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AmerisourceBergen Corp (COR 0.09%)
Q4Â 2019 Earnings Call
Nov 7, 2019, 8:30 a.m. ET
Contents:
- Prepared Remarks
- Questions and Answers
- Call Participants
Prepared Remarks:
Operator
Ladies and gentlemen, thank you for standing by and welcome to the ABC Earnings call. [Operator Instructions]
I'd now like to turn the conference over to, Head of Investor Relations, Bennett Murphy. Please go ahead.
Bennett Murphy -- Head of Investor Relations
Thank you. Good morning and thank you all for joining us for this conference call to discuss AmerisourceBergen's fiscal 2019 fourth quarter and full-year financial results. I am Bennett Murphy , Head of Investor Relations. And joining me today are Steven Collis, Chairman, President and CEO, and James 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 call we will make forward-looking statements about our business and financial expectations on 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 on key risks and assumptions, we will refer you to today's press release and our SEC filings, including our most recent 10-K. AmerisourceBergen assumes obligation to update any forward-looking statements and this call cannot be rebroadcast without the expressed permission of the company. You have the opportunity to ask questions after today's remarks by management. We ask that you limit your questions to one per participant in order for us to get to as many participants as possible within the With that, I'll turn the call over to Steve.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Thank you, Bennett, and good morning to everyone on today's call. I am very pleased to discuss AmerisourceBergen's strong fourth quarter and full first fiscal year results. As well as to look ahead and highlight how AmerisourceBergen continues to execute a differentiated strategy and foster a purpose driven culture to position itself for long-term growth.
Before we discuss our results for the quarter, I want to comment on some of the recent developments regarding the opioid epidemic and related litigation which we recognize is of concern to our stakeholders, including our investors. As you all know, we have been consistent in stating our desire to address the enormity of the opioid challenge by bringing solutions to the table. We continue to work diligently and alongside partners to combat drug diversion while supporting real solutions to help address the crisis in the communities we call home, work, and serve. As we communicated a couple of weeks ago AmerisourceBergen along with our peers reached a settlement with to Ohio counties in the first track of the multi-district opioid litigation. We believe that setting the case is an important stepping stone to achieving a global resolution and demonstrating that our industry is being constructive and thoughtful and how we can address this crisis and try to resolve related litigation. We expect settlement funds to be used in support of initiatives to combat the opioid epidemic including treatment, rehabilitation, mental health, and other important efforts. With the Ohio settlement agreed upon, AmerisourceBergen and other parties will continue the complex process of working toward a global resolution. We are hopeful that the necessary parties including many states' local governments will understand and see the merits of the global framework as a practical path for global resolution. We take our role in the supply chain seriously. As we continue to work closely with stakeholders to evaluate next steps concerning these complex matters, AmerisourceBergen will remain responsible stewards of shareholder's capital. Together, our Board of Directors, management team and associates are focused on developing meaningful solutions for this epidemic. AmerisourceBergen also remains committed to transparency and as we are able to provide shareholders and other stakeholders with information on our efforts and solutions to address the opioid epidemic and related litigation.
Now turning to our business results. Overall AmerisourceBergen performed extremely well in fiscal 2019 driven by execution across our pharmaceutical distribution and global commercialization services and animal health teams. Revenues were up 5% to $45.6 billion for the quarter and reached almost $180 billion for the full year, a 7% increase year-over-year. We delivered adjusted diluted EPS of $1.61 for the fourth quarter and 7 or 9 for the full fiscal year, an increase of 12% and 9% respectively compared to the previous fiscal year periods. This strong performance reflects the hard work, dedication and solution-oriented mindset of our 22,000 associates who enable our company to create value for our shareholders, partners, customers and the patients they serve. Together we accomplished many notable achievements in fiscal 2019.
First, starting with the Pharmaceutical Distribution Services segment. Overall, our core pharmaceutical distribution business achieved strong performance despite challenges at PharMEDium. Our distribution businesses are delivering best-in-class service and solutions to a solid portfolio of customers while maintaining strong execution across the various teams. Our continued strength in specialty distribution and wraparound downstream practice management services produced another year of double-digit growth. We strengthened our relationship with pharmaceutical manufacturers and grew our provider customer base, in addition to benefiting from our robust pipeline of pharmaceutical manufacturer innovation. Additionally, our expertise in areas such as Oncology, Ophthalmology and Rheumatology continue to create an advantage for our market-leading specialty distribution franchise in multiple classes of trade, including health systems and physician practices. Finally, we successfully integrated H.D. Smith and realize the operational synergies of the acquisition more quickly than we expected, which the strong performance of this segment. I'm extremely pleased with how our associates continue to utilize a customer-centric approach to address current market needs and to capitalize on new opportunities and believe that this approach will continue to differentiate AmerisourceBergen in the market and drive our success
Turning now to an update on PharMEDium. Although this business faced challenges in fiscal 2019, we continue to make progress. In August, PharMEDium completed third-party audit inspections At its two open facilities. Based on the findings of the audit, PharMEDium's operations remain on track and importantly in compliance with the consent decree. The two open facilities continue to operate with enhanced quality assurance and quality control procedures. In fiscal 2020, we will continue to remediate and optimize operations as we continue to evaluate the appropriate next steps for the business.
Next, turnings to performance of our global commercialization services and animal health businesses. As a group, these businesses continue to unlock value through a focus on building strong partnership with and providing robust services for manufacturers. MWI Animal Health delivered strong results as it continues to support growth and demand of its strong customer base. Particularly within corporate accounts, where the business is successfully collaborating with key partners to create value commercially. MWI continues to further expand relationships with customers who are growing faster than the market. Additionally, our commercialization businesses are benefiting from investments in leading data and technology platforms across the group, like no World Courier and Fusion at Lash, which continue to drive efficiency and execution excellence. We are pleased with the differentiated services these businesses provide and believe that their performance will continue to create value for manufactures. Especially, as an increasing number of new innovative therapies come to market in the coming years. As the essential commercialization partner, AmerisourceBergen is committed to the ongoing development of an advancement in forward thinking and patient centric solutions that further enhance the customer experience and advance access and adherence outcomes for manufacturers. In addition to supporting manufacturers, we are continuously driving innovation across all points of care, given the ongoing evolution of the entire healthcare landscape. In this dynamic market environment AmerisourceBergen continues to focus on the elements we can control, namely number 1, innovating and investing to support growth across the enterprise. Two, maintaining focus on execution excellence. Three, strengthening associate experience. And lastly, continuing our move toward one ABC. These objectives are in place across the enterprise, as we begin the new fiscal year. Furthermore, our differentiated portfolio of businesses and solutions position us well to achieve them.
First, our core pharmaceutical distribution business continues to enhance safety and security and improve product access and efficiency Throughout the healthcare supply chain. Our state-of-the-art distribution network ability to competitively sourced generic pharmaceuticals and extend to footprint in physician administered products are some of the differentiated capabilities that enable us to drive access to pharmaceutical care across all points of the healthcare spectrum, as well as remaining well positioned for future opportunities such as biosimilars. A market that is evolving and remains promising.
In addition to our global commercialization services and Animal Health Group continues to be the central partner for manufacturers through all phases of product development and commercialization. MWI's highly efficient distribution network and strong demand creation capabilities provide pharmaceutical manufacturers at the capabilities required to advance animal health. One, our portfolio of commercialization services businesses after the critical global specialty and third-party logistics services market access strategies, patient access and adherent solutions and regulatory and compliance support to facilitate access to pharmaceutical manufacturers like saving products. As we enter fiscal 2020, we have a clear vision for execution across these pillars to deliver on continued shareholder value creation. First, we will continue our focus on alignment with key customers. We are proud of the strong customer partnerships that continue to grow well in each market segment. As a pharmaceutical center company AmerisourceBergen will continue to leverage our pharmaceutical supply chain expertise and scale to deepen relationships and drive additional shared value for all of our partners both upstream and downstream. Second, we will continue to build on our leadership in specialty distribution and services. AmerisourceBergen provides unparalleled value to our comprehensive offering in both pharmaceutical distribution and commercialization services. Our extensive footprint in specialty distribution and capabilities uniquely position AmerisourceBergen to provide the innovative commercialization and wraparound services required by complex specialty products. Leveraging our strength and scale, we are growing manufacturer and provider relationships providing the best services and solutions that serve the evolving need while delivering a seamless customer experience. Third, we will leverage unique insights from our partnerships and relationships across the globe and industry to bolster our development and delivery of innovative services and solutions. We continue to create and evolve Our customer focus offerings to further enhance and expand value for manufacturers and our provider customers. For example, we are developing marketing services, digital tools and benchmarking solutions that help pharmacy customers to overcome the barriers and complexities of today's healthcare ecosystems. In addition, we are accelerating the use of technology and data platforms to meet the data, product commercialization, and patient adherence needs of our manufacturer partners. Through our businesses, we are constantly exploring ways to apply or expand our expertise to solve new challenges such as bringing simplicity and efficiency to the complex and challenging world of cell and gene therapies. As connectors between manufacturers and providers, we remain relentless in our pursuit of the most innovative services and solutions that support manufacturing growth. And enable provide us to run their businesses efficiently. Finally, AmerisourceBergen continues to focus on strong corporate stewardship. On the financial side, we remain focused on cash flow generation and strategic capital allocation to continue value creation for our shareholders. On the people side, we are advancing both our people and culture through talent development, career growth and diversity initiatives. I'm proud to work alongside the 22,000 purpose driven associates at AmerisourceBergen and I want to take a moment to thank all of them for their tireless commitment to our customers, unwavering compassion for the patients they serve and for the collaborative innovative and purpose driven approach toward solving unmet needs. Our talent is a competitive advantage and we continue to make additional investments to enhance our associates' experience. I am personally committed to further strengthening the collective engagement of our associates to move closer toward one ABC, becoming even more unified and united in the execution of our strategy and acceleration of our growth. Our strategy focused on customer partnerships, specialty dealership, innovative services and solutions and successful stewardship are pillars that differentiate AmerisourceBergen. It is AmerisourceBergen's purpose that provides the direction and guidance through which we evaluate everything that we do. That purpose of being united in our responsibility to create healthier futures means that we recognize our responsibility to efficiently and effectively deliver healthcare. Our purpose unites, motivates and empowers us to deliver value For all of our shareholders, making a positive impact on our communities, our partners and the patient. Our purpose exists involvement with our growth strategy to ensure that we are a company that does well while also being a good corporate citizen. This is a challenge and a commitment, we have always accepted, and one that we are well positioned to achieve. We are confident in our growth strategy, focused on execution and dedicated to bring in long-term value for all of our stakeholders. Working as one unified connected organization to improve product access and efficiency throughout the healthcare supply chain. Thank you again for your interest in AmerisourceBergen.
I will now turn the call over to Jim for a more in-depth review of our fourth quarter and full 2019 fiscal year financial results, as well as our financial guidance for fiscal 2020. Jim?
James Cleary -- Executive Vice President and Chief Financial Officer
Thanks, Steve, and good morning everyone. My remarks today will focus on our adjusted non-GAAP financial results unless otherwise stated. Growth rates and comparisons are made against the prior year period. For a discussion of our GAAP results, please refer to our earnings release. Fiscal 2019 has been an impressive year for execution and performance across AmerisourceBergen's portfolio of businesses. In our Pharmaceutical Distribution segment, we continue to expand our leadership position in specialty distribution, successfully integrated H.D. Smith into our infrastructure and worked diligently across our business to deliver on initiatives to offset the headwind caused by PharMEDium for the year. In our other segment, global commercialization services and animal health, we delivered on our high single-digit operating income growth expectation. It's our businesses and the group continue to differentiate themselves in their markets. Our execution and focus on delivering best-in-class service and solutions for our partners combined with our unique pharmaceutical centric foundation of businesses enabled us to successfully navigate the complex healthcare environment. Turning now to discuss our results in fiscal 2019 and our expectations for fiscal 2020, I will provide commentary in three main areas of this morning. First, I will detail our adjusted quarterly consolidated and segment results. Second, I will highlight our full-year fiscal 2019 performance and third I will cover our fiscal 2020 guidance.
Moving now to our fourth quarter results, we finished the quarter with adjusted diluted EPS of $1.61, an increase of 11% primarily due to higher operating Income, a lower share count and lower net interest expense. Our consolidated revenue was $45.6 billion, up 5% driven by solid revenue growth in both the Pharmaceutical Distribution Services segment and our Global Commercialization Services and Animal Health group. Gross profit increased 7% to $1.2 billion. In the fourth quarter, we had earlier than expected vaccine sales, which results in a pull forward of gross profit recognition that we had initially expected to realize in the December quarter. This represents a roughly $0.05 EPS shift from fiscal 2020 to the fourth quarter of fiscal 2019. As expected, our operating expenses were higher in the fourth quarter as we exited the fiscal year, in part due to an increase in associate incentive compensation as a result of strong performance in many of our businesses. Consolidated operating income was $456 million, up $24 million or 5% with our operating margin flat. Net interest expense decreased $7 million to $36 million as we continue to benefit from interest income related to our higher average invested cash balance and better interest rates.
Moving now to income taxes, our income tax rate was 19.6%, the same as the prior year quarter. Our diluted share count decreased 4% to 210 million shares for the quarter driven by opportunistic share repurchases in the year. This completes the review of our consolidated results.
Now I'll cover our segment results. Beginning with pharmaceutical Distribution Services, segment revenue was $44 billion, up 5%. The segment continues to benefit from strong specialty product sales and overall customer growth. Segment operating income increased about 3.5% to $369 million with our operating income margin down 2 basis points, driven by the higher operating expenses in the quarter. I will now turn to the other segment, which consists of businesses that focus on global commercialization services and animal health including World Courier AmerisourceBergen consulting and MWI animal health. In the quarter, total revenue was $1.8 billion, up 13% primarily due to growth at MWI and Consulting's Canadian operations and reflecting significant overall growth across the Group. MWI had 10% revenue growth as the business continued to benefit primarily from increased sales to existing customers and the Global Commercialization Services group, which would be our consulting group and World Courier had revenue growth in the mid teens.
From an operating income standpoint, the other segment had operating income of $87 million, up 15%. This group is lapping some quarters that were challenged and experienced some nice growth in all three some components, MWI, World Courier and consulting. This completes the review of our segment results for the quarter.
And now I will turn to our full-year fiscal 2019 performance. Our consolidated revenue was $179.6 billion, up 7% driven by growth within our broad portfolio of customers and multiple strategic partnerships. Our largest customer, Walgreens, represented 34% of our total revenues. And our second largest customer Express Scripts represented 13% of our revenues. Looking ahead to fiscal 2020, we expect that Express Scripts will be a larger portion of our overall revenue in fiscal 2020 compared to fiscal 2019 as we on board incremental volume through the relationship stemming from their merger with Cigna. Consolidated operating income grew 3.5% for the year to over $2 billion, while our operating margin declined 4 basis points , primarily related to the operating loss from PharMEDium in fiscal 2019 compared to a small operating profit in fiscal 2018. Excluding the impact of PharMEDium, operating margin declined 1 basis point in fiscal 2019 compared to fiscal 2018. The performance in both groups, Pharmaceutical Distribution and other, is quite impressive as the teams executed to grow their operating income. Pharmaceutical Distribution segment operating income grew 2.7%, while growth in other was over 7%. In Pharmaceutical Distribution, we saw balanced performance across business in customer segments,. We experienced good growth and expanded share of wallet within anchor customer relationships and segments, including strong performance in Specialty where there continues to being notable growth in immuno-oncology and oncology products more broadly.
Additionally, while still in the early phases of utilization, we saw better-than-expected uptake of oncology biosimilars. While we are still talking about relatively small dollars, the growth we are seeing in biosimilar uptake is encouraging for the future as this part of the market is certain to grow to a more meaningful size. In other, MWI continues to drive value-added business support the growth of their strategic customer relationships and leverage market data to enhance profitability and performance. World Courier's strong business fundamentals positioned it for another strong year of growth as NOVA, their transport platform implementation, continues to progress well in great commercial dividends.
Additionally, we saw meaningful growth in our consulting businesses.
Taking a step back, we did have a significant favorable impact on operating expenses in fiscal 2019 from better than expected healthcare costs. This benefit created a year-over-year tailwind of over $0.05 in fiscal 2019. And we do not expect the same tailwind in fiscal 2020. Regarding income taxes, our full year adjusted tax rate was 20.6%, reflecting a lower mix of US taxable income and a one-time discrete item, both of which had a favorable effect on our tax rate.
Turning now to EPS. Our full year adjusted diluted EPS grew 9% primarily due to our execution to deliver operating income growth, and also a lower share count. Adjusted free cash flow for the year was $1.9 billion, higher than expected primarily due to inventory management and timing of customer and supplier payments. We continue to take a strategic approach to capital deployment. In fiscal 2019, we returned $1 billion to our shareholders through opportunistic share repurchases and dividends and invested $310 million in our businesses through capital expenditures, all while successfully integrating our fiscal 2018 acquisition of H.D. Smith. We understand and appreciate the importance of maintaining the appropriate balance between returning capital to shareholders and investing internally and through acquisitions to both sustain our business and further enhance our commercial value proposition. As I now enter my second year as Chief Financial Officer of AmerisourceBergen, I can confidently say that the optimism I had for the company when I began this role has proven to be warranted. The associates, businesses and culture [Phonetic] across ABC are fundamental to our success and to the incredible value proposition we deliver for our manufacturer and provider partners. In fiscal 2020, we will again look to deliver on innovating and investing to support growth and focus on executional excellence, all while furthering our talent and continuing our move toward one ABC.
Now regarding some working assumptions that are factored into our fiscal 2020 expectations, first, brand pricing. We assume the brand inflation will be similar to fiscal 2019. Now on the generic pricing front, we are anticipating a generic pricing environment similar to the one that we experienced in fiscal 2019. The trend of stabilization on the buy side remains encouraging. And on the sell side, we expect the competitive, but stable dynamic to continue.
Turning now to our financial guidance for fiscal 2020. As a reminder, we do not provide forward-looking guidance on a GAAP basis. So all of the following metrics are provided on an adjusted non-GAAP basis. Starting with revenue, we expect consolidated revenue growth in the mid to high single-digit percent range and roughly a quarter of the growth is due to the onboarding of incremental volume through our Express Scripts relationship.
While we do not provide gross profit guidance, it is worth noting, as we have said in the past that that relationship is predominantly mail order and specialty pharmacy brand product business, which is good for profit dollars, but as a reminder, this type of business is inherently lower margin.
Now turning to operating expenses; we expect consolidated operating expenses to grow in the mid-single digit percent range. Understanding the importance of expense management, we will certainly work to ensure that operating expense growth is at the low end of that range. However, there are a couple of items impacting the year-over-year growth. First, the previously discussed level of reduction in healthcare cost experienced in fiscal 2019 is not expected to repeat. And second, in fiscal 2020 as a result of adopting the new lease accounting standard, certain leases that were previously accounted for as build-to-suit leases will be accounted for as operating leases. This change negatively impacts operating expenses and therefore operating income, but has offsetting favorable impact on the interest expense line. Regarding operating income. We expect to grow operating income in the low to mid single digit percent range with growth expected by both our operating segments. From a segment standpoint, we expect the following: In pharmaceutical distribution services, we expect the segment's operating income to grow in the low to mid single digit percent range. This segment continues to benefit from our leadership in specialty distribution, let me provide key specialty physician services and our key anchor customer relationships across Pharmaceutical Distribution are all in good standing. The lease accounting adoption represents almost 1% headwind to segment operating income. In regards to PharMEDium, we continue to make appropriate progress with our remediation efforts. As it pertains to financial expectations, we continue to expect a loss at the business, but do not expect it to be a headwind in fiscal 2020 compared to fiscal 2019.
Moving now to the other segment, business [Phonetic] is a focus on global commercialization services and animal health. This group is expected to continue on its positive trajectory in fiscal 2020 by growing operating income in the high single-digit percent range. This growth is supported by our expectation for continued strong momentum from MWI World Courier in our businesses within Consulting. As it pertains to Lash, the business will continue to be in transition as the team is focused on migrating existing manufacture programs to the new Fusion platform in fiscal 2020.
While we don't expect Lash to be a tailwind in fiscal 2020, we are greatly encouraged by the new business development wins in fiscal 2019. And by the on boarding of new and existing programs for the Fusion platform this past year. Lash and the other businesses in this group are well positioned in their respective markets where organic growth drivers exist in each and investments in innovation has some positively differentiated for long-term value creation.
Now turning to our consolidated tax rate expectation. Our guidance assumes a full year adjusted tax rate of between 21% and 22%. The fiscal 2019 tax rate benefited from a discrete item, which will not repeat and our higher mix of foreign-based income than expected in fiscal 2020. Regarding share count, as a reminder, we do not include unidentified capital allocation in our guidance. Our fiscal 2020 guidance assumes that we finished the year at between 209 million and 210 million weighted average shares outstanding.
Moving to earnings per share. We expect our fiscal 2020 adjusted EPS to be in the range of $7.30 to $7.60 reflecting growth of 3% to 7%. While we do not provide quarterly guidance, I will note that our EPS growth in the fiscal first quarter of 2020 will likely be in the lower part of the full year growth range.
Turning now to cash flow expectations. First, capex is expected to be about $400 million. Much of the spend relates to key projects being carried over from fiscal 2019 and no one project dominates the spend in fiscal 2020. The projects each have a particular focus or business need and fall into categories ranging from normal run-the-business projects, to investments aimed at supporting growth, increasing efficiency or enhancing our capabilities. For example, in the past few years, we have experienced solid growth related to our national distribution center offering. Manufacturer demand for our national distribution center service has reached a point where we must now invest in expansion this year in order to expand capacity to facilitate continued growth. This is an example of an investment that supports growth and increases efficiency for our manufacturer partners. Now for free cash flow, we expect our free cash flow for fiscal 2020 to be approximately $1.5 billion. In closing, the execution expertise and solutions delivered across AmerisourceBergen continue to fortify and enhance our undeniable value proposition in healthcare. AmerisourceBergen's strategy leadership in growing markets, strong customer relationships talent in culture have us well positioned to continue to create long-term shareholder value and deliver on our purpose of being united in our responsibility to create healthier futures.
Thank you for your interest in AmerisourceBergen. Before we jump into the Q&A portion of today's call, we understand the opioid issue continues to be at the forefront of many of our stakeholders' minds. Due to the ongoing litigation and work toward a settlement, we are unable to comment deeply on these matters we will seek to answer your questions in earnest. But do you want to remind the group here that we are limited and what we can say at this time. We appreciate your patience. Now I will turn the call over to the operator to start our Q&A. Operator?
Questions and Answers:
Operator
[Operator Instructions] Our first question comes from the line of Robert Jones with Goldman Sachs. Please go ahead .
Robert Jones -- Goldman Sachs
Great, thanks for taking the questions. Yeah, I guess Jim wanted to go back to some of the comments around the moving pieces as we think about fiscal '19 turning into fiscal '20. Some of the pieces that we considered in '19 like PharMEDium, H.D. Smith, and I think there was some lapping a SG&A benefits adjusting for those. It seems like you're guiding to the core growth in the Pharma Distribution segment consistent with '19, if not ,slightly better considering things like the lease accounting change. Just wanted to make sure we were thinking about moving pieces in fiscal '20 correctly. So other than the lease accounting which you size, is there anything else that you'd have us note as they considerable change year-over-year as far as headwinds and tailwinds outside of the underlying business.?
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah. Thanks a lot. Bob. So we feel really good about our guidance in fiscal year 20 and of course the way that we finished fiscal year 2019, you asked about the growth in Pharmaceutical Distribution and moving pieces. Overall, our operating income guidance is low to mid single digit growth and Pharma Distribution is low to mid single-digit percent growth and other is some high single-digit percent growth and some of the moving pieces, you know I mentioned in my prepare on my prepared remarks, vaccine revenues and related gross profit. We had some vaccine sales that came earlier than expected in the fourth quarter of fiscal year at '19 that positively benefited the 4th quarter by about $0.05. I indicated so that moves about $0.05 a share from fiscal year 20 to fiscal year '19 and brings the growth rate how little bit down. I talked about the change in lease accounting standard on build-to-suit properties that creates about a 1% headwind in Pharmaceutical Distribution segment operating income. There will be in half benefit interest expense, but it does create about a 1% headwind in operating income. We talked about the healthcare costs throughout fiscal year '19. They brought over $0.05 of benefit fiscal year 2019 as a tailwind. We don't expect to have the same tailwind in fiscal year 20. And then just one other thing I'll call out kind of comparing revenue growth with the operating income growth. We are expanding sales to Express Scripts as a result of the merger with Cigna, and that represents about one quarter of our revenue growth and that's some business that is inherently lower margin business. So it impacts some revenue growth more than operating income growth. Those are some of the key moving parts in PharMEDium noted with a headwind in fiscal year '19. We don't expect it to be a financial headwind in fiscal year '20.
So those are the moving parts, but overall we feel very good about all the business operations and performance particularly our specialty businesses, which are performing especially well.
Robert Jones -- Goldman Sachs
That's helpful. And I guess maybe just a follow-up actually related to specialty. Steve, you made a comment about biosimilars. I know it sounded like, it's early days, but I'm just curious if you could maybe expand on that a little bit. What are you in fact seeing within the specialty channel, as it relates to biosimilars and how big of a contributor can this be as we think about, not just fiscal 20, but beyond.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yeah, hi Bob. Thanks. Biosimilars, definitely we began to see the beginning of some traction. The numbers are still small, but of course of particular interest to us given our specialty franchises. Those buyout products as injectable products that are utilized in the physician office setting, and you know and I think it's just a matter of quantity, we're getting more of those, which is great for patient choice, great for affordability, and you know I think what we've always said is remaining very true that these products will be priced appropriately with that we'll be able to afford not only our Distribution Services, but many of the services that companies like Ion and Exenda[Phonetic] offer with field-based training and Lash with patient support. So, we expect that it's definitely one of the most positive next couple of years and a sweet spot for us is when there is you know two to three different products, which gave us as a chance to compete uniquely with our customer base. So, thank you.
Robert Jones -- Goldman Sachs
Great, thanks.
Operator
Our next question comes from the line of Glen Santangelo with Guggenheim. Please go ahead.
Glen Santangelo -- Guggenheim Partners -- Senior Managing Director
Good morning and thanks for taking the question. Jim, I just want to follow up on one question on the 20 guidance that you gave. I think you suggested in your prepared remarks that EPS growth in 1Q would be at the lower end as compared to the full-year growth rate. I was just kind of curious is that solely related to the vaccine issue that you were just referencing that might have shifted from 1Q to 4Q '19 or is there anything else in there.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah, that's a key driver there, Glenn. Our guidance for the year on EPS of 730 to 760 so that's 3% to 7% growth, and we indicated that we expected 1Q to be at the lower end of that range and kind of the pull forward of the vaccine sales and gross profits, a driver there. And one other thing I'll just remind everyone of with regard to our EPS growth that in our guidance, we don't include any unidentified capital allocation in our guidance.
Glen Santangelo -- Guggenheim Partners -- Senior Managing Director
And that was going to be my follow-up question. I'm kind of curious because when you look at the balance sheet now, you're sitting with net debt of about 800 million. Based on your cash flow guidance for the year, you'll be in a net cash position potentially by the end of the year, but as you just pointed out with your share count guidance, there is no capital deployment in there and I was just kind of curious, is there a specific reason for that or are you saving that cash, I mean obviously there is some outstanding potential litigation exposure or any other changes in the priorities for capital deployment that we should be thinking about.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah, Glenn, I think you called out a number of the key things we feel, really good about the strength of our balance sheet, our free cash flow is $1.9 billion for the year, higher than we had expected. And we have strong free cash flow guidance for fiscal year '20 and yes, we both our guidances we don't have any unidentified capital allocation there in our guidance.
Glen Santangelo -- Guggenheim Partners -- Senior Managing Director
Okay, thank you.
Operator
Our next question comes from the line of Steven Valiquette with Barclays. Please go ahead.
Steven Valiquette -- Barclays Investment Bank -- Managing Director
Right. Thanks, good morning, Steve and Jim. So, just a question around the free cash flow guidance of 1.5 billion for fiscal 20. I heard the comments that you made that the 1.9 billion in fiscal '19 was higher than expected due to timing of customer and supplier payments. So for me, I just want to confirm, is the 1.5 billion, a normal annualized run rate relative to your net income or is that 1.5 billion lower because was pulled into fiscal '19. Thanks.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah, let me give you a little bit more color around free cash flow, I mean we got really got performance in '19, it was driven by really solid inventory management which you will see when you look at our balance sheet. Part of that is due to the success of the H.D. Smith integration and pulling some inventory out as a result of that integration. Also, if we look at the fiscal year '19, we just got really good timing at the end of the year and given the scale of our business, at the end of the year and we look at physical year '20, we still very good about that as a level of free cash flow. We do have higher [Indecipherable] no single major projects that are called out, but our highest returns are reinvesting back in our business and we have a little bit higher [Indecipherable] in fiscal year '20 than we had in fiscal year '19.
Steven Valiquette -- Barclays Investment Bank -- Managing Director
Okay. And a quick follow-up on this. I mean obviously obviously cash flows became little more important with the talks around the potential several years of opioid settlement payments, etc. but separate from any payments. I think you guys had a target previously, you were trying to get free cash flow as some percent of net income. I think the 115% of whatever. I forgot what it was. But just question is, are those numbers still valid, you still have a target, and this would be obviously separate from the inclusion of any sort of opioid settlement payments. Thanks.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah. And so on. On free cash flow, it's clearly a strength of our business and so maintaining high levels of free cash flow is something we've done in the past and continue to plan to do in the future so that we can come continue with our capital deployment strategies. We're really only guiding to fiscal year '20 at this point in time and the guidance is 1.5 billion, which we feel provides really good free cash flow to handle our capital deployment priorities.
Unidentified Speaker
Okay. I appreciate the color. Thanks.
Operator
Our next question comes from the line of Lisa Gill with JPMorgan. Please go ahead.
Lisa Gill -- J. P. Morgan -- Managing Director
Thanks very much. Good morning. I just wanted to go back and just make sure I understand around the potential opioid settlement. What's your understanding around the tax deductibility of the potential settlement. And so how do we think about that. We think about this number, how do we think that the actual impact to cash flow number 1, and then 2, what it would mean to potential debt ratings how would they look at this potential settlement as well.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah, so let me talk about and how we handled the recent opioid settlement in Ohio and there what we've done is we've agreed to, of joined $215 million settlement with the two counties involved other distributors also and what we have done this quarter is we've approved $66 million pre-tax $50.9 million after tax that's some 31% of the aggregate settlement and you asked about what assumptions on tax and what I'll do is them, comments on our assumptions on this particular settlement in Ohio is based on our assumption of how the agreement will be finalized and also based on other past settlements with those counties and manufacturers that we buy treated that settlement on an after-tax basis, as an after tax charge. And then, I think you also asked about credit rating and of course an important part of running our business remaining investment grade. That's very important to us which we've been aware of and conscious of throughout this process.
Lisa Gill -- J. P. Morgan -- Managing Director
OK, great. Thank you.
Operator
Our next question comes from the line of Kevin Caliendo with UBS. Please go ahead.
Kevin Caliendo -- UBS -- Executive Director
Good morning, guys, thanks for taking my call. What is your process for actually accruing a liability settlement for opioid, does it have to actually be finalized. Take me through when you actually decide to accrue for these on your balance sheet going forward, when would you actually feel comfortable enough to want to accrue
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah. And so, you know, as Steve talked about, we're currently engaged in discussions that include the 4 attorneys general, but announced the potential framework on October 21st, as well as plaintiffs' lawyers representing local governments and other parties regarding the terms of the potential framework and the party's objective is to reach agreement in principle on terms for the potential framework, which could be the foundation for a global resolution, but given the large number of parties involved, the complexity and difficulty of the underlying issues and the resulting uncertainty of achieving a potential global resolution, we continue to litigate and prepare for trial in the cases that have been filed and we intend to continue to vigorously defend ourselves in those cases and so accordingly, we haven't recognized the liability related to the potential framework as of September 30. And the Company will continue to evaluate our accounting position based on the facts and circumstances as they develop.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yeah, I mean, if I could just add that we see the merits of the potential global framework which reflects I think sincerely intense negotiations and significant concessions and commitment from our industry, not only to financial settlement, but also to innovative regulatory solutions and to free product disposal and which we think others could potentially join in. So it's a really good framework we think to settle really unproductive which is a lot of litigation. So I just wanted to add that.
Kevin Caliendo -- UBS -- Executive Director
Thank you.
Operator
Our next question comes from the line of Charles Rhyee with Cowen. Please go ahead.
Charles Rhyee -- Cowen and Company -- Managing Director
Yeah, thanks for taking the question guys. Just want to follow up really quickly on that opioids. The fact that you guys are discussing it today, along with your peers over the this earning season since October 21, is it fair to think that you are more optimistic now of reaching sort of a global [Indecipherable] here and can we read into the fact that you guys are at least kind of discuss them more openly versus how you guys kind of discussed maybe in previous quarters that you feel good progress has been made.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yeah, you know, we all continue to litigate. We said all that that the two counties in Ohio, the weekend before the trial was going to start and we think that particularly the settlement that was announced on October 21 is a very good stepping stone and a bridge to what could be a global settlement and we can go to negotiate with those four Attorney Generals I think I just previously characterized that is intense negotiations and with significant concessions from our industry to try to be productive and a reflection of what has been a very serious societal issue and an attempt to allow our business to focus on more productive endeavors as I stated earlier.
Charles Rhyee -- Cowen and Company -- Managing Director
All right. So thanks and Jim maybe one for you, capex guidance is here is about $400 million. Obviously you talked about investments to expand capacity. Is this sort of a good run rate we should think about going forward afterwards, or do you think maybe these are sort of one-time projects to kind of expand capacity and and we'll come back to a more normalized rate. Thank you.
James Cleary -- Executive Vice President and Chief Financial Officer
Yeah, so as I said before, we always get the best returns by investing in our business, we are expecting 400 million approximately fiscal year '20 up from fiscal year '19. And it's probably a little bit higher because we have so many productive projects going on, doing some system implementations and are really successful specialty businesses. And so I would say it is a little bit higher due to the fact that we just got so many productive projects to invest in, but I expect while we're only during fiscal year 20 guidance, we kind of expect that kind of been the level that we are in fiscal year '19 and 20 to be a normalized level.
Charles Rhyee -- Cowen and Company -- Managing Director
Great thank you.
Operator
Our next question comes from the line of George Hill with Deutsche Bank. Please go ahead.
Lee Lueder -- Deutsche Bank -- Equity Research Associate
Hi, thanks. This is Lee Lueder on for George. So last quarter you mentioned that the audit inspections of the two open PharMEDium facilities were a key input into an assessment of the future work plant reopened in the Memphis Facility. So now that those two inspections are done, can you give an update on the reopening of Memphis?
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yeah, we are happy with the progress that Memphis is making. We were happy that the the two facilities remained open. We are complying with the terms of the consent decree and completing initial period volume station [Phonetic] . We had no meaningful milestones, which we are monitoring very closely and we're going to get important input into the assessment of a work plant which will allow us to reopen our Memphis. As we have updates that our material were[Phonetic] different from that, we'll certainly keep you informed because we know that it is important to our investors and important to our operations.
Jim, anything to add?
James Cleary -- Executive Vice President and Chief Financial Officer
Steve, I think that that is really come sales and it was discussed earlier. We don't expect PharMEDium to be financial a headwind in fiscal year '19 compared to fiscal year '20. We will continue to remediate and optimize the operations if we continue to evaluate appropriate next steps.
Lee Lueder -- Deutsche Bank -- Equity Research Associate
Thank you.
Unidentified Speaker
And operator, we have time for one more question and then we'll make a closing remark.
Operator
Okay. Then last question will come from the line of Ricky Goldwasser with Morgan Stanley. Please go ahead.
Ricky Goldwasser -- Morgan Stanley -- Managing Director
Yeah, hi, thank you for taking my question. So my question is around the the on-boarding of the Cigna business , but then also if you see any impact from off-boarding [Indecipherable] . So can you just kind of explain the dynamics there. That's first and second goal is do we think about you going to be on the incremental Cigna business, should we think about it a [Indecipherable] and what's the contribution between specialty in routine. But then more importantly, should we just think about incremental volume that's coming in just at a large client type of margin.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yeah, this is kind of a sort of organic development within a hot one of our established customer relationships and it's a benefit. Yeah, we got, we lost of course some of the Genix RX business. This would be a thought, a quarter of the growth that we would experience next year that we budgeted for and typically mail-order business is the lower margin business for us, because the few [Indecipherable] , heavy balance of specialty drugs and, but it's another example of our strong Express Scripts relationship and of course now ultimately our strong Cigna relationships.
Ricky Goldwasser -- Morgan Stanley -- Managing Director
Just a quick question, so overall incremental to EBITDA growth next year from a dollar value.
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
Yes, it is, it is an operating income contributor, but of course slightly [Indecipherable] [Phonetic] big expirations business but very good top-line and of course, our second largest customer by far large measure. So I know that there was some quality difficulties with AT&T, and we apologize for that. In fact, our line was even drop for a minute. So I don't think I've ever had that before, but I hope that that you will join me to be very proud of this fiscal year in this quarter that AmerisourceBergen has produced for our shareholders. Our [Indecipherable] think that strategy and expertise has us well positioned to continue to create long-term shareholder value in pursuit of our purpose. And you know, we just feel that we have to get [Indecipherable] . I'm going to conclude by saying ABC has 2020 vision for how we can execute and grow well in our upcoming fiscal year. Thanks everybody.
Operator
[Operator Closing Remarks].
Duration: 60 minutes
Call participants:
Bennett Murphy -- Head of Investor Relations
Steven Collis -- Chairman of the Board, President and Chief Executive Officer
James Cleary -- Executive Vice President and Chief Financial Officer
Unidentified Speaker
Robert Jones -- Goldman Sachs
Glen Santangelo -- Guggenheim Partners -- Senior Managing Director
Steven Valiquette -- Barclays Investment Bank -- Managing Director
Lisa Gill -- J. P. Morgan -- Managing Director
Kevin Caliendo -- UBS -- Executive Director
Charles Rhyee -- Cowen and Company -- Managing Director
Lee Lueder -- Deutsche Bank -- Equity Research Associate
Ricky Goldwasser -- Morgan Stanley -- Managing Director
