.60 offset primarily by the change in our expectations for PharMEDium. Switching to our free cash flow.
Our new range which continues to exclude non recurring items is $1,350,000,000 to $1,600,000,000 and reflects the positive impact from our cash tax savings as a result of tax reform. Overall, we are pleased with tax reform, not only the lower effective tax rate, but also preserving the LIFO tax deduction. The benefit from this deduction allows companies like ABC to continually invest in infrastructure, drive scale efficiency and also to carry higher levels of inventory. All of these enable us to better serve our customers. In closing, this continues to be a dynamic time in health care and because of this AmerisourceBergen is evolving and transforming our business.
At the same time, our principles remain strongly in place, financially disciplined and highly focused on execution, doing what we do well and doing it consistently so that our customers can advance their businesses. We're confident that this is a winning formula and it enables ABT to be the partner of choice, which keeps us on the path of creating long term value for all of our stakeholders. We appreciate your interest in ABC. Now here's Teri to start our Q and A.
Thanks, Tim. Operator, we're now ready to move into the Q and A portion of the call.
Our first question will come from the line
comments you made with respect to the guidance. I think you said that the operating profit growth goal was 4% to 7%, and that was sort of post the H. D. Smith acquisition. Now it's 1% to 4%.
So you decreased the guidance by about 3% off the midpoint. And just looking at your operating profit totals for
the year, it looks like
to be a $60,000,000 hit to your guidance. And I think you said that absent PharMEDium, you would not have changed that guidance. So are we correct in assuming that PharMEDium is about a $60,000,000 drag on your operating profit numbers this year?
Yes. Hi, Glenn. Good morning. Yes, I mean, I would say that you're thinking about it correctly. I mean, we were transparent.
We gave our new revised guidance. PharMEDium is when we purchased PharMEDium high margin, high growth, very profitable. So I say as you think about the change in guidance in that midpoint, think about the core business performing really well, probably better than we expected, all the trends that we called out. So a positive from the core business offset almost all by PharMEDium and a little bit of Lash. So that's yes, directionally, you're thinking about it right.
But please don't forget about the core performing very well.
Yes. That was going to be my follow-up question. Steve, you sort of went into it and you talked a little bit about some of the issues in MWI and Lash maybe being a little bit weaker than expected within this fiscal year. And it kind of sounds like the weakness might be offset within the range of the guidance or as Tim just sort of pointed out, maybe the core pharmaceutical distribution business may be doing a little bit better than expected. So could you just sort of weigh in on that a little bit?
Yes. I think on the core business, we carry on hitting on very well on specialty with another record revenue quarters and market leadership there and new products coming out. I think we've done very well with launches and participate in our commercialization services. As you noted, we did have a tough quarter in MWI, but that was more from a comp perspective, not out of a historical norm. And Mark Shaw and Jim Ferry and the team, they are working hard to make their numbers for the year, and we've got every confidence they will.
And I just would say that we had good trends in utilization. Our portfolio of customers is excellent, as you know, all growing very well. And we're benefiting a bit from mix. So although we still see higher than anticipated generic deflation rates, there are a lot of other offsetting trends including specialty, better compliance and some of the rebalancing that we've done, which is a long term process, but definitely we're seeing that it has benefited us. That discipline that we exerted about 2, 3 years ago is really that discipline that we exerted about 2, 3 years ago is really benefiting as that pipeline changes even quicker than we expected it would because of deflation in generics.
And then brand inflation trends were pretty much as expected, maybe slightly higher than expected. So overall, we like the quarter a lot. We just got controllable issues around our own performance with 2 businesses that we're working very hard on.
Okay. Thanks for the details.
Yes. Thanks so much. Operator, can we have the next question please?
Our next question will come from the line of Robert Jones of Goldman Sachs. Please go ahead.
Great. Thanks for the question. Just wanted to go back to PharMEDium. I believe there are 4 PharMEDium facility locations and I know you said that the others were up and running. But is there any FDA concerns or focus around this particular issue at the other facilities?
And then just trying to put some numbers around the farm medium issue. Tim, could you give us just a sense of what percent of total farm medium production comes from Memphis? I know you said it was the highest and most automated facility, but just trying to get a little bit more specific of a gauge of how big that is relative to total Farm Media?
Yes. Hey, Bob. Good morning. Yes, let me emphasize that there are 4 facilities, 3, the other 3 have their inspections completed, all are operational. And again, that's a positive method is our largest facility.
They're roughly ballpark maybe half of our production capacity. They're highly automated. There are some robotics and some automation equipment there. So they're not only large, but they're very efficient. We're confident.
We're mobilized. We're on Memphis. We anticipate it's going to be open this quarter. There will be a glide path to get production back up. And as Steve mentioned, it's manageable controllable.
There's tremendous demand from customers. The positive is a lot of the production that we if we put a customer on a quota, it shifted back to the hospital. We feel confident that we can regain and get that share back in a reasonable amount of time. So again, a little bit slower than we anticipated this year, but positive as we exit the year and get into next year.
No, that's helpful. And then just a quick follow-up on tax. I just want to make sure I understand the impact from tax reform on the quarter and the full year. I think you're excluding a benefit from reduced tax liabilities in the quarter that sounds like it was a result of tax reform, but yet the tax rate on adjusted basis for 1Q was obviously quite a bit lower than what was expected at around 24%. So I guess what drove the lower rate?
And then for the guidance that $0.60 that you're talking about being a benefit for the full year, does that include any portion of the lower rate that we saw in 1Q? Or is that all incremental starting Jan
1? Yes. Bob, let me the $0.60 is all tax reform. I mean that's our estimate of the change in the statutory rate for 3 quarters over our And again, with our share price up a little bit higher previously, we saw some stock comps. So clearly, the $0.60 is all tax reform.
But we continue to work hard to be very thoughtful and planful about our tax rate. Hopefully that answers your question. Yes.
Thanks, Bob.
Thank you.
We move to the next
question, please.
Our next question will come from the line of Charles Rhyee of Cowen. Please go ahead.
Yes. Hey, thanks for taking the question. I'm sorry to keep jumping back to PharMEDium here. But as we expect the ramp the facility to get back online and you expect that to ramp up, Is there any reason not to think that we would recover the EBIT contribution from the Memphis facility? Or is there anything in sort of the remediation that would change sort of what the output of that facility would be?
No. Essentially, it should get back its timing. We have to ramp production up, build up inventory, get the inventories released, get customers back in the ordering cycle. So if we are correct that we get back that we get the facilities inspected and released this quarter, then we should see some impact in next quarter. And hopefully, we end fiscal year 2018 at the full run rate that we would expect at least from revenue.
Some slightly more operating expenses, but nothing serious, maybe 1% or 2% for a higher margin business than any other business we have.
Okay. And then just a follow-up on the OpEx side, obviously, that ticked up again. Can you remind me sorry, I might have missed exactly what that was attributed to? And should we think of this as is this sort of a near term phenomenon? And then should we expect that also to maybe normalize again later on?
Thanks. Yes. OpEx, we did
because of closing H. D. Smith and having that business for 9 months. But again in the prepared comments we were very specific ex H. D.
Smith excluding that, we would have been right in line with our OpEx that we gave originally. And then I think OpEx the important thing really on OpEx is we're going to create some value in 2019. The OpEx is high. There's a little bit of a mismatch as we take on all the business for the full year, as we eliminate some of the duplication in the system down the road there's going to be value created on OpEx and better leverage. So again, getting into 2019 OpEx will certainly be a tailwind as that comes in line with where we expect it to be.
But to be clear, the H. D. Smith was included in the original OpEx guidance too, wasn't it?
No, it was not. When we gave original guidance at the end of the year, at the end of Q4, that was not contemplated. And we never adjusted it when we announced H. G. Smith.
Okay. That's great to clarify. Thank you.
Thank you.
Our next question will come from the line of Kevin Caliendo of Needham. Please go ahead.
Kevin, are you there? You made me on mute.
I apologize. I was on mute. I apologize. Thanks for taking my call. Can you talk to what PharMEDium did from an EBIT perspective in fiscal 2017?
Just we have some scope of how sort of how big this business is for you?
Yes. Hey, Kevin, it's Tim. Yes, I don't think we want to size PharMEDium. I mean, it's they're a terrific business, high margin. We said, demand is very strong.
They are off to a good start this year. On October November, we were off to a really good start. So I don't think we want to call it out. And again, I mean, without the impact from PharMEDium this year, we would have been right in line with op income where we thought we would be. So but again, I think PharMEDium, we talked about it.
We did the acquisition. We paid that healthy multiple because of the growth and what's it and being a market leader, the invest in class. But I think that's as far as we want to go.
No, that's fine. I appreciate that. Can we just talk a little bit about the Rite Aid onboarding? Obviously, it's in your guidance, but can you just talk a little bit about I'm assuming that the Rite Aid Stores will have a little bit lower margin than your corporate average. I'm guessing it will be the same as what you get from Walgreens.
Is that a fair way to think about it?
Yes. I mean we have, as we said, about 600 pharmacies that we really have on board. And we expect to be complete by the late spring. So quarter 4 will be the Q1 that we have the full run rate benefit. And sure, it's part of we do have small beans pricing essentially.
So yes, you could expect it would be slightly lower. But still manageable.
Yes. No, I just wanted to make sure we're thinking about it very early. And just last oh, I'm sorry. Just really quick on H. D.
Smith, a very good reputation business. Can you talk a little bit about how it would be integrated into Good Neighbor Pharmacy product and if there's anything strategically you do with it, how you operate within the independents or the GPOs? Is there anything you can take from them? Or is it going to be fully integrated sort of into your business?
We just had our first CERES integration review last week. Again, I in the independent sectors. I would say we've seen some best practices in areas like long term care. So where we probably lagged a little bit maybe since we lost ForeAmerica. And I think with ForeAmerica coming back into WPAID, we could really think about that sector and gain some reasonable market share there.
We've retained we're not going very fast, Jeff. I think that the team wants to be cautious. It's a highly priced customers like subset. And certainly, there are customers that were anxious to receive some of the benefits of Elevate and Good Neighbor Pharmacy, and we try to transition those on an expedited basis. But we kept all the sales force essentially.
So far, no distribution centers have been cut down. And we're looking at it very closely. But now we've just with the Rite Aid onboarding and that, we decided to go slow again. Now we have the room to do that. So and we've had some key executives right under the Smiths who decided to stay with us and are looking to have their career with AmerisourceBergen.
And we've done very well with executives from wide companies and assumed senior roles at ABC and contribute a lot. So far, we're very happy with it. It's gone well.
Great. Thanks so much and thanks for all the disclosure.
Our next question will come from the line of Erin Wright of Credit Suisse. Please go ahead.
Hey, thanks. In MWY, you mentioned lower rebases. Is that a function of a, I guess, less favorable contracting or negotiated contracts with the consolidating vendor base? Or is this a change in agency versus buy sell relationships? And I guess how will that impact or inflate top line versus the margin trend for that business?
Or are there any other changes or major changes in contracting terms for that business going forward?
Thanks. Yes. You could say with NGLP, I think I've got everything there have been some shifting manufacture dynamics with the Boehringer Ingelheim acquisition of Sanofi. So that changed some things. I think you've had some manufacturers with some competitive overlap where there was some different pricing rebate issues.
And we had a very I wouldn't say we had a bad quarter loss in 2017. It was just really a very good Q4 in 2016, exceptionally good. Maybe more onetime items you could take them in that 4th quarter. So yes, it's something that we were a little bit behind expectations on, but we've got a good plan. And the business the units that they're shipping are very good.
The market share is good. We did a small little acquisition there, which was very important to the East Coast sales force and the East Coast customer base. So I was at the sales meeting, and we're looking at what we could do better on expense control. And so we're confident that MWR will hit their numbers. And that's always given them aggressive targets.
So when we say that we think they're going to hit their numbers for this year, that will be good performance year over year.
Great. Thanks, Aaron. Operator, can we move to the next question? Sorry, I know we're closing out. I only have 10 minutes left in the call.
George Hill, RBC.
Hey, good morning guys and thanks for taking the question. I guess maybe switch gears a little bit and talk about last you talked about the onboarding issues. I guess is there any customer churn risk here? Can we talk about how many I guess can you guys talk about how many people have been onboarded and kind of how do we think about risk to the business as it relates to replatforming?
Yes, we did hi, George. Thanks for the question. We did have some customers that got a bit maybe frustrated about the delay or got particularly price concerned, but not too many. We've onboarded our own about 3 or 4 customers. I'd say they're happy with the results.
We just have renewed 2 new customers or 1 new customer renewed a big one. So we've got solid leadership there and it's a big project. If we had our time over, we probably would have started earlier. But we're working with the facts we have. And it's a great business for us.
It's I've had that business reporting to me since 1998. And this is the 2nd year that it's had budgetary issues. So it's overall been very stable, very good at managing targets, very good at managing programs. We're in a busy time of the year there right now with the reverification processes. So we've got every confidence that it fills a great need in manufacturers.
And there's also some interesting opportunities to do that sort of work, maybe more for providers. So we've got lots of interesting strategic opportunities. So we're bullish on Lash and think it's one of our most important franchise platform businesses.
Great. Thank you. Operator, can we go to the next question please?
Certainly. Our next question will come from the line of Lisa Gill, JPMorgan.
Thanks very much and good morning. Just one clarification and then one question. On the clarification, when we think about PharMEDium and the Memphis facility and talking about getting back up online, the way that I understand what you're saying is that the roughly $60,000,000 impact is going to be for the rest of the year even though things will start to come online, it wasn't specific to the quarter. Number 1, do I understand that correctly? And then secondly, I just want to understand, Steve or Tim, how you think about the impact of flu on your business as we think about how rapid it's been here in the Q1?
Yes. Hi, Lisa. No thanks. I think it's an important question to clarify. Most of that as you think about PharMEDium in terms of cadence for the year, I mean, we did have a couple of penny impacts in Q1 from lower production in December.
Most of that change will be in the March quarter. But I think I mentioned there's a glide path. I mean, so most of the impact will be Q2. There will be a small impact again in Q3 as we kind of glide back to full production and then Q4 less of an impact and really no impact because we're back to full production. So as you think about the cadence, that's the right way of thinking about it.
Sounds helpful.
Flu, I mean, I think flu, I saw some early numbers the other day, slight impact in December quarter. But certainly, as we saw the numbers in January and really picked up in January in terms of revenues. And so far, we haven't had any type of issues in terms of fulfillment or being a short product. We're staying pretty current with what we're shipping out to our customers. But flu looks to be fairly strong from a revenue standpoint in January.
Great. Thank you.
A question from the line of Ross Muken of Evercore. Please go ahead.
Hi. This is Elizabeth Anderson in for Ross. I had a question about biosimilar contracting.
And you mentioned, given that the biosimilar market there have been
And how are manufacturers reacting to your contract even separately from other specialty products? Thanks.
Can you just repeat the last part of that question, contracting with?
Sure. Yes. Just in terms of how you're contracting with contract discussions are going with manufacturers sort of separately from other specialty products?
Yes. I think we've talked about differentiated pricing. Certainly as we think about biosimilars, that's a unique class of how we're contracting with a unique price and making sure we get appropriate compensation. So that's an area as we re contract with customers, that has a specific price and margin and that's how we're going that's how we're approaching the market. Again, Steve mentioned in his prepared comments, the rebalancing is really critical.
It's going to help us offset lower contribution from generics and the headwinds from generic deflation. But we want to make sure we get appropriate pricing on biosimilars, on specialty, on core brand, on generics. That's a big emphasis of the company and we're making good progress. Yes. And most of
the margin has to come from buy side. So services that we provide and the most robust portfolio of services we have is in our oncology and specialty area. It's possible we could have some in U. S. Bio, which is a business we're starting to highlight more that is very successful in oral oncology.
But there's definitely going to be more and more products. Think it depends on how many products there are. It depends on interchangeability. It depends on who the manufacturer is. Some manufacturers are used to buying more services from us.
So try to educate the market more. And I think everyone understands that ABC has a unique capability to bring biosimilars to market and establish market share. We understand reimbursement really well. And I think you've seen I was at an oncology meeting. We had Orlando last week and definitely a very interested and enthusiastic group in terms of having more choices for their patients.
So we're bullish about biosimilars in the long term. We just would like to see more legislative clarity and flexibility and acceleration. I think acceleration is the key word. It's probably another one opportunity there is for cost efficiencies in the system.
Great. Thanks. Operator, can we go to the next question, please?
Certainly. Our next question will come from the line of Ricky Goldwasser of Morgan Stanley. Please go ahead. And the Goldwasser line is open.
Thank you. Hi, good morning. Just a couple of quick clarifications. So Tim, just to clarify on fiscal year 2018 guidance. I thought that on November 20, you actually did up the EBIT guidance to include H.
D. Smith. I think the 4% to 7% of pharma EBIT growth included contribution. So I guess the question is, is what you're seeing in PharmaDium, has there been any sorry, in H. D.
Smith, has there been any changes to the fundamentals in the business? Or is it just that the integration might be taking a little bit slower?
Yes. Hi, Ricky, it's Tim. Yes, I mean, we did update the guidance to include H. D. Smith.
It was only the op income guidance, but there have been no changes in H. D. Smith. We're still very pleased with H. D.
Smith integrating. We talked about this would be kind of steady state integrate, keep the customer experience, work on synergies 'nineteen and 'twenty. But so far,
as Steve mentioned, H. D. Smith is
going really well, kept all the customers, no retention issues. The change in op income clearly on the new guidance and lowering it unfortunately is PharMEDium, which is we believe manageable and contained and we're focused on it.
Okay. And then secondly, just as we think about the signpost to Watch4 and PharMEDium and what's factored into guidance. So does the new guidance assume that the facility is going to reopen at the end of the quarter? Or when we think about the high to low end of the guidance range, is there also some assumption there that things might take longer to play out?
I'll start and Steve can jump in. The new guidance, we did our best estimate. We put a lot of time and thought into it and talked to our business. And again, our estimate assumes that they're going to be open during the quarter. And again, we know this is important and we'll update the investor community if that changes.
But that's our best estimate today that based on the effort we know behind the remediation and progress, they'll be open during the quarter. I would say certainly the guidance, as you think about the guidance, there are a lot of positive trends in the business, in the core business. The volumes turn out to be better, rents are better, generic compliance, we're chugging along. If we're a little bit better on OpEx, we'll move up on the high end of the range. Certainly, we're optimistic and hopeful that we always start better than the guidance and that's what we're working towards.
Great. Operator, I think we have time for maybe 1 or 2 more questions. Our
next question will be from the line of Mr. David Larsen of Leerink. Please go ahead.
Hi. Can you just talk briefly about brand inflation and generic pricing? With the 7% to 9% generic deflation, what in your mind is a normal range for the buy side? Is it like minus 3% or so? And then can you touch on the sell side environment?
Like how is your spread trending between the buy and sell side? Thanks.
So it's again, the generic deflation levels are higher than the norm. We didn't have inflation for very long, but we did we were having 1 or 2 years where it was net or even slight positive overall with inflation. And that was very helpful to the mix of business. So we've seen now stubbornly persistent high single digits sort of deflation rate. And I think there's signs that it's going to turn with product rationalizations at least announced from the bigger players.
So we will see how that turns. But so far, we haven't seen anything that would change our guidance, and we're more at the higher end of the range. On brand, we were encouraged. I mean, a lot of increases in the high single digits. And so sort of what we expected, maybe slightly stronger trend than we expected.
But I think that we wouldn't ever expect anything more than that. That's the sort of rate that's letting me sustainable. And of course, we see these increases at the growth level. At the net level, a lot of them go away a lot. And depending on the category and the competition and the product maturity, but that is definitely at the growth level, and that's still how we pay.
So we see that playing out for a while, but we're managing with it. Your other question was on the competitive environment. We're lucky we haven't really had a lot of big RFPs out this year. We went through a stage where we had a lot. We managed through those.
I don't think we lost a big one other than where there was a customer consolidation, which everyone goes through. So the market's fairly stable. And I think we all have very similar economics and all intent on these successful public companies. So there's some natural gate there. And again, the customers have to be pretty motivated to want to leave us because HaralsourceBergen does a great job.
We're very integrated with the customers, and we try our help to keep them and enhance the level of services and do a good job for them. And so they're usually not motivated to leave. But I think Carrie, you want to do one more question? Yes.
I think we have time for one more operator.
We have a question from the line of Brian Tranquilout of Jefferies. Please go ahead.
Hey, good morning. Just to follow-up on that last question. So as we think about the negative 7% to negative 9% generic pricing comment, so does that essentially mean flattening of the generic pricing levels at the current level today? And then how do you view that translating into margins, obviously excluding the drag from PharMEDium and H. E.
Smith?
Well, the 7% to 9%, we try to make that up by unit sales and better compliance from customers, which I'd say in the last few years we've done very, very well on. Occasionally, we have an opportunity to make more margin on the buy side, on a generic, which could offset some of the deflation. So product that's deflated, say, 10%, we managed to retain a bit more of the gross profit dollars, but it depends on reimbursement and the market. So and of course, there's been a lot of consolidation in the industry. Anytime we buy a customer like H.
D. Smith, a competitor like H. D. Smith, that does change some dynamics in the market. So as you get to understand pricing that others are enjoying in the market.
So there has been a lot of activity in the market. And I think it's a market certainly where you could describe it as a buyer's market. So we're very active.
Operator, thanks. I think this concludes the Q and A portion of the call. I'll just turn it over to Steve for any closing remarks and thanks everyone for joining us. Steve? Yes.
So Carrie, thank you. I think we try to be well prepared to explain to you the manageable performance issues we have, particularly at PharMEDium and the fact that we see a bright future over there and at Lash as well. We think we've made all the right investments. Somebody was saying to me that every 483 you get, you need to treat it as a learning experience, accept it, improve your standards, improve your qualities. That's what the team at PharMEDium is trying to do.
We are the leader in the industry. So we think that us setting the standard is the way to go. And then just would like
to remember that on the 90% of
our business, we performed very well and almost at all cases above expectations and through some very strong trends. So we are overall really thrilled with the quarter and feel good about the rest of the year. So thank you for your time and attention. And we look forward to being in touch with you at some conferences and certainly on the next earnings call to update you more. And also last thing I'll say is that the tax reform worked up spectacularly well for ABC when you think about preserving LIFO and such a significant benefit, not only to EPS but to cash flow also.
So we're very pleased with how that's all worked out. And we think that it's just made it a lot fairer for primarily U. S.-based companies like ourselves to compete internationally. So I wouldn't want to lose that as a very strong a lot of you have noted it already, but it's a very strong change in our business fundamentals, which we are extremely excited about. Thank you.
Gentlemen, that does conclude our conference call for today. On behalf of today's panel, we'd like to thank you for your participation in today's ABC earnings call and thank you for using our service. You have a wonderful day. You may now disconnect.