美源伯根 (ABC) 2002 Q2 法說會逐字稿

Ladies and gentlemen, thank you for standing by and welcome to the Amerisource Bergen second quarter conference call. At this time, all participants are in a listen-only mode. Later, we will conduct a question and answer session. Instructions will be given at that time. If you should require any assistance during this conference, please press zero then star. As a reminder, this conference is being recorded. I would now like to turn the conference over to our host, the head of Investor Relations, Mr. Michael Kilpatric. Please go ahead, Sir.

Good morning, everybody, and welcome to Amerisource Bergen's conference call covering second quarter results. I'm Mike Kilpatrick, Vice President of Corporate and Investor Relations and joining me today are David Yost, Amerisource Bergen President and CEO, Kurt Hilzinger, Chief Operating Officer, and Mike DiCandilo, Chief Financial Officer. As in the past, I want to begin with some comments regarding forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. These statements are based on management's current expectations and are subject to uncertainty and changes in circumstances. Actual results may vary materially from the expectations contained in these statements. The forward-looking statements include statements addressing future financial and operating results of Amerisource Bergen and the benefits and other aspects of the merger. The following factors, among others, could cause actual results to differ materially form those describe din the forward-looking statements. The risk that the businesses of Amerisource and Bergen Brunswick will not be integrated successfully, failure to obtain and retain expected synergies, and other economic business, competitive and/or regulatory factors affecting the business of Amerisource Bergen generally. More detailed information is set forth in Amerisource Bergen's Form 10K for FY01 and Form 10Q for the first quarter of FY02 and Amerisource and Bergen's joint proxy statement prospectus of August 1st of '01. Also, Amerisource Bergen assumes no obligation to update the matters discussed in this conference call and this call cannot be taped without the express permission of the company.

As most of you know, Amerisource Bergen looks to forums such as this as our primary vehicle for communicating our results. On the Amerisource Bergen website at Amerisourcebergen.net under Investor Relations, you will find a short slide presentation covering some of the points we will discuss today and you're welcome to follow along. As in the past, those connected by telephone will have an opportunity to ask questions after our opening comments. Here is Dave Yost, Amerisource Bergen's President and CEO, to begin our remarks.

Good morning, everyone, and thank you for joining us. This is our second full quarter as Amerisource Bergen and we're very excited about our results, the industry we operate in, and our leadership position in that industry. On the financial front, revenues were up 17 percent quarter over quarter versus the combined former companies last year to $9.9 billion with one less billing day. Pharma Distribution Company operating revenues were up 17 percent to 9.75 billion and PharMerica was up 6 percent to $360 million. Expenses were flat year over year and operating margin expanded 7 basis points for the total company. We generated significant cash and drove our return on committed capital over 24 percent. EPS was a whopping 53 percent over last year to 87 cents per diluted share before special changes. This was clearly an unprecedented quarter as we exceeded consensus estimates by 12 cents. However, our focus has continued to be on the year rather than individual quarters. Lots to like about this quarter. There were two broad drivers to our strong performance this quarter - - merger synergies and interest savings. Regarding merger synergies, we have begun to capture operating and purchasing synergies earlier than anticipated. Kurt will talk about the details, but on the operating front, we were able to drive revenues up 17 percent while operating expenses increased only 2 percent in Pharma Distribution. This demonstrates that the early action we have taken is paying off. We think that a large portion of the buy side margin we captured in the March quarter is a reflection of the scale and balance sheet we now command. Buying opportunities are not a new phenomenon and a portion is offset by LIFO, but I think it demonstrates ABC's leadership position in the industry and the positive results our scale and balance sheet can produce versus the two former companies.

When we're presented with opportunistic buys from our suppliers, we take full advantage of them of course, but apply our standard discipline of a minimum rock of 20 percent to the decision. Mike will talk about our interest savings as we were advantaged by historic low rates, but let me broaden the usage to capital usage. During this quarter and the past six months, you see the discipline and capital usage of the new ABC Company. The cash we generated, $644 million for the quarter, was driven by the basics - lower DSO's and inventory productivity. The strong rock of 24 percent demonstrated our discipline in approaching all the opportunities that we were exposed to. There's lots to like about ABC and we're just getting started. Let me hit a few topics from 50,000 feet.

First, we continue to execute the basics. Yesterday, we announced that Amerisource Bergen was again named the top national wholesaler by Novation, the purchasing organization of VHA and University Hospitals System Consortium. We take theses surveys and our daily delivery of service and value to our customers very seriously. Second, let me remind everyone about the quality of our inventory which has followed historic trends and at March end is more like September than December. Our inventory is an appreciating asset with no risk of obsolescence. Generally expired inventory is returned to our supplier for full credit and we're price protected for cost decreases. Return supplies are in the 2 percent range. Third, brand name to generic switches are very positive for us. We are the largest buyer of generics in the U.S. and are convinced we buy generics as well or better than anyone. Generics offer us a unique opportunity to use our scale to search the market for the best value, price and other factors considered, and bring that value to our customers. A value they can not duplicate for themselves because of scale. The manufacturers that participate in our program enjoy our scale as we move market share for them. So for the participants, it's a win-win. This is a classic wholesaler opportunity. The future of the industry includes an increasing importance of generics and an increasing role for us. We see the total industry growth at 13-15 percent, and within that, we are very bullish on generics. Where they have a moderating effect on revenue, they produce better margins than brand name and better return on committed capital. Fourth, we continue to be convinced we are properly positioned in the industry, doing business with the right customers in the right segments and we continue to be very excited about our specialty pharmaceutical distribution business and its potential. Fifth, we are seeing nothing in Washington that is giving us serious concern for the industry. Though Medicare pharmaceutical coverage will probably not be a reality this year, the large manufacturer of prescription card programs and any CDS' consolidated program will go a long way to lower the Washington rhetoric regarding big pharmas pricing policies. Finally, and most important. we continue to be very optimistic about our ability to capture $150 million worth of annual operating synergies by the fiscal year ending 2004 just two and a half years from now. 150,000 million is a big amount based on our annualized operating income of $780 million. For the next several years, synergy capture will be a major earnings driver in our model. Synergy capture is totally under our control in an area where we have demonstrated expertise. Going forward, we're comfortable with our guidance of revenue in the 15-17 percent range for the fiscal year. We have provided new fiscal year EPS guidance of $3.15, reflecting a very strong March quarter but would caution against a higher level at this time since we remain unsure about the manufacturers pricing environment and the interest rate environment is also unclear. You will recall we started the year with an estimate of $2.90. As I turn the floor over to Kurt, let me reiterate how excited I am about Amerisource Bergen and our potential. It really is as easy as ABC. Here's Kurt.

Thanks, Dave. Good morning, everyone. Today I'd like to comment on some of the operating highlights from our business units and update you on our merger integration activities. In our market leading pharmaceutical distribution which includes Amerisource Bergen Drug Company and Amerisource Specialty Group, we stayed focused, continued to make customer service, expense control and effective capital management top priorities while at the same time moving aggressively ahead with our integration work. Pharmaceutical Distribution recorded excellent top line growth in the quarter at 17 percent, with its two key customer segments, retail and institutional, up 15 and 19 percent. Balanced, solid growth. In particular, I would highlight the group's extremely strong operating expense performance, up only 2 percent over the prior year, reflecting our disciplined management approach as well as the early capture of cost synergies to our integration activities. While I'll comment more on our integration more in a few minutes, we are beating our internal expectations for synergy capture which is yielding limited expense growth and driving healthy operating margin expansion. While we're very busy with the work of integration, we remain focused on customer service which was recently recognized by Novation, as Dave mentioned. Our fundamental strength lies in customer diversity, not weighted heavily toward any one customer group. We enjoy number one market positions in the hospital systems of Q-Care markets, alternate site market which includes mail order, the regional chain arena, and with independent community pharmacies. These customer segments offer us a broad range of growth opportunities where our higher service capability and offerings are recognized and rewarded. Dave commented on the strength of our buy side margin contribution this quarter which was due, in part, to the improved scale and the now combined procurement expertise of ABC.

I'd like to highlight that we remain disciplined in our use of capital, requiring returns on committed capital greater than 20 percent from our investment buying activities. Keeping mindful of the fact we want disciplined customer pricing and expense and capital control to be the primary drivers of our earnings long term. During the quarter we finalized, as planned, new manufacturer contracts for our generic formulated program, ProGeneric. Savings to the pricing file exceeded our internal expectations. With the rollout of the new program on April 1st, both we and our customers will benefit from a lower cost of goods sold during the second half of this year. Our early feedback indicates that it's been very favorable received by our customer base. AmeriSource Bergen's Specialty Group continued its rapid growth and development in the quarter by focusing on the distribution of pharmaceuticals around specific disease states and by providing an increasing array of services to our manufacturer partners. Our planned consolidation of Health Services Plus, the vaccine distribution business of former Amerisource, was consolidated in Best Medical, a light business of former Bergen at the end of March as scheduled. PharMerica, our institutional pharmacy business, continued to make substantial gains growing revenues 6 percent and operating income 21 percent in the quarter. The companies increase in revenues and operating earnings were driven by both improved operating performance at the company's long term care pharmacy division and the contained strong performance of the company's workers' compensation division. The recently completely common IT platform in the long term care division drove improved expense efficiencies to more consistent application of best practices at the pharmacy level. Continued focus on asset management, particularly in the areas of credit and collections, dramatically reduced gross days sales outstanding, further lowering our committed capital invested in the business.

Now I'd like to turn to our integration efforts. Let me begin by saying, we're doing very well. Our approach of running integration as a business within a business is allowing us to make substantial gains toward our integration objectives and cost savings targets, while at the same time allowing our day to day activities to remain focused on our customers and their needs. We are now willing to execute the carefully detailed integration plans we wrote last summer and early fall. In terms of progress again specific milestones, at the end of March we completed, as scheduled, the software programming and testing allowing for the interface of former Amerisource customer order entry systems to former Bergen's warehouse operating system. The programming was completed ahead our internal schedule which allowed for a substantial amount of system testing prior to implementation. Customers transferred their first orders through the bridge on March 29th without error. With this bridge complete we can now begin consolidation of distribution centers between the two former networks. During the month of April we completed the consolidation of the former Phoenix division of Amerisource into the Phoenix division of former Bergen with no customer interruption. We remain on track to consolidate four additional distribution centers before the end of September with our next one being consolidated by the time we report the June quarter. Our total consolidation goal of seven distribution centers in fiscal year `02, remains on track. Using the collective buying power Amerisource Bergen we recently completed negotiations with providers for new combined health and welfare and retirement benefit programs. Results were better then our expectations in both reducing cost and broadening our benefits offerings, improving the overall well being of our associates and our marketplace competitiveness for talent. An enrollment the new benefits programs by all ABC associates will be completed in July. In addition, our payroll systems are on track to be consolidated before the end of the fiscal year as well. Our sales and marketing integration efforts remain on track with continued progress and staffing and slotting and the integration of both former companies numerous value added offerings. Progress toward integration of a single procurement system remains on track as well. Lastly, I'd like to provide a little bit more color on our plans for our future state distribution network. As I mentioned in our last call, our plans call for the construction of six new distribution centers. These will be large, state-of-the-art distribution centers located across the U.S. In addition, the plan calls for the expansion of 7 existing distribution centers and a total of 28 consolidations for a final DC network of 28 DC's serving the continental U.S. plus Hawaii and Puerto Rico, for a total of 30 distribution centers. The time necessary to complete all of this work ins in the four to five year timeframe. Based on our synergy cash experience to date, we remain I confident in our initial forecast of achieving annual cost saving synergies of $150 million by the end of fiscal year `04. However, we envision in addition to the $150 million, savings in addition to the $150 million as we continue to work to complete our network build out plans beyond 2004. Capital expenditures to complete the program are around $350 million with a substantial portion being funded through inventory reductions attributable to the reduced number of DCs in the combined network. Using our newfound scale, we're headed toward building the highest quality, lowest cost distribution center network in the industry. Now I'd like to turn the call over to Mike for a review of the financials.

Thanks, Kurt. Good morning, everyone. Amerisource Bergen's second full quarter as a new company included very strong financial results across all our businesses and in every important financial measure including revenue growth, expense reduction, operating margin expansion, interest expense control, significant cash flow generation, strong return on committed capital, and lower levels of net debt. The outlook continues to look strong and I'll talk more about that at the end of my comments. Before I get to the details of the quarter, let me mention that my comments and year over year comparisons will exclude special items totaling $2.9 million for the quarter and $7.3 million for the six months, net of tax, related to merger integration costs which are set out as a separate line in our financial statements. As you are aware, the combination is accounted for as a purchase of Bergen by Amerisource. Accordingly, the current year financial statements included the results of both companies and prior year financial statements include only the results of former Amerisource. In our earnings release this morning, we again provided combined proforma financial information for each quarter last year on a combined business and for each business segment. This proforma information not only combines the operating results for both former companies, but also eliminates the amortization of goodwill consistent with the new accounting this year. Most of my remarks this morning will refer to comparisons to the proforma information.

First, the consolidated results for Amerisource Bergen. Operating revenue for the consolidated group was $9.9 billion for the quarter, up 17 percent on a proforma basis and as Dave mentioned, there was one less billing day in the current quarter compared to the prior year. Operating income was up a strong 22 percent on a proforma basis compared to last year's quarter and earnings per share for the quarter increased a very strong 53 percent to 87 cents per diluted share compared to 57 cents per share reported last year before merger costs. Five percent of the 53 percent increase was due to not having to amortize goodwill in the current year period. Turning to the pharmaceutical distribution segment, operating revenue for the segment was $9.75 billion, up 17 percent on a proforma basis compared to last year's quarter. The customer mix in the quarter between institutional, which induced Health systems in alternate sites, at 52 percent, and retail, which includes independents and chains at 48 percent was unchanged when compared to the combined businesses last year and to Q1. Institutional revenue grew 19 percent in the quarter versus the prior year due to strong growth with out mail order customers and our specialty group. The specialty group, which is included in this segment, exceeded $1 billion of operating revenue for the six months ended March 31, 2001 while improving operating margins. Retail revenue grew 15 percent in the quarter, primarily due to strong performance from our regional chains and food/ drug combos. Gross profit margins in the pharmaceutical segment declined on a proforma basis by 26 basis points compared to last year's quarter, in line with our expectations. The reduction is a result of our larger customers growing faster, the shift to lower gross profit margin businesses such as mail order, and the competitive environment. The second quarter provided us with more buy side opportunities than the individual companies experienced in the past and the company was able to take advantage of those opportunities due to its improved capital structure and liquidity. However, the impact of LIFO accounting somewhat mitigated the impact of those buy side opportunities in the second quarter. The LIFO charge this quarter was $36.2 million compared to $3.4 million for the separate companies combined last year and the increase is directly related to the increase in manufacturer price increases realized during the second quarter. The company's quarterly LIFO provision is based on our estimate of our full year LIFO provision which is calculated in the fourth quarter. Importantly, buy side profits net of the increase of the LIFO provision, are expected to continue to meet our expectations and we anticipate the gross profit margin decline for the year will be in the 20 to 30 basis point range, in line with out prior guidance. Operating expenses as a percentage of revenues decreased 33 basis points compared to the combined companies last year. IN addition to customer mix, this decrease in operating expense ratios reflects efficiencies of scale, the elimination of redundant costs through the merger integration process, and the continued emphasis on productivity throughout our distribution network. As a result, operating margins increased to 1.80 percent in the quarter, a six basis point improvement over the prior year.

Turning to PharMerica, PharMerica continues to show improvement in all of the important financial aspects of its business. On a proforma basis, revenues increased six percent over last year's quarter to $360 million. The gross profit margin declined to 33.5 percent of revenues, primarily the result of sales gains in the lower gross margin workers' compensation business, which grew at a much faster rate than the long-term care business. However, the operating earnings margins and the return on committed capital for the workmen's' compensation division are superior to the core long term care business. The change in mix, as well as the consolidation of IT operating platforms and improvements in billing and collections practices, drove operating expenses down to 28.1 percent of revenue in the quarter, down 298 basis points from the prior year. As a result, operating income for the quarter was up over 21 percent and operating earnings margins increased 69 basis points to 5.43 percent. We expect PharMerica to continue to produce strong results in the second half of the year. Below the EBIT line, interest expense, including the pre-tax distributions on the trust preferred securities for the current quarter, was $38.8 million, lower than our earlier expectations as we capitalized on low interest rates and more efficient use of capital. Average borrowing in the quarter were $2.7 billion compared to quarter end debt of $1.8 billion. As a result of anticipated borrowing levels and expected increases in interest rates in the second half of the year, interest expense, including pre-tax distributions on the preferred securities, is expected to be in the $75-80 million range for the next six months. The effective income tax rate for the quarter was 39.7 percent. We continue to anticipate that the tax rate for Amerisource Bergen will be between 39 and 40 percent for the fiscal year. Now I will comment on our balance sheet and cash flow. For the Pharmaceutical Distribution segment, DSOs for receivables were a record 16.2 days compared to 7.2 fays last year, the improvement, driven by customer mix and attention to asset management at the local level. Net receivables actually declined this quarter versus the December `01 quarter. Inventory levels of $5.3 billion at the end of March, decreased by almost $500 million compared to December 31 levels, as expected. Inventory turns in the quarter were 6.9, our net working capital investment as a percentage of sales was 7.9 percent in the current quarter, compared to 8.8 percent on a proforma basis last year. At PharMerica, net DSOs were down from 51 days to 42 days, a decrease of 9 days. For long term care, bad debt expense as a percent of sale was lowered to 1.5 percent versus 2.5 percent last year because of these improvements. Capital expenditures were approximately $20 million for the first six months of the year primarily related to technology investments. We are lowering our cap ex expectations for the year to $60-70 million from $90 million. Total debt, including the preferred securities to total capital at quarter end was 37 percent compared to 40 percent at September 30, reflecting the efficient use of working capital. Net debt to capital was 31 percent. Cash generated from operations, as Dave mentions, for the quarter was a very strong $644 million and for the six months was $231 million. This represents an improvement of almost $400 million from the prior year quarter. We continue to expect to produce positive cash flow from operations of close to $100 million for the fiscal year 2002 and that's actually a slight increase from the $60-70 million guidance we provided earlier. In fiscal 2003 and forward, we anticipate cash flow from operations to exceed $200 per year. Return on committed capital, or ROCC, which you recall is one of our primary financial measures in which we define as operating income, excluding amortization divided by fixed assets plus inventory and receivable less payable on a rolling 12 month basis, was 24.3 percent for the quarter, well above our long term goal of 20 percent. This continues to reflect the disciplined use of capital and asset management. Going forward, we continue to expect revenue growth in the 15-17 percent range for the year in line with our long term target of 15 percent. ROCC should be well above our long term goal of 20 percent and we expect our earnings per share to exceed our long term goal of 20 percent growth before the positive effect of the elimination of goodwill amortization. As a result of our performance in the quarter, the progress of our integrations and a continued favorable interest rate environment, we are increasing our guidance for the fiscal year to $3.15 per share before merger costs.

Now let me turn this back to Mike Kilpatric.

Thank you, Mike. We will now open the call to questions. I would ask you to limit yourself to one question only until all have had an opportunity. Then, if there is time, you can ask additional questions. Go ahead, Mary Sue.

Chris McFadden, Goldman Sachs.

Thank you. Good morning, and it goes without saying, congratulations. We kind of feel like a technology analyst here given the results without all the business model risks. Obviously, the results speak for themselves. Two questions that I'll blend together given Mike's request. One is, can you talk a little bit about the business climate. Generally, we've heard some discussions around competitiveness. I'd like to hear how you guys would characterize the market as you're seeing it, particularly in light of the results. Then imbedded in that, I guess, would be the generics program that you've just announced. You've talked about improvements in the second half of the year and how do you expect that program to impact=t your competitive position, particularly in some of the markets where you already have good leadership? Thanks.

Chris, maybe Kurt and I will split it up a little bit. He can talk to the generics. I'll just talk about the general business climate. I will tell you, Chris, we continue to think it's a great industry to operate in, with good organic growth rates. We're guardedly optimistic, I guess, that we'll continue to have all our competitors presenting value proposals which is what we do. But we continue to be very excited about the space we're in. I will tell you, I've been in the industry now for about 28 years or so and I think that the prospects for the industry have really never been brighter and part of that is because of the generics program. We're very excited about the new program we just hit the street with which I'll let Kurt talk about.

Well, Chris, as I mentioned, we finished our contracting activities this spring and we spent a good part of the second quarter getting geared up for the launch on April 1st and I would say it's been very favorable received by the marketplace. We've got a very competitive generic pricing file which benefits us, of course, in the second half of the year through a lower cost of goods, but as important or more important, our customers are a key value drive for ABC and the marketplace. It will be for this year and probably for the next two years at least because I think we've made significant gains in the prices that we achieved in the pricing file. So I think it's going to be a major differentiator for us and a real benefit to our customers as well.

Ray Salsee with Bear Stearns.

Good morning, guy. Great quarter. Just to ask the generics question a lightly different way - - I think obviously, Dave, your tone here is arguable a bit more positive than maybe it had been two or three months ago and I was wondering if more of that is driven by what Kurt just referenced as the new set of pricing files and everything that went into effect on April 1 on your historical library of generics or is it also driven by some of the dynamics in some of the more newly launched drugs like the Prozacs and the Glucofasons, or is it somehow a combination of the two?

Ray, I will tell you I know I got painted with a bad brush in terms of my not being optimistic about generics in the past and I think I ended up perhaps even being misquoted. But we are very excited about generics. I think, as Kurt talked about, it's a differentiator for us, our scale giving us the best opportunity, we think, to bring value to our customers. So we're very optimistic about it and I will tell you, Ray, we don't want to talk about any specific items, but we've been very happy with how we ended up with a total mix that we've brought our customers and we think they are, too. So I guess if you've got to write down a word next to me for generics, write it down as bullish. We're very bullish on generics and the role we can play in it.

Okay, I got it loud and clear. Thanks.

Glen St. Angelo with Solomon Smith Barney.

Yes, thanks. Dave and Kurt, I just have one quick question. I was going through some of my old notes looking at some of your contracts that are coming up for due and I counted 5 or 6 multi-billion dollar contracts that are coming up for renewal in the next 12 months. I think they are Novation, Keyser, United Drugs, Advanced PCS Consortia and PPSC. If you could sort of give us an update on some of these big contracts and what you're seeing n terms of your renegotiation efforts on that front, that would be helpful.

Well, you know the first thing I'll just comment, Glen, and I want to tell you that I think it's great that they got your name right. I think it's the first call I can remember when they announced your name right which I think is super. Going back and looking at old notes always makes us nervous. Our palms start sweating when you do that. But, let me just tell you that the environment that we're seeing, I think we're going to see more and more customers, particularly large customers, not putting their business up for bid in the classic sense, but rather renegotiate with their supplier particularly when it's Amerisource Bergen because of the forward integration, you're dealing with our customers As we expand our value proposition with them, we are doing more and more things for them than just selling them product at a price and so it represents some disruption for them to leave. I'll just comment on a couple of them because I recently visited Novation. We continue to be very excited about our relationship with Novation. We put a press release out yesterday where we again got top billing for Novation in terms of what the hospitals said about our service. This is the third year that Novation has done this annual survey and we've been ranked the first in every one. So we're very happy about that. Premier continues to - - which is a large group organization, continues to be, our relationship continues to be excellent there. So I can't remember the - - United - - We've expanded our role with United. In fact, I had an opportunity to visit with them within the last 60 days and they're very happy with the relationship as are we, and our growth in the west with United continues to be very well. Kurt, do you want to talk about Keyser?

I think the Keyser relationship, Glen, is strong. We service them, I think, very successfully all around the country and so the early feedback from them is very positive as well from what they're seeing from ABC. So, I think all the customers that you've listed here we feel as though we have got very good value propositions with them, we're servicing them superbly on a day to day basis, and we would expect renewals in each and every case.

Great. Just if I could follow up with Mike, did I hear the LIFO charge was $36 million in the quarter?

That's right, Glen. 36 million versus the $3 million last year.

And that's just a function of the high drug price inflation? We're truing that up?

Exactly. It's a direct result of the increase in the manufacturer price environment in the quarter and I think, importantly, what we said is that our net buy side profits going forward the second half of the year are going to be right in line with out prior guidance. I think we have to look at those two together.

David Weisinger, Merrill Lynch.

Thanks very much. In terms of the generic procurement savings, I think that you had mentioned back in September that you anticipated $30 million in annual savings. Is that what we should expect on an annualized basis in the June quarter since the program went into effect on April 1st?

Yes. Your recollection is spot on, David. We actually indicated total procurement savings as a component of the $150 as being about 35, I think, and with the pricing of the generic file, I think we'll be on a run rate of having a lot of that now into the P&L and benefiting from it on forward basis.

That was a total number, David, that included other goods and services as well and some of the people savings and so forth, but that was the quarter magnitude we ere talking about.

Robert Willoughby with Credit Suisse First Boston.

David, I understand your need for conservatism here, but it's not clear to me really what factors that you're seeing that would contribute to a down quarter sequentially.

Well, we're being - - First of all, Bob, I would say that historically there is some fluctuations in the business from quarter to quarter. Typically if you look at the opportunities that were available in the March quarter within the industry, there are generally more opportunities available in that quarter than there are others. Since we spin our inventories so fast, those have a tendency to speed through our P&L pretty fast. So I'd say that's probably the biggest driver.

Guys, could you - - you said the synergy number you're seeing more than you expected this quarter. Can you quantify perhaps where we are? As I recall, I think this year we were only supposed to get like $10 or $20 million worth of synergies? What's it going to be for the full year?

Andy, it's Kurt. We gave guidance to $150 million as a run un rate by the end of fiscal year `04, so you'd really be benefiting in fiscal year `05. We did not give specific guidance for this year. I would just tell you that we did have some fairly finely tuned calculations that we were running against internally here and as I mentioned in our prepared comments, we're confident that we're ahead of those internal expectations and that's really our tracking metric but we have not been publicly disclosing where we are on that trend line.

If I could just clarify on the inventory issue - - is the buy side margin that you saw from the inventory that you had in December already though the balance sheet? If you could clarify the gross margin comment in terms of the buy side.

Andy, we recognized a lot of buy side in the second quarter. However, because we recognize profits as we sell the product, there's still products left in our inventory that will sell out into the third quarter. I think the important point is, our inventory turn is a little bit higher than our competitors so we would tend to cycle through a little bit more of those profits in the second quarter than those competitors.

Eric Coldwell with Prudential Securities.

Thanks, guys. Again, nice quarter. I have a question that basically goes back to what you said about contract renegotiations versus RFPs. I guess my basic question is, is it same to assume that your reference of renegotiation versus contracts going out for bid are pears less damaging than contract going out for bid and that's coupled with the large competitors that this week said that there may be an abatement of sold side margin pressure in the group.

I think it's a wonderful set of circumstances when we can renegotiate without the contract going out for bid. Clearly, that gives us an opportunity on a one on one basis to reaffirm our value to that customer, show them how our services are providing savings to them and just renewing the relationship without being at risk on the contract. So that is what we strive fore here at ABC and I think as each of the wholesalers in the channel become more proficient at articulating our value proposition, I think hopefully, we'll see fewer RFPs and more renegotiations of contracts so that we see more continuity in the relationships with our customers over the long term.

Eric, I don't want to pile on, but I would just point out that it's disruptive for our customers, as well. We work very hard to be fully integrated with them. A large customer - - we're not only providing them the brand name merchandise, of course, but the generic and our generic program is unique to Amerisource. We've been providing them with repackaged goods if it's a retail account. We'd be providing them with promotional merchandise and private label merchandise and the like, so it's clearly a disruption for them and we find more of them willing to just sit down and negotiate as opposed to going through a formal process.

Lisa Gill, J.P. Morgan.

Thank you very much and let me also add my congratulations on the quarter. I was wondering if you could talk a little bit about your specialty distribution business. It sounds like sales gross were great for the quarter. I was wondering, first off I had a specific question on -- in the press release, you talked about growing your manufacturing services business within this group. I was wondering if you could explain that a little bit and then just secondly, talk about where you see some of the growth opportunities right now. Thanks.

Lisa, it's Kurt. I'll take a first crack at this and maybe Mike or Dave chip in. The business continued its strong trend line, growth rate approaching 30 percent in the quarter so a very strong growth. Importantly, nearly every business within the specialty group, and there are seven businesses in total, were ahead of their revenue expectations and operating earnings expectations so the group, as a whole, just had a terrific quarter and we were very excited for them. As it relates to the manufacturing businesses within there, we're talking about ICS, which is the 3PL third party logistics business, we're talking about LASH, which provides reimbursement consulting services to the manufacturers and a couple other smaller ones. Those businesses had exceptionally strong quarters as well. You do have to keep in mind though that they are relatively small businesses in the context of specialty and they're relatively small businesses, certainly in the context of ABC, but we were pleased as Steve Kawas and the team was very pleased with the progress made in those services because they ultimately are kind of a leading indicator where we think we need to continue to develop the franchise here which is arraying more offerings up the channel toward the manufacturer so they were a great development for us.

David Buck, Buckingham Research.

Good morning gentlemen and my one question is regarding revenue growth and there's a couple of facets but fairly quick. Just on the -- on a quarterly basis, is there any reason to expect sequential decline in revenues and the second question on revenues is, how do we read into your forecast of 15 to 17 percent, the potential for OTC switches on a couple of high profile products, Claritin being one and number two being Prilosec potentially, the 20 milligram which is in late June debate on that. Is that in your forecast and what would you expect the outcome to be in terms of yours sales if that actually happened?

Dave, I'll take the first part of that and then I'll turn it over to Dave. The first part is yes, we expect sequential growth in Q3 and Q4 and maybe Dave can comment on Claritin.

Yes, well we're a little uncomfortable talking about individual products Dave and individual manufacturers as well. Clearly as we talked about in our prepared remarks, as we look at the individual brand name products that have the -- that could possibly come off patent in July, that can affect our revenues going forward. We monitor that very, very carefully and we've tried to account for that going forward but I guess I would take a broader perspective in terms of first of all, revenues, and say that looking at them in any one quarter is probably not the right perspective. You probably ought to look at them in a broad way and I would also just draw attention to that we have many metrics units to follow return of committed capital and the like and revenue is just one of those.

Not to have you comment actually directly on those products but just broadly if you would expect OTC switches, in general what would you expect to happen to the prescription market? Have you seen any impact in the past on the prescription market for the categories and do you see that as a risk or an opportunity?

That's a little bit -- that's kind of a specific question and a brand product going all the way to OTC is somewhat unprecedented so I think we're going to have to kind of wait and see how that works through but given the fact that the product sale continues with our customers, it will continue to be captured by us and no one knows at this point what the comparable products will do going forward, so I think we've got to kind of wait and see on that one.

Okay, fair enough. Thanks.

Good morning. I was wondering if you could talk about your -- you've reduced your cap ex goal and was wondering if you would talk about what changed there and whether that's reflective at all of what you're finding your investment needs are related to your integration or if there's something else there?

Yes, I think it's just the timing of our integration versus how we planned it at the beginning of the year. We were pretty conservative in our plan at the beginning of the year because at that point, we had not yet finalized our detail integration plan. Now that we've made progress on the integration plan as Kurt mentioned, we've laid out the plan and we've talked about $350 million of cap ex related to the plan. We've had a chance to take that number and assign it to more specific periods and what we've determined is that we're not going to reach the $90 million this year so we've lowered that expectation. Our expectation for next year would be in the $90 to $100 million range and the remainder of the billed out will occur after '03, the remainder of the cap ex related to those build outs will occur after '03.

Hi, I was wondering if you could talk a little bit about the differences in your customer base versus the competition? And also whether you could break out the top line on the Pharma Distribution side on price versus volume? Thanks.

Well Kim, why don't we talk -- we'd rather not talk about our competition, we're a lot more comfortable talking about our business so why don't we just give you a little sense on how our business breaks out. A large amount of our business, a large amount of our retail business with the independents and smaller and regional chains, we think this is great space to be in. We do not do store door business with the four large warehousing chains or with WalMart. The reason we like the regional chains, some of whom are very large, 400 plus stores, and the independents, is that they have a great appetite for value-added services so they look to us to provide them, not just the brand name merchandise but rather all their merchandise, including generics which is very important for them and us, private label programs, promotional programs, over the counter programs and the like. So, we like that space very much. We do more business than anyone else in the regional chains and with the independents. Within the hospital -- within the institutional business, we're heavily - weighted into the acute care market. We do a lot of business with Novation and Premier, two large suppliers to them, as well as the VA, so those are our really -- I would say our differentiating customer groups.

Larry Marsh, Lehman Bros.

Okay, Dave, I tell you -- to paraphrase your comment, you're making it look too easy. That's obviously not the case, a lot of hard work. Way to go.

Thanks.

My question is following up -- maybe just elaborate, what would your anticipation be for the full-year LIFO charge and remind us what it is now through six months? And then just -- are we suggesting then that the traditional pattern that you saw at AmeriSource of sequential earnings billed may be changed this year or are you just saying it's too early to draw any conclusions, specifically for Q3 and Q4?

Okay, Larry, just on the LIFO, the $36 million was for the quarter where $41 million after six months. Our expectation is that the LIFO charge would be in the $20 to $30 million range for the next six months and we're going to have to continue to monitor that very closely. The environment was very volatile this year and we still need to make a determination as to how long it will continue and at what rate it will continue and that will have an effect on our calculation which will true up in the September quarter. As far as the sequential EPS growth, we did have that in the former AmeriSource and a lot of that was due to strong revenue growth and continued strong revenue growth in the second half of the year versus the first half of the year. What you have to consider in this case here is one, the extent of the price increases in the first half of the year. This year have been greater than we've experienced in the past and we're just not confident that that's going to continue throughout the year and I think that's probably the biggest driver.

Bruce Babcock, Safebrook Capital.

Thank you. Can you talk a little bit about that long-term debt situation? I think I saw somewhere in the press release that you mentioned you had a savings and interest cost because you had not rolled it over in the longer term. Money -- what is the plan for the future? Are you going to do that or are you going to pay a lot of it off with a strong cash flow?

Well at the end of the -- one of the comments that we made was our long-term debt, was $1.8 billion at the end of the quarter. It's important to note that the average during the quarter was $2.7 billion so that we have a lot of activity throughout the quarter and the quarter end is not necessarily a permanent reflection of where we're going to be. We still need that flexibility for investor -- for investment buys and manufacturer opportunities. We're very comfortable with where our debt structure is today. We have $3.7 billion of availability and at the end of the quarter, we did have close to $1.9 billion available to take advantage of those future buys. So, at this point we're very comfortable with our structure.

Thanks Bruce. I think in the interest of everyone's time, we'll turn down the -- we'll shut off the questions. We're of course available to answer any questions if you want to call into Mike. Just in closing, I'd just like to thank you for joining us. I'd like to thank you for the support you've given to AmeriSource Bergen as we've brought these two fine companies together. Given the unprecedented corner we have, I feel that I should probably close by reiterating our long-term goals rather than focus on any individual quarter. Our long-term goals have not changed and we continue to be committed to them and strive long-term to grow our revenues at 15 percent, our EBIT at 15 percent, keep our ROCC over the 20 percent, be very disciplined in the use of capital as we grow our EPS at 20 percent or greater. With that, I want to tell you we continue to be very excited about the industry we operate in, very excited about the role we play in it and we look forward to seeing you next quarter. Thank you very much.

That concludes today's conference and we do appreciate you participation. You may now disconnect and have a great day.