美源伯根 (ABC) 2002 Q4 法說會逐字稿

Ladies and gentleman thank you for standing by and welcome to the AmerisourceBergen fourth quarter earnings conference call.

At this time all participants are in a listen only mode.

Later we will conduct a question and answer session.

The instructions will be given at that time.

If you should require any assistance during today's call please press the '0' followed by the '*' key on your touch-tone phone.

As a reminder today's conference is being recorded.

I would now like to turn the conference over to our host Michael Kilpatric, please go ahead sir.

Good morning everybody and welcome to AmerisourceBergen conference call covering fiscal 2002 fourth quarter results.

I'm Mike Kilpatric, Vice President Corporate and Investor Relations and joining me today are David Yost, AmerisourceBergen's CEO, Kurt Hilzinger, President and Chief Operating Officer and Michael DiCandilo, Chief Financial Officer.

During the conference call today we will make some forward-looking statements about our business prospects and financial expectations.

We remind you that there are many risk factors that could cause our actual results to differ materially from our current expectations.

For discussion of some key risk factors we refer you to our SEC filings, including the definitive copy and prospects for the AmeriSource and Bergen merger as filed on August 1st, 2001, our 10K report for fiscal 2001 and our 10Q report for fiscal 2002 to date.

Also AmerisourceBergen 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 in past quarters on the AmerisourceBergen website under investor relations you will find a short slide presentation covering some of the points we will discuss today and you are welcome to follow along.

As always, those connected by telephone will have an opportunity to ask questions after our opening comment.

And here is Dave Yost, AmerisourceBergen's CEO to begin our remarks.

Good morning and thank you for joining us.

This call represents an important milestone for AmerisourceBergen.

It's on this call we will quote our results for our first full year of operation as AmerisourceBergen.

The industry leading pharmaceutical distribution company, created in August 2001 by the merger by the former AmeriSource Health Corporation and the former Bergen Brunswick drug company.

In an era where large-scale mergers often produce disappointing results, ABC stands out as an unqualified success at the conclusion of year one.

A reflection of the hard work and hardy spirit of the ABC associates.

If called upon to describe our performance in a single phrase it would be 40/40 in the first.

In our first full year of operations we grew our revenues to over $40b and increased our EPS by over 40%.

Obvious great performance on the top and bottom line and great performance in many other areas as well.

We hit every integration milestone we set for ourselves on time and on budget.

We moved decisively and quickly to fill all key management positions and avoided the temptation to have co-leadership anywhere.

Today the cultural and organizational integration is essentially complete and it is rare to hear references to us and them or we and they or A and B. We are all ABC now and we're moving forward together to complete the many tasks that remain.

So, a very strong year. 40/40 in the first and it came with a revenue increase, improved operating expense ratios, improved operating margins, record DSL, excellent inventory productive, record cash generation and a very, very strong internal committed capital.

Both reported segments, the drug distribution company and PharMerica continue to deliver excellent results.

There is a lot to like about this year and this quarter for ABC and I'll leave the details to Kurt and Mike and spend just a minute on the industry.

The pharmaceutical distribution market continues to be robust.

Recent IMS health data has set a top-line growth over the next four years to be 11-14%, down from recent experience through the temporary lack of blockbuster [Grogan] productions and the impact on generic introductions.

The IMS range is wider in this fourth forecast in part due to the uncertainty in predicting generic introductions.

But by a large market-leading share, we expect to grow with the market for the year.

Generics continue to dampen our top-line but continue to benefit our income statement and balance sheet.

We continue to be very bullish on generics.

We expect price appreciation to continue in the 5-5.5% range and see no fundamental change in the industry.

Our business is not dominated by any single supplier or customer.

More on AmerisourceBergen.

Early in this quarter we concluded the acquisition of AutoMed Technologies.

AutoMed provides the most comprehensive pharmacy automation solutions currently in the market and is unique in its scalable application to both the retail and institutional environment.

AutoMed have applications for single retail pharmacy, doing 200 prescriptions a day on their most advanced central fill or largest institutional pharmacy.

It addresses the pharmacy shortage and increased pharmacist efficiency as well as dispensing accuracy and includes pharmacy design and workflow analysis that is unequal.

AmerisourceBergen's scale is clearly aiding Auto-Med's traction.

This morning we announced the acquisition of Bridge Medical, which we expect to close by the end of the calendar year.

We are also very excited about adding Bridge to the AmerisourceBergen family.

Bridge Medical has developed the most comprehensive and flexible system for bedside scanning hospital, patient safety in the industry today and has a number of installations and a strong pipeline of signed contracts.

This is not a medication error reduction program in development but rather a third generation software that is currently operational.

Bridge Medical is led by John Grotting, who has spent more than two decades in hospital leadership positions, including the positions of hospital CEO and COO.

He is a been there done that kind of leader who understands first hand the challenges of patient safety in the hospital and has developed an extremely competent team to meet those patient safety needs.

We invite you to visit the Bridge website at www.bridgemedical.com to view their video press releases and customer information.

The addition of AutoMed and Bridge to the AmeriSource offering is extremely important as we enhance our role in value in the pharmaceutical supply channel.

AmerisourceBergen now has the most comprehensive proven offering to meet our customer's current and growing need for efficiency, accuracy and safety.

All components are in place.

Our national recognized high service pharmaceutical distribution offering, our customized packaging, through our American Health packaging operation, our scalable workflow automation and efficiency systems through AutoMed and now bedside scanning and patient safety through Bridge Medical.

Our offering best addresses the market needs for efficiency, accuracy and safety and it is available today.

It's as easy as ABC.

A year ago we said we would maximize the opportunity of our merger to use our scale to increase our efficiency and operating expenses and working capital and then use our scale to enhance our role in the supply channel and bring our customers value added solutions to their problems.

We are doing just that.

Today we are right where we said we would be and very excited about our future.

Now let me turn the floor over to AmerisourceBergen's recently announced new president Kurt Hilzinger.

Anyone who has followed AmerisourceBergen knows Kurt.

Kurt and I have worked together for over a decade.

His previous titles have included CFO and President and COO of the former AmeriSource Health and he is clearly one of the most knowledgeable, effective and energetic executives in the industry.

His new title added to that of Chief Operating Officer of ABC, which he has had since the merger was concluded reflects his current responsibility and the leadership role he will continue to play going forward.

Now some color on 40/40 in the first.

Thanks Dave and good morning everyone.

Today I would like to focus my comments on some of the operating highlights of our business units and integration activities during the quarter and lay out some of integration milestones for fiscal year 03.

In our market leading pharmaceutical distribution business, which includes the drug company and the specialty group, we again posted strong results driving both solid top line and solid operating income performance.

The cost savings from our integration work are now clearly evident with operating expense dollars virtually flat with year ago levels, driving healthy operating margin leverage.

We are also particularly pleased with our capital management performance and return on committed capital, which strengthen for the fourth consecutive quarter since the merger, which Michael detailed.

I will comment more on our fourth quarter integration accomplishments in a couple minutes.

Our momentum continued to remain strong, again driving synergy capture savings ahead of our internal expectations.

As we have continually emphasized, the fundamental strength of our drug company lies in customer diversity, not weighted too heavily toward any one customer group, or single customer.

We enjoy number one market positions in the hospital systems, the acute care market, alternate site market which includes mail order, the retail chain arena and with independent community pharmacies.

These customer segments offer us a broad range of growth opportunities where our higher service capabilities and offerings are recognized and rewarded.

During the fourth quarter those capabilities were again recognized by Goldman Sachs in their annual survey of hospital pharmacies where we were again ranked number one in customer service and satisfaction for the third consecutive year and in as many years as the survey has been conducted.

AmerisourceBergen Specialty Group continued its rapid growth and development in the quarter by focusing on the distribution of pharmaceuticals around specific disease gates and by providing an increasing array of services to pharmaceutical manufacturers.

Each of the businesses which make up the specialty group exceeded our internal expectations for both the quarter and for the year on every key measure - revenue growth, operating income and return on committed capital.

The group is now operating with annualized revenue in excess of $2.5b.

This was a very attractive group of high growth, high return on committed capital businesses, growing substantially faster than our core pharmaceutical distribution business.

As a reminder the businesses take as a whole provided significant future growth platform for AmeriSource.

In fiscal year 2003 particular emphasis will be placed on bringing together more completely the unique capabilities of these individual businesses into a comprehensive service model offering for bio-pharmaceutical manufacturers.

PharMerica, our institutional pharmacy business, continued to make substantial gains growing revenues 14% and operating income 22% in the quarter.

The company's increase in revenues and operating earnings were driven by the continued strong performance of the workers compensation division and accelerated revenue growth of the long-term care pharmacy division.

In the past year PharMerica has added sales and marketing resources to accelerate its long-term care revenue growth, which particularly benefited the fourth quarter and we expect a continuation of this trend in fiscal year 03.

Focus on asset management, particularly in the area of credit and collections, lowered our capital invested in the business and dramatically improved PharMerica's return on committed capital over year ago levels.

By leveraging the recently implemented common IT platform in the long-term care division, in fiscal year 2003 PharMerica will continue to drive improved operating expense efficiencies through the consistent application of best practices at the pharmacy level.

Also in fiscal 2003, additional emphasis will be placed on leveraging the clinical expertise resident in PharMerica through greater therapeutic interchange recommendations, increasing the value proposition to customers and manufacturers alike.

Now I would like to turn to our integration efforts.

We continue to make solid progress.

During the fourth quarter we continued to lead our integration timetables, executing the detailed integration plan we wrote a year ago.

We remain ahead of our internal expectations, on synergy capture and importantly, below our estimates in terms of cost to capture.

With regards to specific milestones, during the fourth quarter we completed a total of four-distribution center consolidations.

Portland into Seattle, Idaho Falls into Salt Lake, Sacramento into Sacramento and [Maraloma] into Corona] in Southern California.

This brings the total number of consolidations in the fiscal year to seven in line with the goal we set at the beginning of the year.

In addition, during the quarter we migrated all or our procurement activities to a single procurement system, which allowed us to drive service level improvements and additional working capital efficiencies in the fourth quarter and will continue in fiscal 2003.

This was accomplished nearly one quarter ahead of our original timetable.

The integration of our key functional and support areas are now nearly complete.

Our integration efforts in 2003 will be almost entirely devoted to executing the work plan for our future state distribution network.

In fiscal 2003 we plan to accomplish the following:

Consolidate six existing distribution centers.

These consolidations will involve much larger facilities than were consolidated in fiscal year '02 and therefore will drive significantly more cost savings on a per facility basis.

These consolidations are scheduled to occur in the second, third and fourth quarters.

We will also complete the expansion of two existing distribution centers and be well underway with the expansion of two other distribution centers.

We will begin actively installing a new state of the art warehouse management system in the DC network as well and importantly we will be well underway with the construction of our planned six new distribution centers.

As of today we have broken ground on two locations and are actively negotiating for the purchase of land parcels for the remaining four.

The planned six distribution center consolidations will drive the majority of our synergy capture dollars in fiscal year 03.

And consistent with the past year, our management incentive compensation will include the capture of cost synergies in the upcoming year.

As I mentioned in our last call, in total our future state distribution network plan calls for the construction of six new distribution centers, the expansion of seven existing distribution centers at a total of 28 distribution center consolidations.

Significant levels of new automation and systems technologies will be introduced into the network to improve productivity and accuracy.

The timeframe necessary to complete this work is four to five years.

We remain confident in our initial forecast of achieving annual cost savings synergies of $150m by the end of fiscal year 2004 and as we have discussed previously, we do however envision additional savings beyond 2004 as we continue work to complete our distribution network build out plan.

Savings beyond 2004 will be driven by the distribution center consolidations which will occur on completion of the six new builds, which will begin coming online in late 2004.

It takes approximately two years to build, equip and bring online these larger facilities.

We believe we're headed towards building the highest quality, lowest cost distribution center network in the industry.

Finally while we were busy with the work of integration, the organization remained focused on our customers' needs.

Customer service and local market responsiveness will continue to be a hallmark of the AmerisourceBergen franchise.

Now I'd like to turn the call over to Mike who will review the numbers.

Thanks Kurt and good morning everyone.

AmerisourceBergen's fourth fiscal quarter results include continued strong operating performance across business segments and disciplined capital usage resulting in operating margin expansion, significant operating cash flow, interest expense control and strong return on committed capital.

Our working capital as a percentage of operating revenues was 6.9% for fiscal year 02 in comparison to 7.9% in the prior year on a pro forma basis.

Our return on committed capital improved by over 300 basis points in the current year, also in comparison to the prior year pro forma numbers.

The year ahead continues to be very promising and I'll talk more about that at the end of my comments.

Allow me to begin by mentioning that my comments and year-over-year comparison will exclude special items totaling $2.3m for the quarter and $14.6m for the fiscal year net of tax related to merger integration cost which are set out at as a separate line item in our operating statement.

As you are aware, the combination is accounted for as a purchase of Bergen by AmeriSource.

Accordingly the current year financial statements include the results of the merged companies and prior year financial statements include the results of the former AmeriSource and approximately one-month of the results of the former Bergen.

In our earnings release this morning, we again provided combined pro forma financial information for each quarter of last year on a consolidated basis and for each business segment.

This pro forma 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 this pro forma information.

My comments will include the financial highlights for the consolidated company as well as the two operating segments - pharmaceutical distribution and PharMerica.

First the consolidated results for AmerisourceBergen.

Operating revenue for the consolidated group was $10.4b for the quarter, up 14% on a pro forma basis.

Our top line growth for the fourth quarter was consistent with our previous guidance and with the previous quarter.

The current quarter included one additional selling day versus the prior year.

Operating revenue for the year increased by 15% consistent with our 15%-17% guidance for the year.

Operating income was up a strong 22% compared to last year's quarter on a pro forma basis resulting in operating margin expansion of 12 basis points.

Earnings per share for the quarter increased a robust 38% to $0.88 per diluted share before merger costs compared to $0.64 per share reported last year before merger cost.

Earnings per share for the year increased an impressive 42% to $3.29 per share on the same basis.

The earnings growth for the quarter and for the year was positively impacted by ongoing merger synergies and low interest expense, which in turn was drive by continued improvement in working capital, combined with continued low market interest rates.

Moving to the pharmaceutical distribution segment.

Operating revenue for the segment was $10.2b, up 14% on a pro forma basis compared to last years quarter.

The customer mix in the quarter between institutional, which includes health systems, alternate site pharmacies, including mail order pharmacies in our specialty group at 54%.

And retail which includes independently chained at 46%, shifted slightly from the first three quarters of fiscal 2002 and the prior years quarter as our institutional business grew 19% and our retail business grew 10% versus the prior year quarter.

For the year our mix was 53% institutional and 47% retail.

In the pharmaceutical segment, gross profits margins declined on a pro forma basis by 20 and 26 basis points compared to last years quarter and year respectively in line with our expectations.

The reduction is a result of larger customers growing faster, to shift to lower gross profit margins business such as mail order and the competitive environment offset in part by the strong performance of our PROGenerics program.

With regards to [LIFO] accounting, we generated a small credit this quarter of $600,000 compared to a credit of $15.5m in the fourth quarter last year.

The company's [LIFO] charge for the current fiscal year was $60.6m versus a credit of $6.7m in the prior year.

The current year charge of $60.6m was lower than our previous guidance of $65-$75m primarily due to [LIFO] price appreciation being slightly less than anticipated in the fourth quarter.

We expect drug price inflation to be in the same 5%-5.5% range in fiscal 03 than it was in fiscal 2002 which would imply a [LIFO] charge similar to fiscal 02 before fiscal 03.

As usual factors such as product mix and brand generic conversion among other factors can moderate this charge.

Moving onto expenses.

Operating expenses as a percentage of revenue decreased 31 basis points for both the quarter and the year compared to the combined company of last year.

In addition to customer mix, this decrease in the operating expense ratio reflects efficiencies of scale and the elimination of redounding cost resulting from the merger integration process.

As a result, operating income as a percentage of operating revenue increased by a strong 11 and 5 basis points over the prior year quarter and year respectively.

Turning to PharMerica.

PharMerica continues to show improvement in all of the important financial aspects of this business.

On a pro forma basis revenues increased 14% over last years quarter to $386m.

The gross profit margin declined to 33.7% from 34.5% primarily due to the sales gains and the lower gross margins, workers compensation business which grew at a much faster rate than the long-term care business.

Importantly, as Kurt mentioned, the long-term care business continued their revenue momentum as a result of increased emphasis on new business opportunities.

The change in mix as well as the consolidation of IT operating platforms and continued improvement in billing, collection and operating practices drove operating expenses down to 27.8% of revenue in both the quarter and fiscal year.

A reduction of 120 and 231 basis points respectively from the prior year periods.

As a result, operating income for the quarter and for the year was up a strong 22 and 21% respectively and operating margin expanded by 40 basis points to 5.92% for the quarter and 56 basis points to 5.66% for the year.

PharMerica expects to continue to produce strong results in fiscal 2003, we expect PharMerica's revenue to grow in the low teens and its EBIT to grow at a slightly faster rate with operating margins expanding to greater than 6%.

Looking again at the company as a whole.

Below the EBIT line we recognized a $4.6m charge for the write down of a technology investment in the quarter which is reflected within the equity and losses of our [selling line] on the income statement.

Interest expense including the pre-tax distribution on the trust preferred security for the current quarter was $31.7m as we continue to benefit from improved capital usage and lower interest rates.

Net average borrowings in the fourth fiscal quarter were $1.3b compared to $2b on a pro forma basis in the prior year, again reflecting strong disciplined asset management.

Due to the improvements in working capital and cash flow from operations, borrowing levels remain lower despite the cash needs required to fund the AutoMed acquisition in July.

At the tax line the effect of income tax rate for the quarter in the year was 39.7%.

We will expect this rate to be 39.5% in the coming year.

Turning to the balance sheet and cash flow.

Our key working capital measures showed significant improvement in the quarter.

For the pharmaceutical distribution segment, day sales outstanding for receivables were significantly reduced to 16.4 days in the quarter compared to 17.9 days in last years fourth quarter.

The improvement was driven by customer mix and attention to asset management at the local level.

At PharMerica, DSO's were down 43 days from 46 days in the prior year quarter and were down an impressive 10 days for the year.

Inventory levels are $5.4b at the end of the year, increased by approximately 60m from June 30th and increased by 7.5% for the year.

Inventory turns in the quarter were 7.5 compared to 7.1 last year, reflecting the impact of utilizing best in class procurement software against the entire distribution network as well as the facility consolidations during the year.

DSOs were up to 40.2 days in the quarter from 39.9 days in the prior year and our net working capital investment as a percentage of revenue was 5.8% in the current year quarter compared to 6.3% on a pro forma basis last year.

Again, a significant improvement.

Capital expenditures were $24m during the quarter and $64m for the year in line with our previous guidance of $60-$70m.

These expenditures primarily related to technology investment and warehouse improvements.

Total debt to total capital at quarter end was 35% compared to 40% at September 30th of last year reflecting the efficient use of working capital during the year.

Net debt to capital also significantly improved to 26% versus 33% at September 30th last year.

In addition we demonstrated great improvement and our leverage coverage in other key credit ratios most of which today are either in line with or very close to investment grade measures.

As a result we would expect to continue our progress towards investment grade status which we expect to reach in the next 12-18 months.

As we stated last quarter, we expect to refinance our $150m senior notes which come due in January of 03 and we're also considering refinancing our $125m of 8% PharMerica bonds which are callable in April 03.

Cash generated from operations for the quarter was a very strong $407m compared to generation of $377m on a combined pro forma basis in the prior year quarter.

For the fiscal year ended September 30, 2002, cash provided by operations was $535m reflecting the improvements in working capital and was well above our prior guidance.

In fiscal 2003, we anticipate cash flow from operation will approximate $300m and the CAPEX will be in the $100-$130m range.

The CAPEX increase is primarily related to planned investment in our future state distribution center network.

Return on committed capital or ROC, which you recall is one of our primary financial measures and which we define as operating income, excluding amortization divided by fixed assets plus inventory and receivables, less payables on a rolling 12-month basis, was 25.5% for the quarter and for the fiscal year.

Well above our long-term goal of 20% and a significant improvement over our prior year ROC of 22.4% on a pro forma basis.

This reflected disciplined use of capital and operating margin expansion as discussed previously.

All in all, another very strong quarter and an excellent year.

Now, let me turn to fiscal 03.

We expect operating revenue to grow inline with the market, which IMF Health expects will be 11%-15% over the next few years.

We expect that pharmaceutical distribution gross margins will decline in fiscal 03 at a rate less than fiscal 02.

Once again, more than offset by a reduction in the operating expense ratio.

As a result, we expect operating margins will again expand in the single digit basis point range for both pharmaceutical distribution and for the consolidated company.

We expect interest expense to be in the $140-$160m range and expect EPS to grow 20% over the $3.29 we reported for fiscal 02.

I will now turn it back to Mike Kilpatric for a few additional comments.

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 Janine.

Ladies and gentlemen if you would like to ask a question at this time please press the "1 "on your touch tone phone.

You will hear a tone indicating that you have been placed in a queue and you may also remove yourself from that queue at any time by pressing the "£" key.

If you are using a speakerphone we ask that you please pick up your handset before pressing any numbers.

We'll take our first question from the line of Ray Falci with Bear Stearns.

Please go ahead.

Mr. Falci your line is open do you have your mute key on?

Oh yes, I apologize.

It's Ray Falci hi.

Mike, I was wondering if you could comment on your inventory balance at the end of the quarter.

It came in I think a little bit stronger although seasonally it does tend to pick up for you.

Are you seeing any trends there worth noting in terms of opportunities that you are participating in?

I guess the other part of the question would be given that this is sort of your anniversary quarter of the closing of the merger, what are your thoughts on how those comparisons look starting next quarter in terms of some of the inventory opportunities that you have been looking at?

I think that Ray you're correct, our inventory has gone up from June 30th to September 30th and that indicates that there are opportunities out there for us.

We would expect to continue and grow our inventory through the December quarter as we have done in the past.

I don't think there has been any fundamental change to our buying habits and to the industry and we expect to take advantage of those in the December quarter like we have in the past.

Okay great, I'll stick to the one question thanks.

Thank you Ray.

Our next question is from the line of Christopher MacFadden with Goldman Sachs.

Please go ahead sir.

Thanks, good morning.

Congratulations on your results everyone.

Could you talk a little bit about the LIFO dynamics here as you finished out the fiscal year?

You've given some guidance on LIFO in the fourth quarter.

You've talked about a small credit here in the actual results and if you could look forward and just give an expectation on how you think the LIFO dynamics will play out on a fiscal '03 basis.

Thanks.

Chris as I mentioned in my comments we did have a small charge for the quarter at $600,000 which was obviously a little bit less than the small charge that we had forecast.

As I mentioned, our FIFO price appreciation to which the LIFO was very directly tied too was a little bit less than anticipated in the quarter and that was the reason for further decline.

I think as we look forward we expect a very similar environment next year as I mentioned with drug prices inflation in the 5%-5.5% range and with that type of inflation we will expect a similar LIFO result next year that we had this year.

As once again there is a lot of dynamics that go into that calculation.

I mentioned a couple such as branded generic conversions, the timing of those conversions as well as just changes in production and customer mix, all which contribute to the LIFO calculation.

Great and if I could just ask a brief follow up question.

Relative to PharMerica business your comments there were well understood.

You've had now a quarter and a half maybe two full quarters of the full IT implementation.

Are facility rationalizations or other attempts or steps to kind of continue to improve operating margins part of how you are thinking?

You're going to think about PharMerica on a [no free] basis and in separating out PMFI from that business at least on a recorded basis, potentially part of the scenarios you are evaluating?

I'll let Mike comment on the reporting side regarding PMFI and what our alternatives are there.

With regards to next years performance, Chris, we as I mentioned in my prepared comments, we do expect to continue to drive operating expense efficiencies in PharMerica.

Getting best practices more across the pharmacy network.

There are some consolidation opportunities in the network but I would characterize them as quite limited, a handful at most.

There are some other things that the team, Chuck Carpenter and the team are doing down there to avail themselves of other technology deployments.

For example at the end of September all of the pharmacies under this new IT platform are capable of doing barcode scanning which meant in fact we could put basically our pre-filled packages, put pre-packs up in each one of the pharmacies and save labor and improve accuracy.

So those things are all available to the business in 03 and I think we continue to have confidence that we will see an expansion in the operating margin in that business in 03 compared to 02.

Mike.

From a reported segment perspective, our reported segments reflect, how we manage our business and PMFI being a part of PharMerica is reported through PharMerica and I would not expect any change to that in the near future.

Thank you Chris.

Thank you.

Our next question comes from the line of Larry Marsh with Lehman Brothers, please go ahead.

Yes, just a thanks and great results.

Just a follow up to make sure I'm clear and just a quick question.

I guess Mike you're saying that you anticipate a LIFO charge for fiscal 03 that will be in that $65m range for the year and if so are you going to comment at all about, you know, sort of that strategy versus your competitors?

I think Larry what I'm saying is if the inflation rate is consistent with what it was this year, we would expect to be very similar in the $60m range and obviously we will have another years of experience behind us would be on a similar procurement system across the company for the whole year and there could be some opportunities to reduce that number.

But based on the environment that's out there our expectation at this time is that it is going to be similar.

You know versus other companies, the other companies I really can't comment on their practice.

I know we look at our business of managing inventory, driving the right economics out of that inventory and we're concerned about the bottom line, the net results, not necessarily the FIFO versus the LIFO results.

Thank you.

Our next question is from the line of Robert Willoughby with Credit Suite First Boston, please go ahead.

Thank you Mike, on the cash flow from operations goal for fiscal year 03, can you comment on what's going on from a working capital stand point?

I would have thought that would be higher with some of the distribution centers coming down.

One of the dynamics Robert is we are going to be in the process next year of closing six rather large distribution centers.

I think during the integration time we'll probably commit ourselves to carrying more inventory than we would normally to make sure that those consolidations go very smoothly.

So I think that's one of the reasons that we've kept the cash flow to $300m.

I mean you will remember that that is an increase over our previous guidance of $200m for 03 and we came in significantly greater in 02 than what we had forecast coming in at over $500m versus $100m.

Now there were some dynamics in working capital like we mentioned earlier such as PharMerica coming down 10 days year-to-year in DSOs that aren't going to repeat themselves.

And where we're going to continue to see improvement and we think all of our ratios we think that improvement will be more measured in fiscal 03.

Our next question comes from the line of Glen Gormant with Salomon Smith Barney, please go ahead.

Thanks it's actually Glenn Gormant calling in on Glenn Santangelo's behave.

You guys grew revenues by slightly more than 60% in fiscal '02.

Now if we assume that's the impact of additional generic introductions to [DNE] in the range of 200 to 250 points in fiscal 03, you actually arrive at revenue growth outlook of anywhere from 13.5%-14%.

Yet your actual outlook is in the 11%-14% range.

So my question is you know generics aside, is there anything else going on such as anticipated changes to your customer mix, which has caused your revenue growth outlook to be, you know, below the 16% that you reported in fiscal 02.

Thanks.

There is really nothing else going on there Glen.

What we're really doing is as a market leader is reflecting growth with the market.

We think it's irresponsible to talk in any other terms over the large market share that we have.

Okay, so is it fair to say that the 11%-14% is the company adopting sort of a conservative stance.

It's the company really reflecting IMS's most recent data, which has just come out since our last earnings release.

Okay, thanks a lot for those comments.

Our next question is from the line of Michael Fitzgibbons with Morgan Stanley, please go ahead.

Hi I think your comments on LIFO price increases to be slightly lower than you expected, I think you said was the reason for the returns on credit.

How does that relate to the price increase environment in general?

Is that now analogous to when you guys talk about 5%-5.5% price increases, is that the same type of number and does that mean that you generally saw lower rate of price increases this quarter or were you looking for something higher than 5-5.5%?

If you can talk about that.

I think Glen it was more, excuse me Mike.

That was more that we had less price increases than those price increases being less than 5%.

You know seasonally the fourth fiscal quarter is always a fairly light quarter from a price appreciation standpoint but I think as we have looked at it throughout the year, the price increase environment have been very strong.

We see no indication of that changing and as we look towards fiscal 03 again, we're holding up our inventories in anticipation that we're going to have a robust environment again.

So, it's not that the rate was any lower, it just might have been that you have fewer price increases than you expected.

I think that would be right.

Okay, I understand, thank you.

Our next question is from the line of Kevin Bird with First Albany, please go ahead.

Can you just talk a little bit about the different influences between the two customer segments?

What are some of the drivers of the 19% growth in the institutional business and 10% gross to retail business?

Yes, Kevin it's Kurt, I'll give you a couple of CCs on that.

On the retail side a couple of impacts relative to the institutional.

One is you know we do a lot more generic business on the retail side than we do on the institutional.

So that branch of generic switch had a larger effect and some of the retail customers that we service on the retail side are growing slower than even some of their peers in their segment.

So it's a function mix and generics on the retail side.

Just suppose that to the institutional side where you know we had enormous growth during the year and for half the year with advance PCS on the mail order side.

We also include our specialty group operations in the institutional side of the business so their robust growth this year also weighted that number up to 19%.

Should we expect the same type of growth difference next year?

I think we're going to see, I think we're going to see the segment sell.

We'll still see a difference in the segment, I don't think we'll see them as wide apart as we've seen in the fourth quarter here.

Thank you very much.

You're welcome.

Our next question is from the line of Andy Speller with AG Edwards and Sons.

Please go ahead.

Yes, I want to follow up on that last question.

Can you give us in the retail side the total growth was 10%, can you tell me where the independents are tracking in that and is that marginally different from the overall growth in that segment.

We're seeing the independents on a same store basis and they, continue to do very well.

Although, I think that the point Kurt made, you know, is a good one, is that they have a great opportunity for generics.

Now that has an impact on their top line but as far as their good growth, it gives profitability at the bottom line.

So, we would be correct in saying the independents are growing less than 10% for that total category?

I think you can see, I think you can see the independents on a same store basis growing very similar to their peers in the pharmaceutical end of the business.

Okay, thanks.

Our next question comes from the line of Michael Vader with [Value Line].

Please go ahead.

Hi guys, can you remind us again of the LIFO charges in the fourth quarter last year?

The LIFO, the LIFO credit?

Sorry, LIFO credit

In the fourth quarter last year was $15.5m.

Thanks.

Sure.

Our next question comes from the line of Lisa Gill with JP Morgan, please go ahead.

Ms Gill your line is open do you have your mute key on?

Sorry about that, I was wondering if you could just talk a little bit about the acquisition of Bridge Medical today?

Talk a little bit about what you're strategy looks like from an acquisition perspective as well as the pricing environment you're seeing for that business, right now.

Thanks.

Thanks Lisa, let me talk about you know in --- I appreciate the question but we are ver, very excited about Bridge.

What we really think Bridge does is really fill out our full service offering for our customers in terms of the entire issue of patient safety which is a key issue today in the hospital arena.

Clearly now we've got the pharmaceutical distribution.

We've got packaging.

We've got automation.

Now we've got literally bedside scanning with the most advanced offering out there.

So, we really think it fills out our offering, particularly for institutional customers and we are very, very excited about it.

I think we said on a number of occasions as we go forward you can look to us to use our scale, enhance our role in the pharmaceutical supply channel and that's exactly what the last two acquisitions we made, AutoMed and Bridge, have done.

So, we're very, very excited about that.

In terms of pricing, we're very disciplined in all segments of our business and you can expect us to be very disciplined as we make future acquisitions as they present themselves.

Thank you Lisa, next question please.

Our next question is from the line of Brian Illardo with UBS Warburg, please go ahead.

Hi it's Howard Capek.

Can you comment on your comments on the gross margin decline year-over-year albeit less than the magnitude of this current year.

Yes, I think we mentioned that we were down 26 basis points for this fiscal year in pharmaceutical distribution which was in line with our guidance of 20-30 basis points and our comment is that we would expect that that range would be less than 26 this year.

And factors driving that?

Well I think the factors driving are the same drivers that have been driving it for a long time.

You know one is our bigger customers are getting bigger which typically have the best pricing.

Certainly the trend that we've talked about with the institutional growth and the growth of mail order has had an impact on our margin this year and will continue to have a margin next year and I think the overall competitive environment as well.

And offset to that is the performance that we expect and that we had this year with our PROGenerics program and we think that will be somewhat of an offset.

But we continue to see a downward trend and once again we will more than offset that downward trend with reductions in operating expenses and produce operating margin expansion in the single basis point range.

Which is what we promised this year and delivered and what we expect next year once again.

And the capital improvements term wise, the other side of the invested capital, return capital continuing to improve as well.

Yes again I think we'll see some moderation as we go through some large consolidations next year and I think we'll continue to see improvements in our replenishment terms will offset a little bit next year by the extra inventory that we'll have on hand during that consolidation.

Do you have a better sense of the timing on those consolidations and inventory bills specific to those six centers relative to overall forward buying opportunity and just general concerns, if that's what they are out there on sustainability of drug price inflation.

With regards to the timing on the consolidations, I think Howard, we commented that you're right we have six planned for next year.

Those are scheduled to occur in the second, third and fourth quarter.

We will have as Mike said some inventory bills to support those to make sure we are in full service capability for our customers.

We tend to want the consolidations done, burn off in excess inventory fairly quickly although some of that will be on the balance sheet we anticipate at September 30 next year.

Howard clearly, in terms of price inflation we continue to see it as a 5-5.5% range.

We don't see anything right now, that leads us to think anything differently.

If, one of your questions, the implication was, that some how the consolidations in the light of what we are doing impact on our ability to capture any benefit from that 5% or 5.5%.

The answer is no it will not.

Thanks very much.

You're welcome.

Our next question is from the line of Len Yaffe with Bank of America Securities, please go ahead.

Thank you, I'm going to throw out a bunch of number type questions and feel free to answer whichever ones you like.

Okay, first of all I missed the inventory numbers average ending in the quarter.

Secondly, as you go through in this year which quarters will have extra days, or fewer days because that influences overall revenue growth by about 1.5% and there is significant sensitivity with that.

The third one is could you review for us why the tax rate for the fourth quarter was so low relative to that reported in the first three quarters.

If there was any [...].

Fourth is could you go through the mix a little bit better in terms of institutional versus retail breaking down by the individual components.

Then the last one is, we're expecting generic [pile effect] possibly on the market in early December and that in itself isn't significant because it is a US$2.8b drug.

They will only be one company producing the generic.

Can you go through given that scenario and effectively only one company for seven years due to the patent issue, what that means for pricing and greater profitability opportunities on generic products.

Thanks for taking those questions.

Okay Len this is Mike.

I'll take a couple of those numbered questions first and I'll turn it over.

The tax rate did not change in the fourth quarter.

It was 39.7% for the quarter, the same as it was for the year.

The point that we made was that next year we would expect that to reduce to 39.5%.

The point that we made about inventory is that our inventories at September 30th were approximately $5.4b and that was up from June 30th, by about $260mln and was up 7.5% for the year.

And the only other comment we made towards inventory is that we would expect that to grow again towards the end of December as we have done historically.

I think the number of days in the first quarter of next year are similar and I will have to check the days in the second, third and fourth quarters for you.

For the December quarter I'm pretty sure it is the same.

I think it is the same for March.

I think that's right.

Okay.

Can you break down the mix before you get to the, institutional retail by segment?

No.

It's Kurt.

I think we are not disclosing that level of detail by customer segment.

We made the decision we will report on institutional retail only at this point.

Okay.

Do you want to talk about product?

Go ahead.

You know it's conjecture at this point Len but with one supplier out there we would not expect a precipitous drop in the price of generic products.

You know it remains to be seen but my guess is it will be up there.

My guess in the 20%-25% discount to the brand.

But it's just conjecture on my part.

Kurt have you got any other?

That's equivalent with the data we've been working with so.

And what would it do to your acquisition costs of the generic versus the acquisition costs of a brand?

Will this be bigger so that would be more profitable for you?

Yes.

Okay thanks.

Thank you.

Next question please.

Your question is from the line is Eric Coldwell with Prudential Securities.

Please go ahead.

Thanks very much.

I'm curious if you can give us an expenditure mix for just generic in dollar terms at this point?

Also just for you to follow on, are you seeing any change in incentives from the manufacturers not to [...] your amounts of volumes?

Would you prefer it if the manufacturers went down that safe way?

Thanks Eric.

In terms of generic Eric, in terms of dollars, we've put a lot of safety with that because we think is clearly a strategic number.

But we have sliced it in the past.

It is less than 10%.

So you know we're not overstating the case.

I think the entire industry it might be in the neighborhood of 8% in terms of dollars.

So those numbers are industry and in broad perspective.

With regards to IMA agreements, Inventory Management Agreements, with manufacturers you know there had been some cases in the last year, even the year before, where manufacturers have looked to put those agreements in place and we supported having those agreements.

Recognize the issue faced by manufacturers.

They sometimes have concerns that are speculation activities.

Put costs on them by making their production cycle less productive.

So we have entered into IMA agreements.

It has always been where we sit down at the table and we have a discussion about what level of profitability that particular line of product has provided us from those activities.

And we look to getting a hold on those profit dollars and by and large that is the case.

We intend to get a great hold on those profit dollars so those remain in our P&L and we then avoid contractor risk of speculation.

So all in all I think it is a mutual trend.

It is slightly positive to the manufacturers who are willing to participate.

Thank you very much.

We will take one more question operator.

Certainly and our final question this morning comes from the line of Ray Falci with Bear Stearns.

Please go ahead.

Thanks guys.

I'm back in again, sorry about that.

I wanted to have you on the gross numbers.

Do you have any ability to cover maybe unit growth?

I understand IMS's numbers are 11-14 and that's sort of their range for the next three years.

But if you look out over a more sort of near term timeframe, the next 1-2 quarters or next year, do you have any sense of unit growth trends?

Which obviously I think would be more relevant to driving your gross profit trend.

If you could give us any color there and maybe if you do anything on a bottoms up from your customers to help augment those thoughts, that would be helpful?

Yes we don't track units as closely as dollars Ray primarily because a unit of work is really a line extension or the amount of products that are delivered.

Just like we don't track very closely the amount of prescriptions because one prescription for ten pills is a lot cheaper than one prescription of nine pills.

So we really tend to focus on the dollars rather than the individual units.

Thank you very much and thank you everybody for your questions.

For those of you who are interested in hearing more about AmerisourceBergen and our story the company will hold an Investors Meeting on December 5th, in New York City.

The meeting will focus on ABCs enhanced role in the pharmaceutical supply channel.

We'll start with lunch and go until mid afternoon.

We'll be sending out invitations this week and the meetings will be webcast for those who want to participate in that manner.

Also on November 14th we will be speaking at CSFB's Healthcare Conference in Phoenix.

And now David would like to make some final comments.

I would just thank you all for joining us.

I would note that our first full year's AmerisourceBergen was clearly an unqualified success.

We did what we said we what do.

Deliver what we said we would deliver and more. 40/40 in the first is a pretty strong start but we truly believe we are just getting started.

We would like to qualify, reiterating our enthusiasm for our industry and enthusiasm for the role we play in it and our confidence in growing our EPS by 20%.

Thank you very much.

Ladies and gentlemen today's conference will be available for replay beginning today Tuesday November 5th at 4.15pm Eastern time and will last for one week running through November 12th at midnight.

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Those numbers again are 1800 475 6701 and 320 365 3844 with the access code of 654935.

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